Insurance law Notes

CHAPTER 1 THE FORMATION, OPERATION, AND TERMINATION OF THE INSURANCE CONTRACT

The nature of an insurance contract

Interpreting insurance contracts: legal formalism versus legal functionalism

Legal formalism

the law is viewed as a complete and autonomous system of logical principles and rules, where the judge applies the law and remains socially neutral.

in insurance, judges look at the contract and apply the rules applicable to all contracts.

See Brown v. Equitable Life insurance Co 1973

A... contract of insurance rest upon and are controlled by the same principles of law that are applicable to other contracts and the parties may provide such as they deem proper as long as the contract does not contravene law or public policy.@

application of judicial restraint.

Legal functionalism

it is socially-based and result-oriented in order to validate the reasonable expectations of society.

Application of judicial activism.

they stress that insurance contracts are different from the others as they are contracts of adhesion.

It is rejected by most courts today.

one reason is that the formula does not give any factors to be used to determine reasonable expectations.

COLLINS v. FARMERS INSURANCE CO. OF OREGON 1991

The plaintiff was injured while a passenger in the car of the insured. The action arises because the insurance company did not want to pay the full amount of the liability putting ahead a provision of the contract restricting the coverage.

the two courts below granted summary judgment

is the provision illegal?

the supreme court reversed the judgment and directed for summary judgment in favor of the defendant.

the court applied the statute and said that it was unambiguous. It said that the defendant had respected the required coverage and that an insurer can add coverage if it wants to. If there is additional coverage it can limit it in anyway.

the dissent went into an analysis of the two theories and said that the jurisdiction had formally recognized the functionalist theory but had applied in 2 recent cases and that it should be applied in this case as the plaintiff had reasonable expectations to be covered.

Ambiguity

when the insurance contract leads to two or more interpretations, courts usually interpret it strictly against the insurance company under the doctrine of contra proferentum.

both formalist and functionalist courts agreed on the outcome in case of ambiguity.

when the twp parties are informed, they only used the doctrine of contra proferentum when the intent of the parties cannot be determined by extrinsic evidence.

the middle ground approach

as the functionalist approach has not be formally adopted, most courts used the middle ground approach:

insurance contracts will be construed according to general principles of contract law, unless modified or regulated by state statute, or unless contrary to state public policy. However, since insurance contracts are not ordinary contracts, and are often contracts of adhesion, and since the reasonable expectations of the insured should be honored when appropriate, insurance contracts are subject to the following:

should be interpreted in their common sense and not in their legal sense.

if ambiguous, it will be construed in favor of the non-trading party.

Waiver, estoppel, reformation of contract and election are construed in favor of policy holder.

coverage can be limited even though the insured did not read the contract if the exclusions etc.. are not ambiguous.

What is a contract of insurance

It is very important to determine if a contract is an insurance one or not as the insurance industry is heavily regulated.

GRIFFIN SYSTEMS, INC. v. OHIO DEPARTMENT OF INSURANCE 1991

the plaintiff engaged in the business of offering and selling service repair contracts for automobiles to Ohio residents. The Ohio department said that their business amounted to insurance and thus were covered by the new regulation and had to cease their activity.

Whether this kind of activity amounts to insurance.

the court said that it did not amount to insurance business.

the court distinguished two cases:

Duffy:

it concerned guarantees protected tired from certain events. In that case it amounted to an insurance. The court in that case made the distinction between guarantees which protect against defects of a product and insurance which protects against loss or damage.

Herbert:

same facts but the contract offered replacement of the tires for a limited amount of time. Here, it did not amount to insurance.

thus, combining the two cases, a contract amounts to insurance when it promises to cover losses or damages over and above or unrelated to defects within the product itself.

Dissent:

The dissent argues that Griffin cannot be considered asa manufacturer or a supplier of the product. The dissent mentioned The Magnuson-Moss Warranty Act which provides for warranties: written warranty and service contract.

Most courts have not defined specifically what an insurance contract is but in Goucher v. John Hancock Life insurance Co 1974, the court said that the basis for an insurance contract was the familiar contract trilogy of an offer, acceptance and consideration.

Validity of oral contracts:

An oral contract is valid if the parties agreed on:

the subject matter identified

the risk insured against

the amount of insurance

the duration of the risk

the premium

the identities of the parties.

Some States have prohibited the use of such contracts

GULF INSURANCE Co. V. GRISHMAN 1980

Insurance taken for a plane by the Martinezes. They dealt through Sapp and they corrected a mistake which Sapp said would be taken care of, they never were in contact with the insurance companies. An accident occurred and the insurance was not corrected thus the victim was not covered.

whether the discussion between Martinez and Sapp amounted to an oral contract of insurance.

the court stated that the insurer was not bind by a person who was not an authorized agent, there was no oral contract between the insurer and the insured and as the insurance is not bind by an unauthorized agent, the insurer is not bind by an oral contract.

Conditional Receipts and Binding Receipts (binders)

It is a question of determining if they amount to temporary insurance and they are very heavily litigated.

Conditional receipts are used for life insurance

life insurance agents are soliciting agents and cannot bind the insurance without the approval of the home office.

the courts are split on whether conditional receipts are temporary insurance.

Some courts decided that if made by an authorized agent, it is a temporary contract of insurance subject to a condition which would terminate if the insured is found in good faith to be uninsurable.

Most courts reject the temporary insurance doctrine and determine the legal consequences on the basis of a satisfaction type contract, the applicant=s insurability is a condition precedent to the insurance=s affording coverage.

Binding receipts are used for property and liability insurance.

a binder may be written or oral and founded on words or deeds on an agent as usually they are general agents and bind the insurance

There are three types of conditional receipts recognized:

an approval conditional receipt: the insurance will not come into effect at the time of the application until it is approved by an authorized official of the insurer

a satisfaction or condition precedent conditional receipt, the proposed insurance comes into effect at the time of the insurance application, only if it later appears that under objective standards of insurability, the applicant was a standard risk at the date of the application

unconditional temporary or interim coverage during the pendency of the application.

GLANER v. TIME INSURANCE CO 1991

A professor was contacted for a life insurance by Vassar, the first application was rejected due to blood pressure readings. A second application was filled and submitted to the appellant. Vassar on behalf of the insurance executed a conditional receipt for the premium payment. In July, respondent had a heart attack and some medical expenses were incurred, he submitted all the bills to the insurance which refused to pay saying that he was rejected without giving any specific reason.

Whether there is a temporary contract of insurance.

The court said that the condition precedent was unconscionable, and thus that the insurance had to cover any expenses.

The court first said that approval type conditional receipt and satisfaction or condition precedent conditional receipt offer illusory coverage. The court said that the condition 3 amounted to an approval type conditional receipt. The court further stated that if there is any ambiguity in the terms of a contract, it must be resolved in favor of the party against which it is used. Furthermore, the Minnesota court adopted the reasonable expectation doctrine. Thus as he reasonably expected to be covered, the insurer must honor the bills.

Insurer=s unreasonable delay in acting upon the insurance application

Most of the courts do apply liability to insurers when they delay to act upon insurance application. There are four theories:

The negligent delay theory: an insurance is under the duty to act upon an application within a reasonable period of time. See Continental Life & Acc. Co. v. Songer 1979.

An estoppel theory: the insurer is estopped from denying that its delay did not imply acceptance of the application. See Moore v. Palmetto State Life Ins. Co. 1952

A contract theory: retention of the premium and failure to reject the application is tantamount to acceptance. See Cartwright v. Maccabees Mutual Life Ins. Co. 1976.

An implied agreement to act promptly. See Barrera v. State Farm Mut. Auto. Ins. Co. 1969.

A minority of courts say that mere delay does not impose either contractual or tort liability.

INDEPENDENT LIFE AND ACCIDENT INSURANCE CO. v. McKENZIE 1987

Agents of an insurance contacted a family. To be covered the signatures of the two kids were needed. One of the parents offered to obtain the signature of the son but the agent rejected the offer. The signatures were never obtained and the son died in an accident. As there was a period of time after the termination of the previous insurance, they recovered from the previous insurance. But they wanted to recover from the new insurance company. The trial court denied the motion for summary judgment moved by the insurance and decided that the insurance company had to pay the proceeds.

Whether the consent of the insured is needed to recover.

The court affirmed the decision of the trial court

The court stated that the plaintiff could not win on a contract or estoppel basis but that they could win on the negligent delay doctrine. The court said that the insurance did not do anything to secure the signature of the son in a timely manner.

When court decide that the insurance is negligent for unreasonable delay, they used the theory that a contract insurance is attached with a public interest.

You really need to pay premium to have consideration. Antoine V. Sentry, the guy won but there was no damages because he did not pay any premium because he had reasonable expectations.

Contractual powers of insurance agents

Introduction

The relation between the agent and the insurance company generally follows the rules of agency law.

General agents: for liability and property insurance, they possess general powers to make contracts, absent any limitation to these powers expressed in the insurance policy or elsewhere.

Special or soliciting agents: for life insurance, they possess limited powers, the final decision belongs to the insurance company to accept the applications

Brokers are persons who solicit business from the insured and the insurer.

An insurance agent possess actual and apparent authority.

any mistake, fraud or wrongdoing binds the insurance company except when the agent and the insured are in collusion.

any information possessed by the agent will bind the insurance.

WEAVER v. METROPOLITAN LIFE INSURANCE CO. 1982.

Weaver applied for an insurance requesting the disability waiver. In the first policy, the waiver was not contained, then a second policy was delivered and the agent assured Weaver that the waiver was included and that he was paying for it. Actually the waiver was not included. After a certain time, Weaver became disabled in the meaning of the policy and contacted the agent to process a claim. The agent said that he had to wait 2 years which he did. After the two years, the claim was processed by the agent but the claim was rejected stating that he waiver was not included.

whether the insurance company is bound by the actions of the agent?

the court stated that the insurance is bound by the agent=s acts.

the court stated that in the absence of fraud by agent and insured, the insurance company is bound by the act=s of the agent. The insurance must be bound by acts when the agent has apparent authority.

Acceptance, premium payment and policy delivery

To effectuate coverage, the insured needs to pay the premium but some courts recognize constructive payment.

