INTRODUCTION TO INSURANCE
Types of Insurance
 First party vs. third party insurance
o Third party is essentially liability insurance. Insured might have to pay damages to P in tort lawsuit.
 Commercial liability, med mal, etc.
 First party, example, house is fired by fire and you collect under your homeowner’s policy. The insured is the one that is
damaged. Collision, etc.
o Homeowners – first party, something happens to your property. Also liability part of coverage, covers the
insured for liability claims.
o Auto – first: collision and comprehensive. Comprehensive, damage to car. Liability. And then uninsured
motorist.
 Types
o Property/Casualty
o Lines of Insurance – medical malpractice, products liability, homeowners, multiple peril, commercial property
insurance, commercial liability insurance, auto
o Life, health, and disability
o Group vs. individual
 Group – i.e., State of MS health insurance. Lots of health is group.
 Individual – auto, umbrella policy.
o Reinsurance
 When an insurance company, they sell insurance and will purchase reinsurance from an reinsurer, will
obligate reinsurer if first company is obligated.
o Excess Insurance
 Lots of commercial entities will buy layers of coverage.
 Primary insurers – duty to defend.
 Excess – in addition to primary, only pay if judgment or settlement above limit on primary.
 Types of Insurers
o Stock companies
 Owned by shareholders
o Mutual companies
 Owned by policyholders
 Mutual companies don’t have to generate a profit for shareholders, in regular corporations,
shareholders will want dividends. Doesn’t make much of difference otherwise.
o Lloyd’s of London
 Different insurers insure a percentage of risk. Underwrite percentage.
o Government as insurer
 Medicare, Medicaid, federal crop, federal flood (all flood insurance is sold through the federal flood
program, but private companies may sell).
Functions of Insurance
 Risk Transfer
o Liability insurance, transferring risk to liability insurance company that you might be sued and have to pay.
o 1% chance of suffering a $10,000 loss
 Expected loss = $100
 A lot of people would transfer the risk of this loss rather than the second.
o 10% chance of suffering a $1,000 loss
 Expected loss = $100
o A risk neutral person would treat these risks the same. A risk averse person would prefer the latter risk and
might pay $105, $110, or even more to obtain insurance to transfer the latter risk.
 Risk Pooling
o Larger the pool is, the more certain the insurance company can be that it has guessed right. Variant is not going
to be as great the larger the number of people insured.
o By insuring many insureds, an insurance company can more accurately predict the risks involved. Thus, by
pooling a large # of insureds, an insurer can reduce the cost of insurance to each insured. For example, it might
cost $110 to transfer a $100 risk to a company that insures 1,000 policyholders, but only cost $105 to transfer
the risk to an insurance company that insures 2,000. Pooled risks that are independent are the ones that reduce
risk.
 Risk Allocation
o Insurance companies try to figure out what risks you pose so they can charge you the right premium.
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Risk allocation refers to the insurer’s attempt to classify the risk posed by the insured and to price the coverage
accordingly.
o Problems Caused by Imperfect Information
 Adverse selection
 Insured know they pose a higher risk than the insurance co. believes.
 Or think you are getting a bad deal. Would drop out of the pool. As low risk people drop out
of pool, higher risk people left, so will have to keep raising premiums, and low risk people
will keep dropping out.
 Want insurance co. to be able to allocate risk appropriately.
 If higher risk, want them to be solvent enough to pay when you have a claim.
 Could be that co. has more info than you do. I.e. know the chance your house is going to burn
down. Know more about general risks.
 Moral hazard
 Used to refer to someone intentionally causing a loss that was covered.
 Insurance has tried to combat by requiring an insurable interest.
 Modern kind of moral hazard, fear that b/c you have insurance, you won’t be careful as you
might be.
 B/c you know you have insurance, might be a little more negligent.
 Product’s liability – might be a little more risky in design of a product b/c you have liability
insurance.
 How do insurance companies deal with these policies? Methods of Addressing Adverse Selection and
Moral Hazard
 Lengthy application/screening process to determine the degree of risk and to screen out those
who pose too much risk.
 Classify insureds according to risk and set premiums accordingly.
 Experience rate when policy is renewed.
 Deductibles, co-insurance, co-pays
 If you have to pay, less likely to abuse your insurance or consume more than you
need.
 Coverage limits
 You will be risk averse at some level.
 Require insurable interest
 Cover unusual risk separately or exclude them
 Skydiver, pilot
 Earthquake, b/c not independent risk. Hard to calculate.
o Healthcare reform
 One provision – can’t exclude coverage for preexisting conditions.
 In the absence, why would they exclude coverage for preexisting conditions? Adverse
selection problem. Gives people the incentive to opt-in at any time, why would you buy
coverage now when you could get it in 30 years when you get sick? Not transferring a risk,
transferring a known risk. But they will charge more.
 Individual mandate – if you make everyone buy insurance now, can’t have adverse selection. Also in
reform. Judges have said these two go together. So if everyone has to buy today, people can’t
adversely select.
Breach of Warranty – Common Law Rule
 CL Rule – any breach by insured voids coverage.
o Were not required to prove breach of the warranty led to the loss.
 Judicial Methods of Mitigating Harsh Effects of the Rule
o Treat as representation – insurer must prove material
o Treat as affirmative rather than promissory
 Affirmative – what is true on the day K is made
 Promissory – warrant that it will always be true
o Contra proferentum
 Legislative Regulations – treat warranty as representation
o Breach voids policy only if it is material
 Different tests for material
 Breach caused or contributed to loss
 Breach increased risk
 Even if die in a car wreck and you lied about smoking, breach still increased the risk.
 Misrepresentation was fraudulent (some states)
o
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Even if it doesn’t increase risk
In other states, intent doesn’t matter, so even if innocent misrepresentation, if
material, then breach.
State statutes not uniform. Could define materiality as any of the above.

Vlastos
o The court said affirmatory, not promissory. Relevant date is date policy is issued, not the date of the fire.
o Could require a promissory warranty, but language has to be clear.
o Two reasonable interpretations. Warranted that it was a janitor’s residence only or that was a janitor’s residence
but could have other stuff. When two reasonable interpretations, the insured wins.
The Transformation of Warranty Law
 Misrepresentation
o Most jurisdictions: if a term is a representation, the representation must be material in order to void coverage.
o To void coverage, insurer must prove:
 1. The insured made a false/misleading statement
 2. That was material
 3. That induced justifiable reliance
 4. That caused insurer damage
o False Statement
 Statement is not false as long as it is substantially true
 Majority Rule – intent is not relevant unless it is a statement of opinion
 If intent is required, will make everyone’s costs go up.
 So majority doesn’t require a fraudulent misrepresentation, the risk of a good faith
misrepresentation is on the insured.
 Minority Rule – intent is always relevant, whether fact or opinion
o Materiality
 When is a representation material? Varies by jurisdiction:
 1. If it contributed to the loss
 2. If it increased the risk
 3. If disclosed, the insurer would have denied coverage
 4. If disclosed, the insurer would have either charged a higher premium or offered less
coverage
 POV – majority – objective – is this a fact that would be reasonably material to an insurer in this line
of business?
 Even if subjective standard – 99% of things that are relevant to one insurer will be material to
all insurers.
o Justifiable Reliance
 Closely related to materiality b/c insurers aren’t going to rely on immaterial representations.
 Prevents insurer from voiding policy if they knew that the representation was false.
Neill v. Nationwide Mutual Fire Insurance Company
 If insured answers agents truthfully but agent makes misrepresentation, insurer cannot rely on misrepresentation unless
insured engaged in fraud or collusion with agent.
o Absent fraud or collusion – agent’s knowledge is commuted to the insurance co. and since they know the
answer, can’t rely.
o If agent tells you it’s immaterial, no reason to doubt the agent.
 Duty to read application?
o Most courts will take a similar position to the one taken in this case, even if signed and misrepresentation in
application, not dispositive. Jury could still find that the insured wasn’t responsible for misrepresentation. Some
courts will be more conservative.
Concealment/Duty to Disclose
 Should you have an affirmative duty to disclose if they don’t ask and you know it is material?
o Common Law – had a duty and could void coverage.
 Applicant knew a fact to be material and failed to disclose it.
o Modern Rule – not fair. So relaxed standard. If they don’t ask, led to believe that not material. Wary of insurer’s
argument that you knew it was material and didn’t disclose. Insurers should be in the business of knowing what
questions to ask.
 Mackenzie v. Prudential Insurance Company of America
o Duty to disclose if one of your answers is not untrue but was when you made it.
o Here the policy has a provision, so that might be relevant.
 No insurance will take effect unless “all of the answers…continue to be true and complete answers as
of the date of the delivery of the policy.”
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o
Duty to correct earlier response even though true when made and now no longer true. In most jurisdictions, duty
to disclose even if no language in policy.
Standardized Forms
 Why is it arguable necessary for property and casualty insurance to use standard form? Super-standardization gives
insurance companies the ability to stay solvent
o Useful to have claim loss data from a bigger risk pool
o Creates some benefits
o A lot of times, not really shopping based on policy, really for price and probably service.
 Pros:
o Consumers can make price comparisons
o Standardized language is more precise/clear; meaning and application more consistent and predictable. Great
uniformity across states. Can use other jurisdictions interpretation to show meaning.
o Makes it possible to pool claim data.
o Pooled data enhances insurers’ ability to maintain solvency.
 Cons:
o Difficult to buy customized coverage
 Can sort of customize but even customization is standardized b/c you buy standard endorsements.
o Anti-competitive effect on substances and pricing
o Discourages innovation
 Contract of adhesion so construed against the drafter.
Principles of Interpretation
 Coverage provisions interpreted broadly.
 Exclusions interpreted narrowly.
 Same terms in different parts of the policy interpreted in same fashion.
 Terms given ordinary meaning, not hyper-technical meaning.
 Contra Proferentum: ambiguity construed against the drafter.
 Limited by reasonable expectations of the insured.
Construing Ambiguities Against the Drafter/Insurer
 Contra Proferentum
o A provision is ambiguous when it is subject to two reasonable interpretations. If two reasonable interpretations
– construed against the drafter.
o Don’t have to show you thought it meant one thing, just that there is an ambiguity.
Reasonable Expectations of the Insured
 Majority Rule – Weaker Form
o Reasonable expectations doctrine may only be applied when the K contains some kind of ambiguity.
o Construe against drafter when ambiguity when consistent with reasonable expectations of the insured. Have to
have an ambiguity.
 Minority Rule – Strong Form
o Even if a policy is not ambiguous, objective reasonable expectations of the insured must be satisfied.
 We don’t care what policy says, even if unambiguous, we will cover the reasonable expectations of the
insured.
o Burden on insurer to clearly communication coverage and exclusions.
o Insurance company has to use clear, unambiguous language AND dispel any reasonable expectations of the
insured.
o Atwood case.
 Issues
o Typically, want to ask: is this the type of insurance most of the people would want and would be wiling to pay
for it?
o Requirement of insured saying: “I thought I was covered?”
 Not in most cases. Courts just look at what a RP would think.
o Also, when looking at reasonable expectations, courts protect consumers. They might treat sophisticated buyers
differently.
o Atwater Creamery Company v. Western National Mutual Insurance Company
 Forcible entry requirement in burglary insurance policy. No ambiguity.
 Court says they should get coverage – reasonable expectations of insured. Why would you buy a
policy that covered sloppy burglars and not sophisticated ones?
 Other courts look at purpose – if there is evidence that it was not an inside job, they would be serving
the purpose of the definition by giving coverage.
 This court rejects that approach.
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 Burden on insurer to clearly communicate coverage and exclusions.
When a Court Uses Reasonable Expectations Test
o It applies to that particular policy language in that state.
o As a matter of law, when this language is used, this is what the policies mean because of reasonable
expectations of insureds.
The Role of Intermediaries
 Why would you use an agent?
o To some extent they provide service on the front end and when you make a claim.
 Agents
o Exclusive
 i.e. an exclusive agent for State Farm. Only work for State Farm. Will be able to give service about
what kind of insurance you need, etc.
o Independent
 Don’t have an exclusive relationship with one agent.
o Get paid based on commission, i.e. a percentage of your premium.
o Hired and paid for by the insurance company. They do owe a duty to applicant insured but work for insurance
company.
 Brokers
o Hired by the insured.
o Typically, hired by more sophisticated insureds to get sophisticated or difficult to find coverage.
 Employers/Group Insurance
o Esp. with healthcare, it is provided by an employer.
o In some instances, they will be deemed you agent.
 If they give bad advice like you can opt-in here, etc. may be deemed to be an agent of the insurance
company so not estopped from giving you coverage.
 ERISA pretty much preempts any state law that relates to an ERISA plan. So to the extent these agent
relationships are controlled by state law, might be displaced if you plan is an ERISA plan.
 When will insurer be bound by independent agent?
o Actual and Apparent Authority

Actual
o Express
 K may say agent has authority to bind coverage.
o Implied
 Insurer acts in such a way through its relations with agent. Might ratify coverage that agent shouldn’t
have bound. Course of conduct.
 Apparent
o Insured must show something insurer did to create apparent authority on the part of the agent.
o Essentially saying, I thought the agent had authority.
o What kinds of things could be relevant?
 Tell you you’re covered, etc.
 About the appearance of authority to the insured.
 How can insurers protect themselves despite apparent authority?
o If agency did have apparent authority, the insurance company ends up paying for the coverage.
o But they can get indemnification from agent because no actual authority, express or implied.
 Insured still gets coverage.
 Agent may still argue implied actual authority.
o Not a whole lot insurance companies can do to dispel apparent authority.
 An insured is going to think an agent has authority to give them coverage.
o Best bet is to make sure they can pay indemnification claim if they exceed actual authority.
 Require bond, require them to be solvent.
 Not without cost, will make everyone’s insurance go up.
o Could try to make sure no apparent authority by putting big words on application that says agent doesn’t have
actual authority to bind these certain things.
Claims Against Insurer Based on Agent’s Conduct
 1. Insurer is liable because agent bound coverage (actual or apparent authority).
 2. Waiver: intentional relinquishment of known right
o Insurer is liable because agent or insurer waived requirement (such as file proof of loss w/in 60 days)
o Clear requirement in policy but the agent says don’t worry we’ll give you six months to file. Argument is that
agent waived that requirement.
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Can an insurer disclaim an agent’s authority to alter and/or waive policy language? Can inhibit your ability to
argue waiver and estoppel.
 Some courts enforce limitations even when the insured did not read it
 Other courts refuse to enforce such limitations
 Other courts will enforce limitations with respect to coverage provisions but not with respect to
provisions relating to claim proceeding
o Whether there has been a waiver is usually a question of fact.
 3. Estoppel
o An agent made some misrepresentation and you detrimentally relied.
o Rules
 Majority – estoppel cannot be used to create coverage that never existed or is excluded in the policy
 So how can it be used?
 If for instance, an agent tells you that you have 6 months to file a claim but you really on have
60 days. You wait and filed 5 months later. Could use estoppel.
 Minority – estoppel can be used to create coverage if there was a misrepresentation and reasonable
reliance before or at the inception of the K.
 No estoppel for post-loss statements by agent under either rule.
Insured’s Claim Against Agent
 1. Negligent Failure to Procure Coverage
o Failure to obtain coverage OR failure to notify of possible coverage
o Agent’s duty is to act as a reasonable agent
 Unless agent holds himself out as being expert
o Must prove: duty, breach, causation, damages
 Duty and breach – usually need an expert
o Causation
 Bound by the limitations on the market. Have to show that the coverage is available on the market.
And you would have gotten it.
 2. Breach of K to Procure Coverage
o Failed to get coverage promised by agent. Here, doesn’t matter if coverage was available or not. They made a
promise and they broke it, that is all that is required for a K claim.
o
FIRE & PROPERTY INSURANCE
Standard Homeowner’s Policy – First Party Property Insurance
 Declarations page. Almost all policies will have this.
o Named insured, policy period, coverage, limits, premiums, residence insured, policy #.
o Coverage (here):
 Section I
 Dwelling
 Other structures
 Personal property
 Loss of use
 Section II
 Personal liability: each occurrence
 Medical payments to others: each person
 Will tell you the amounts and usually the amount of the deductible.
o Declarations page should also list any special endorsements, i.e. you bought more for jewelry, etc.
 Then agreement
o Really not the coverage language. Some generic promise to pay. Promise to provide coverage.
 Definitions section
o Will always see one either at beginning or end of policy.
o This one defines you, your, insured, bodily injury, occurrence, property damage, etc.
 Deductible section
 Coverages
o Coverage A – dwelling
o Coverage B – other structures
o Coverage C – personal property
o Coverage D – loss of use
o Coverage E – additional (debris removal, credit card theft, additional cost to rebuild due to ordinance/law, etc.)
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Perils Insured Against
o Coverage A and Coverage B
 We insure against risk of direct physical loss to property described in Coverages A and B
 That is what to look to see if you are covered for your claim.
 All risk, doesn’t delineate specific things it covers.
 Then says we do not insure however, for:
 Usually intrinsic things. Things you expect.
 And then a whole # of exclusions on page 205.
 Coverages A and B: all risk v. specified risk, don’t cover mold, wear and tear, pollution, etc.
o Ensuing loss cause
 Under 2.b and c above, any ensuing loss to property described in coverages A and B not precluded by
any other provision in this policy is covered.
 Might cover damages for an ensuing loss that is caused by a precluded peril.
o Coverage C (named peril)
 Personal Property
 Have to show my personal property was damaged by one of these specific perils
o Exclusions
 Ordinance or law, earth movement, water damage, neglect, war, intentional loss
 Neglect – not if you leave the coffee pot on and your house burns down. More like, your roof gets
blown off and you do nothing and you continue to let rain pour in and damage property. Neglect means
neglect of an insured to use all reasonable means to save and preserve property at and after the time of
a loss.
 At beginning of exclusions
 If two perils combine to cause a loss and one is covered but the other isn’t, it is excluded,
whether they combine at same time or separate times.
 Anti-concurrent losses clause.
 B. We do not insure for loss to property described in Coverages A and B caused by any of the
following. However, any ensuing loss to property described in coverages A and B not precluded by
any other provision in this policy is covered.
 2. Acts or decisions, including the failure to act or decide, of any person, group, organization,
or governmental body.
 Very broad.
o Conditions
 Insurable interest
 Notice and proof of loss
 Have to be able to show what you lost
 Loss settlement
 How much you get paid
 Coinsurance provision
 Coordination of coverage – other insurance
 Here, pro rata by limits
 Mortgage clause
 Have to name mortagee if the bank makes you buy homeowner’s. So if homeowner
intentionally burns house down then bank can still recover.
 Policy period
 Policy applies to loss which occurs during period
 Section II – Liability Coverages
o If a claim is made or a suit is brought against an insured for damages b/c of bodily injury or property damage
caused by an occurrence to which the coverage applies we will:
o Cancellation (in Sections I and II conditions)
o Subrogation (in Sections I and II conditions)
 Those are provisions that you need to be aware of. Some particular to property insurance, but most for all kinds of
insurance.
The Requirement of an Insurable Interest
 Why Require an Insurable Interest?
o Combat moral hazard
o Prevent gambling/wagering
o Also, the principle of indemnity. Don’t want insureds getting windfalls. They should be restored but not made
any better b/c if not – risk of moral hazard.
 Insured should not profit from loss.
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 Insurance protects insured from suffering a loss; it does not serve to create an opportunity for gain.
Richard C. Gossett and Margaret D. Gossett v. Farmers Insurance Company of Washington
o Statute – insurable interest is any lawful and substantial economic interest in the safety or preservation of the
subject of insurance free from loss, destruction, or pecuniary damage.
o Court:
 It doesn’t matter that they paid premiums.
 Expectation of profit not enough
 Also, had no lease and not even an option to buy.
 No coverage for loss of expected future profits
 No insurable interests
 They do have insurable interest in improvements.
 Limited to value of improvements, not value of entire house.
 No legal interest in continued possession.
 Insurable interest is determined at the time the loss occurs
o For life insurance, it’s when you buy the policy.
 Insurable Interest Tests
o Legal or Equitable Interest in the Property
 Fee simple, life tenant, remainder man, equitable lien
 Usually not options
o Factual Expectancy
 Expectation of economic advantage if insured property continues to exist
 Expectation of economic loss if insured property is damaged
 Some jurisdictions recognize factual expectancy while others do not
o Contractual Rights
 Secured creditor has interest in security (deed, title, security interest, mechanics lien, etc.)
o Legal Liability
 If insured has legal liability for destruction of somebody else’s property or for breach of promise to
procure insurance.
o Sample H.O. Policy
 Section 1 – Conditions
 A. Someone other than the owner of a home, such as a secured creditor (a bank), may have an
insurable interest.
Trigger and Occurrence Issues
 Sample Policy – Coverage A & B – Dwelling and Other Structures
o Section I – Perils Insured Against
 “We insure against risk of direct physical loss to property.”
 Property damage means physical injury to, destruction of, or loss of use of tangible property.
 Tangible v. Intangible Property
o Section I – Conditions
 “The policy applies to loss which occurs during the policy period.”
 “Occurrence means an accident, including continuous or repeated exposure to substantially
the same general harmful conditions, which results, during the policy period, in (a) bodily
injury; or (b) property damage.
 Courts generally will not allow recovery for event that is not fortuitous.
o Port Authority of New York and New Jersey v. Affiliated FM Insurance Company
 The mere presence of asbestos, without damage or loss, is not enough to trigger coverage.
 Ps must prove their structures were physically damaged in order to trigger coverage. Mere presence of
ACMA not enough.
 No loss of use, no coverage.
 P did not lose use of building, asbestos did not interfere with use.
 If losses are progressive, which policy is triggered?
o The policy period during which loss was discovered or should have been discovered (manifestation)
 The policy in effect at the time property damage was discovered or should have been discovered is the
only one that will provide coverage.
 Courts generally follow and hold only one policy triggered even when other policies were in
effect at earlier times when the insured was unaware the damage was occurring.
o OR the policy period during which damage first occurred.
o OR the policy period during which any damage actually occurred.
o Examples of progressive losses
 Progressive foundation damage; progressive asbestos contamination

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Business Interruption Coverage
 Usually, covers economic loss when there has been:
o 1. Damage to covered property
o 2. Caused by a covered peril
o 3. Resulting in a necessary (depending on the policy) interruption of business
 Sometimes, complete cessation required.
o 4. As a consequence of which there is a covered loss.
o 5. Which occurs during the period of restoration of the business.
 Not necessarily the same as policy period. Will be defined in policy, how long you get to recover for
your lost income.
 Business interruption coverage is a standard part of commercial property insurance.
 Only going to cover the loss as attributed to the covered peril.
o Does not insured against the risk of pure economic loss.
o Sometimes, there is coverage if civil authority shuts down business even though there is no damage to insured
property.
 You get to recover the likely net income of the business. Insured does not get to take advantage of market upswing.
 Contingent BI Coverage
o Covers the risk of suffering economic loss resulting from damage to certain other property, such as property of
suppliers and customers.
o Non-covered property typically has to be damaged by covered peril.
 Duane Reade, Inc. v. St. Pal Fire & Marine Insurance Company
o Insured: period of restoration = amount of time necessary to rebuild complex at WTC.
 Pretty much forever.
o Insurer: period of restoration = amount of time in which insured could have restored operations at other
locations.
 Nationwide to get back to pre-911 gross sales.
o How long the restorations period is determines how much you get.
o Also an extended recovery period here.
o Court: restoration period equals time it would take insured to rebuild/replace its WTC store at a suitable
location. Otherwise, the Extended Recovery Period is rendered superfluous.
o Loss of Market Exclusion?
 Only excludes losses by changes in competition and shifts in demand.
 Not loss covered by physical destruction or covered peril.
o If a policy has two different periods you can’t have a definition of the first that extends coverage to the end of
the second one.
 Compare:
o 1) In determining the loss of earnings, due consideration shall be given to the earnings of the business before the
date of damage or destruction of its property and to the probable earnings thereafter, had no loss occurred.
 A lot of people argued loss was ambiguous and if it only meant loss to their physical business then
could have made more money, i.e. lumber company and Hurricane Katrina.
o 2) The amount of business income loss will be determined based on: (i) the net income of the business before
the direct physical loss or damage occurred; and (ii) the likely net income of the business if no physical loss or
damage had occurred, but not including any net income that would likely have been earned as a result of an
increase in the volume of the business due to favorable conditions caused by the impact of the covered cause of
the loss on customers or on other businesses.
 This was a response to the above arguments.
Exclusions
 Purpose
o Combat moral hazard
 E.g. have to have insurable interest; not covered for neglect once loss occurs.
o Limit adverse selection
o Avoid catastrophic loss
o Avoid duplication of coverage by different policies
 In homeowner’s policy, liability for car wrecks excluded b/c you have to buy auto insurance.
 BOP
o Insurer had BOP to show that loss was caused by an excluded peril.
 Intrinsic Loss
o Policy only covers fortuitous losses caused by an external peril.
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o
Policy may be all-risk but still requires a loss caused by an external force rather than an inherent characteristic
of the property.
o Shouldn’t be able to insure against a known risk.
o Court in Chute said that this is such a strong public policy issue that even if a policy is silent, might find the
same way.
o Exclusions in Sample Policy
 Deteriorations, latent defect, inherent vice, wear and tear, etc.
o See provisions in 6(a) and (b) on page 203
 Imminent Collapse v. Actual Collapse
o Why are insurers hesitant to provide coverage for imminent collapse?
 Avoid coverage for intrinsic loss
o Language Makes a Difference
 Risk of loss involving collapse v. Direct physical loss involving the sudden, entire collapse of a
building or any part of a building followed by definition of collapse.
o Division of authority as to whether there is coverage when collapse is merely imminent.
o Sample Homeowner’s Policy
 Language providing for actual collapse, not imminent collapse.
 Collapse 8. a. (1) definition (b) collapse must be caused by …
 8(b) exception for collapse caused by decay that is hidden from view
 6(c) exclusion for collapse caused by dry-rot
 The general rule is that you cannot use an exception to an exclusion where the loss is excluded
elsewhere.
The Problem of Causation – ACC Clauses
 When more than one peril can be said to have caused or contributed to the loss, is there coverage when one peril is
covered and the other is excluded?
o ACC language applies to the losses listed as excluded in that section.
o If one of these things contributes at all it doesn’t matter, the loss is excluded.
 Efficient Proximate Cause Rule
o If a covered cause is the efficient proximate case of the loss, the loss is covered even if an excluded event
contributed.
 If you have one covered peril and one excluded peril and they combine concurrently or sequentially to
cause one indistinguishable loss then the loss is covered.
o Some courts will not enforce the EPC rule where the ACC language expressly says otherwise.
 When that is not the case, sometimes the court will enforce the EPC rule.
o In the absence of K language addressing concurrent causation, many courts have adopted the EPC rule.
o MSSC allows insurer to K out of the EPC rule through ACC clauses.
o State Farm v. Bongen
 Home destroyed by a mudslide. Prior to this, the city had cleared area above home for construction
which caused erosion and ground to weaken. And then mudslide.
 Clear exclusion for mudslide damage – earth movement exclusion.
 Typical for earth movement to be excluded, b/c catastrophic, so a bunch of claims. Not independent.
 Policy excluded from coverage any loss resulting from earth movement, regardless of the cause of the
earth movement, and regardless of whether a non-excluded risk acted concurrently or in any sequence
with earth movement.
 Court here went with majority rule – an insurance company can contract out of the efficient proximate
cause rule.
 Percy: insureds should have made a reasonable expectations argument:
 Not consistent with reasonable expectations of coverage.
 Reading the policy would typically think that the exclusion was referring to catastrophic loss,
not something like this as the result of someone’s negligence.
 Mold Exclusion – Liristis v. American Family Mutual Insurance Co.
o Here a fire and then water damage which caused mold.
o Why not cover for mold?
 It’s intrinsic.
o This is not intrinsic – the mold came from the water damage b/c of the fire.
o Court – mold damage caused by a covered event is covered; losses caused by mold are excluded.
 Loss caused by mold v. Mold as the loss
o Another Case
 Covered for loss caused by frozen pipes. But exclusion for loss caused by mold.
 Argument
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Mold caused by the pipes. Two perils, one covered, one excluded. Default rule is EPC when
no ACC clause.
o Sample H.O. Policy
 Attempts to exclude all mold.
 Ensuing Loss Clauses
 Losses involving wear and tear and faulty design are not covered.
 But
 If wear and tear or faulty design resulted in fire damage to insured property, the loss would be
covered b/c the ensuing loss by fire is itself a covered peril.
 Katrina – MS Supreme Court decision in Corban
o Storm surge is within water/flood exclusion
o Right to coverage/indemnity attaches when (at the time) a loss is sustained that is within coverage
 This right will not be divested simply b/c something else happens later.
 Wind damage preceding water damage is covered even though storm surge that came after would have
caused the same damage.
o In any sequence language was considered ambiguous – will not exclude coverage for wind damage even though
it would not have occurred in the absence of flood damage.
o P is covered for wind damage.
o When wind (covered peril) and water (excluded peril) act together, at the same time, as one indivisible force,
ACC clause precludes coverage.
o In other words, ACC clause only applies when you have indivisible damage that acted concurrently or
sequentially.
 Only indivisible loss caused by wind and water is excluded.
o With respect to coverages A and B, insured bears the burden of proving direct, physical loss and the burden
shifts to the insurer to prove that the loss was caused by an excluded peril.
o Note: remember to pay attention to when and if loss attached.
Increased Risk
 Dynasty, Inc. v. Princeton Insurance Company
o Exclusion for increase in hazard: insurer not liable if hazard is increased by any means within the control or
knowledge of the insured.
 Not standard language for H.O. policy but comes up with fire insurance.
o Neither party disputes that the fire was the result of arson.
o Insurer claims that P increased the hazard by intentionally disabling the sprinkler system.
o Court – issue for the jury
 Courts have mitigated the potentially harsh effects of the clause by:
o Requiring knowledge and control
 Or constructive knowledge and control
 Example: landlord-tenant
 House burns down b/c tenants have a meth lab. Increase in risk b/c of met lab for
more than an insignificant amount of time.
 He would have to know there was a meth lab or he should have known (negligence).
 Obviously, have control.
o By narrowly construing who the insured is
 One case, a low level employee turned sprinkler system off. Might have to be someone higher up than
that.
o By requiring the increase in hazard to be substantial in time and/or magnitude
 Casual, temporal changes generally do not amount to an increase in hazard
o By treating the issue as one for the jury
 Typical increase of risk cases are where property is put to a different use.
 Standard increased risk cases
o Risk has been materially and substantially changed over time.
o Will forfeit your coverage.
 What about putting warnings on your property that it is protected by spring loaded guns?
o Fire-men are not coming to that fire. So a court has said that increases the risk.
 Appears more frequently in commercial properties.
 Vacant or Unoccupied Clauses
o Vacant means empty – no furniture
o Unoccupied – refers to if someone is living there.
o Exclusions for damage caused by freezing pipes, etc. if property vacant or unoccupied for a specified # of days
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Also, many policies provide general exclusions or conditions barring coverage if property was vacant or
unoccupied for a period of more tan 60 days at time of loss.
Sample Policy – For exam
 Should be familiar with Coverage A, B, C
 Collapse
 Exclusions on pg. 203, mainly for intrinsic loss or wear and tear
 Basic grant of coverage on pg. 202
 Ensuing loss clause, pg. 204, left-hand column
o If rust is wear and tear but an ensuing loss is otherwise covered you would otherwise come w/in it.
 Personal property – named peril
o Have to prove caused by one of those
 205 – ACC cause
 With big exclusions we talked about
 Neglect
o Roof damage and don’t do anything
 Intentional loss
 Conditions on pg. 207 that tells you about how much you get
 Duties after loss – pg. 207
o Tells you what you have to do
 Loss settlement – pg. 207
o Personal property – actual cash value at time of loss but not more than the amount required to repair or replace.
The Measure of Recovery – Actual Cash Value Clause
 2 Views of Indemnity
o Economic conception: to assure that insured’s net worth is the same after the loss as it was before OR
o Functional conception: to return the insured to roughly the same style of life as he or she occupied before the
loss.
 Tests for Actual Cash Value
o 1. Replacement/repair cost minus depreciation
o 2. Fair Market Value
o 3. Broad Evidence Test
 Permits consideration of all evidence that an expert would find relevant to a determination of value.
 Size, material, market value, etc.
 Express Replacement – Cost Coverage
o Many policies provide insurance for the cost of replacement without deduction for depreciation.
 Such policies might require that this only applies when there is actual replacement
 Otherwise, ACV will be paid.
 Valued Policy Statutes
o Provide that in the case of a total loss of the insured property:
 The measure of recovery = the face amount.
 Regardless of is ACV at the time of the loss.
o Point of Equity – a valued policy forces the insurer to provide the coverage for which the insured has paid with
years’ worth of premiums.
 Zochert v. National Farmers Union
o How is loss calculated for silos?
 Actual cash value.
o There’s a $35,000 limit per silo. Spent $15,000 repairing them.
o He is claiming $15,000 less his deductible. Insurance co. says $15,000 less deductible and depreciation.
o If you meet coinsurance you get repair or replacement w/out deduction for depreciation.
 If you don’t, get actual cash value.
o Why allow repair or replacement of some things but actual cash value of other things?
 Consumer v. Commercial
 Consumer – point is to put you back in the position you were before. Things like silos – more
like a business asset. Don’t want to get to replace it as more than it is worth today – huge
moral hazard problem.
o No more than cash value until actual repair or replacement is complete.
o Actual cash value is meant to be different method of evaluation than cost to repair or replace; 3 ways to measure
 1. Market Value
 2. Replacement cost less depreciation and
 3. Broad evidence test
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o Here, they use broad evidence test.
Coinsurance Clauses
 Why Provide for Coinsurance in a Policy?
o To prevent an insured from only insuring against partial loss.
o To make sure homeowners buy more coverage.
o Property coverage is priced evenly – it doesn’t go up with the risk of more or less loss. The 4th $100,000 of
coverage costs the same. With liability, the higher are cheap b/c priced according to the risk.
 Why Would an Insured Only Insure for a Partial Loss?
o Partial losses are more likely
o Premiums are constant
 Sample Policy
o Section I – Conditions; C; Loss Settlement; Subsection 2
 If, at the time of loss, the amount of insurance in this policy on the damaged building is 80% of more
of the full replacement cost of the building immediately before the loss…full cost to repair or replace.
 If the amount of insurance in this policy is less than 80% of the full replacement cost of the building,
we will pay the greater of the following amounts, but not more than the limit of liability…
 1. Actual Cash Value or
 2. That portion of the cost to repair or replace which the total amount of insurance on this
policy bears to 80% of the replacement cost.
 80% means that the amount of insurance you have is at least 80% value of your house.
 Meet coinsurance provision if you insure your house for 80% of the cost to repair or replace.