Wanshura v. State Farm Life Ins. Co 1978

actual payment is not required and a tender of payment may be sufficient.

KRAMER v. METROPOLITAN LIFE INSURANCE CO. 1980

The plaintiff met with the agent of met to discuss life insurance. They signed the contract and authorized automatic withdrawal where it was specified that the initial payment premium was to be made in cash. The plaintiff and her husband were aware of this and said they would pay, the agent refused saying that the application might be rejected and he reported why he did not accept the payment on a log. Met issued the policy and the agent contacted the plaintiff, but the husband was not there to sign, the agent did not call for a few days and finally came to the house but he refused to hand out the policy because he said that the policy was not into effect. The husband died and the insurance refused to pay because they did not pay the initial premium.

Whether there was a waiver of premium?

The court held in favor of plaintiff but deny punitive damages.

The court first stated that this kind of initial payment was valid. The court stated that the insurance constructively waived the premium requirement as it issued the policy to the plaintiffs. The court then said that the policy was constructively delivered to the plaintiffs even though the agent did not given the policy to the plaintiffs because of the negligence of the agent.

Notes:

The case above illustrates the majority view but some courts apply a stricter view

see Reynolds v. Guarantee Reserve life Ins. Co. 1976: the delivery of the premium did not render the policy effective because they strictly applied the terms of the application.

Payment of premiums

Mode of payment

Usually the payment is made by cash.

But if the check bounces back, the insurer cannot cancel the policy for some courts, see Statewide Ins. Corp. v. Dewar 1984.

Some other courts say that the insurer can cancel the policy, see Snowden v. United of Omaha Life Ins. 1984.

Time of payment

Usually it is determined by the language of the policy but if it is ambiguous then the doctrine of contra proferentum is applied in favor of the insured.

LIFE INSURANCE CO. OF THE SOUTHWEST v. OVERSTREET 1980

Dispute over the time of expiration of a policy. The decedent had paid his premium on a certain date. For the last one, he did not pay and he died. The trial court and the appellate court decided that the policy had not lapsed.

How do you determine the expiration date or the due date to pay?

The court reversed.

the court reversed on the ground that the effective date was March 15^th, the court used the evidence of the letters sent by the insurer asking for payment.

dissent:

the dissent argued that there was nowhere in the policy the language about when the payment were due. And that the case cited by the majority showed that it had to be expressly stated for the contract to apply. He said that the language was ambiguous and thus the decision should be in favor of the insured.

Notes

the date when the premium is due is usually determined by examining the contract.

what happens when some provisions of the contract are inconsistent?

See State Security Life Insurance Company v. Kintner 1962.

concurrence opinion: the judge said that to pay a premium while you would not be covered is against logic, thus what is important is when the contract is delivered to determine the date of the effectiveness of the contract.

Pb 4: it=s a general agent. No limitations to his powers to modify the policy.

Grace period

Introduction

Every life insurance has a grace period of 31 days for the payment of an overdue premium. This is such because they are usually long term insurances which require safeguards against forfeiture for nonpayment.

The other kinds of insurance do not have a grace period even though it is sometimes tolerated to pay being late.

Can coverage still exist once the grace period has passed?

BRAND v. MONUMENTAL LIFE INSURANCE CO. 1981

Action brought by the widow of the insured. The insured was always in the habit in paying the premium in a sixty day period. The insurance never said anything about it even though they made sure that the insured was in good health before accepting the premium. The insured died before paying the premium but within the grace period. The trial court granted the motion for summary judgment moved by the defendant stating that the insurance before accepting the premium always make sure that the insured is not dead which was not the case.

Whether there was a grace period?

the court affirmed stating that the practice of the insurance to accept overdue payment within sixty days showed that it was only valid if the insurance was sure that the insured was alive at the time of the payment.

Notes

the majority of jurisdictions decided that if the grace period ends on a Sunday, then the payment can be made on the following business day except if there is a contrary provision in the insurance contract.

Can the insured validly waive the grace period?

COE v. FARMERS NEW WORLD LIFE INSURANCE CO. 1989

Coe decided to cancel his insurance as he did not need to keep it while he was not under the employ of the company he worked for. He died afterwards and the insurance refused to pay the coverage because of the cancellation. The widow brought an action against the insurance because she said that there was a grace period and that he had paid the premium and as such the insurance had to pay. The trial court denied the action.

Whether the insurance is estopped from alleging cancellation when they have accepted premium?

the court affirmed the judgment.

the court stated that the insurance contract was not like all the other contracts where termination can only be made with the mutual consent of the parties, all it needs is the decision of the insured, the insurance does not have to do anything, not notice of it, no acknowledgment. Because there is no consideration after the insured has canceled the policy.

notes

California had no statutory grace period, that is why they went into the discussion of other states.

Policy terms in conflict with the state public policy

Introduction

There is always a conflict between the right to contract freely and the intervention of the state to protect insured people.

KARL v. NEW YORK LIFE INSURANCE CO. 1977

Case of first impression.

The insured had an accident and died some months later. He had two life insurances and both refused tp pay the accidental death benefits stating that he died after the periods provided by the contracts which were of 90 and 120 days. The widow brought an action against the insurance companies.

Whether the unambiguous language of the contract should be applied?

The court held in favor of the plaintiff.

The court relied on the Burne case decided by the Supreme court of Pennsylvania which decided that it was against public policy to enforce such provisions because it would induce insured or the beneficiaries of the policies to make certain decisions that they would not make if the provision did not exist. The court here adopted the reasoning of the Pennsylvania Supreme Court saying that it was against public policy making sure that this holding would not affect clear and unambiguous provisions that were not against public policy.

Notes:

The Burne case is a real departure from the traditional rule that the contract should be enforced the way it is when it is clear and not ambiguous.

The Burne holding has not been adopted by all courts

See Kirk v. Financial Sec. Life Ins. Co. 1978: the court here said that because of the legislature, the 90 day period limitation was not against public policy because the legislature did not say anything about it. It gave authority to the director of the department of insurance to approve any kind of policy before an insurance can use it.

The test to decide if a provision is against public policy is whether the contract is injurious to the public, or contravenes some important, established social interest or when its purpose is to promote, effect, or encourage a violation of the law.

Some courts have relied on state public policy to override nonambiguous, explicit terms in an insurance contract whenever the contract term would operate to defeat the reasonable expectations of the insured.

Reformation of the insurance contract

Introduction

The traditional rule

the insured is bound by the terms of the contract whether he/she has read it or not.

Exception

when the insurance agent makes an innocent or fraudulent mistake, the insured can act in equity to have the contract reformed.

Reformation must be proven by clear and convincing evidence.

WOOD GOODS GALORE, INC. v. REINSURANCE ASS=N OF MINNESOTA 1991

The plaintiff was insured under three different policies. They asked a bank to have an extended line of credit which the bank agreed to under the condition that they extend the coverage of the policies. The plaintiff then met the agent and asked for the extended coverage which was agreed to. A fire ensued and the insurance company refused to pay because it said that there was no coverage. The trial court reformed the contract.

whether reformation is possible?

the court affirmed the judgment.

the court stated that to reverse the decision of the trial court, it must find that the trial court has erred in its findings. It said that the trial court was a better judge to decide which testimony was more credible than the other. The court said that here there would be reformation upon mutual mistake, as there was no fraud, only if the evidence was clear precise and convincing.

Some courts still hold that it is the duty of the insured to read his/her policy.

some other courts hold that the failure of the insured to read the policy does not per se constitute negligence or laches to deprive the insured of the remedy of reformation.

Must the policy coverage be explained to the insured.

Introduction

AIn the case of standardized insurance contracts, exceptions and limitations on coverage that the insured could reasonably expect... must be called to his attention, clearly and plainly, before the exclusions will be interpreted to relieve the insurer of liability or performance@ Logan v. John Hancock Mut. Life Ins. Co. 1974

SELECTED RISKS INSURANCE CO. v. BRUNO 1983

The parents were insured and the son was insured because he was member of the household. Bruno jr got into a fight with another guy and left him unconscious. The guy died of his wounds and Bruno jr was convicted of the crime of simple assault. A civil action was brought y the family of the deceased to recover monetary damages. They called upon their insurance and the insurance instituted an action for declaratory judgment not to be held liable because the policy excluded coverage when the harm was intentional. The district court held that the exclusion should have been put to the attention of the insureds. It based its decision on a Pennsylvania Supreme court case.

Whether the insurance company should be held liable for exclusions that were not explained to the insureds.

The court of Appeals reversed the decision.

The court rejected the application of the reasonable expectation theory in this case because the evidence showed that the insured did not expect to be covered for this kind of events. The court further stated that strictly to apply the rule of the Hionis case would be absurd because it could cover even unreasonable expectations.

Notes

The Hionis case has been formally rejected by the Supreme court of Pennsylvania in Standard Venetian Blind Co. v. American Empire Inc. co. 1983 with the caveat that because of the difference of bargaining power between the insurance and the insured, a court may on occasion be justified in deviating from the language of a contract of insurance.

When there is no agent to deal with to explain the policy, the court will always apply the doctrine of contra proferentum or the reasonable expectations one.

Cancellation and renewal of the insurance Contract

Introduction

The purpose of notice provisions is to prevent the cancellation or nonrenewal of the insured=s policy without allowing adequate time to obtain other insurance in its place.

Statutes provide for the way insurance can cancel policies, especially for life insurance, automobile and fire insurance.

Non payment of premiums may be enough for other kind of insurance.

Policy Cancellation

WISCONSIN HOUSING & ECONOMIC DEVELOPMENT AUTHORITY v. VEREX ASSURANCE, INC 1990.

Maria Carrasco got two mortgages loans by M&I which insured both of them by Verex. They defaulted her and said that she had made misrepresentations. Verex rescinded the policies because of the misrepresentations. The trial court said that the insurance should have complied with the statutory requirements. The insurance appeals

Whether rescission equals cancellation?

The court affirmed

the court said that a reasonable person could interpret the statute in different ways so that it was ambiguous enough for the court to look at the intent of the legislature. The court stated that to adopt the insurance=s interpretation would negate the purpose of the entire statute.