 Example
o Repair or replace cost = $125,000
o Policy = $75,000
o ACV = $10,000
o Homeowner has a loss that would cost $20,000 to repair or replace.
o 80% of full replacement cost ($125K) = $100K
o Not $100,000 worth of coverage; only $75,000
o Didn’t buy 80% so will pay actual cash value (here: $10,000) or that proportion of the cost to repair or replace,
after application of any deductible and w/out deduction for deprecation, that part of the building damaged,
which the total amount of insurance in this policy on the damaged building bears to 80% of the replacement
cost of the building.
o Fraction = $75,000/$100,000 = amount bought over the 80% to repair or replace.
o $75,000/$100,000 = 0.75 * $20K = $15K
o Gets $15,000 or $10,000 (actual cash value). But have to actually repair or replace to get $15,000. So likely to
get the $10,000.
Subrogation
 Subrogation
o Property insurer is usually subrogated to the insured’s right of recovery against a 3 rd party for loss covered
under the policy.
o Life insurers usually don’t have this right.
 Principle of Indemnity
o Insured shouldn’t profit from loss
 Collateral Source Rule
o Jury isn’t informed that P has collateral source for payments
 Traditional
o Allocates financial responsibility to 3rd party who caused the loss.
o Tortfeasor pays but really their homeowner’s liability pays. Negligent party bears the cost. Insured doesn’t get a
windfall.
 Sample Policy – pg. 216
o An insured may waive in writing before a loss all rights of recovery against any person. If not waived, we may
require an assignment of rights of recovery for a loss to the extent that payment is made by us.
o If an assignment is sought, an insured must sign and deliver all related papers and cooperate with us.
 Two Ways
o Passive subrogation – don’t intervene in the lawsuit, just asserts its subrogation rights and notifies the
neighbor’s lawyers.
o Active – insurance co. sues on its own. Maybe homeowner has no incentive to sue b/c all they have is property
damage. So you would just assign your claim and insurance co. would be the P. Be a named party.
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In the middle – intervene in P’s lawsuit. Only if tort lawsuit. Would have to be active if insured is not going to
sue.
 Even if no K language, equity would recognize subrogation claim. B/c if not, homeowner would get windfall. So even
absent K language, CL recognizes an equitable subrogation claim.
o If no K language, then equitable principles come into play:
 Won’t have to pay insurance subrogation if insured has not been made whole. Equitable is only to
prevent insured from getting a windfall.
 Common Fund Principle – you can argue that if you pay them subrogation, they have to pay 33% of
that b/c you are paying your lawyer. They have to contribute to lawyer’s fees in recovering a common
fund.
 Some jurisdictions have said they are doing away with collateral source rule and subrogation all around.
o So you are just not allowed to recover if you have been paid by a collateral source.
o Insurance company and insured are really paying for damage caused by a tortfeasor.
o So insurance will be more expensive.
 Prospective Releases/Waiver of Right to Sue
o Great Northern Company v. St. Paul Fire and Marine
 Bought a three year property policy. Then entered into construction K and in that K waived the right to
sue.
 Can waive a right to sue before a loss. No subrogation rights to interfere with before a loss.
 Pre-loss you can, post-loss you can’t.
 Settlement
o If insured settles with neighbor after loss but before receiving policy coverage, insurer does not have to pay
insured (voids policy).
o If insured settles with neighbor after receiving policy coverage, the insurer can only sue the 3 rd party if the
insurer has provided notice to the 3rd party
 Insurers will always notify the tortfeasor that it has the right to sue (and insured does not have the right
to settle) before it pays claim to the insured.
 Usually, party with subrogation interest will be involvement in settlement discussions.
o Should “made whole” rule apply when the insured settles for less than total damages?
 Once you have a jury decide what your injuries are, you can’t take a position inconsistent with that.
Can’t say you haven’t been made whole. So can’t make a made whole argument in subrogation
litigation.
o Another Case
 Primary insurer and law firm it hires owe a duty to insured defendant. Primary insurer gives updates to
excess insurer. May tell them they’re not exposed but then settle for millions and excess has to pay. So
they sue lawyers. Argue subrogated to nursing home’s claims for legal malpractice against the law
firm. A big dissent that the legal malpractice claims were enough. Enough to establish a duty. But
majority said no. Might owe a duty to an excess insurer that you don’t even have a contractual
relationship with.
Limited Interests/Mortgagees
 If you buy a house and bank loans you money, they are going to make you get property insurance and name them as
mortgagee.
 Sample Policy
o If a mortgagee is named in this policy, any loss payable under Coverage A and B will be paid to the mortgagee
and you, as interests appear. If we deny your claim, that denial will not apply to a valid claim of the mortgagee,
if the mortgagee…
 If we pay the mortgagee for any loss and deny payment to you:
 We are subrogated to al the rights of the mortgagee granted under the mortgage on the
property; or
 At our option, get assignment mortgage.
 Generally
o Insurer will pay mortgagee up to limit of liability or the mortgagee’s interest.
o If the insurer pays all of the mortgage, insured’s debt to bank is cancelled and insured gets the rest of the
coverage.
o In sample policy, the mortgagee will only get that which is payable under dwelling and other structure
coverage.
 Effects of Misrepresentations by Insured
o Insurer still pays the mortgagee’s interest even if insured makes misrepresentations that are grounds for voiding
the policy.
o Insured has a subrogated right of mortgagee.
o
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Northwestern Farm Bureau v. Alhauser
o House fire; insurer pays mortgage but denied coverage to homeowner b/c of material misrepresentation; insurer
gets assignment and steps in shoes of bank and tries to foreclose on homeowner claiming homeowner has
obligation to pay mortgage.
 Subrogated rights of mortgagee: by paying the bank off, insurer gets to step in the shoes of the bank
thus having a subrogated right to foreclose.
 Farm Bureau pays mortgagee even though it denied claim as to insureds.
 Althausers claim that debts were extinguished and that bank has no foreclosure rights
 Court says they do.
What if one spouse burns down house leaving an innocent spouse?
o Some courts have allowed innocent spouse to recover.
o Some courts went with reasonable expectations.
o Others are worried about moral hazard so they treat technically
 I.e. are they joint tenants thus making them one insured?
o Sample Policy
 If one insured intentionally causes a loss, no insureds are covered.
What if homeowner wants to rebuild with the proceeds?
o Occasionally courts have allowed this, but usually banks get to decide.
LIFE INSURANCE
Types of Life Insurance
 General Note – when reading a policy, first determine whether there is a statute that controls.
 Term (Pure Insurance)
o As you get older (policy matures), premiums increase.
o Can obtain term life with right to renew at certain premium (more expensive).
 If you don’t do this, when you go to renew it will be more expensive, b/c you’re older.
 Permanent Insurance
o Whole life insurance
o 2 parts: 1) life insurance and 2) investment
o Premiums appear to remain constant, but as you get older (policy matures), the cash value increases and the true
insurance portion of face value declines.
o Investment feature (key distinction)
 Term life insurance plus accumulation of a cash or investment value that permits the insured to
surrender the policy for that value.
 You can cash out (if you reach a certain age) policy or borrow against it.
 As you get older, more of what you’re paying for is the investment.
o Universal
 Can alter the premium and death benefit instead of those being fixed.
o Variable
 Premiums might be invested in different accounts and guarantee true insurance.
 Credit Insurance
o Lending institutions sometimes purchase life insurance on the life of the debtor so that it pays off the debtor’s
debt. Value of amount of insurance is underlying debt.
 Convertible (from term to whole)
 Annuities
o Kind of opposite of life insurance.
o If you purchase one today, it gives you the right to receive fixed payments until you die. Cost depends on your
expected life. Get money’s worth if you outlive your expected life.
Form Life Insurance Policy
 Declarations page
 Premium structure
 Contract
o Promise to pay
o Incontestability
 Standard. Will not contest a misrepresentation after policy has been in effect for 2 years.
o Suicide
 Moral hazard. Here it is one year.
 Ownership (transfer and assignment)
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Binders
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o Could be different from insured and beneficiary.
o Owner has a right to transfer ownership.
o Owner can change beneficiary and has to pay the premiums.
o Owner can also assign the rights to collect as security.
Payment of premiums (grace period and refund)
Convertibility
Beneficiaries (naming and changing)
o Requirements to do that
o Direct and contingent beneficiaries
 For ex. if direct are dead
Usually, easy to show the death. In the case of a missing person might litigate over that. But usually no issue over
coming w/in coverage.
Then, book has sample application. Percy says this is actually short.
Will come to your house sometimes and make you take blood work, etc.
Approval Binder
o Coverage exists as of the date of application/binder if the application is approved before a loss
 Policy does not have to be issued; just must have been approved.
 Conditional on approval
 Before a loss is the key provision
 A loss occurring after application date but before approval is not covered.
o Example
 1/1/12 – Binder
 1/7/12 – Approved
 1/9/12 – Policy Issued
 If you died on the third not covered b/c application not approved before the loss. If you died on the 8 th
you would be covered.
Conditional Binder
o Coverage exists as of the date of application if we are assured of insurability.
 Assured of insurability = medical exam/review
o Example
 1/1 – Binder
 1/4 – Pass exam
 1/7 – approved
 1/9 – policy issued
 1/3 loss is not covered
 1/5 loss is covered
 1/8 loss is covered
Unconditional Binder
o Coverage exists until policy is issued or until notice of rejection is given.
 Still covered after you fail an exam, and after “not approved” until rejection notice.
How can insurer avoid problem?
o Don’t issue a binder
o Decline to request payment of the first premium with the application.
Gaunt v. John Hancock Mutual Life Insurance Company
o He was shot. This court says it wasn’t accidental b/c someone intentionally did it.
 But a lot of courts would call being shot accidental b/c it is unexpected.
o Aug. 3 – Gaunt applies, pays premiums and “passes” exam
o Aug. 9 – Home office asks for another exam
o Aug. 17 – Lay medical examiner in home office approves application
o Aug. 20 – Home office asks for more info re: draft
o Aug. 24/25 – Response to 8/20 request made.
o Aug. 26 – Final approval.
o Shot on the 24 or 25.
o Policy says if:
 (a) satisfaction of insurability and
 (b) approval before death
o Then:
 Coverage as of the time of completion of part B
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Box to check on application. Coverage exists at time of approval or part B.
Not covered under legal language of policy. But court said he had a reasonable of coverage b/c he passed the
medical exam. Reasonable person would have read it as coverage.
o What the policy really says is you’ll never be covered from the time of completion of Part B until final
approval.
o Paid premium, gave him this binder so thought as soon as I pass the medical test I’m good.
o So the court said the language was misleading and he got coverage. Even though insurance person would
understand it.
Accidental Death – Double Indemnity Provisions
 Pay proceeds when death was “accidental”
o Might exclude some things that regular life insurance provisions won’t.
 Accidental death benefits will be paid if the insured died as the result of accidental bodily injury. The benefit is not
payable if death were “contributed to by disease or bodily mental infirmity.”
o Kind of like ACC clause. Contributed to by something else or concurrently.
o W/out this language would argue efficient proximate cause
 Multiple causation issues
o “directly and independently of all other causes”
 Double indemnity
o You get double coverage if you come w/in the provisions. Usually accidental death. Beneficiaries might need
more money for accidental deaths.
Insurable Interest
 Purpose
o To combat moral hazard and wagering
 Parties Involved in Life Insurance
o Owner – pays for the policy, can name and change beneficiary, retains right to change things.
 Can sell or transfer ownership of policy.
 Can assign the right to the proceeds.
o CQV – life insured
o Beneficiary – receives the proceeds
 Scenarios
o Owner is CQV
 Owner has an insurable interest. Beneficiary needs no insurable interest.
o Owner is not CQV
 Owner and beneficiary must have insurable interest in on the person’s life who is insured.
 Kinds of Insurable Interest (some states have statutes defining insurable interest; sometimes they aren’t very clear)
o Close Family Relationships
 Spouses
 Parents and minor children
 The further apart you get with family ties, less likely to a court is to find an insurable interest.
 Aunts and uncles – most courts have said too far.
 Siblings – most courts have said ok.
 Most statute says something like close personal relationship so it’s kind of case by case. if you can
show that relationship you have an interest. But the farther you get, the less likely.
o Business Relationships
 Business Partners
 Key Man
 Creditors
 Can have an insurable interest in the amount of the debt.
 Some courts cap amount of insurable interest at, or right above, amount of debt
o Policy amount and interest can’t be grossly disproportionate; would defeat
insurable interest.
o Example Statute
 Love and affection.
 Economic interest.
 Ryan v. Tickle
o Two business partners made each other the beneficiaries of each other’s life insurance policies. When one died,
his wife sued and tried to get the pay out.
o Bought two policies insuring their joint lives, would pay to survivor of the two.
o Wife is suing saying there is no insurable interest.
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 Argues it is like wagering and void b/c face value of the policy grossly exceeded the insurable interest.
Is it a wager?
 Might have the effect of a wager if survivor better off (depends on how profitable company would
have been if both survived)
o Court doesn’t have to decide. Wife didn’t have standing to bring the claim.
o Rule – only the insurer has standing to assert lack of insurable interest.
 Some states have statutes that allow the estate to sue the recipient of the proceeds based on lack of
insurable interest.
 This might be the rule b/c in cases like this it would have been so hard to figure out if there was an
insurable interest.
Insurable interest for life insurance is determined when the policy is issued/purchased.
o Note: this doesn’t prevent all moral hazard.
The Creditor’s Insurable Interest
o Policyholder must have an insurable interest
 In the life of the party insured
o AND
o At least equal to the amount of coverage purchased
 Where the relationship is between debtor and creditor, the amount of the debt is typically the limit of
the creditor’s interest.
o Note Case
 Someone owed a guy $200. He took out $240,000 worth of life insurance. Took him hunting and the
guy died on the hunting expedition. Even if you could not prove he committed murder, could say the
face value exceeds the credit limit by such an amount that policy is void b/c of lack of insurable
interest.
Interpleader
o File a lawsuit and name the two competing interests as defendants. Serve them and then they litigate. Usually
the lie insurance company can be dismissed as a party.
Assignment/Transfer of Ownership
o Sample Policy – pg. 312
 Owner
 Can transfer ownership (written proof required)
 Can assign as collateral security
 If you owe a creditor, you could make an assignment.
o Creditor has an insurable interest
 Can name or change beneficiary
 Owns policy, pays premiums, can sell policy, assign proceeds, and change beneficiary.
 If you die and no beneficiary and no contingent beneficiary the proceeds to go your estate.
 Proceeds
 If proceeds go to beneficiary are not subject to claims by creditors of estate.
o Rights
 Transferee – basically anything the owner could have done
 Assignee – only has right to proceeds
 Right to proceeds is superior to beneficiary
o Grigsby v. Russell
 Owner had a policy. He needed surgery. He sold the policy to the doctor. Transfer of ownership.
 Can you buy a policy and later sell it to someone who has no insurable interest?
 Yes, as long as legit transaction at the outset. Owner who is also CQV can assign policy to
person w/out an insurable interest.
 Insurance policies are assets. So if you can’t sell that is not letting you transfer your property.
 Must assignee/transferee have insurable interest?
 Rule: if transaction is legit at the outset, owner/CQV can assign policy to a person w/out
insurable interest.
 If the transaction is a sham (wager) from the outset, the policy is void ab intitio.
 Why no insurable interest requirement?
 Life insurance is an asset like anything else.
 Where the owner is the CQV, assignment would be the same as naming assignee a
beneficiary.
 Can also assign right to proceeds. Assignee can’t change beneficiary or anything like that. Those are
ownership rights.
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What if you immediately assign it to a friend who lacks an insurable interest? Most courts say that if
void. If that is what you meant to all along. But could name as beneficiary.
Changing Beneficiaries
 Sample Policy – pg. 315
o The owner can change beneficiaries.
 While the insured is living, OR
 W/in 60 days after insured’s death, if the insured, just before his/her death was not the owner.
o Effective Date – pg. 316
 The effective date of a name change will be the day a written request is signed.
 IF the home office receives an acceptable written request.
 Strict Compliance
o Complies with the terms of the policy
 E.g., policy may require that the change of beneficiary be requested on a form satisfactory to the
company.
 Sample policy – written request that is acceptable to the company.
o Fact-Intensive Inquiry
 When questionable who the beneficiary is, the insurer should commence interpleader action and make
payment of proceeds into court.
 Substantial Compliance
o A narrow exception to the requirement that the owner of an insurance policy can change the beneficiary only by
strictly complying with the terms of the policy.
o The owner will have effectively changed the beneficiary if the following is proven:
 1. The owner clearly intended (expressed intent) to change the beneficiary and to designate the new
beneficiary.
 AND
 2. The owner has taken substantial affirmative action to effectuate the change in the beneficiary.
o Majority of courts recognize this doctrine.
 Engelman v. Connecticut General Life Insurance Company
o It was a policy insuring her life. She doesn’t like the nephew. She wrote a letter saying she wanted to change.
Had the policy # a witness, etc.
o They sent a form back but the form was asking for the same thing the letter wanted.
o Her letter included all important info. They put the letter in the file. No proof she ever got the form they sent.
o Trial court said not enough b/c she didn’t do all that was physically possible.
o Appellate court then says she did enough. Substantial compliance.
 Avoiding Payments by Mistake
o Divorce
 Divorce alone does not operate to change designated beneficiary.
 A divorce decree that specifies that the former spouse is no longer the beneficiary does, however,
suffice.
 Some courts – enough that the decree says the former spouse’s interest is surrendered
 Others – require specific language about the beneficiary status.
o Date of Change
 Generally, the interest in the policy vests at the time of the insured’s death.
 Therefore, if a change was in the process of being made (e.g., form in transit) when the insured dies,
the change will not apply.
Murdering the CQV – State Mutual Life Assurance Company v. Hampton
 Hampton Case
o Insurance co. denies proceeds b/c she is accused of murdering her husband. She is acquitted.
o First part of the statute says if you’re convicted.
o The court says it doesn’t matter what the statute says. CL rule. Pre-existing CL rule that says if you kill
someone you don’t get proceeds. Whether or not you’re convicted.
o So then her argument is that she was acquitted so court has already tried the issue of whether she killed him or
not.
 Court says acquittal doesn’t matter. Two different BOPS. And other parties not represented in criminal
case.
o Does not bar re-litigation in a civil issue.
o Lots of states have these statutes, called slayer statutes. And there might be broader CL rules in those states
o General Rule – if the CQV is murdered by the beneficiary, proceeds go to the contingent beneficiary or the
estate.
 Conviction Deprives Beneficiary of Right to Proceeds
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o Statutory in some states, but conviction not necessary under the CL.
Acquittal (or other resolution in criminal proceedings)
o CL
 Leaves issue open for resolution in civil proceeding
 What Constitutes Sufficient Intent?
o Negligence – not enough
o Gross negligence amounting to reckless behavior – maybe enough
o Insanity – won’t work; can’t form intent
 Holding
o It is not required that a beneficiary be convicted in order to be disqualified from receiving the proceeds.
 An acquittal does not per se entitle the beneficiary to recover proceeds.
 Slayer Statutes
o Conviction deprives beneficiary of right to proceeds
o But conviction not required
 Acquittal or other resolution in criminal proceedings leaves issue open for resolution in civil
proceedings
 Different BOP
 Fairness/due process to other potential beneficiaries
 “Murdering” beneficiary has BOP that he is the legit beneficiary, then the BOP shifts to
contingent beneficiary to prove intention to cause death.
 Potential Homicide-Related Preclusions from Recovery
o Self-Defense
 Statute says “unlawful and intentional”
 Self-defense is not unlawful
o What if there is suspicion but no arrest and no competing claim?
 Insurance companies might want to put the money in interpleader
 Some courts – insurer will not be liable later to contingent beneficiaries if they act in good
faith.
 Some courts – must have conviction to bar recovery.
o Plea Bargains
 Interpleader
Viatical Companies
 A company purchases the policy from owner for a percentage of the face value. The company is assigned the policy and
is entitled to the proceeds and responsible for the remaining premiums.
o Allows people to get money immediately for things like medical expenses.
o Transfers are highly regulated to avoid unsavory situations.
Life Settlements/Accelerated Benefits
 Some life insurers allow benefits or life settlements for elderly or terminally ill policyholders in the last years of their
lives.
Stranger-Originated Life Insurance
 Procuring a policy with the intent to assign:
o 8th Circuit – held such a policy to be void.
o Does happen b/c difficult to prove.
Common Disaster Problem
 Most states have Model Acts saying that if CQV and beneficiary die at the same time
o Proceeds go to contingent beneficiaries or revert back to estate
 Creates problem of proving who died first.
o Model Uniform Simultaneous Death Act
 1993 Version
 An individual who is not established by clear and convincing evidence to have survived the
other individual by 120 hours is deemed to have predeceased the other individual.
 Treated as dying at the same time so the proceeds go to your contingent beneficiary or your
estate.
Limitations of Risk
 Silverstein v. Metropolitan Life Insurance Company
o “Policy covered death caused directly and independently of all other causes by accidental means.” Policy did
not cover “death…caused wholly or partly by disease or bodily or mental infirmity or medical or surgical
treatment therefore.”

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o
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


He had a small ulcer. He sustained a blow on the job. Would not have flared up or caused any harm absent some
kind of external blow like the one he suffered.
o Court said the ulcer was not a disease or infirmity within the meaning of the policy.
o Insurance co. – caused directly and independently. So but for the ulcer, the milk can falling would not have
killed him. If anything else contributes you’re excluded. Kind of like the ACC clause.
o But court says the disease or infirmity must be so considerable or significant that it would be characterized as
disease or infirmity in the common speech of men.
o So his estate wins.
 Rely on reasonable expectations doctrine. Would think the policy would cover something set off by an
external force if it was unexpected.
 If disease causes a fall, you shouldn’t be covered.
Accidental Means/Death
o Coverage
 Accidental death is a coverage issue
 Beneficiary has BOP
 Might get double indemnity
o Exclusion
 Suicide is an exclusion issue
 Insurer has BOP
o Accidental or Not Accidental
 Where CQV’s actions might in some way contribute to the death.
 Arguably there is no moral hazard here. The CQV is not likely to increase the risk of dying
b/c he has life insurance.
 Examples
 CQV’s death = innocent bystander
 Usually accidental
 If the CQV is the aggressor or engaged in criminal activity
 Probably not accidental
 Some courts say death is foreseeable
 Some policies explicitly exclude death while committing a crime
 Unintentional Drug Overdose
 Depends on whether policy says accidental death or accidental means
o If policy covers means – not accidental.
 If you engaged in voluntary intentional behavior that results in accidental death you
can’t recover under accidental means policy.
Some courts are no longer concerned with whether the means were accidental as long as the death was accidental.
o Most policies now are accidental death.
Accidental Death: E.g., covers accidental death; not payable if death was contributed to by disease, etc.
o Pays proceeds when death was accidental
o Accidental death benefits will be paid if the insured died as the result of accidental bodily injury. Not payable if
death was contributed to by disease or bodily or mental infirmity.
o Multiple causation issues
o Some courts say accidental from the standpoint of the insured.
Modern Rule
o Efficient Proximate Cause
 Accident must have been the dominate or substantial cause of death.
 What if a brain tumor caused a hiker to lose consciousness to fall off a cliff and die?
 Caused by disease. Some courts have found these falls were covered, if fact-finder finds fall
to be efficient proximate cause. Directly and independently. Language is attempt to K out of
efficient proximate cause rule.
 In an accident, go hospital, die from infection you got there?
 Efficient proximate cause. A lot of courts would say you are insured; reasonable expectations.
Some courts will say not covered.
 If you die during surgery, surgery caused by disease, but death is caused by something accidental.
 Courts would go both ways.
 Over-exertion that results in death. Vigorous exercise that results in fatal heart attack.

Courts are split.
 Some of the arguments are exactly the same that we saw with the ACC clause.
o Language v. Reasonable Expectations
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
Was the death unexpected from the standpoint of the insured? In Silverstein, yes. So the court used the
reasonable expectations test.
 A lot of courts – if death was caused by accident and disease, was accident the dominate cause of the
death? Based on reasonable expectations, it looks like a lot of courts will ignore the language and
apply efficient proximate cause.
 Drunk Driving/Risky Behavior
o Majority Rule – death that occurs while insured is driving under the influence is not accidental.
o Daredevil behavior = split as to whether the court will look at the means (which would not be accidental) or
only at the death (which would be accidental).
o Accidental drug overdose = split
o Consider: was the death unexpected from the standpoint of the insured?
 Death While Committing a Crime
o Modern trend – courts tend not to create implied exceptions for deaths caused while the insured is engaged in
criminal activity.
 Could be express exceptions.
 Suicide
o Why have suicide exclusion?
 Moral hazard
 Usually a 2-year exclusion for suicide so CQV won’t buy insurance knowing they are
planning to killing themselves.
Incontestability
 General Incontestability Provision – the insurer can’t deny coverage after 2 years (even if there has been a
misrepresentation)
o Usually applies to misrepresentation, fraud, concealment.
o Insured has to survive 2 year period. If dies after 2 year period, certain things become incontestable.
o When does it start to run? Might be when issues. But in some cases there might be an issue if there is a binder.
Need to look at the policy and figure out when it starts to run – insureds need to make sure they are comfortable
with when it starts.
 Purpose
o Provide assurances to insured/beneficiary that coverage exists and the beneficiary will be protected.
o Prevents insurer from raising defenses after insured’s death (insured person is always going to be dead. So they
can’t testify as to what they said or if they told the truth).
 Prevents investigating after death instead of at time of application
 Don’t want beneficiaries to have to do battle with powerful insurance carriers.
 Incentive for insurer to discover fraud early
 Want to encourage life insurance companies not to engage in post-claim underwriting so that they are
looking for a reason once you die to deny coverage.
 Amex Life Assurance Company v. Superior Court
o Sample policy: w/in incontestability period, may deny coverage based on a material misrepresentation (would
have affected decision somehow). But after that, can’t. Here, 2 years (pretty much standard). If attempt to raise
that after that period, insurance may be barred.
o This guy was HIV positive. He applies in his name, says he’s not HIV positive. Sends someone else to take the
blood test.
o Court focuses in part on how easy it would have been to see it was an imposter. Noticeably different height and
weight, no ID. And looks unhealthier or older than his stated age.
o And insurer still relied on his blood test.
o Amex argues imposter defense – that it never had K with Morales b/c imposter gave blood. But those cases
(where imposter defense was raised) are where the imposter applies as someone else.
o Court lets this guy get coverage.
o There are some costs to the incontestability clause. This guy is covered. Some fraudulent claims will be
covered. Some states have said if the applicant meant to lie, i.e. fraudulent, that is contestable.
o But here, the court says even that is incontestable.
o Gives people an incentive to lie.
 Test for Contestability
o Coverage v. Validity
 Arguments that go to coverage remain contestable, i.e. was your death accidental?
 Validity does not, i.e. void policy based on misrepresentation.
o Void ab intio v. Voidable
 If the policy was void from the get-go, it remains contestable. Whether it’s voidable becomes
incontestable.
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o
Exceptions v. Conditions
 Exceptions can always be raised but a condition becomes incontestable.
o Discoverable v. Non-Discoverable
 Maybe not the best test.
 Becomes Incontestable
o Goes to validity, voidable
 Fraud
 Misrepresentation
 Breach of Warranty
 Concealment
 Majority
 Condition requiring insured to be in good health
 Split
 Eligibility (work full-time under group policy)
 Remains Contestable
o Policy bought with intent to murder CQV (void ab initio)
o Premiums not paid (goes to coverage)
o Death was not accidental as required (goes to coverage)
o Majority
 No insurable interest – void ab initio
o Split
 Eligibility – split about whether lying about an eligibility requirement is incontestable after the two
year period.
Negligent Actions Against the Insurer
 Mauroner v. Massachusetts Indemnity and Life Insurance Policy – Negligent Delay
o CQV applied and paid premium on the same day, but application wasn’t processed until 13 weeks later (usually
took 4-8 weeks). Insured committed suicide 3 weeks before the 2-year period excluding suicide.
o Beneficiary argued that it was the insurer’s negligent delay that caused the death to be outside coverage (i.e.
excluded by suicide exclusion) thereby damaging P.
 Argument – insurance company took so long that the suicide period started to run later. He would have
committed suicide outside of the suicide period and would have been covered but for the delay.
o Negligence claim – court goes through the elements
 Negligent delay on the part of the insurer = the time between completion of application and the time it
takes the insurer to process it.
 The court found the delay to be unreasonable in this case; amounted to negligence.
 36 day delay. Doesn’t sound like there was an expert for standard of care but court still said
unreasonable.
o Rule – ordinary negligence must be proven (including causation)
o Held – insurer was negligent and that negligence was the cause of P’s loss.
o What does the standard of care require?
 There was a breach.
 How does she prove causation? If it had been issued in a timely manner he would have been w/in
coverage. Policy should have been, under the standard of care, issued at least 3 weeks earlier and if it
had he would have been covered when he committed suicide.
 The insurance co. would have had a proximate cause argument…that this is not the type of risk
protected against.
 Negligence Claims Against Life Insurance Companies
o Wrongful Death Claims
 Negligently issued a life insurance policy w/out an insurable interest and then that person went and
killed person covered.
o Should they have to tell you if they discover you have a communicable disease?
 Argument under Learned Hand Theory that they should
o What about telling beneficiaries that they have been changed?
 Bigger stretch
HEALTH INSURANCE
Differences in Health Insurance
 Not standardized to the same extent that other policies are.
 What is different about health insurance?
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o
o
o
o
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Cost
o
o
o
o
A lot more claims. Know you are going to use it.
A lot of group policies.
Public and private insurers. Private and the government.
Access
 It is estimated that there are about 43-48 million Americans who are uninsured.
 Who is uninsured?
 Poor who are ineligible for Medicaid
 Making too much to qualify for Medicaid but not enough to buy private
 Unemployed
 Young people
Cost is dramatically increasing, about $2.4 trillion in 2007 (17% of GDP); $7900/person
Annual premium for family of 4 = $12,700
Annual premium for single person = $4,700
That is one argument for health care insurance – if you cover everyone, the total cost will go down. So if you
give them access to preventive care it will be cheaper in the long run than sharing the cost of the acute care.

Quality
o Infant mortality rate is the worst in the developed world
o Life expectancy lags behind many other countries
 Healthcare Reform and PEC Exclusion
o Pre-existing condition exclusion is necessary to the integrity of the insurance being sold. But public policy
reason – we want people who have cancer to be able to get coverage. The individual mandate goes with this.
Can’t adverse select and wait 6 years if you have to get it today.
o If we want to get rid of pre-existing condition exclusion have to make people buy it today.
 Is access to health care a right/entitlement or is like any other consumer good?
 Unlike other types of insurance, health insurance covers small, routine, expected losses.
 Something you’re going to consume at a certain level every year.
 There are private and public providers of health care services and funding.
Pre-Existing Condition Exclusion (PEC)
 Definition: (usually defined in the policy)
o A good policy ought to define pre-existing condition
 Examples
 Affliction for which insured was diagnosed or received treatment.
 Broader – symptoms for which a reasonable insured would have sought a diagnosis or
treatment
 Serves to combat adverse selection
 Look Back Period
o Typically 6 months to 2 years
 What period it looks back to in order to determine pre-existing conditions
 Exclusion Period
o Most policies say for 1st year
o Some try to exclude forever
 Lawson ex. rel. Lawson v. Fortis Insurance Company
o Goes to ER before getting coverage. Diagnosed for something. Doctors didn’t know it was cancer. Dad gets
coverage like 2 days later. Later, when policy is in effect, diagnosed with cancer.
o While the policy is in effect, she receives lots of treatment for the cancer.
o Policy excludes coverage for pre-existing condition, defined as “Sickness, Injury, disease or physical condition
for which medical advice or treatment was recommended by a Physician or received from a Physician w/in the
preceding five year period.
o Sickness is defined as “illness, disease, or condition which is diagnosed or treated while this policy is in force.”
o The court here lets her get coverage. At a minimum, language is ambiguous so construe against drafter. Focus
on the word “for.” Connotes intent.
o Here, the parents, the daughter, and the ER didn’t know it was leukemia.
o Let her get coverage, but if you think about the policy reasons behind the exclusion, just b/c you don’t know
what you have doesn’t mean you haven’t adversely selected.
 Other cases where courts have enforced pretty broad exclusions if umambiguous.
 HIPPA (Health Insurance Portability and Accountability Act of 1996)
o Only applies to employer-provided insurance
o PEC
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
Must relate to condition for which medical advice, treatment, or diagnosis was received or
recommended
o Look Back Period
 6 months (at most)
o Exclusion Period
 Not more than 1 year
 With credit for previous coverage
 Unless there is a gap of 63 days
 i.e., a person covered under prior policy has to get a new job within 63 days in order to
receive coverage credit (from prior policy)
 Switch jobs, get employer-provided healthcare at your job. Exclusion period is only one year as long as
you had coverage under an old policy for one year. So get credit and you are covered.
o HIPPA was aimed at job lock
 You’re at a job, worked there forever, you get cancer. Then you change jobs and heath insurance might
get denied. This is what HIPPA fixed.
 At least one circuit held that a similar PEC clause applied when the insured learned from her physician that she had a
breast lump before the policy was issued. She was not diagnosed with breast cancer until after the policy was issued.
New Healthcare Policy
 Coverage for pre-existing conditions
 Universal mandate
 If you’re 26 you get to stay on your parents
 Now bans exclusions for minors
 Limitation on total amount of premiums received that any insurance co. can use on administration.
 Cost containment measures, i.e. preventive care is cheaper than care when someone gets sick.
 Other issues, how are you going to pay for it? Big increase on Medicare tax rate.
 Cadillac plans. Will have an income tax on fancy plans.
 Fees on insurance.
 Couple that with the fact that we have the most expensive healthcare in the world w/the fact that we don’t have the best.
Basically sucks.
Cost Containment
 HMO’s
o have to receive your healthcare from someone in the HMO
 PPO’s
o Preferred provider. Attempt to do the same thing. Encourage you to seek treatment from a member in the PPO.
 Deductibles, co-pays
o Not a huge disincentive to have to pay $15 to go to the doctor.
 Pre-Authorization
o Have to get approval before treatment/surgery.
o Not sure that is particularly effective, given the administrative costs.
 Limiting coverage treatment that is “medically necessary” or not part of research, etc.
o Medically Necessary
 Coverage only if treatment is medically necessary
 Treatment is not medically necessary if:
 Furnished in connection with medical research
 Not authorized by Health Care Financing Administration
o Fuja v. Benefit Trust Life Insurance Company
 Policy listed five criteria, each of which had to be met for it to be medically necessary.
 At issue here: not furnished in connection with medical or other research.
 Coverage only if treatment is medically necessary.
 Not medically necessary if furnished in connection with medical research.
 Not medically necessary if not authorized by Health Care Financing Administration.
 Policy is not ambiguous.
 No question in this case that it was in connection with a medical research. She received all that info
and was aware that it was a medical trial.
 Why exclude coverage for something that is experimental?
 Is this coverage most people would be willing to pay for? Probably not. It is really expensive
and usually don’t know if it will work.
 Who determines if it is medically necessary? Lots of policies have an internal appellate process and in
some, can appeal to an external board.