NATIONAL AUTOMOBILE & CASUALTY INSURANCE CO. V. CALIFORNIA CASUALTY INSURANCE CO 1983

the principal insured died without the knowledge of the insurance company. The car was in the proper possession of another insured under the same policy. The company sent a notice of policy lapsing to the insured saying that he had until the 12.08 to pay the premium. The car was involved in an accident before the end of the grace period. The insurance still refused to pay the benefits saying that the policy had lapsed. The trial court decided that the policy was still effective on the accident because the insurance did not comply with the cancellation procedure provided by the code.

Whether there is need of complying?

The court affirmed the judgment of the trial court.

The court stated that the issue here was whether there was an automatic renewal by failure of the insurer to comply with the code. It said that the fact that the principal insured was dead was immaterial. The sections of he code are here to protect the insured for him to find coverage elsewhere or to renew the policy with the same insurance. Thus there was coverage at the time of the accident and thus the insurer had to pay the benefits.

Notes

In some states, cancellation will be effective only if the reason given is one of the reason enumerated by the statute.

If the insurer does not comply with the requirements, then there is no cancellation.

Policy renewal

EGNATZ v. MEDICAL PROTECTIVE COMPANY 1991

Doctor Egnatz sued the company for non renewal of his medical malpractice coverage. He tried to apply to another coverage and was rejected but he did not apply to the state medical malpractice coverage. He had to retire early because of that. The trial court granted summary judgment in favor of the company.

Whether the company can not renew a policy at will?

the court affirmed the judgment.

the court said that for a renewal to occur in insurance contracts, there must be an offer and an acceptance. There is no authority that states that an insurance company has a duty to renew the policy. There is no implied good faith and fair dealings requirement. Furthermore, he had other options to get coverage, that is the other reason that the court denied all his claims.

Notes:

the decision to renew or not are left to the intention of the parties even though they are heavily regulated by the states.

Is it a new contract or the continuation of old one? It is determined by the intention of the parties.

Policy Form and Contents

Introduction

The only time the statute will be held void will be when the court consider that it goes beyond the reasonable and legitimate interests of the state.

To prevent insurer companies to deal with the insurer in a bad way, the state started to regulate what provision can be in or not.

MUTUAL LIFE INSURANCE CO. v. DADDY$ MONEY, INC. 1982

Dispute over the payment of the coverage. The policy contract contained an endorsement provision that excluded the coverage, but it had not be approved by the state commission. The insured contested the application of the provision. The trial court said that the endorsement was not enforceable.

Whether an endorsement is applicable when it is not approved.

The court affirmed the judgment

The court said that usually endorsements will supersede the contract but here the endorsement was not approved by the state commission so that the endorsement was not enforceable. The court also it was a nullity because it did comply with the code.

Notes

A state commission can approve or disapprove a policy but it cannot do so arbitrarily.

A decision to disapprove a policy may be appealed in most states.

The Daddy$ rule is generally applied by the other states.

The Conway Rule:

an insurance company=s failure to have its policies approved by the state commission would not render the policy invalid per se, it would be invalid insofar that it conflicts with the statute.

Conflict of laws

Introduction:

Traditional view

application of the law where the contract was in fact made or finally executed.

It is called the Lex Loci Contractus, the state law are incorporated in the contract.

The modern view:

application of the law of the state with the most significant relationship to the insurance contract.

it=s coming from the restatement second of conflict of laws.

KRAUSS v. MANHATTAN LIFE INSURANCE CO. OF NEW YORK 1981

The deceased was insured by his company. The company paid the premium as if he was a full time employee which he was not. The widow tried to get the benefit from the insurance and the insurance company paid the benefits due to a person who worked part time even though the company paid full-time premiums. The principal insurance company was in New York but the rest was done in Illinois. The judge of the district court decided that New York law applied and thus the insurance company had to pay the full benefit.

Which state law is applicable?

The court of appeals reversed the judgment

The court stated that they were rejecting the doctrine of the lex loci contractus.

That according to the Erie doctrine, the court has a three-step analysis to make:

the court mus isolate the issue on which the laws conflict

it must identify the purposes of the conflicting state laws to determine whether a genuine conflict exists.

it must examine the contacts of the interested jurisdictions to ascertain which has the closer connection with the facts of the case.

the court then specified where the problem was. Here the two state laws conflict on how to deal with the eligibility clause. If NY law applied, then the widow would receive the entire benefits whatever the clause said.

The court then said that Illinois had more contacts and interests than NY and rejected the application of certain cases because in no way, NY ever asserted that they would give the benefit of their laws to non domiciliaries.

Notes:

This has been generally adopted by the various jurisdictions.

Reinsurance contracts

Introduction

The reinsurance will agree to assume part or the entire risks of another insurance. This exists on areas where it would be impossible to insure if the reinsurance did not assume part of the risk.

Lloyd=s of London is an example.

Contractual relationship between the insured and the reinsurer.

Reinsurance contract are solely between the insurer and the reinsurer which agrees contractually to assume in whole or in part a risk undertaken by the original insurer.

There is no contractual rights between the insured and the reinsurer.

THE MERCANTILE & GENERAL INSURANCE COMPANY v. SPANNO CORPORATION 1991

Spanno is in the business of valuating equipment. For that purpose Spanno had to insure itself. The insurance reinsured to Mercantile. Mercantile then refused to reinsure saying that Spanno obtained the insurance by fraud. Mercantile sought a declaratory judgment to that effect and Spanno counterclaimed by an action of damages against Mercantile. The jury found in favor of Spanno stating that Spanno was the third-party beneficiary to the reinsurance contract. Mercantile then moved to set aside the jury verdict.

Whether there is a beneficiary to the reinsurance.

the court said that if there is a provision that binds the reinsurer, it will be held liable against third party beneficiaries. The court said that the policy contract did not create a right to sue for third-party beneficiaries. Thus the verdict was set aside.

Notes.

under the standard reinsurance contract, the initial insurer retains its contractual relationship with the insured, and handles all matters with the insured.

Contractual relationship between the insurer and the reinsurer

The reinsurer agrees to indemnify the insurer in whole or in part for a loss sustained by the original third-party insured.

CHRISTIANA GENERAL INSURANCE CORPORATION OF NEW YORK v. GREAT AMERICAN INSURANCE COMPANY 1990

GAIC insured Honda for losses in excess of $10 Million, GAIC got reinsurance by Christiana among others. Honda suffered a lot of losses with one of their models because the model did no require a driving licence and because it was ill designed and a lot of drives suffered severe injuries. They were not sure that the layer would be pierced until it came on to them. The reinsurance company sued for failure to prompt notice as required by the policy.

Whether there was not proper notice?

The court said that prompt notice is highly recommended in N.Y. The court then sated that it was more or less a case of first impression. The court then said that notice should be given when it is ascertainable that the layer would be pierced not when it is uncertain!!!! It also stated that to recover the reinsurance company must show prejudice by the late notice. The court then stated that there no fiduciary duty to the reinsurer but there is a duty of good faith and fair dealings to the reinsurer.

Notes:

Some courts still apply the doctrine of contra proferentum to this kind of contracts even though the two parties are more knowledgeable than common insurers. Some other refuse to apply the doctrine and some other court apply the middle ground doctrine where the intent of the parties cannot be determined by use of extrinsic evidence.

Excess (umbrella) insurance: Duties of primary insurer and Excess Insurer

Introduction

There are two types of excess insurance

excess insurance by coincidence

the insured has two or more insurance policies on the same insurable risk: it is other insurance.

umbrella or catastrophe insurance: this is the true excess insurance: the excess insurer promise to provide for additional liability with regard of a primary insurer.

GENERAL ACCIDENT & LIFE ASSURANCE CORP v. AMERICAN CASUALTY CO. 1980

A baby drown in a pool which was insured to a certain amount by general and American casualty insured in excess. The parents sued the owner and the two insurance companies. General defended its insured but the excess carrier did not take an active part in the trial. American asked general to settle but general did not answer. The jury rendered a verdict in favor of the parents. American then sued General for bad faith.

Whether there is a bad faith action available to excess carriers.

The court affirmed the decision of the trial court to recover from bad faith.

It first said that the bad faith action was developed for insured and that it was then extended to excess carrier because the excess carrier steps in the shoes of the insured. But the court said that an offer to settle is not a prerequisite to its liability to its excess carrier.

Notes

The duty to settle lies with the primary insurer and the excess insurer is the third party beneficiary.

The primary insurer must act in good faith toward the excess carrier.

Self-insurance and risk retention groups

Introduction

There are four sub-categories

a captive insurance company

a self insurance trust

a self-insurance reciprocal

a smaller in house risk retention group

A risk retention group is defined as any limited liability association whose primary activity consists of assuming or spreading liability of its group members and which is chartered or licensed under the laws of a state, or was chartered or authorized to engage in the business of insurance under the laws of Bermuda or Cayman islands and has met the minimal capitalization requirements of each state.

ARAD v. CADECEUS SELF INSURANCE FUND, INC 1991

Physicians grouped themselves in a self-insurance. They hired an outsider consultant which said that they should have an assessment the person who hired thought it was inconclusive and said so to the group. They rehired later the same consultant and this time they realized what was the problem. They had to make an increase in the premiums. Some of the doctors sued. Some settled with the group but some didn=t. The trial court entered a judgment in favor of the insurer. Thus the appeal.

Whether there was fraud.

The court held that the doctors relied detrimentally on the misrepresentations. The court held that the appropriate remedy is rescission thus the insurer must return everything. But they did not get the premiums back.

Notes

ERISA supersedes any state law concerning plan benefits. There is a problem with the risk retention programs because there=s nothing in ERISA about it.

CHAPTER 2 INSURABLE INTEREST

Property insurance

Introduction

The purpose of acquiring an insurable interest in property is to prevent wagering contracts which may well result in the destruction or impairment of the property rather than its maintenance.

A person is generally said to have an insurable interest in property if he derives an economic benefit from its existence, or would suffer any loss from its destruction- whether or not he has any title to, possession of, or lien upon the property.

The majority view, only the insurer can question the lack of insurable interest.