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
ERISA
Court here says it would be good to have an independent body decide what is medically necessary.

Employment Retirement Income Security Act
o Applies to all employer plans. Goal was to make administrative of employee healthcare cheaper.
 Generally applies to employer-provided pension, disability and health plans
 Preempts all state laws that “relate to” any employee benefit plan
o Problem that “relate to” is so broad that there is a lot of litigation.
o Purpose was to preempt state regulation and make it exclusively federal
 Savings clause excepts form preemption any state law which regulates insurance
o Still wants states to regulate insurance
 Deemer Clause – result of clause is that self-funded plans are not subject to state insurance regulation.
 Complete preemption (gives rise to removal jurisdiction)
o Complete preemption; allows insurer to remove b/c it has been completely preempted so it is a federal question.
 Exclusive civil enforcement scheme – claims for denial of benefits must be brought under ERISA; generally, a claimant
has no claim for extra-contractual damages even if state law would allow such a claim.
 Examples of saved state laws:
o Anti-subrogation law
o California’s notice prejudice
 A common requirement under liability insurance is that you give notice of the occurrence before you
get sued. And notice of a claim. CA has a common law rule that the insurance co. can’t deny a claim
based on untimely notice unless they can prove prejudice also. So that is regulating insurance and not
preempted.
o Mandated benefits statutes
 Different states mandate coverage for different things.
 Examples of preempted state laws/causes of action:
o Claim for punitive damages (Miss.’s bad faith law wasn’t a law regulating insurance)
o K and tort claims for failure to provide benefits
 Only claim you have is the ERISA claim.
Coordination of Coverage
 Which insurer is obligated to pay when the insured has more than one policy that is triggered?
 Look to Other Insurance Clauses or Coordination of Coverage/Benefits Clauses
 Types
o Pro Rata – will pay in relation to coverage
o Excess – will pay excess after other insurer has paid limit (primary v. excess)
o Escape – will not pay at all if other insurer
 Primary v. Secondary
o In health insurance, if policy covers employee, then it is primary. If policy covers spouse, who is covered as
employee under a different policy, then policy is secondary.
 Governing State Law or Regulation
o Some states have laws that coordinate how the provisions work together. For example, some have statutes that
enforce the above.
o Just be aware of state statutes and laws.
 Judicial Coordination
 Examples
o Assume for all that insured has three policies
 Policy 1 - $20K limit
 Policy 2 - $30K limit
 Policy 3 - $50K limit
 Total Amount of Coverage = $100K
o Pro Rata
 If a loss covered by this policy is also covered by other insurance, we will pay only the proportion of
the loss that the limit of liability that applies under this policy bears to the total amount of insurance
covering the loss.
 Insured suffers a $50K loss.
 Insurer 1 will pay $10K (b/c it provides 2/10 of total coverage). Insurer 2 will pay $15K (b/c it
provides 3/10 of total coverage). Insurer 3 will pay $25K b/c it provides (5/10 of total coverage).
o Excess
 This plan requires that if any person covered hereunder is also covered under any other plan, the other
plan shall be primary and this plan shall pay this balance of expenses up to total eligible charges.
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Policies 1 and 2 have pro rate clause. Policy 3 has excess clause.
Total Primary Coverage = $50K.
Excess Coverage = $50K
Insured experiences a $50K loss.
Insurer 1 will pay $20K (2/5 of primary coverage). Insurer 2 will pay $30K (3/5 of primary coverage).
Insurer 3 will pay $0 (b/c excess or secondary).
o
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Escape
 If there is other insurance written on the insured interest, then there is no coverage under the policy.
 Policies 1 and 2 have pro rata clause.
 Policy 3 has escape clause.
 Insured experiences a $60K loss.
 Policy 1 will provide $20K. Policy 2 will provide $30K. No coverage under Policy 3.
Harris Corporation v. Humana Health Insurance
o Margaret was covered under Harris plan during the relevant time period (7/94-12/95) as an inactive former
employee.
o Margaret was covered as the spouse of an active employee under her husband’s policy with Humana.
o Harris ended up covering her expenses. They pay and then sue Humana for the amount they paid once she
became eligible for Medicare.
o Harris – coordination of coverage provision – there wasn’t one that applied to her. No applicable coordination
of benefits clause.
o Humana – secondary if other policy and no applicable coordination of coverage clause.
o Medicare Secondary Payer statute mandating that a policy based on an individuals (or spouse’s) current
employment status must be primary to Medicare. Other policies may be made secondary to Medicare pursuant
to coordination of benefits clauses. The statute provides authority to bring a cause of action for double damages
against a primary insurer that refuses to pay.
 Cost-saving measure.
o Harris’ argument – that Humana is primary to Medicare and Harris is secondary so Humana should have paid.
 Harris is secondary to Medicare (statute allows Harris to make Medicare primary and Harris plan
contained provision that did so). Humana is primary to Medicare (statute so provides).
 Harris’s argument: “Statute reorders priority between private insurers. Humana has to pay before
Medicare while Harris has to pay after, so Humana must be primary to Harris.
o Court doesn’t buy Harris’s argument – no congressional authority to reorder private insurance. Medicare didn’t
matter, didn’t have a dog in this fight. Statute doesn’t address priority b/t private insurers.
Excess v. Excess/Escape v. Escape
o Knock-Out Rule
 Clauses are mutually repugnant, so other rule such as pro rata is imposed.
o Employee v. Dependent (in health insurance)
o Interpretive (birthday rule)
 Variations
 Oldest policy is primary
 In case where children are covered under both parents’ plans, plan of parent whose birth date
falls earliest in the calendar year is primary.
Pro Rata v. Excess
o Those coordinate
Pro Rata v. Escape
o Majority – policy with pro rata clause must pay in full (no other primary coverage to pro rate), policy with
escape clause provides no coverage b/c there is other insurance.
o Minority – knock out rule; don’t like escape clauses
It doesn’t really matter what method of interpretation the court uses as long as everyone knows what it is.
Excess v. Escape
o Enforce Excess Clause
 Policy with escape clause is primary. Excess is secondary. Coverage is provided by primary policy b/c
no other valid primary coverage. Excess would pay once other policy is exhausted.
o Enforce Escape Clause
 Policy with escape clause never comes into existence b/c other insurance exists. Thus, policy with
excess clause must pay. The policy with the escape clause would not pay even if the policy with the
excess clause didn’t provide full coverage.
o Knock Out Rule
 Pro Rate
Subrogation
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Equitable Subrogation
o Not based on K.
o Necessary to prevent unjust enrichment of the insured P who might otherwise obtain a double recovery.
o If the insured has not been made whole, then there is no need for equitable subrogation b/c the insured is not
unjustly enriched.
o The Common Fund Principle
 Equitable doctrine that applies to equitable subrogation and requires the insurer to pay a fair share of
the insured’s attorney’s fees.
Contractual Subrogation
o Insurers often include provisions contracting out of the made whole rule and giving the insurer top priority
o Often include provisions contracting out of common fund doctrine
Anti-Subrogation Statutes
o Might prohibit subrogation – sometimes until insured has been made whole
o Might alter collateral source rule so that the insured does not get to recover for damages in tort suit if the
insured received payment for those damages from insurer.
o Some prohibit subrogation until insured is fully compensated and also require the insurer to pay a proportionate
share of attorney’s fees.
o Some states, as a matter of CL, refuse to enforce policy provisions contracting out of made whole rule or
common fund doctrine.
Associated Hospital Service v. Pustilnik
o Pustilnik settled with SEPTA for $235,000
o BCBS claims it is entitled to almost $19,000 in subrogation
o Can demonstrate they paid almost $17,000 but paid the $19,000 but issue in accounting.
o What is BCBS’s subrogation right?
 $17K v. $19K
 Trial court: $17K
 Appellate court: $19K
 Is insurer entitled to full subrogation when insured settles?
 Pro-rata (trial court reduced claim by 50%)
 Full subrogation (appellate court)
 Made whole rule
 One argument against: if subrogation is good and reduces cost, it is against those
goals.
 Encourages Ps to settle lower so they aren’t “made whole.” Ex: total damages are
$5M. Got $2M from insurance so would settle for right at $3M. So that way you
don’t have to deal with insurance co. Wouldn’t want to spend the extra time and
money trying to recover the $2M from the health insurance company.
 What about attorneys’ fees and expenses?
 Trail and appellate court: 40% fee + expenses
o If your plan is an ERISA plan, self-funded employer provided insurance is exempt … If ERISA plan, look at
policy.
o Basically, ERISA really complicates subrogation and attorneys’ fees.
LIABILITY INSURANCE – COMMERCIAL GENERAL LIABILITY
The CGL Form Policy
 Declarations Page
o Want to know if there is a per occurrence limit or a limit in the aggregate.
 Retroactive Date
o Not important for occurrence based policies, really important for claims made policies. We’ll talk about the
difference.
 Coverage A: Bodily Injury/Property Damage
o Insuring agreement
o Tort claims for bodily injury or property damages. This is liability insurance – insurance against tort claims.
 Right and duty to defend
o Right and duty to defend in any suit seeking those damages.
 No duty against any suit seeking damages for bodily insurance or property damage to which damage
does not apply.
 Get to investigate and settle.
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To which this insurance applies – will look at that section.
Right to duty and defend ends when we have used up the applicable limit of insurance in the payment of judgments or
settlements under Coverage A or B or medical expenses under Coverage C.
The CGL Form Policy
o Applies to what?
 Bodily injury and property damage only if caused by occurrence that takes place in the coverage
territory.
o Occurrence – accident including repeated exposure to harmful stuff.
o Applies only if:
 Bodily injury or property damage is caused by an occurrence that takes place in the coverage territory
and
 The bodily injury or property damage occurring during the policy period (occurrence vs. claims made
coverage)
o Known loss clause – can’t insure against a known loss. No coverage for known losses.
o Occurrence means an accident, including continuous or repeated exposures to substantially the same general
harmful conditions.
 We will talk about how you figure out how many occurrences there are.
o Exclusions
 Expected or intended injury
 i.e. not covered for battery
 How certain do you have to be about something to know that it will happen?
 Exception for self-defense and protection of property
 Pollution exclusion
 Liquor exclusion
 Have to buy that separately
 Owned property exclusion
 Business risk exclusions
o Coverage B: personal and advertising injury
 Insuring agreement
 Exclusions
 SEE SLIDE
Who is an insured?
o Includes employees. To be an employee and to be insured, broader than scope of employment, also includes
related to conduct of your business. Employee working w/in scope or while performing duties related to the
conduct of employer’s business.
o Limits
o Conditions
 Such as duty to provide notice and duty to cooperate
 Timely notice of occurrence
 Timely notice of claim or suit
 Duty to cooperate
o Other insurance
 Primary; if other primary will
 Excess over any other insurance that is higher…blah blah blah
 Primary, excess, method of sharing (equal parts if that is what all other insurers do, if not then pro rata)
 Non-renewal
Declarations Page
Coverage A: Bodily Injury/Property Damage
o Insuring agreement
 We will pay those sums that the insured becomes legally obligated to pay as damages
 Because of “bodily injury” or “property damage”
 To which this insurance applies
 Duty to defend any “suit” seeking damages
 Duty to defend ends when the case is over essentially.
 Right to settle
The insurance applies to “bodily injury” and “property damage” only if:
o 1.b(1) the “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage
territory” and
o 1.b(2) the “bodily injury” or “property damage” occurs during the policy period (occurrence v. claims made
coverage) and
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1.b(3) No coverage for known losses.
“occurrence” means an accident, including continuous or repeated exposures to substantially the same general
harmful conditions
 A.Y. McDonald Industries, Inc. v. Insurance Company of North America
o Insuring agreement: “we will pay all sums that the insured shall become legally obligated to pay as damages
because of bodily injury or property damage to which this insurance applies.”
o They are being ordered to clean up pollution and take preventive measures by the EPA.
o Are clean up costs and civil penalty “damages” which the insured shall become legally obligated to pay? Court
decides yes.
o Court looks at what other federal and state courts have done.
 Decide that the word damages is ambiguous.
 Damages is a specific legal term. But not a defined term here. One interpretation might be is in the
legal sense, money damages from a lawsuit in a legal claim. But not clear, could mean any damages
resulting from property damage.
 So construe against insurer.
o Traditional rule outside of this context with regards to injunctive relief is that is not damages. B/c you are being
ordered to do something.
 In the pollution context, some courts have said that injunctive relief comes w/in the meaning of
damages. B/c it will cost so much.
 Other courts have said exactly the opposite – damages doesn’t mean equitable relief. Majority of courts
have found coverage.
 Even consent decrees – courts have said that b/c of public policy concern they will find that they are
damages. Would rather people clean up pollution.
o Difference in preventive?
 Yeah. Costs incurred to pay for preventive measures taken in advance of pollution are not “damages
b/c of property damage.”
o What if you are experiencing just emotional distress? Most courts have said you have to have some form of
physical manifestation, i.e. lost weight, can’t sleep, etc.
o Damages b/c of bodily injury – includes every kind of damage you can recover in a tort lawsuit b/c of bodily
injury. Includes lost wages, emotional distress, loss of consortium, etc.
 F & H Constructin v. ITT Hartford Insurance
o Property damage?
 Physical injury to tangible property
 Difference between liability for defective workmanship and liability for defective
workmanship which caused bodily injury or property damage (consequential damage)
o Here, used the wrong pile caps.
o Is this physical injury to tangible property? No. If the defective caps had caused some damage, it would be. But
here, no external real physical injury.
o Put the pile caps on…not that they damaged the pile, they just used a lesser grade.
o Loss of use of tangible property that is not physically injured?
 Not suing for that here. Suing for cost to reinforce the pile caps.
Triggers and Allocation of Coverage
 1. Manifestation Trigger
o When disease is diagnosed (injury becomes manifest) or when symptoms appear that should have put injured
person on notice. Discovery rule.
o Easy to identify when a person is diagnosed.
o Pros
 Ease of application?
 Likely to trigger only one policy, so avoids allocation of coverage issues
o Cons
 Inconsistent with reasonable expectations? (Do insureds expect coverage based on actual injury or
manifestation?)
 As soon as disease becomes known, insurers will exclude coverage (e.g. for any diseases that take a
long time to show symptoms)
o Other
 Likely to trigger later policies with higher limits
 Likely to trigger only one policy, so less coverage (unlike exposure trigger).
 2. Exposure Trigger
o When claimant is exposed (i.e. when person ingests medicine or when property is polluted).
o Pros
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 Relatively easy to apply?
 Avoids problem posed by manifestation trigger
 Consistent with insured’s expectations?
o Cons
 Inconsistent with language (except in cases where exposure caused immediate injury)
 Not every exposure results in injury
o Other
 May trigger many policies, more coverage
 Will trigger earlier policies with lower limits
3. Actual Injury Trigger
o Coverage triggered when actual injury occurred, whether manifest or not.
o Pros
 Consistent with policy
o Cons
 Very difficult to apply on case-by-case basis in thousands of anticipated cases (expert testimony in
every single case)
 Going to be a lot of medical expert testimony just to figure out when it occurred. So every
case is going to be very expensive.
o Other
 Triggers later policy with higher limits
 May trigger multiple policies if injury is continuous
4. Continuous Trigger
o From time of exposure to manifestation
o Each year in which actual injury occurs
o Each year in which exposure occurs
o This could potentially implicate many different policies over time
 Issue: how to allocate damages between the policies
 Common approach: allocation on time of the risk or allocation by limits
Number of Occurrences
o Tests
 Number of causes (majority)
 Number of effect (minority) (from standpoint of victim)
 Number of events triggering liability (immediate event, last link in casual chain)
 Really a version of the cause test
Allocation of Coverage – how do we allocate bodily injury/property damage over a period of years? When multiple
policies?
o Damages As Proven
 Figure out how much damage occurred in each of the years (i.e. policy period)
o Pro Rata by Limits
 Each policy triggered pays a fraction based on the amount of limits
o Pro Rata by Time on the Risk
 Majority Rule
 Takes total owed and divides it among the policies triggered – each pay the same share
o Joint and Several
 Insured can pick which policy to trigger and can get all the money from one insurance company who
then seeks contribution from others
o Joint and Several – Pick One Year
 Insured gets to pick one year
See Hypo, pg. 24 outline
Allocation of Coverage
o Horizontal
 Pro rata by years
 Pro rata by limits
o Vertical
 Joint and Several
 Joint and Several – pick one year
Pro Rata Time on the Risk (Horizontal)
o Majority
o Divide loss by number of years triggered
 Takes into consideration years where there is no coverage
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o Fair if damages were actually evenly distributed from 1 year to next
o Not insured friendly (unless fully covered)
Pro Rata by Limits (Horizontal)
o Coverage allocated according to % of total coverage determined by policy limits during triggered period
 Takes into consideration uncovered years
o Not very fair to insurer b/c those insurers who provide more coverage are punished
o Better than “on the risk” for insured but not as good as joint and several
Joint and Several (Vertical)
o Tort based
o Lets the insured pick which policies will be invoked
o Insured friendly (allows insured to either fully recover or get policy limit from each policy)
Joint and Several Pick One Year (Vertical)
o Insured can pick one year’s policy
See Hypo, pg. 25 outline
American Home Products Corporation v. Liberty Mutual Insurance Company
o Latent or insidious diseases.
o Court goes with actual injury trigger. Reasonable expectation of insured and closest to policy language.
In Re Silicone Implant Insurance Coverage Litigation
o Breast implants that had caused some cell damage.
o What trigger did the trial court apply?
 Actual injury or injury-in-fact
o When did injury begin?
 At or about the time of implantation?
o They talk about pro rata by risk and about time on the risk allocation.
o They talk about several of these types of allocation.
o Trail court found injury continued so it then had to allocate loss to various policy periods and it did so by using
the pro-rata by time on the risk methods (used in NSP and Domtar)
o NSP pollution case – court used time on the risk. Continued pollution over time. Wasn’t one big dump that
caused it. Allocation by time made sense.
o But if there is one event, don’t need it.
o They used time on the risk for those cases where you can’t identify when injury started or occurred and
occurring at a relatively equal rate every year. Pollution.
o Here, have one actual injury.
o Allocation isn’t appropriate here b/c one occurrence.
o What does the court avoid by picking just one year? Time on the risk. Having to figure out that shit.
o Problem of uninsured years (court in Domtar allocated loss to uninsured years based on time on the risk)
o Minnesota Supreme Court: in cases where continuing injury arises from discrete and identifiable event, only the
policy on the risk at the time of the event is triggered
o Avoids allocation of coverage issue
o If you have a claims made policy – this is irrelevant, b/c covered when claim is made. This is for occurrence
policies.
Metropolitan Life Insurance Company v. Atena
o Why is Metropolitan, the insured, arguing that there was only one occurrence, while the excess insurers argue
that each exposure was an occurrence?
o If each one is an occurrence, the deductible would probably be more than what they had already settled to pay
some of the plaintiffs. If each claim is an occurrence, the deductible would be higher than nuisance settlement
value.
o Policy has a clause that the court calls continuous exposure clause
o “all bodily injury and property damage arising out of continuous or repeated exposure to substantially the same
general conditions shall be considered as arising out of one occurrence.”
o Insurers were arguing that the exposure to all the different plaintiffs were occurrences.
o Insureds say failure to warn was occurrence. Failure to warn would have to be general condition. Court said that
doesn’t make sense.
o Effect of batch clause is not to make one failure to warn one occurrence or to make all of the 200,000 claims
different occurrences. Serves to combine claims arising from exposure to asbestos at the same place at roughly
the same time into one occurrence, not to combine hundreds of thousands of exposures at different times and
locations into one occurrence.
o Tests:
 Number of causes (majority)
 Number of effects (minority) (from the standpoint of the tort plaintiff)
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Number of events triggering liability (immediate event, last link in casual chain) (really a version of
the cause test)
o Metropolitan Life court: using the event test, exposure to asbestos was the last link in the casual chain.
o Does the language allow aggregation of claims based on similar conduct?
o What is the effect of the batch clause (similar to the unifying directive in the sample policy’s definition of
occurrence)
 Court concludes that the clause allows claims to be aggregated if claimants were exposed at the same
place at approximately the same time.
Accidental Means v. Accidental Results
 Acceptance Insurance v. Powe Timber Company
o What is the allegation in the complaint? Either they burned the timber and inhaled fumes or held it w/out gloves
and were injured that way.
o Is the insured wood company potentially legally obligated for damages because of bodily injury?
o Was the alleged bodily injury caused by an occurrence, defined as an “accident”?
o Accidental means vs. accidental results
o Court: complaint alleges that insured wood treatment plant purposefully distributed treated wood chips
o Court says this is not an accident. They intentionally made this available to people. Meant to distribute the
wood.
o They are being sued for negligence. When you purchase liability insurance you are purchasing it to cover for
your negligence.
o Court essentially is saying that any time you do something on purpose…it is not covered.
o Problems with Holding
 They didn’t know the chemical was going to cause harm.
 Intentionally sold the wood but there were unintended consequences – you should be covered for that.
 What people buy coverage for it negligence. Just b/c you do something on purpose doesn’t mean the
result is intentional.
 This is not just in MS – there is a line of cases that say this.
 To be an accident – accidental means or result? Some courts say result. That’s what you buy insurance
for.
 They are not saying they expected it here. Saying they should have expected it.
 Most of the time, you’re negligent b/c you are doing something on purpose. It’s just stupid.
 If that is the rule, could you ever have liability coverage for a design defect? No. Every design is
intentional. Percy – this is very problematic.
Exclusions and Conditions
 1. Expected or Intended Harm Exclusion
o Who bears the burden of proof?
 Insurance company
o Expected
 What does expected mean?
 Majority – there is a high or substantial probability that damage will occur, damage is
practically certain to occur.
 Damage might occur or is foreseeable – probably not sufficient
 Damage is likely to occur – probably not sufficient (but some courts)
 Subjectively aware that damage will occur? That is different from expecting it will occur.
 What must be expected?
 Majority – same general type of harm
 Any harm – too broad (insurer friendly)
 Exactly the same harm – too narrow (insured friendly)
 Do expected and intended mean the same thing?
 Most courts say no.
 Subjective or Objective?
 Majority – subjective test to determine whether expected
 Provides for more coverage (allows coverage for negligence)
 Minority – the should have known objective test. Really broad.
 Whose expectation?
 From the standpoint of the insured
 So most of the time looking at employer’s expectation.
 What about vicarious liability?
 Low-level employee does something intentionally to cause injury/damage?
 Employee is not covered by insurance – exclusion
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What about the employer of this employee?
 Most courts would say that the employer is a separate insured who will still be
covered b/c not responsible for excluded conduct.
Stonewall Insurance v. Asbestos
 Being sued for bodily injury and property damage for injuries caused by the manufacture of asbestos.
 To figure out what was expected, the jury was asked to evaluate the defendant’s insured expectation on
a product by product basis. Is that consistent with the policy? The court said it was. Nothing wrong
with a jury instruction that looks like that. This is a subjective test.
 What evidence did they use to prove that they didn’t expect or intend bodily injury or property
damage? They introduce a record custodian.
 When does the insured have to expect or intend loss for coverage to be excluded?
 At the time of insured’s conduct.
 At time of manufacture and sale in this case. If you didn’t know then, it doesn’t
matter that they find out 20 years later.
 Known Loss Principle (Defense)
 An insured may not obtain insurance to cover a loss that is known before the policy takes
effect.
 Applies to 1st and 3rd party insurance.
 Asbestos: loss must be practically certain to occur for the insurer to use the defense.
 Insurance company argues that when they bought these policies they had already been sued a
bunch and knew that there were potential cases out there.
 Court said: although NGC was aware of the risks posed by its products, it was “highly
uncertain” regarding the likelihood of successful claims and the amount it would be called
upon to pay.
 Held: exclusion does not apply
Known Loss Rule
 How is it different from expected or intended exclusion?
 A loss has happened.
 What must be known? Courts are split.
 Loss
 Probability of liability
 Certainty of liability
 Rule might not be necessary if insurer asks sufficient questions in application process, given defenses
of misrepresentation and concealment.
 New CGL policy contains explicit known loss rule (Section I, 1.b.(3), 1.c, and 1.d on pg. 466)
Intended
 Was there an accident?
 Accident means v. accidental results
 Accidents are unforeseen, unexpected and unintended
 What must be intended?
 Majority – conduct plus intent to cause some damage/injury of same general type or severity
 Minority – conduct plus intent to cause exact type of damage/injury
 Minority – intentional conduct with foreseeable results
 Whose intention counts?
 The insured seeking coverage?
 All insureds?
 In the Unigard case, court said evaluate it separately. Because said “the insured.”
 In the homeowner’s policy in the book, says “an” insured. Some courts have said not separate.
Unigard Mutual Insurance Company v. Argonaut Insurance Company
 Parents have homeowner’s insurance. Personal liability insurance. Insuring language is similar to
CGL.
 Son of parents set fire to the school. And the school’s insurance paid and now they are suing family’s
insurer.
 Expected or intended
 He said he meant to start the fire, didn’t intend it to spread.
 Two issues
 1) Was there an accident?
 2) Are parents covered?
 Because he lit the fire on purpose, it wasn’t an accident.
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Then look at parent’s claim. They are covered, b/c they are separate. They are being sued for
something like negligent supervision. It was an accident from their standpoint and they did not expect
or intend property damage.
o Trucker Case
 Expected or intended exclusion does not apply to self-defense.
 Insured – employees or executive officers but only with acts in the scope of employment or for acts
related to their employment.
2. Owned Property Exclusion
o Hakim v. Massachusetts Insurers’ Insolvency Fund
 Why exclude coverage for own property? You are supposed to buy first party coverage for that.
 There was a pollution exclusion under their first party insurance. They have been ordered to clean up
some of the clean up costs in the river.
 The Owned-Property Exclusion “OPX”
 Insurer here is saying they don’t owe the homeowner’s money that they spent to clean up their
own property.
 Categories of potential cases:
 Damage only to owned property and no threat to other property (almost all courts hold
exclusion applies)
 Damage only to owned property but damage to other property is imminent (majority: no
coverage; minority: insured can recover costs of preventing damage to other property)
 Damage to owned property and to other property (majority: exclusion doesn’t completely bar
recovery, but costs incurred for the sole purpose of remedying the insured’s property are
excluded)
 Going to be hard to figure out what is for remedying, etc.
 Other Issues:
 How do you allocate costs?
 Who owns groundwater?
 CL says you don’t own ground water so can argue that damage is not to “owned
property.”
 What about argument that all ordered clean-ups are presumably to protect the property and
health of third-parties, thereby suggesting that all clean-ups are “because of property damage
or bodily injury” of others?
 Preventing future damages
 Occurrence policy may not cover future loss b/c damage doesn’t occur during policy
period.
3. Business Risk Exclusion (BRX) – sample policy pg. 470
o Generally, BRX exclusion = no coverage for against liability for faulty work
o Property damage to the following are excluded
 Property damage to your product
 Property damage to your work
 Exception – exclusion does not apply if a subcontractor performed the damaged work on
insured’s behalf
 Property damage to impaired property
 Recall of products, work, or impaired property/sistership exclusion
o BRX does not apply
 If your work causes damage to other property
 If your work causes bodily injury
o Weedo v. Stone-E-Brick, Inc.
 Being sued for faulty construction. In one case, hired to do masonry work. And in another hired by a
general contractor to do stone work.
 Exclusions
 Does not apply to work performed by the insured.
 Insurance is supposed to apply to tort claims. Not contractual shoddy work claims.
 Insured pointed to an additional exclusion in the policy. Had an exception for warranty of fitness or
quality.
 Court says no ambiguity. Can’t use an exclusion to grant coverage. Purpose is that contractual
liability is excluded but exception if the breach of that causes property damage or bodily
injury and not just faulty workmanship.
 Generally for tort liability, not contract liability. Not for the risk of bad work, but the risk that bad
work might cause bodily injury or property damage. Shoddy workmanship not covered.
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In a lot of states there is a claim for breach of implied warranty of fitness irrespective of what the K
says.
 Would be covered for that, if under tort law. Same thing the other exception was doing in this
case.
 Covered for tort claims as long as for bodily injury or personal property. Not impaired
property.
 Basic Rules
 Complaint alleges merely economic loss – no coverage
 Alleges damages to other property – coverage
 4. Pollution Exclusion
o History
 Pre-1966
 Pre-1966 – coverage for an “accident”
 1966
 Coverage for an occurrence which was defined as an accident, including continuous or
repeated exposure to conditions, which results during the policy period, in bodily injury or
property damage that was neither expected nor intended from the standpoint of the insured.
Some courts found coverage for damages resulting from long-term gradual exposure to
environment pollution even if discharge was intentional, finding that the ultimate loss was not
expected or intended.
 1970
 This policy shall not apply to bodily injury or property damage arising out of the discharge,
dispersal, release, or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals,
liquids or gases, waste materials, or other irritants, contaminants or pollutants into or upon
land, the atmosphere or any watercourse or body of water; but this exclusion does not apply if
such discharge, dispersal, release or escape if sudden or accidental.
 1973 – Above endorsement was incorporated as an exclusion.
 Problem with sudden – means unexpected; courts found coverage for pollution over long
periods of time.
o The 1986 Exclusion – The Absolute Pollution Exclusion
 This insurance does not apply to: bodily injury or property damage arising out of actual, alleged or
threatened discharge, dispersal, seepage, migration, release, or escape of pollutants at or from the
premises you own or rent…
 Pollutants mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor,
soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled,
reconditioned, or reclaimed.
 All courts apply the exclusion in environmental pollution cases but some are hesitant to apply
the exclusion in other contexts.
 Some courts say if policy is unambiguous, exclusion applies regardless of nature of pollution.
 I.e. zambone at hockey game releasing carbon monoxide.
o ASI v. Koloms
 Coverage for carbon monoxide fumes from a furnace in commercial building was denied under
pollution exclusion.
 Held: pollution exclusion only applies to hazards traditionally associated with environment. Traditional
environment pollution and environmental clean-up.
 Pollution exclusion was not ambiguous but was overbroad.
 Reality – this is applying reasonable expectations even where no ambiguity.
Notice Requirements – Occurrence v. Claims-Made Coverage
 1. Occurrence Policy – Notice Conditions
o Insured must give reasonable notice to the insurer as soon as practicable.
o Notice of What?
 Occurrence (most policies)
 Claim or Suit (some policies require notice of both)
 Form policy – both
 Also, requirement to cooperate in defense of suit.
o When?
 Reasonable Notice Approach
 Reasonableness is determined on case-by-case basis.
 “As soon as practicable” doesn’t necessarily mean “immediately” or “promptly.”
 Sample Policy says “as soon as practicable.”
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Notice to Whom?
 Directly to insurer or
 Usually to agent who has authority to tell insurer
o In What Form?
 Look at policy language
 May be required to be in writing
2. Occurrence Policy – Notice Prejudice Rule (Majority)
o Prejudice Requirement
 Insurer must be prejudiced by a delay in notice
 BOP – Majority – insurance company has burden of proving prejudice.
 Do not have to prove that they would have won the lawsuit, but the issue must be significant.
o Types of Prejudice
 No sufficient time to prepare a defense
 Inability to investigate
 To prepare defense or to show no coverage existed
 Evidence has been lost/destroyed that might have proven an exclusion
 Inability to mitigate damages
o Prejudice is usually a jury issue, i.e. a question of fact
o When failure to give timely notice is excused
 Sued and didn’t know it
 Insurance company has notice from other source
Mighty Midgets, Inc. v. Centennial Insurance Company
o 10/18/70 – accident
o 10/70? – Halle has conversation with Dunn (agent) on the phone; Halle asks health or liability claim and is told
to file a health claim.
o 4/7/71 – Health insurer notifies Midgets there is no coverage.
o 5/25 – Father hires lawyer who writes letter to Midgets that lawsuit is in the offing. Halle forwarded letter to
Centennial c/o Dunn.
o Policy says give written notice as soon as is practicable. So phone call doesn’t count. More than 7 months later
is when they give notice. Is that practicable?
 Insurer argues insured failed to give timely notice of an occurrence.
o Court said under these circumstances this is reasonable notice as soon as practicable.
 What is reasonable – case by case factual inquiry.
o Here the policy said an agent doesn’t have the authority to waive timely notice.
 But what the agent did – told them to file it under health was not necessarily a waiver. It was relevant
of whether notice was timely.
o Here, dealing with notice of occurrence. No claim has been filed yet.
o Other issue in case – if you are insured and have to sue your insurance company for coverage you’re entitled to,
will you be entitled to attorney’s fees if you can show something other than breach of K? Would need to show:
o Bad faith
o No arguable basis to deny coverage…etc.
West Bay Exploration v. AIG Specialty Agencies
o Michigan – state version of EPA made them take remedial measures and told them that the leakage had been
intentional.
 Waited like 2 or 3 years to give notice.
o Even though case by case basis – more than 2 and a half years notice is not even an argument about timely
notice.
 Going to be considered untimely.
o That is not timely but the insurer also has to prove prejudice.
 A lot of times the claim is that your defense of the underlying case is prejudiced.
o Here they are arguing that their ability to prove that they don’t have to provide coverage is prejudiced.
 How did they make that argument? Pollution exclusion – to prove that would have to show gradual
pollution and couldn’t do that after 2.5 years.
3. Exposure/Actual Injury Trigger – Occurrence v. Claims-Made
o Occurrence coverage insures against liability for injury or damage that occurs during the policy period, even if
suit is brought later. Bodily injury or property damage occurs during policy period.
 Regardless of the date of discovery or the date the claim is made or asserted.
o Claims-Made coverage insures against claims made during the policy period. Service must have been
performed after the retroactive date and the claim must be made during the policy period.
 Notice of claim is the most important aspect of the claims made policy.
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Most professional liability insurance policies are claims-made policies.
Usually says that the claim must have occurred on or after the retroactive date.
Pros of Claims-Made Policy
 Shorter tail, easier to predict losses and calculate premiums
 More reliable premiums
 Avoid trigger issues and allocation of coverage
 Only 1 year can be triggered
 Cons of Claims-Made Policy
 Confusing
 Retroactive dates might cause gap in coverage
 Esp. when switching from occurrence to claims-made
 Must purchase tail/extended reporting endorsement when you retire
 Really like purchasing occurrence policy
 If risk adverse, might purchase until statute or repose runs
 Threat of non-renewal
4. Claims-Made Coverage
o Claim
 The date insured first reports incident or injury to the insurer.
 Under St. Paul Policy – claim is made on date insured reports incident or injury to St. Paul.
 Under MACM Policy – claim is made when insured reports medical incident to MACM.
o Does switching from occurrence to claims-made coverage create a gap in coverage for a physician who started
working on 1/1/09?
 2009 – occurrence policy
 2010 – occurrence policy
 2011 – claims-made policy with retroactive date of Dec. 31, 2009.
 No gap in coverage.
o Does switching claims-made coverage create a gap in coverage?