The intermediate position: on the question whether the insurable interest defense can be defeated by estoppel.

What constitutes an insurable interest in property?

Introduction

There are five categories in which an insurable exists according to Vance.

when the insured possesses a legal title to the property insured, whether vested or contingent, defeasible or indefeasible.

he has an equitable title to the property

when he possesses a qualified property or possessory right, such as that of a bailee.

when he has mere possession or right of possession.

when he has neither possession of the property, nor other legal interest in it, but may suffer, from its destruction, the loss of a legal right.

the factual expectancy theory has been widely adopted:

See Lucena v. Crauford 1805 ( House of Lords)

creates a bona fide insurable interest in the absence of a corresponding basis of legal right or a present existing title.

CASTLES CARS, INC v. UNITED STATES FIRE INSURANCE CO. 1981

Case of first impression in Va.

The plaintiff bought a used car that it sold afterwards. But before there could be any delivery, the car was stolen. The insurance paid for the loss. But it discovered that in fact that the car bought was a stolen car. The true owner was not found. The trial court found in favor of the insurance company.

Whether there is an insurable interest in stolen property/

The court reversed the judgment of the trial court.

The court reviewed the decisions of other jurisdictions. And in particular, the dictum of Tilley v. Connecticut Fire Ins. Co. 1980 where the court said the a person who has any interest in the property legal or equitable, or who stands in such a relation thereto that its destruction would entail a pecuniary loss upon him has an insurable interest. The court further said that the general assembly adopted that dictum. Thus the dealer had an insurable interest. The court rejected the notion that because it was thief, it could not insure the property.

WHY did they agree that the dealer was a bona fide purchaser??????

Dissent: said that there could not be an insurable interest in stolen property. It=s a minority view.

Notes

the minority view expressed by the dissent comes from property law where it is said that no title to stolen property can be passed.

The majority view is also consistent with the factual expectancy theory.

the insured has a substantial economic interest in the preservation of the stolen vehicle or other stolen property since he or she paid a large sum of money.

Problem

Specific Relationships and insurable interest in property.

Contractor or owner of building under construction

ISABELL v. AETNA INSURANCE CO. 1971

The plaintiff was the owner and hired a contractor, the contract specified that the payment would be made in one big lump. It was a turn-key contract. No mention of insurance. The FHA financed the construction and it was specified by the Isabell had fully to insure the property. They contracted a fire insurance with Aetna. The structure was destroyed by fire and Aetna refused to pay because of the turn-key contract.

Turn-key contract definition: Project in which all owner need do is "turn the key" in the lock to open the building with nothing remaining to be done and all risks to be assumed by contractor.

Lester sued the plaintiff and the trial court decided in his favor. The plaintiff brought an action against the insurance company and the trial court found in their favor.

whether there was an insurable interest in their favor.

the court affirmed the trial court=s decision.

The court applied the factual expectancy theory to the case and adopted the Am. Jur. 2d definition. The owner of a building under construction has an insurable interest in the property.

Unsecured creditor in debtor=s property

A simple contract creditor without a lien does not have an insurable interest and own only a personal claim against his debtor.

Stockholder in corporation=s property

a stockholder has an insurable interest in the property of the corporation which will sustain on a policy issued to him on such property.

Vendor-vendee, mortgagor-mortgagee, lessor-lessee, bailor-bailee, and life tenant-remainderman situations

The vendor retains an insurable interest in the property because of his legal title or his equitable lien, and the vendee acquires an insurable interest because of equitable conversion or a like claim.

the same for a mortgagee.

the same for lessor-lessee.

the same for bailee-bailor.

Problems

When an insurable interest must exist in property

Patterson, Essentials of insurance law

In an English case, the lessee was found without any insurable interest as he was not a lessee anymore even though the insurance was still running. The judge made a statement about the incipient insurable interest: the person insured should have an interest or a property at the tie of the insuring and at the time the fire happens.

but it is not applied because of the various types of contract.

KINGSTON v. GREAT SOUTHWEST FIRE INSURANCE CO 1978

The plaintiff had filed a condemnation request. The city asked for an immediate occupancy which was granted. The plaintiff was still on the premises even though the city should have been able to get the property. The condemnation order was contested but no final decree was given. The property was finally destroyed by fire.

Whether the plaintiff had an insurable interest

The trial court rendered a decision if favor of defendant.

the court reversed he judgment.

The court applied the incipient insurable interest to the case. It said that the plaintiff had that. They applied a decision of Va where the facts were similar to the case at bar. The order of condemnation was given by the commissioner but the court stated that the condemnation order was defeasible and that the people were still in possession of the property.

Problem

Extinguishment of insurable interest

Introduction

an insurable interest should be extinguished when the insured would not derive an economic benefit from the property=s existence nor suffer any loss from the destruction of that property.

TUBLITZ v. GLEN FALLS INSURANCE CO. 1981

Case of first impression

the plaintiff had contracted to have three buildings destroyed. But before the destruction started one of the building was destroyed by fire. The insurance refused coverage on the basis that the plaintiff wanted the building destroyed anyway.

whether there was a loss

The court found in favor of plaintiff.

The court first stated that to recover there must be a loss. But applying decisions from other jurisdictions, the court found that it is not because there was an executory contract for demolition that the plaintiff had no insurable interest anymore in the property. The court also applied the reasonable expectancy test to the case.

CHICAGO TITLE & TRUST CO. v. UNITED STATES FIDELITY & GUARANTY CO 1973

The building was destroyed by fire but it was not used in any way.

Was there an insurable interest

the court found in favor of the insurance company.

The court decided that because the building was useless and already been subject to fire, there was no insurable interest because there was no economic value to the building..

Notes

Tublitz represents the physical loss theory whereas Chicago Title represents the financial loss theory.

problems

Waiver of or estoppel to deny existence of insurable interest

Introduction

Waiver is the intentional relinquishment of a known right whereas estoppel involves the reliance of a party on the misleading representation or behavior of another.

ALLSTATE INSURANCE CO. v. MOORE 1983

the plaintiff divorced and a separation agreement was drafted and incorporated in the divorce decree. Among the properties that were given to plaintiff was a car that belonged to the ex-husband and was insured by him. The policy stated that a notice of transfer of property should be given to the insurance company and approved by it. None of that has been done. There was an accident and the insurance refused to pay. The plaintiff brought an action and the trial court found in her favor.

Whether there was an insurable interest after the transfer.

The court reversed the decision of the trial court. The court stated that her ex-husband lost any insurable interest in the car when the transfer was made thus she could not argue that she driving the car with is permission and that she was covered. The court stated that insurance coverage cannot be created by estoppel. And it rejected the argument that lack of insurable interest can be waived.

Notes

Majority view:

a insurer cannot waive the insurable interest requirement nor be estopped from asserting the lack of insurable interest.

some courts accept those defense when the insurer is alleging that the value of the interest is less than the proceeds claimed under the policy. Thus, once a bona fide insurable interest has been established, the insurer cannot question the value of that interest.

Problems:

Life insurance

Who has an insurable interest in a life?

Introduction

every person has an insurable interest in his own life.

An English statute prohibited to insure on a life where the person had no interest

This had been adopted by the American Courts.

RUBENSTEIN v. MUTUAL LIFE INSURANCE CO OF NEW YORK 1984

Plaintiff had a life insurance on his partner who died in bizarre circumstances. The plaintiff hired the decedent to take care of a new business of his. In exchange of 25% of the partnership, the decedent was to pay $1000 per month over 20 years. The insurance was made in 1979 and the decedent died some month after. The insurance refused to pay the benefits stating that he had no insurable interest and gave the premiums back.

Whether there was an insurable interest?

The court held in favor of the insurance company.

The court first found that the partnership was undercapitalized and thus the coverage was disproportionate to the amount of capital. Second, the court found that the decedent died in really bizarre circumstances, and there was doubt concerning the accidental death. The court said that the beneficiary could not recover if he actually killed the insured. The court also found that for an insurance to be valid there should be a proportion between the debt of the insured at the time of the insurance policy and the time of death with the amount recoverable. If not, the contract was null and void. The court found the contract null and void on the capital issue and on the debt issue.

Notes

It has been uniformly held that a beneficiary cannot recover when he killed the insured and the proceeds must be paid to the estate of the decedent of his family.

But there is an innocent instrumentality exception:

the liability of the insurer is not affected by the beneficiary=s unlawfully killing the insured may arise when the beneficiary is also guilty of fraud with respect to the insurer.

problem:

PEELER v. DOSTER 1982

Peeler and Doster wanted to form a partnership. Doster gave equipment and Peeler gave cash for capital. The two purchased life insurances and named each other beneficiaries. On the first policy, they named the beneficiary as partner on the second policy they named the united sand and gravel as the beneficiary. The partnership was never formed because peeler could not raise the funds to contribute to the capital. Doster was the one paying the premium on each policy. Peeler withdrew from the business. He dies from injuries due to car accident. The dispute arose between the widow and the partner, each wanting the proceeds of the policies. The trial court and the court of appeals held in favor of Peeler=s estate.

Who is entitled to the proceeds?

the court reversed in part and remanded.

the court discussed first which part of the name was descriptive. It said that in the second policy, the partner word was descriptive and thus Doster was the legal beneficiary of the policy. On the other hand for the first policy where the beneficiary was the partnership, the court held that because the partnership never existed, it had no property and there was no insurable interest and thus the proceeds should be given to the estate of Peeler.

Notes

the assured must be related by blood or law and must have an insurable interest engendered by love and affection. Or there must be a lawful economic interest in having the life of the insured continue.

It is generally recognized that an insurable interest exists between a husband and his wife and between parent and minor child. A specific pecuniary benefit must be found to support insurable interests for aunts, uncles, nieces, nephews, cousins and various in-laws or step-children.

Some courts state that the term wife only encompasses the legal wife, thus a de facto wife could not be the beneficiary.

problem:

WREN v. NEW YORK LIFE INSURANCE COMPANY

Case of first impression, Erie did not apply.

Ex-wife took an insurance policy on ex-husband. She signed all the papers and signed in the stead of the ex-husband with his oral consent. The husband died by shooting, she acted in self defense. The insurance company refused to pay because she did not get his written consent. The trial court held the policy invalid as against the statute and against public policy.

Whether the policy was valid and whether she had an insurable interest.

The court affirmed.

The court use the clearly erroneous standard to review the summary judgment decision. The court stated that it was against public policy to take an insurance on a person without his written consent and when there is no insurable interest as they were divorced. Plus, the court said that it would defeat the purpose of the statute to equate an oral consent to a written consent in that particular case.

Notes

If there is no statute, divorce does not divest the ex-spouse of the insurable interest on a pre-existing policy.

The same is applied to partnership, when it has been dissolved and there is an lawful economic interest.

When an insurable interest must exist

Patterson, essentials of insurance law

The insurable interest mus exist at the time of the contract but not at the time of death.

An incipient interest is both necessary and sufficient in life insurance.

The English legislature passed a statute in 1774 which required that the insured had an insurable interest in the life insured and declared that he could not recover in an action at law based on the policy, more than the amount or value of the interest in such life.

the English courts then decided that if the interest was no more, the policy was not unenforceable.

But the insurance companies continued to pay and finally the court decided that if the insurance paid, they could not come back into court to say they wanted the money back.

AMALGAMATED LABOR LIFE INSURANCE CO v. ROWE 1967

Bartley, employer, took an insurance on one of his employee. The employee died on the job. The administrator sued to get the proceeds. Bartley abandoned the claim and the trial court gave the proceeds to the administrator. The insurance appeals the judgment because it said that Bartley had no insurable interest in the life of his employee.

Whether an employer has an insurable interest in the life of employees.

The court affirmed.

the court examined the law in the state and as the employer did not have worker=s comp protection, if head not taken the insurance he would undertake risks. Thus, he had an insurable interest in the life of his employee. The court then said that the fact that the job was terminated was immaterial to the existence of an insurable interest.

Notes

none

Who may question the existence of an insurable interest?

Introduction

the majority rule is that the only one who can claim lack of insurable interest is the insurer.

it is true for property insurance as well.

RYAN v. TICKLE 1982

the decedent was partner with the defendant and they took several insurance policies as each other for beneficiaries in view of being able to buy out the partnership in its entirety. The decedent was diagnosed with cancer and died. The insurance gave the proceeds to the surviving partner. The wife of the decedent brought an action to get the proceeds. The trial court dismissed the claim. The plaintiff appealed.

whether the family can raise the ground that the beneficiary had an insurable interest in the life insured.

the court affirmed.

the court said that they did not need to discuss the issues raised by the plaintiff because she lacked standing. The court established that the rule is that only the insurer can raise lack of insurable interest.

Notes

a minority of courts hold that any person can argue lack of insurable interest.

if the insurance paid the proceeds it has been generally held that the insurance waived the defense.

Who may be designated as beneficiary?

AMERICAN CASUALTY COMPANY v. ROSE 1964

the insurance delivered a 30 day accidental policy to rose. She died accidentally during the time the policy was in effect and there was a beneficiary. The company refused to pay but finally settled, the family of the deceased sued because they said the beneficiary hold the money in trust for the family. The trial court declared the insurance liable for the remaining to the family.

whether the court was right.

the court reversed.

the court found that the deceased was indebted to the beneficiary for a certain amount but for less than what was the policy coverage. The court found that the deceased had an insurable interest in his own life and that he could decide who was the beneficiary. So the court said that there was nothing that said that the family should get the remaining.

Notes

most jurisdictions accept this view even if the beneficiary has no interest in the life of the insured.

Assignment of the life insurance Policy

Introduction

there are four parties in a life insurance policy

the insurer

the owner of the policy

the life that is being insured

the beneficiary.

the owner has the rights

to change the beneficiary

to assign the policy

to cash in the policy

to borrow against the policy

GRIGSBY v. RUSSELL 1911

Grisby on the request of the deceased bought an insurance policy for him in, accepting to pay the premiums due. He ha no interest in the life of the deceased. The trial court held the assignment valid but held in favor of the administrator of the estate of the deceased.

whether there was a valid assignment?

the court reversed.

the court said that it was not a wager of the life of the insured because it was a perfectly good policy. Thus, there was no problem and the doctor could receive it.

Notes

a majority of courts follow this holding if the assignment has been made in good faith and not with the intent to encourage wagering contracts.

the New Jersey rule: minority rule

the beneficiary has a vested right in the policy and can be deprived of it only by a change of beneficiary. In a contest between beneficiary and assignee, the beneficiary will win

the assignee is generally entitled to the insurance proceeds as against the beneficiary and it had been stated that when an assignee is authorized to collect the insurance proceeds for his own benefit, this has the same effect as a new beneficiary designation. Under the majority rule, the beneficiary will get nothing if the assignee is absolute.

Creditor=s rights

Introduction

a creditor has an insurable interest in the life of the debtor.

the traditional rule

the interest of the creditor in the life of the debtor is measured by the amount of the debt. Then a recovery that is largely over the debt is void and illegal.

but some courts stated that the creditor under circumstances would get the full amount of the policy proceeds.

ALBRENT v. SPENCER 1959

both half owned the stock of a corporation. Albrent was indebted to Spencer and purchased life insurances. The policies were pledged to Spencer as well as the stock. Then Albrent transferred the pledged things to Albrent, Spencer then satisfied the indebtedness. Albrent died and Spencer was paid the face value of the policies. The trial court stated that the debtor surrendered only the cash value of the policies.

whether it=s the full amount of the debt or the only the amount of the debt.

the court reversed.

the court held that the creditor=s insurable interest is the amount of the debt. Thus he cannot get more that the amount of the debt. If the amount received is more that the debt there is unjust enrichment.

Notes

if the designation of the creditor as beneficiary or assignee is only to secure the debt then the creditor should only be entitled to the amount of the debt.

Extinguishment of insurable interest

TRENT v. PARKER 1979

Parker and East Lawn owned both the stock of a corporation. The were two insurance policies and one was taken on the life of Trent. The chancellor said that East lawn had no insurable interest in the life of Trent and canceled the two policies. At the time the polices were taken, Trent was the CEO so it was taken because he was a key man. He then sold everything and resigned from his position and he was only a creditor to East Lawn.

Whether there was an insurable interest.

the court reversed.

the court held that because Trent was an employee it had the right to take an insurance policy on the life of its CEO. The court then held that because he left that did not extinguish the insurable interest.

Notes

a life insurance policy valid at its inception is valid forever.

Liability insurance

Introduction

It must generally be supported by an insurable interest in the insured.

It is based upon whether the insured may be charged with liability under automobile liability, professional malpractice liability, defective products liability.

JAMES v. PENNSYLVANIA GENERAL INSURANCE CO 1983

The father transferred the property of the car to his son who was the primary driver on the policy for the car. The insurance was not notified of the transfer even though the premium were not based on title of ownership. The policy provided that the assignment of interest in the car cannot be enforced unless the insurance consented. The trial court said that the transfer was void because the insurance did not consented to the transfer.

Whether the clause is valid and enforceable.

The court affirmed in part and reversed in part.

The court held that it will use a risk-focus analysis. The court held that there was no requirement in the policy that the owned automobile must be titled in the name of the insured. Thus the court held that in the absence of a provision the transfer of titled does not void the policy. The court said that the father had an insurable interest in the car. Thus there was liability coverage for the father even with the transfer. But he had no interest in the property damage of the car thus he could not be reimbursed.

Notes

A minority of courts have held that having an insurable interest is not a requirement for liability insurance.

Selected statutes on insurable interest

Not interesting.

CHAPTER 3 LIMITATION OF RISK: THE INSURER=S PROTECTIVE DEVICES

Warranties

General discussion

Introduction

Patterson

a warranty is always a term of the insurance contract creating a condition to the insurer=s promise.

Vance

it is a statement or a promise, set forth in the insurance policy or incorporated by reference, the untruth or nonfufillment of which would render the policy voidable by the insurer, regardless of the materiality of such statement or promise.

third definition

it is a statement or undertaking on the part of the insured, appearing in the insurance policy or in another instrument incorporated with the policy, relating to the risk insured against.

warranties at Common law are binding on the insured without regard to whether its breach occurs from negligence, misinformation, or any other cause.

insurers use mostly the term condition or condition precedent.

HOME INSURANCE CO v. CICONETT and CICONETT v. HOME INSURANCE CO. 1950

the boat sunk twice. The policy had a provision saying that there should be a person on the oat at all times when docked. The court dismissed for the first sinking but held liability for the second sinking.

the court affirmed the decision

the court held that a warranty in a contract must strictly be complied with and that if there is a breach, the insurance is not liable.

Notes

this is a common law application of the warranty.

there has been five purposes offered to support such a doctrine

it serves a protective function to the insurance companies by limiting insurance losses to cases in which all application questions had been truthfully answered.

deterrent function

it promotes personal integrity in insurance contracts.

fraud and perjury are prevented

element of certainty, predictability and uniformity

Some states now may apply a materiality test in certain breaches.

this rule has judicially interpreted to protect the insured.

Judicial Interpretation of warranties generally

Affirmative vs. Promissory warranties

introduction

affirmative warranties represent or assert existing facts or conditions at the time they are made.

a promissory or continuing warranty stipulates that certain things shall be done or exist in the future, during the life time of the insurance policy.

REID v. HARDWARE MUTUAL INSURANCE CO. 1969

the insurer issued a fire policy to Reid with a mortgagee clause payable to a bank. There was transfer of the property to someone with the mortgage as well. But the policy was not transferred with the property. It was destroyed by fire. An action was instituted by Reid and was joined by the new owner of the property against the insurance. The trial court held in favor of Reid

whether it was a continuing warranty.

the court affirmed the judgment

the court held that the trend was to hold a warranty as an affirmative warranty if it has been made in the past. Thus the description that an owner is living in the house is not a promise to continue in the house.

Notes

the court will usually say it=s an affirmative warranty except if the language is clear.

The descriptive warranty concept

introduction

words or phrases that describe the object insured are warranties only if they relate to facts that are deemed material to the risk insured.

if it only to describe the object, then it is not a warranty.