 2009-2010 – claims-made coverage with one carrier, retroactive date of Dec. 31, 2008
 2011 – claims-made policy with new carrier with a retroactive date of Dec. 31, 2010
 Gap there. If a claim is filed on June 24, 2011 based on a medical incident which occurred in 2009 or
2010, does the physician have coverage?
 So when switching coverage, really have to pay attention to retroactive date.
o Notice
 P’s filing of complaint is not enough notice.
 Majority Rule – notice of a claim within the policy period is a material part of the consideration for a
claims-made policy. To invoke coverage, a claims must be made and reported to the insurer during the
policy period.
 Notice prejudice rule DOES NOT apply to claims-made policy. Prejudice to the insurer resulting from
late notice is NOT required to deny coverage.
 Some courts – have entertained the possibility that insured could be “equitably excused” from
reporting a claim during the policy period, especially if the insurer is not prejudiced.
 Some courts apply the prejudice rule to claims that are not reported “promptly,” as required
by the policy, when they are still reported during the policy period.
 Sample Policy – pg. 596 – written notice as soon as practicable during policy period.
 This looks like a lower standard than “promptly.”
 The reporting requirement will NOT be excused when a claim is made but not discovered by the
insured during the policy period.
 The doctrine of impossibility does NOT excuse late reporting of claims under claims made
policies.
Thoracic Cardiovascular Associates, Ltd. v. St. Paul Fire and Marine Insurance Company
o Lawsuit is filed in Oct. 1987
o Were not served until July 1988. Had cancelled their policy before that. And then they gave notice.
5. Things to Consider When Purchasing Legal Malpractice Coverage (Errors and Omissions Coverage)
o Eroding coverage
 Limit includes defense costs, defense costs are “inside”
o Does deductible include defense costs?
o Is there an aggregate per year limit on the deductible?
o Can insurer settle w/out consent?
 Hammer clause – insured can refuse to settle but insurer’s liability is limited to amount for which it
could have settled
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o
o
o
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Right to choose defense counsel
Prior acts coverage/retroactive date
Are sanctions covered?
Do you need “tail” coverage/extended reporting endorsement
Lateral hires – special considerations
 If you’re switching jobs want to think about that – if there is a gap
Duty to Defend
 1. The Duty to Defend
o The duty to defend is broader than the duty to indemnify.
 Insurer has a duty to defend even when the claim has no merit.
 Insured purchases insurance against litigation, not just liability.
 2. Test – Scope of Duty to Defend
o Eight Corners or Four Corners Rule
 Court will look at the 4 corners of the complaint and 4 corners of the insurance policy.
 If the complaint alleges facts that (if proven) would trigger coverage in the policy, the insurer
must defend EVEN IF the allegations turn out to be groundless, meritless, or frivolous.
 What if the insurer is aware of extrinsic facts indicating the claim is covered?
 Some Jurisdictions – Duty
 Even if complaint does not allege facts that would trigger coverage, if the insurer is
aware of extrinsic facts that indicate the claim probably is covered, the duty to
defend is triggered. This looks outside of the 4 corners.
o The insurer cannot terminate the duty by tendering the policy limits.
o Does the Insurer Have a Duty to Appeal?
 It depends.
 If the judgment is for the P and is within the policy limits, generally the insurer has discretion to
appeal.
 If the judgment is in excess of policy limits and insured demands an appeal – duty to appeal may
depend on reasonableness of appeal.
 There is no set rule or test.
o If duty to defend, insurer usually has right to select attorney to defend the claims.
o Potentiality Rule
 Duty is triggered if the claim is potentially within coverage.
 Beckwith Machinery v. Travelers
o Insured is sued and the damages claim is for excessive downtime, a decrease in the market value of the
equipment, substantial damage in the performance of certain stuff, increased cost of labor, etc.
o If standard policy, what triggers coverage? An occurrence. Insured has to become legally obligated to pay sums
as damages. Are some of the claims bodily injury or property damage to which the insurance applies?
 No. Purely economic.
o What other exclusion might be an issue? Business risk exclusion.
o Defended claims even though maybe outside of policy.
o What happens to underlying case? Settles for $100,000. Some things were outside of coverage.
o Had to pay settlement b/c once the insurer unconditionally assumes the defense, it is estopped from denying
coverage later.
o What would you recommend them do?
 Get a reservation of rights. Or attack coverage on the front end (but unlikely).
o Collateral estoppel – to what extent do issues resolved it the tort case prevent re-litigation of those same issues
in the coverage case? Next case.
 Gray v. Zurich Insurance Company
o Gray was sued for assault after he got into an altercation with Jones. Jones filed a complaint accusing Gary of
intentional assault. Gray notified insurer and informed he was acting in self-defense. Insurer denied coverage.
Gray lost case and was ordered to pay $6K. Gray sued insurer for failure to defend.
o Insurer’s arguments
 Complaint alleges intentional conduct.
 Against public policy
 Would cause conflict of interest
 Best thing for them is for it to be assault and battery or defendant win. B/c don’t want to have
to pay.
 Even if there was duty to defend, no duty to indemnify since D was liable on intentional claim.
o Court – in order to preserve right to contest coverage, must defend those claims that could have fallen w/in
coverage.
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 So if there was duty to defend, can’t deny coverage.
3. Insurer’s Options – If Duty to Defend is Questionable
o 1. Assume Defense (Defend Unconditionally)
 If insurer undertakes defense w/out reservation of rights, it is estopped from later denying coverage.
(Beckwith)
o 2. Refuse to Defend
 If court finds there WAS a duty to defend, insurer can’t deny coverage even if the claim clearly falls
outside of coverage. (Gray)
 If insured refuses and it turns other that there WAS NO duty to defend, the insurer has not breached its
duty.
 Most courts do not require insurers to defend an entire lawsuit when some claims are w/in coverage
and some are outside.
 Insurer only defends claims w/in coverage.
o 3. Defend Under a Reservation of Rights
 Assume defense and get insured to sign reservation of rights (insurer reserves the right to contest
coverage).
 Lets you satisfy the duty to defend but lets you preserve your ability to deny coverage.
 Can then seek a declaratory judgment that there is no coverage so no duty to defend.
 If after assuming defense, it becomes clear that claims are not w/in coverage, can ask court’s
permission to w/draw its defense.
 The longer the insurer defends w/out suggesting that there is no coverage, the better argument the
insured has for estoppel.
o 4. Bring a Declaratory Judgment Action
 Seeking a ruling that insured is not covered and there is no duty to defend/indemnify.
o What if There is Potentially a Claim Within Coverage? Potentially Rule
 Majority – Duty to defend if facts alleged create possibility of coverage even if claim asserted falls
outside of coverage. (Gray)
 Minority (Burd) This is one jurisdiction – Insurer may refuse to defend IF:
 Defense would create conflict of interest OR
 Defense of tort lawsuit won’t resolve coverage issue.
 Allows insurer to sit out the tort lawsuit and the duty to defend is assessed in a later coverage
suit
 Insurer only has obligation to reimburse defense costs of initial suit if it turns out
there is a duty to indemnify.
4. Possible Remedies for Insurer’s Breach of Duty to Defend
o Attorney’s fees and costs in defending the original litigation.
o Judgment w/in policy limits on covered claim
 In excess – not generally awarded in majority
o Settlement w/in limits when complaint alleged claims w/in coverage?
 Most courts – require the insured to pay the entire settlement even though some of it (or all of it) may
be for claims outside of coverage.
o Attorney’s Fees and Costs Incurred Defending Litigation Against Insurer?
 Usually, regular K rule prevails and insured pays.
 BUT if insurer acted in bad faith, most jurisdictions will award
o Tort damages for emotional distress if insurer acted in bad faith
o Punitive Damages?
o Should the insurer be estopped from denying coverage? (Gray)
 Most jurisdictions apply estoppel.
o Is An Insurer Entitled to Reimbursement for Defending Claims That are Not Covered?
 No real majority rule
 Shoshone Court – No
 Other courts – have awarded
 Claims that were never potentially w/in coverage vs. claims that were potentially w/in coverage
 Mixed Claim – one or more counts in complaint are potentially covered and at least one count
was never potentially covered
 Some courts have allowed reimbursement for non-covered claims in the amount that
insurer could prove was expended on that claim.
 Sometimes based on unjust enrichment arguments.
 Can allocate cost of prosecuting counterclaim to insured.
 Reservation of rights letter can’t create rights not contained in policy.
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Shoshone First Bank v. Pacific Employers Insurance
o Rule in Wyoming is that you have to defend the entire suit.
o Some courts will say you have the duty to defend the entire suit if there is one claim w/in coverage even if 25
are outside of coverage.
o In a lot of states you’re prohibited from defending claims that are outside of coverage b/c of potential conflicts
of interest.
o Is an insurer entitled to reimbursement for defending claims that are not covered?
 Shoshone court: No.
o Only some of the claims against Shoshone were within coverage. BUT Wyoming (and other courts, ) say that
insurer has duty to defend the WHOLE suit if even only one of the claims is within coverage
 This is a crazy rule – insurer will have zero incentive to defend claims that are outside of coverage
adequately. Creates a huge conflict of interest.
o Also in this case, the insurance company couldn’t allocate cost of prosecuting counterclaim to insured.
 Because no such right was provided in the policy
5. Conflicts of Interest
o The defense attorney represents insured but is paid by insurer, thus creating conflicts of interest.
 Highest duty owed is to insured.
 If conflict arises during litigation
 Withdraw completely or inform insured they can no longer represent them.
o Parson v. Continental National American – Discovering Information Adverse to Insured
 Insured is sued for battery. Insurer assumes defense. Defense attorney later finds out the insured was
not insane, making his actions intentional actions excluded under the policy.
 Defense counsel communicated confidential information to the insurance company that alerted insurer
to the possibility that the claim wasn’t covered.
 What does the court say lawyer should have done?
 Withdraw
 Problem: what would that signal to insurer?
 But continued to represent him and sent a reservation of rights letter to defendant’s parents. Defendant
found liable.
 Then, the victims (plaintiffs in the original trial) brought a garnishment action against the liability
insurer. Liability insurer retained same lawyer that had represented D to represent them here denying
coverage based on the intentional act exclusion.
 Issue: Whether insurer is estopped from denying coverage under its policy when its defense against
coverage is based on confidential information obtained by defense counsel from the insured as a result
of defense counsel’s representation of the insured in the underlying tort action?
 Held: When an attorney who is an insurance company’s agent uses the confidential relationship
between an attorney and client to gather information so as to deny the insured coverage under the
policy in the garnishment proceeding we hold that such conduct constitutes a waiver of any policy
defense and insurance company is estopped as a matter of law from disclaiming liability under an
exclusionary clause in the policy.
 Insurer was estopped from denying coverage.
 Conflict of interest constituted a source of prejudice upon which the insured may invoke the
doctrine of estoppel.
 Especially where attorney did not fully and completely disclose to the insured the
specific conflict of interest involved.
 This is all regardless of the reservation of rights.
Moeller v. American Guarantee
o Moeller (the plaintiff in the underlying suit) sued his employer (law firm) for wrongful discharge, breaching
employment agreement, fraudulent misrepresentation, damage to his reputation, and defamation. The
firm/employer counterclaimed back against Moeller for defamation
o The employer’s (the insured) insurance policy included liability coverage for defamation claims but not for
claims such as wrongful termination.
o The insurer agreed to defend the entire claim but under a reservation of rights and selected the defense counsel.
 The reservation of rights letter stated: “you (insured) might want to hire your own counsel to defend
your interest because investigation may reveal questions of coverage to be decided at later date . . .we
further reserve the right to withdraw from the handling of this matter upon notification to you.”
o Now, the insurer seeks a declaratory judgment that the claims are not covered under the policy and that the
insurer is not obligated to defend the insured on appeal.
o Defense counsel’s duties:
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If there’s going to be a coverage issue, the insurance counsel should undertake to defend only the claim
that is clearly covered and the insurance should afford the insured opportunity to select his own
independent counsel.
In this case:
 America didn’t do this, just had the attorney representing interests of both the insurer and the insured
even though insurer was undertaking defense under a reservation of rights.
 Furthermore, insurer chose to furnish legal representation for claims clearly outside the coverage of the
policy, creating an additional conflict of interest.
So, because the insurer here undertook to defend all claims, and did so under reservation of rights, it should
have given insured opportunity to select its own independent counsel and is liable for ALL the reasonable legal
expenses incurred in defense of the complaint.
Options when presented with claims that might fall outside coverage:
 Deny the claims that fall outside coverage
 Defend all or some claims under reservation of rights
 Insurer is obligated to permit the insured to select its own counsel and pay reasonable legal
fees for the claims not covered.
When insurer asserts a coverage defense and defends its insured under a reservation of rights, conflicts of
interest arise:
 1) If the insurer knows that it can later assert non-coverage or thinks that loss which it is defending will
not be covered, it may only go through the motions of defending (risk of token defense).
 2) If there are several theories of recovery, at least one of which is not covered under the policy, the
insurer might conduct the defense in such a manner as to make the likelihood of a plaintiff’s verdict
greater under the uninsured theory.
 3) The insurer might gain access to confidential or privileged information that it might then try to used
in a later coverage suit.
Potential Conflicts and Remedies to Conflicts
 Defending Under a Reservation of Rights
 Remedy – Moeller Letter
 Explain reservation (mention coverage or exclusions at issue)
 Identify conflicts or potential conflicts even if insured has outside counsel
 Obtain waiver of conflicts/potential conflicts in writing
 Defense and coverage issues should not be handled by same lawyers and/or claims
adjuster (exercise abundance of caution even if insured waives conflict)
 Defending Claims Outside of Coverage
 Remedy – don’t defend claims outside of coverage and properly informed insured that certain
claims are outside of coverage.
 Amount Sued for or Potential Verdict is in Excess of Policy Limits
 Remedy – inform insured of risk of personal liability and right to secure counsel at insured’s
expense.
Duty to Settle
 1. When Does the Insurer Have a Duty to Settle?
o Majority – Reasonable Offer Rule
 Would a reasonably prudent insurer w/out policy limits have accepted the offer?
 MS uses this rule.
 Example – suppose $1M limit of liability under policy, settlement offer of $200K, claimed damages of
$2M.
 Assume 15% chance of liability.
 Expected value = $300K ($2M * 15%)
 Offer is reasonable: $200K < $300K.
 Assume 6% chance of liability
 Expected value = $120K ($2M * 6%)
 Offer is not reasonable: $200K > $120K.
o Minority – Bad Faith
 Did the insurer reject the settlement in bad faith?
 Can be established by dishonesty, fraud, and concealment. But don’t have to have those to
prove.
o No Court – Strict Liability
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Whenever an insurer receives an offer to settle w/in policy limits and rejects it, the insurer is liable for
any final judgment even if it exceeds policy limits.
 Would strict liability change the insurer’s decision?
 In examples above, if there is strict liability, insurer will pay for above limit judgments in
both 1 and 2. Will this cause insurer to settle in case #2?
o Prima Facie Strict Liability (W. VA)
 Insurer must prove by clear and convincing evidence that the failure to settle was based on reasonable
and substantial grounds.
 2. Extra-Contractual Damages Resulting from Insurer’s Failure to Settle
o Crisci court – you can get emotional distress damages. Treat failure to settle as a tort (breach of duty of fair
dealing).
 Crisci – old woman who was landlady. Someone fell through steps. There was an offer to settle w/in
policy limits and she offered to contribute some to the payment. Insurance company refused. Jury finds
against her. She becomes destitute. Recovered emotional distress damages against insurance company
for breach of duty/bad faith.
o Other Jurisdictions – no.
Relationship Between Primary and Excess Carriers
 1. Duty to Settle
o Commercial v. Safeway
 Policy Limits
 Travelers – up to $50K
 Safeway – up to $100K
 Commercial – up to $20M
 Does the primary insurer owe the excess insurer a duty to settle w/in the limits of the primary policy?
 Excess carrier has a subrogated right to the insured’s interest.
 Insured has a claim against the primary insurer for breaching a duty to settle – the excess
insurer is subrogated to that right.
 Equitable subrogation right
 Would first apply reasonable offer rule
 Does the insured owe the excess carrier a duty to settle?
 No.
 No language in policy creating this duty.
 But, an insurer might create this right by including this duty in the policy.
 2. Drop-Down Liability
o Follow-Form v. Umbrella Coverage
o Language makes a difference:
 Insurer shall not be liable for ultimate net loss
 In excess of the limits of the primary policy for each occurrence covered by the primary
policy
 In excess of the amount recoverable or collectible under the primary policy
o Covered v. Recoverable
 Covered
 Excess carrier didn’t intend to underwrite coverage when primary is insolvent
 Places burden on insured to monitory solvency of primary insurer
 Recoverable
 Some courts say excess drops down
 Argument: clearly contemplated that excess will be liable if the primary is insolvent
 Some excess policies specifically say “no drop down coverage.”
 Mission National Insurance Company v. Duke Transportation
o Primary insurer went bankrupt.
o Had the covered language.
o Didn’t drop down.
AUTOMOBILE INSURANCE
Form Auto Policy
 Declarations Page
 Definitions
 Coverage
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o
o
o
o
A. Liability
B. Medical Payment
C. Uninsured Motorists
D. Property Damage
 1. Collision
 2. Comprehensive
 Duties
Four Kinds of Coverage Provided by Auto Insurance
 1. Liability
 2. Property Damage
 3. Uninsured Motorist
 4. Medical Payments or broader personal injury protection
Compulsory Liability Insurance Statutes
 Every state has enacted some form of statutory requirement regarding auto insurance.
 Policy behind compulsory statutes often acts to overcome exclusions.