WOODS v. THE HARTFORD FIRE INSURANCE CO. 1840

the policy was issued for a paper mill. The owner changed it to a grist mill. The trial court held for plaintiffs

whether it was a mere description or a warranty.

the court affirmed

the court held that if it relates to the risk then it is a warranty. The court held that the description was related to the risk because the premiums were based on it. However the court said that the change did not alter the building, that the same tools were used for another activity. Thus the plaintiffs did not breach the warranty.

Notes

the age and type of construction may be a warranty when special rates are applied.

The distributive warranty concept

introduction

it deals with the severability or divisibility of the policy

the question is

whether the breach voided the entire policy or just one part of it.

CONSUMER=S MONEY ORDER CORP. OF AMERICA, INC. v. NEW HAMPSHIRE INSURANCE COMPANY 1964

the insurance policy was against robbery. One of the clauses required an alarm on the vehicle activated when the person was not in the car. The alarm was frozen and the person could not activate it. He went into a store and when he came back he could not start the engine he looked at the engine and a person robbed him at that moment. The trial court held in favor of the insured.

whether it was severable or not

the court affirmed.

the court held that the insurance policy provided for coverage for two locations and that the warranty concerned unattended vehicles. Thus, it could not be applied as the person was at the car.

Notes

the divisibility is usually a question on the intent of the parties.

they are various rules of construction

if the policy states any misrepresentation or any breach will invalidate the entire policy, it=s indivisible.

if the breach would increase materially the risk of loss then the policy is indivisible

if the breach affects only one part, then it is divisible

The substantial compliance concept

Most courts will hold that substantial compliance is enough to uphold the insurance policy.

the iron safe illustration

LIVERPOOL & LONDON & GLOBE INSURANCE CO. v. KEARNEY U.S. 1901

the insured had two policies with the insurer against fire. In the policy it was stated that the insured should keep a record book as well as the last inventory of the business. A fire broke in the town and the insured retrieved the records from the safe but the inventory was lost. The lower courts all held in favor of the insured.

whether the iron clause was complied with.

the U.S. affirmed the judgments below.

the court said that as the insured acted in good faith and with such care as prudent men ought to exercise under like circumstances, it could not reasonably be said that the terms were violated.

Notes

these kinds of clause are very common, their goal is to protect insurance companies against fraudulent loss-of-inventory claims.

to determine if there is sufficient compliance, it is always a question of fact.

the watchman illustration

HANOVER FIRE INS. CO. v. GUSTIN 1894 (Neb.)

Insured had a fire insurance in which the was a watchman clause. He actually hired a watchman to do the job. One night the watchman left to buy a lock for one of the buildings with the permission of the insured. The insurance refused to pay. The trial court held in favor the plaintiff.

Whether there needs to be strict compliance?

The supreme court affirmed.

the court said that the wording of the policy must be construed as to carry the effect of the purposes of the insurance Thus substantial compliance with the terms of the policy is sufficient.

Notes

the courts are split on the issue of substantial compliance with the watchman clause.

In Coffey v. Indiana Lumberman=s mutual Ins. Co., the court held the contrary where the insured fired the watchmen among others.

it does not apply to marine insurance.

problem

the burglar alarm illustration

SFI, INC. v. UNITED STATES FIRE INSURANCE CO. 1978

the insured had a burglar alarm clause and an alarm was actually there. But the employee forgot to tun it on when he left for dinner. The plaintiff asked for recovery but the insurance refused to pay.

Whether there should be strict compliance or not.

the court held in favor of plaintiff.

the court said that plaintiff used due diligence to comply with the clause, in short that he should not pay for the mistake of his employee who forgot to turn the alarm on. It is an occasional failure, different from the custom not to turn on the alarm.

Notes

he could recover even though it was his employee who did not turn it on, that=s the problem.

the rule requiring strict compliance applies when the language is unambiguous.

problem

not done.

the purposive warranty concept

Instead of applying substantial compliance, courts will look at the purposes of the policy.

FIDELITY & DEPOSIT CO. OF MARYLAND v. FRIEDLANDER 1939

the insured had a jewelry store and the policy specified that at least two employees should be in the store at all times. The store was robbed and the insurance refused to pay because one of the persons in the store was an employee of a company hired by the store to the cleaning job. The court below found in favor of the insured.

whether there should be two employees of the defendant in the store to comply with the policy.

the court affirmed.

The court said that the term employee which is in dispute cannot be construed as narrowly as the insurer would like. The janitor was an employee even though he was an employee of a company employed by the insured.

Problem

Suspension of coverage for breach of non compliance with warranty

Under the traditional common law rule, a breach of a warranty may void the policy ab initio.

The modern approach is that the breach only suspends the policy until there is no breach anymore.

If the loss occurred when there is a breach, the insured cannot recover.

BECKWITH v. AMERICAN HOME ASSURANCE CO. 1983

Beckwith was an employee of an airplane company. The insurance specified that employees were covered if the insured is riding as a passenger. On a trip, Beckwith took command of the plane and did the take-off. The other person looked at the console and found that there was a problem and tried to rectify it but could not and Beckwith dies of his injury while the other survived. The insurance refused to pay because of the breach as Beckwith was piloting the plane.

whether the policy was suspended are not.

the court held in favor of the insurer.

the court said that the fact that the other took the command after Beckwith was not enough to remedy the breach, the insurance was suspended and the breach was still there because Beckwith increased the risk of loss.

Notes

under the traditional rule, once the warranty has been breached, subsequent compliance cannot revived the policy.

under the modern rule, the breach only suspends the policy and it will recover once the breach has been remedied.

problem:

Judicial interpretation of standard warranty provisions in insurance contracts

Increase in hazard clauses

they are usually found in fire and other property insurance. An increase in hazard means a substantial change of conditions affecting the risk of loss which would materially increase the risk of loss.

A negligent temporary act will not defeat the effect of the coverage but a permanent one will.

INDUSTRIAL DEVELOPMENT ASSOCIATES v. COMMERCIAL UNION SURPLUS LINES INSURANCE COMPANY 1988

the insured when the insurance broker came to visit the buildings told him that the sprinkler system was disconnected. A fire broke and the insured filed a claim to be reimbursed from the losses. The insurance company refused to pay. The insurances were granted summary judgment because the court found that the insured breached its obligations under the sprinkler=s clause.

whether this was a permanent breach.

the court reversed everything.

the court first reversed the summary judgments because there was a dispute on the facts that was material to the decision. The court then stated the clause was mandated by statute and was standardized and as such is subject to interpretation by the courts. The court said that there will be no increase in hazard if the change is temporary. The court also said that the burden to show that it was permanent was on the insurer. Negligence in itself does not increase the hazard, it needs a change in use of the premises as well.

Notes

A moral hazard is an increase if the likelihood that the insured will intentionally destroy the property.

the risk or the danger of the destruction of the insured property by fire as measured by the character and interest of the insured owner, his habits as a prudent and careful man or the reverse, his known integrity or his bad reputation, and the amount of loss he would suffer by the destruction of the property or the gain he would make.

an increase in a physical hazard includes a change of business where the risk of loss by fire is greatly increase.

that happens when a new use of the insured property is made or when its physical condition is changed from that which existed when the policy was written and the new use or changed condition increases the risk assumed by the insurer.

see N.Y. statute has been adopted by numerous states.

problem

problem

Mode of use of the property insured

the use of the insured property is crucial for fire insurance and the likes as the coverage and the conditions will vary based upon it.

DURHAM v. COX 1984

Durham had a homeowners insurance, which specified that no part of the structure could be use for business purposes. The plaintiff built a garage and advised the insurance that he was constructing a garage that would be used for storage and upholstery, and asked the insurance to increase coverage. He started to operate the business and then a fire broke out. The insurance refused to pay claiming the benefit of the use of the property clause. The trial court granted the motions for summary judgment asked by the insurance.

whether the clause was effective?

the court reversed and remanded.

the court said that the clause was a condition working a forfeiture, which can be waived like any other provision by the acts of the insurer. That it was not an exclusion provision. The court noted the distinction between an excepted risk and an accepted risk quoting another case. Furthermore, every modification of the policy has specified garage for storage and upholstery purposes, thus the insurance could not contend they did not know. The court reversed the motion for summary judgment because there was a dispute of a material fact.

Notes

an accepted risk is a warranty, a excepted risk is an exclusion.

problems

the sexual molestation, both plaintiff and defendant are going after the insurance. The defendant assigned his right of action to the plaintiff. Failure to supervise the child goes under the business exclusion. The court held in favor of insurer.

It is a non profit thing, thus it does not go under the business purposes exclusion.

problem:

it is a promissory warranty. The insured should have known or know that there is a breach, he=s not covered. If he did not know, then he=s covered.

the warranty of occupancy

For a dwelling, occupancy means a person must live or sleep in the building,

a vacant building means that most of the furniture has been moved.

CHIAPETTA v. LUMBERMENS MUTUAL INSURANCE COMPANY 1990.

Chiapetta was operating a clam plant. He leased to someone else and moved to Louisiana. The lessee operated the plant until his permit was revoked. He vacated the premises and Chiapetta came back to remove all the furniture. The building was insured, the policy specifying that there would not be any coverage if the building was not occupied. The building was destroyed by fire. The trial court held in favor of the insurance because the fire was arson and there was some doubts as to the conduct of the insured.

Whether the clause was effective?

the court affirmed.

The court said that the non-occupancy clause which could be usual and incidental did not apply in this case because Chiapetta closed the plant while in season showing that it was not the reason for closing. The court also stated that he=s coming back to remove everything was not an activity that could amount to occupancy thus it cannot operate to suspend the period of non-occupancy. Furthermore, there was probably an increase in risk because the hazard may have been increased by any means within the control or knowledge of the insured.

Notes

a statement concerning the property as being used or occupied may be construed as an affirmative warranty and the fact that the building is unoccupied will have no effect.

If the policy states that there will be no coverage if the building is vacant, then it is continuing warranty or a promissory warranty.

problem:

it=s unoccupied and vacant, the warranty is revived because the furniture is put back.

problem:

customary and incidental for professors because there was an intent to return. But if he had left for three years, then there would have been a problem.

Coverage, it is determined from the time of the issuance of the policy you don=t care what happened before that.

Prohibition against other insurance

the purpose of an other insurance provision is to prevent over insurance in the form of double or triple indemnity for a single insurable loss.

BURGESS v. NORTH CAROLINA FARM BUREAU MUTUAL INSURANCE CO. 1980

Plaintiff subscribed to a farmer insurance while he was actually insured by another insurance. He paid premiums on both policies. A fire destroyed the entire property. The defendant refused to pay the coverage on learning about the second insurance. When the agent sold the policy he informed the insured about the other insurance provision. The trail court held in favor of defendant.

whether the other insurance provision precluded the plaintiff to obtain more?

the court affirmed.

the court said that the language of the provision was not ambiguous and as such was applicable. Plus as the agent told them about the existence of such a clause, there was no deception or misrepresentation.

FOSSO v. STATE FARM MUTUAL INSURANCE COMPANY 1991

the couple had an insurance for medical purposes and the husband asked that their unborn child to be included. At the same time, the wife was under the insurance available at her firm. She terminated her employment but asked to receive the benefits. When the child was born, they realized he had a birth defect. She asked for additional coverage to her own insurance. It was approved. The coverage related back to the birth of the child. They did not notify the first insurance about the additional coverage. The insurance refused to pay because of the failure to notify. The trial court held in favor of the plaintiff because they could not notify something they did not know about.

Whether the other insurance provision was applicable.

the court affirmed.

the court said that there could be no notice because there was no coverage at the time of birth as the insured did not know if they would be accepted, the fact that it relates back does not preclude them from recovering. Furthermore, they rejected the application of the statute because it applied to dependents that could be covered by the insurance of an employee. She was the only one insured under the insurance by the employer.

Notes

in Kent v. Insurance Company of North America, there was a other insurance clause as well as a pro rata clause in the policies. The trial court held in favor of the insurance companies and the court of appeals reversed saying that the prohibition clause worked as a forfeiture if another insurance was taken, so they did a pro rata.

Most of the courts will hold the companies liable at a pro rata of the actual amount of the loss.

problem:

Actively at work on full time

they are usually issued without a medical examination. Thus they actually ask that the insured is working full time at the time the policy is issued to protect the insurer from covering previously incapacitated workers.

BLUM v. PRUDENTIAL INSURANCE CO. OF AMERICA 1973. (NJ)

an insurance was issued for a company=s employees with the warranty that the employee was actively at work. The insured was in florida for a heart condition and was advising clients by telephone. He died in N.Y.C..

what does it mean?

the court held that he was not actively at work.

the court held that merely conferring with his partners and sometimes talking to his clients did not amount to be actively at work. Thus the insurance was not liable.

Notes

NONE

Location of the property

if the location is given to define the risk then if it is removed, then there=s a breach.

BITUMINOUS CASUALTY CORP. v. HARRIS 1979

the plaintiff decided to sell its business , thus liquidating it and selling most of it removing the rest to a warehouse. A fire destroyed the property. The trial court returned verdict in favor of the plaintiff.

whether it was a risk or only a description

the court affirmed.

the court held that the provision was ambiguous. Thus the court held in favor of the plaintiff. But the court held that it was pertaining to the risk.

Notes

Herbert v. Aetna: the location pertained to the risk assumed.

Place of garagingC auto Insurance

it usually permits to establish the premiums.

ARBUCKLE v. LUMBERMENS MUTUAL CASUALTY CO. OF ILLINOIS 1942

there were two locations where the car could be garaged. He had told the agent that he was going to sue the car there but the agent did not put exactly that in the policy. The trial court held in favor of the plaintiff.

whether it was breached or not.

the court affirmed.

the court held that there was no breach and that the provision was anyway ambiguous.

Notes

NONE

Warranty against encumbrances

it is any right to or interest in property that may diminish its value.

LILLDAHL v. INSURANCE COMPANY OF NORTH AMERICA 1990

the plaintiffs owned a house that was destroyed by fire. The verdict was in favor plaintiffs.

whether there was an encumbrance.

the court affirmed the judgment.

the court said that it is not because the mortgagee was not listed that it voided the policy because it was not material to the loss.

Notes

it is generally enforceable if there is no statute prohibiting it.

most courts do not look at the materiality of the omission.

Some courts have relied on an increase in hazard.

Transfer of ownership or title

introduction

when there is a transfer, the consent of the insurance is required to have the policy continuing.

TRANSAMERICA INSURANCE CO. v. CARTER COUNTY STATE BANK 1992

there was a property and a bank loaned money on it. Later the corporation charter was forfeited which was made known to the bank. The policy was renewed each year until it was destroyed.

whether there was a breach.

the court held in favor of the insurance.

the court held that it was established that the owner did not notify the insurance of the change in ownership. The mortgage holder cannot receive the proceeds if he had not notified the insurance of the change of ownership.

Notes

they are strictly enforced against the insured.

Problem p 226

The court held that the insurance had to pay the benefits because its own doctor should have found there was something serious.

But it should have been a material misrepresentation, he should not have been able to recover.

Even though it was a fraudulent misrepresentation

Incontestability Provisions

Representations

General discussion

Patterson

it is a statement made by the applicant for insurance or by someone acting for him and by his authority, to the prospective insurer, before the making of the contract of insurance and not embodied as a term of the contract

it is made part of the contract, it becomes a warranty

Vance

it is a written or oral statement which precedes the contract of insurance, and which relates to the facts necessary to enable an insurance company to decide whether or not to accept the risk and at what premium.

Judicial interpretation of statutory and non statutory representations

Innocent v. deceitful misrepresentations

KENTNER v. GULF INSURANCE 1983 (Or)

the kentner had an insurance for their home and during an investigation, the insurance discovered that the value was less than stated. They asked the kentner to cancel the policy voluntarily instead of voiding it itself. They refused and employees of the insured signed the cancellation in their names. The house was destroyed. And they filed a claim of loss to the insurance against new Zealand the new insurer. Gulf refused coverage. then they filed a suit to declare the insurance policy with Zealand invalid because not made with their consent. The jury rendered a verdict in favor of the insurance.

whether the fraud had to be wilful or reckless misrepresentation is enough.

the court reversed.

The court held that it was needed that the fraud was wilful, recklessness is not enough under the statute.

Notes

the supreme court of Oregon reversed the decision of the court of appeals saying reckless misrepresentations were enough.

if it material to the risk of loss then it will void the contract even if it not wilful misrepresentation.

representations in automobile insurance applications

GLEN FALLS INSURANCE CO. LONG 1973 (Va)

long was injured while in a truck struck by a car. The trial court found that to be void the insurance must show that it was wilful misrepresentation and that it did not show that it was a wilful misrepresentation.

whether it was wilful.

the court affirmed

the court held that the plan was made for poor risk drivers. The court held that it had to be a wilful misrepresentation.

Notes

some states said that misrepresentations will not void the policy even if it is wilful.

FERREL v. COLUMBIA MUTUAL CASUALTY INSURANCE CO. 1991 (Ar)

the insured had lied when doing the application but she wasn=t the one making the application. The trial court said that the statute had abrogated the common law right to rescind the policy ab initio.

whether it did that or not.

the court reversed.

the court held that the misrepresentation made y the father were to be imputed to the daughter. Thus, there was no coverage.

Notes

NONE

representation in life insurance applications

BANKERS LIFE & CASUALTY CO. v. LONG 1972 (Al)

the deceased purchased a policy and didn=t say that he had some medical problems. He died and the widow asked for the proceeds. The insurance refused because of the misrepresentation. The trial court held in her favor.

whether it was misrepresentation

the court reversed

the court held that for a contract to be void the misrepresentations were false made either with actual intent to deceive or the matter represented increased the risk of loss and the insurer relied on them to its prejudice. The court said that t was affecting the risk.

Notes

there is a difference between opinion and facts. If it is an opinion that is being asked, then the contract will not be void if it was not true.

representations in property insurance applications

NAPPIER v. ALLSTATE INSURANCE COMPANY 1992

the house was destroyed by fire, the insurance refused to pay because the owners did not answer yes where they were asked if they had a previous policy canceled. The trial court held in favor of the insurance.

whether it was material or not.

the court affirmed.

the court held that even if they thought it was not the homeowner=s policy that was canceled that was a material misrepresentation.

Notes

it is irrelevant that they were in good faith.

but it will not void the policy if it is a compulsory motor insurance.

representations in liability insurance applications

NATIONAL UNION FIRE INSURANCE CO. v. SAHLEN 1993

a company had a policy, the officers were doing something bad. It was discovered and they withdrew some of the documents attached to the application of the policy. The trial court found in favor of union and said that the documents attached were material misrepresentation as under the statute.

whether it was material

the court affirmed

the court held that the statements were material to the risk of loss.

Notes

misrepresentations by officers and directors will bar recovery under their liability insurance.

Continuing duty of full disclosure during the pendency of the application

WESTERN FIRE INSURANCE CO v. MOSS 1973 (Ill)

the boat had an accident and people were injured. The owner was talking to the agent who purchased the insurance for him even though he knew there had been an incident. He didn=t tell the insurance and the insurance delivered the insurance, two weeks later, they filed a claim for the injuries. The trial court found that the agent was the plaintiff=s agent and not the insurance=s. That the misrepresentation could be imputed to moss through his agent.

whether there was a duty to disclose.

the court reversed.

the court held that the agent was the insured=s agent and that the concealment fatally vitiates the policy.

Notes

an insurance applicant has an affirmative duty to disclose any new material facts to the insurance company that occur after he has submitted his application but before the policy is issued.

The test of materiality

if the misrepresentation is not material it will not void the policy.

Vance

it is the effect the representation would have on the parties in the making of the contract

SENTRY INDEMNITY CO v. BRADY 1980 (Ga)

a policy was issued and on the application they said that nobody had been convicted for traffic violations. An accident occurred. During an investigation the insurance found that he had lied. Sentry filed for a declaratory judgment asking to have the policy void ab initio. The trial court rejected the motion for summary judgment asked by the insurer.

whether it was material.

the court held summary judgment for Sentry.

the court held that usually materiality is for the jury to decide but here there was no questions so the summary judgment was proper to decide.