 MS – Liability Insurance Requirements
o $25K/$50K/$25K
o (per person/per accident/property damage)
 Effect of Compulsory Liability Insurance Statutes on Coverage
o Named Driver Exclusion (St. Paul v. Smith – enforceable)
o Automobile Business (valet) Exclusion (State Farm v. Smith – unenforceable)
o Accident (Tringali – unenforceable)
o Intended Bodily Harm or Property Damage Exclusion
o Household/Family Exclusion
Accident v. Intentional Conduct
 Triangli
o Held – purpose of statute was to compensate victim of a car wreck even if it was intentional conduct.
 Interpret accident very broadly – unexpected from victim’s point of view.
 Probably minority today
 Modern Policy
o Uses expected or intended exclusion or intentional exclusion
o If insurer is forced to pay b/c of a statute when the occurrence would otherwise be excluded, the insurer will
only cover the minimum required by the statute.
Household Exclusion
 Excludes liability coverage if a family member is injured in an accident cased by insured
o Could argue compulsory statute voids this exclusion b/c it says for “any victim”
Omnibus Clause
 Insured = any person while using the owned vehicle, provided the operation and actual use of such vehicle are with
permission of named insured and are within scope of such permission.
o Difference between insured and named insured.
 Questions to Ask
o Was there permission?
o Did the driver exceed the scope of permission?
 Curtis v. State Farm
o Named insured’s daughter (not licensed) took car at 1:00AM and let a friend drive. Older daughter knew
unlicensed daughter was driving the car. Unlicensed daughter allowed a friend to drive.
o Definitely no actual permission from named insureds
o Consider implied permission – permission can be implied
 Named insureds – parents
 1st permittee – older daughter (had actual permission from parents)
 2nd permittee – younger daughter (no permission from parents)
 2nd permittee assuming implied consent from older daughter
rd
 3 permittee – friend who drove
o Holding – implied consent did not got so far as to cover a 3 rd permittee.
 Court might have the daughter, as 2nd permittee, to have implied consent.
 Scope of Permission
o Majority – Minor Deviation Rule
 Minor deviations from scope of permission = coverage
o Liberal Rule – Permission is Permission
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 Once insured gives permission, driver has permission to do anything.
 Driver and all others in chain of permission can grant further permission. Coverage all the way down.
o Conservative Rule – Any Deviation
 Any deviation from the scope of original permission voids coverage
o Sample Policy
 Reasonable belief of permission
Driving Other Cars Clause (DOC)
 Insured is covered when driving other cars
o i.e. not owned by the insured and not covered in their policy.
 DOC Exclusions
o Using car w/out reasonable belief that entitled to do so
o Other car owned by insured
 Have to have separate policy
 Other Insurance Clause
o Majority – owner’s policy provides primary coverage
o Most policies also say that driver’s policy is excess
Use of the Vehicle
 Farm Bureau v. Evans
o Policy: coverage for bodily injury arising out of the ownership, maintenance, or use of the insured vehicle.
 Injury was caused by the throwing of a lighted firecracker from the rear of a parked station wagon.
o The court found there was no casual connection between the use of the vehicle and the injury.
o The use of the vehicle was too remote from the negligent act.
 Causation Tests
o Proximate Cause Test
 But for
o Nexus Test (Broader)
 Evans Court: use of vehicle did not causally contribute to injuries.
o Transportational Function Test
 Does liability arise out of ownership, maintenance, or use?
o Ask:
 Is it an accident?
 If no, probably excluded
 Was bodily injury expected or intended?
 If yes, probably excluded
Notice and Cooperation
 1. Duty to Cooperate
o Insured had 2 duties:
 1. Provides notice (insurer must prove prejudice)
 2. Cooperate with insurer
o Types of Non-Cooperation
 Lying
 Giving false testimony
 Failure to appear
 Collusion
o Two Requirements for Non-Cooperation
 1. Non-cooperation must be material
 2. Non-cooperation must have prejudiced insurance company
 Non-cooperation prejudiced insurance company in material way.
o Materiality
 Failing to show up at trial is material
 Repeated failure to appear at depositions/interviews is material
o BOP
 Majority – insurer has burden to prove material and prejudice
 Minority – insured has BOP to prove lack of prejudice
o What is Prejudice?
 Majority – if the insured had cooperated, there would have been evidence to create a jury issue
(Davies)
 Anytime you have disputed factual testimony, you have a jury issue.
 Per Se Rule – if insured doesn’t cooperate, insurer is not responsible for paying
 But For Rule – But for insured’s non-cooperation, the claim would’ve failed
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Substantial Impact – compromise rule. Failure to cooperate had a substantial impact on trial. Vague
and unpredictable.
 State Farm v. Davies
o Failed to cooperate b/c she didn’t show up for trial.
o Is this non-cooperation? And what do you have to prove other than non-cooperation? That it prejudiced them in
a material way.
o This state, Virginia, had a statute. That they must be prejudiced.
 2. Non-Cooperation: Settling Without Consent
o Miller v. Shugart
 Insurer is contesting coverage. Why?
 Insured settled a claim for $100K, twice the policy limit.
 Insured won’t be subject to individual liability.
 Insurer ordered to pay policy limits of $50K plus interest on total settlement of $100K.
 Can insurer refuse to pay based on insured’s non-cooperation (entering into settlement)?
 Court found that the insured had a right to settle before the declaratory judgment was
rendered.
 In suit against insurer, plaintiff judgment creditor must demonstrate reasonableness of settlement.
 Court found that the amount was reasonable in light of the amount of damages.
 Does insurer have any alternatives?
 Raise premiums in order to cover the cost associated with allowing policyholders to reach
settlements w/out the insurer.
Other Insurance
 Sample Policy
o If coverage arises for a vehicle the insured does not own, the insured’s policy is excess.
 Excess v. Excess – Carriers Ins.
o Both policies which cover the claim contain an “Other Insurance” clause which purports to make the policy
excess.
o Knock Out Rule – mutually repugnant policies – not going to enforce either excess clause.
 Options to Allocate Coverage Between Two Primary Carriers:
 Pro rata by limits
 Pro rata by premiums
 Pay in equal portions until the limit of the lower limit of liability is reached
o Functional
 Compare policies – battle of language
o Owner’s Coverage is Primary
 Driver’s is secondary
o Interpretive
 1st policy issued is primary
Collision/Comprehensive
 Auto Property Coverage Comes in Two Forms
o Collision
o Comprehensive
 Collision Coverage
o Insures against damage to the insured vehicle caused by:
 Its impact with another vehicle or object
 The upset of the covered vehicle
o NOT collisions
 Missiles, fires, theft, explosion, earthquake, windstorm, hail, colliding with bird or animal
o Usually a deductible for collision
 Insureds usually don’t care about repairing minor dents. So have collision with deductible and then
comprehensive.
 Comprehensive Coverage
o Sample Auto Policy, Part D – other than collision
o Insures against loss resulting from many causes excluded from collision coverage
 Tests to Distinguish Between Collision and Comprehensive
o Look first to policy language to distinguish and then resort to test.
o Operational Risks v. Non-Operational Risks
 Comprehensive more likely to apply to non-operational
 Collision more likely to apply to operational
 Was the vehicle being operated?
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
Was loss caused by operational risk?
Was the operation of the vehicle a substantial contributing cause?

Allison
o Bridge collapsed as truck drove over it.
o Court found the even was out of insured’s control, so comprehensive coverage.
 Rodemich
o Insured only had comprehensive: said he swerved to avoid animal. He heard a thump, but no sign of impact.
o Court remanded
 If contact – comprehensive
 If no contact – collision
o Court is saying that the results of avoiding a collision w/an animal is not a collision.
o Most courts say hitting and swerving to avoid are the same thing.
 Inherent Diminished Value
o Decreased value of vehicle as a result of a collision
 Most courts have held that diminished value is not covered.
 Original Equipment Manufacture Parts (OEM)
o Is insured entitled to demand OEM parts be used to repair auto?
o Or can insurer use less expensive non-OEM parts?
o Case by case reasonable expectations of insured
o Some vehicles require OEM parts
o Some policies provide for parts “of like kind and quality” or “of equal or better condition than pre-accident
part.”
Uninsured Motorist Coverage (UM)
 Boynton
 What does UM Cover?
o We will pay damages for bodily injury, sickness, death, or disease which you are legally entitled tor recover
from the owner or operator of an uninsured or underinsured vehicle.
 Injury must be caused by an accident and arise out of the ownership, maintenance, or use of the
uninsured vehicle.
 Sample policy – similar language
o Does not include property damage
o Includes lost wages due to bodily injury
 When Can Insured Recover Under UM?
o Vehicle that caused damage is uninsured
o Insured is legally entitled to recover damages from the responsible party
 Was the Vehicle Causing Damage Uninsured?
o Look to language of policy; definition of uninsured
 Car with no policy
 Car with a policy in which an exclusion applies
 Car for which the insured denies coverage
 When is the insured legally entitled to recover damages from the owner or operator of an uninsured vehicle?
o Not when owner/operator is immune.
 Ex: UM does not apply when the uninsured tortfeasor is immune from liability b/c of workman’s comp
law (Boynton)
 The insurer will have available all of the substantive defenses that the tortfeasor would have raised
o Immunity, contributory negligence, etc.
o Boynton – responsible party was immune b/c of workmen’s comp
 No right of subrogation b/c insurer can’t sue the immune party
 Arbitration Clause – Sample Policy, Part C
o Insurer can only arbitrate with insured to determine whether the insured is legally entitled to damages
 Hit and Run Clause – Simpson
o Clause requires physical contact with a vehicle to recover under UM.
o Is that requirement void as against public policy?
 Court – yes. Contravenes purpose of UM coverage statute to provide for broad, liberal coverage.
o Purpose of Requirement?
 To avoid fraudulent claims by drivers in single car accidents
o Disinterested Witness Legislation
Stacking
 Can UM coverage be stacked?
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
Intra-policy stacking
o One policy insures multiple vehicles
 If you have 2 cars under one policy, there’s a separate premium each car for UM coverage.
o Look to limit of liability
 Sample policy - Limit of Liability – pg. 690
 Pretty unambiguous anti-stacking clause.
o Arguments for stacking could be:
 Language is ambiguous – difficult argument to make now b/c most policies are clear
 Reasonable expectations (double premium) – If you’re paying double, you should get double the
coverage.
 Insurance company would counter that 2 drivers means double the risk for the insurance
company.
 UM statute requires stacking
o Taft
 P’s daughter dies in car accident; sued owner and driver of car.
 Both Ds are uninsured.
 P filed a complaint against his insurer Allstate under UM provision in policy.
 P’s paid 2 separate premiums for UM coverage.
 Issue: Can P stack the UM coverage provided for each of the 2 vehicles on a single Allstate policy?
 Yes, P’s can recover sums found legally recoverable up to the aggregate sums of the vehicles
insured.
 But, court said this holding is based on the facts of this case.
o If an insured receives a premium discount on additional cars – indicates stacking should not be permitted.
 Inter-policy stacking
o More than one policy and both provide UM coverage
o Controlled by other insurance clauses in the 2 potentially applicable policies
 Sample – Other Insurance Clause
 No stacking for multiple policies
Liability for Bad Faith Breach
 Claim for Bad Faith (against the insurer)
o Not available in every case where the insured should have been covered but the claim was denied
 Why permit the claim for bad faith?
o Insurer has fiduciary duty
o Deter insurers from denying valid claims
 Burden of Proof (varies among jurisdictions):
o More probable than not (POE)
o Substantial evidence
o Clear and convincing
 What type of claim is it?
o Contract
o Independent Tort
 Such as Fraud or Emotional Distress
o Tort of Bad Faith
 Dominant approach
 B/c insured can get damages for emotional distress plus other damages not available through a
contract claim (i.e. punitive)
 What damages can be recovered?
o Actual damages
 Economic and non-economic
 Including damages for ED
 When can punitive damages be recovered?
o Requires:
 Bad Faith plus
 Intent to vex, injure, or annoy
 What triggers liability?
o Negligence +
 Gross negligence, Reckless disregard
o Coverage is not “fairly debatable”
 Depends on what the Supreme Court is the particular state has decided
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o
o
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
Directed Verdict Rule (Insurer-Friendly)
 When the lower court refuses to grant DV in coverage case, the judge has made a determination that
reasonable persons could find for no coverage.
 The DV rule is not always applied.
Other egregious behavior
 E.g. forcing low settlement on an insured in dire straits.
Silberg
o Silberg had personal health insurance policy which provided $5,000 coverage for health care. He incurred
$6,900 in medical expenses. He eventually settled with workers’ comp. carrier for $3,700 ($1,100 was used to
pay medical bills, leaving $5,800 in medical bills unpaid)
o At the trial level:
 Court determined that insurer must provide coverage ($4,900)
 Jury awarded $75,000 as compensatory damages for physical and mental distress
 Jury awarded $500,000 in punitive damages
o Trial court granted new trial based on insufficiency of the evidence and excessiveness of the verdict
o Is the claim covered?
 Promised to pay for loss, except losses covered by any worker’s comp.
o Is the claim excluded?
 Did not cover any loss for which worker’s comp would pay
o Is insurer liable for bad faith?
 Yes, why?
 Worker’s comp. coverage questionable. Insurer should have paid bills and then filed a lien in worker’s
comp. proceeding.
o Is insurer liable for punitive damages?
 Trial court didn’t abuse discretion in finding that
 Insurer didn’t engage in oppression, fraud or malice (b/c no clear precedent and no clear industry
practice).
State Farm v. Grimes
o Grimes submitted claim to State Farm for damage to his vehicle after theft
o State Farm denied claim
o Grimes seldom drove car
o Car had mechanical problems
o Grimes had maxed out credit cards
o Exterior of vehicle not damaged, no evidence it had been towed
o Grimes was hobbyist mechanic
o Grimes was not awakened by theft of car
o Word on the street: “it was inside job”
o Jury awarded $1,900 for actual damages and $1,250,000 in punitive damages.
o State Farm argues on appeal that trial court’s refusal to grant Grimes a directed verdict indicates it had an
arguable basis to deny the claim.
o Court notes difficulty of distinguishing cases in which only consequential damages are appropriate (no
reasonable basis to deny claim) and those in which punitive damages are also warranted (wilfull, malicious,
gross and reckless disregard). Jury verdict should stand absent compelling grounds for reversal.
United American v. Merrill
o United issued a policy for $5000 insuring Robert’s life and naming Natalie as beneficiary.
o Question asked if w/in the last 3 years, he had been treated for a heart attack, etc.
 Natalie says Robert told agent about bypass surgery almost 20 years earlier and that agent responded it
didn’t matter because that happened more than 3 years ago. Agent check no and Robert signed.
o Robert died of a myocardial infarction (related to hypertension caused by bypass surgery).
o United spent eight months gathering Robert’s medical records from 3 year period prior to application and asked
his treating physicians whether they had treated Robert for congestive heart failure. Each responded that they
had not.
o United’s medical director testified that even though Robert’s medical records didn’t mention congestive heart
failure, they indicated Robert had congestive heart failure b/c he was taking drugs typically prescribed for
congestive heart failure. Robert’s treating physicians testified they were not treating Robert for congestive heart
failure and that the drugs were for something else.
o United denied the claim based upon an alleged misrepresentation. Natalie cashed the check for the refunded
premiums. She had been forced to take out a loan to pay for the funeral and then had to take the night shift at a
casino to pay back the loan.
o United amended its answer to argue accord and satisfaction based on Natalie’s cashing of check.
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o
Jury awarded Natalie $500,000 in compensatory damages and $900,000 in punitive damages. Trial
court remitted actual damage award to $200,000, affirmed punitive damage award and awarded
$527,474 in attorneys’ fees (United stipulated that amount was reasonable).
Appellate court
 No accord and satisfaction (nothing to indicate check was offered as full satisfaction)
 Wasn’t error to exclude irrelevant records
 Instruction regarding responsibility for action of agents. Court held that insurers are bound by actions
of agents within the scope of their apparent authority regardless of the policy’s actual terms.
 Wasn’t error to instruct jury to award damage for emotional distress if it found United breached the
contract.
 Court didn’t err in admitting testimony of United employees.
 Court didn’t err in allowing agent to testify that insurer should have paid.
 Court didn’t err in submitting punitive damages to jury
 Insurer didn’t have arguable basis to deny claim
 Insurer acted with gross and reckless disregard
REGULATION OF INSURANCE
ERISA


The federal ERISA statute preempts all state laws (state statutes and common law).
A state cannot deem something to be the business of insurance and then regulate accordingly.
o If you’re going to sue for employer-provided benefits, you must sue under ERISA for tort or breach of K.
Cannot sue in state court.
o Some state laws are saved from preemption.
McCarran-Ferguson Act
 Allocates responsibility for regulation of insurance to state courts.
 State regulations of business of insurance is in public interest
 No implied federal pre-emption of state law; must specifically say so.
 Business of Insurance regulated by state law is exempt from Sherman Act and other anti-trust laws if the state is actually
regulating insurance.
o Exception to exemption (subject to federal law): Boycott, coercion and intimidation are subject to Sherman Act
even if state has regulated business of insurance.
State Regulation by Insurance Commissioner
 Unlike most states, MS elects insurance commissioner
 Supposed to:
o Ensure that rates are not excessive, inadequate or unfairly discriminatory
o License and set standards
o Approve policy language / forms
o Monitor solvency of insurers
o Regulate deceptive and unfair practices
o Ensure availability of coverage
 Assuring Solvency
 Unfairly Discriminatory
o Must have an actuarial basis. Statistical correlation?
o Can generally discriminate on the basis of:
 gender
 handicap
 marriage status
 etc.
o What if it’s causal but not controllable? Could have a public policy concern.
 Genetic history
 Family history
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