BRYANT v. NATIONWIDE MUTUAL FIRE INSURANCE CO 1985 (N. Ca)

a house was destroyed, the insurer refused to cover because it said that the insured put the fire and misrepresented certain facts. The trial court held in favor of the insurance.

whether it was material to the policy.

the court reversed.

the court held that the materiality depends on the nature of the misrepresentation. The curt held that the misrepresentations concerning the financial status and the marriage status were not material to the risk. The court said that it has to prejudice the insurer.

Notes

many courts analyzed the materiality with the question whether the insurer would have rejected the application if known to it.

most states require that the application is attached to the policy.

that excludes anything not attached to the policy.

Incontestability provisions

the policy will be incontestable after a certain period as one or two years, except for certain defenses. It usually gives a reasonable time for the insurer to discover fraud.

GOMEZ v. SMA LIFE INSURANCE COMPANY1992

the plaintiff had purchased the insurance and two years and half after filed a claim for disability benefits. The insurance refused because the plaintiff did not disclose a pre-existing condition. The insured claimed that it was incontestable, the insurer said during the disability, the policy was tolled.

whether the incontestability clause is applicable.

the court first held that if it ambiguous it is held in favor of the insured. The court said that the clause was ambiguous. The court held in favor of the insured.

Notes

it usually apply to misrepresentations, warranties and other conditions related to coverage issues.

the pre-existing medical conditions usually fall under the incontestability clause.

BURHAM v. BANKERS LIFE & CASUALTY CO 1970 (Utah)

the policy was reinstated on the condition that it should be contestable based on fraud and misrepresentation within two years. The insured did not tell the insurance about his visits to a doctor. The trial court held it was fraud and misrepresentation.

whether the contestability clause is applicable to the reinstatement policy or not.

the court reversed.

the court held the contestability clause should be calculated not at the time of the reinstatement but at the time of the policy taken. The court held that the insurance could not add a condition because it is a continuation of the old policy.

Notes

the clause will be broader for a life insurance because the insured will not be able to testify.

Selected statutes

NONE

Concealment

What is the doctrine of concealment

Mcgill, life insurance

it is an affirmative act to hide the existence of a material fact.

a concealment is a misrepresentation by omission.

Concealment involving different types of insurance policies

concealment in marine insurance applications

Generally, it will not allow the insurer to void the policy unless an intent to defraud is proved.

But under marine insurance, the insured has a duty to disclose any material fact known to him. It can be voided.

KING v. ALLSTATE INSURANCE COMPANY 1990

king through an agent asked for a policy for his boat he had a temporary coverage and later the insurance said that it will not cover him. The boat sunk a day prior the termination. The jury rendered a verdict for the insurance because of concealment.

whether it was covered or not.

the court reversed.

the court held that it is a question of pure contract law and not maritime law, thus they could contract out the way they wanted. It was a binder. The binder was merged with the policy contract. The court reversed because the jury instructions were based on maritime law.

Notes

it was an all-risk boat owners insurance policy thus they used their own language about misrepresentations and concealment.

concealment in property insurance applications

FARLEY v. ST CHARLES INSURANCE AGENCY 1991 (Mi)

the house was destroyed by fire and they filed a claim for the proceeds. The insurance claimed that there was fraud. The trial court held in favor of the insurance. the insured had made the policy lapsed and then the house was destroyed then they came to the agent and asked for the policy to be reinstated without telling about the fire.

whether there was fraud or not.

the court affirmed

the court fist held that when there in a practice to accept late payments, the insurance should estopped or had waived any defense. But the court held that because they concealed the fact, they could not claim estoppel or waiver.

notes

NONE

concealment in life insurance applications

NYONTEH v. PEOPLE SECURITY LIFE INSURANCE COMPANY 1992

they applied for insurance after he was diagnosed with cancer but they didn=t say that he had cancer. They left the insurance lapsed but she applied for reinstatement. He died and she filed a claim for the proceeds. The trial court held in favor of the insurance stating that the incontestability clause was inapplicable due to fraud.

whether it was applicable.

the court affirmed.

the court first said that this concealment was material to the risk. It held that usually the clause should be enforced even with concealment, but it means that the contract was valid thus if the contract is void, the clause is inapplicable. But the court said that the contract is only voidable thus the clause is applicable and the defense should stay. But the court then held that the reinstatement created a new period of incontestability thus, it was not yet incontestable.

Notes

NONE

The insurance has two years to do an independent investigation

CHAPTER 4 THE INSURER=S DEFENSES

Waiver, Estoppel, and election

General discussion

A waiver

is the voluntary, intentional relinquishment of a known right which may result from either the affirmative acts of the insurer or its authorized agent or from the inaction, with knowledge of the applicable facts.

There must be a clear intent to relinquish the right.

Estoppel

it is a misleading act, conduct, or inaction on the part of the insurer upon which the insured detrimentally relied.

it is an equitable remedy.

Definition and general rules of Waiver and Estoppel

GILBERT FRANK CORP v. FEDERAL INSURANCE COMPANY 1983

there was a burglary and the company tried to recover. There was a provision regarding when the suit could be filed: within12 months after the loss. There were meetings between the inusrer and the insured during the year. The trial court granted the motion that the action was barred by the provision.

whether there was waiver or estoppel.

the court reversed.

the court held that there were questions of fact and that motion for summary judgment was inadequate.

Notes

they do not operate to rewrite or enlarge the risks covered by the policy.

The incipient breach Doctrine

It means beginning to show itself. It is a breach that at the inception of the policy comes to the attention of the insurer.

JONES v. UNITED INSURANCE COMPANY OF AMERICA 1985

the insurance refused to pay the proceeds of the life insurance to the beneficiary because the policy had misrepresentations, omissions and incorrect statements. The trial court held in favor of the insurance company.

whether there was waiver.

the court reversed the judgment.

the agent knew certain things but entered answers contrary to what he knew. The court held that it was imputed to the insurer because he was a general agent. Thus there was waiver because he knew of the misrepresentations.

Notes

the same when the insurance knew of a pre-existing condition.

Effect of entire Contract statutes on applicant=s false statement

The application must be attached to the policy.

GARDINER v. OLD HICKORY CASUALTY INSURANCE COMPANY 1988 ( Louisiana)

there was car accident and the insurance refused to pay because the son was not listed as a member of the household. The trial court denied admission of the application.

whether it=s entire statute or not.

the court affirmed.

the court said that the statute did not require the attachment of the application to the policy thus the trial court was correct.

Notes

traditional view

the insured mus read the policy and if the application is incorporated is not correct the insured must correct it.

there will be no recovery if not corrected.

modern view

if the agent has put wrong answers contrary to what the insured said, then the insurance cannot avoid the liability.

Non-payment of premiums

Failure to pay will make the policy lapse after a grace period.

The insurer does not have to notify the insured that he has to pay because the policy provides for it.

TIME INSURANCE CO v. VICK 1993 ( ILL)

the insured asked the agent to change the monthly payment to a quarterly payment. The policy lapsed and there was a new application for reinstatement which was accepted. He died. There were payments made after the end of the grace period and accepted by the insurance. The insurance refused to pay coverage after she notified of the death of her husband because there was misrepresentation in the application. The trial court granted the insurance= motion.

whether it had lapsed.

the court affirmed.

the court first said that they did not pay after the grace period like they alleged. The court the said that the insurance was not estopped because it had retained the premium while waiting for the application for the reinstatement.

Notes

NONE

Course of dealing

It is when it is the common practice of the insurer and then it is going to be estopped from alleging the contrary.

WALTERS AUTO BODY SHOP, INC v. FARMERS INSURANCE CO, INC 1992 ( Missouri)

property was destroyed by fire and the trial court ordered the insurance to pay the proceeds. The insured was very late in the payments and never got a balance = 0.

whether it was a question of fact or a question of law.

the court reversed.

walters siad that it was an express waiver. The court held that until the check is paid there is no real payment. The court held that the insurance did not think of the check as full payment. The court the held that the insurance did not have practice establishing waiver of right.

Notes

NONE

Failure of insurer to make timely objection

HENSON v. CELTIC LIFE INSURANCE CO 1993 (Alabama)

Henson=s mother tried to find an insurance for a daughter but couldn=t because she was epileptic. She finally found one, the daughter signed it but was never explained the terms of the policy. A clause of the application said that the insured must have a full time employment to be covered. She answered to that on the application but it appeared that she wasn=t fully employment for a long time and that her employer had fired her. She testified that she received the letter 6 months after she was actually fired and didn=t know before then. The insurance reused coverage on the basis of her epilepsy but then the decision was reviewed and she recovered. Then the insurance refused to pay because she wasn=t employed and that she misrepresented the fact. The trial court granted a motion for summary judgment to all the defendants.

Whether it was a waiver or not?

the court reaffirmed in part and reversed the part concerning the insurer.

The court distinguished the McGee case because in McGee the employment provision was in the policy itself and not in the application. The court said that this would be considered an exclusion and thus waiver does not apply but here it applies because of the conduct of the insurer. The court said that here the provision was ambiguous and as such should be construed in favor of the insured.

Can coverage be extended by waiver or estoppel

FIRST UNITED BANK OF BELLEVUE v. FIRST AMERICAN TITLE INSURANCE CO 1993 ( Neb)

First American Title issued an title insurance to first United for a parcel of property. Loss would occur in case of any lien or encumbrances on the property. There were four liens on the property including First united. Some creditors filed a forfeiture action against the property. First United asked First American Title to defend it which it accepted to do. The court entered a decree of foreclosure which foreclosed all the rights of United on the property. First United deposed a claim which the insurance refused to cover. It sued and the insurance answered by saying they had suffered no loss. United answered that the insurance was equitably estopped because they took the defense in the foreclosure. The trial court and the court of appeals rejected United=s claim.

Whether there was estoppel and coverage?

the court said that United did not suffer any loss because of the other liens existing on the property. But the court said that the insurance was equitably estopped because they defended United on the claims. It applied the test to see if equitable estoppel was fulfilled. It said that the insurance had both constructive and actual knowledge that would have permitted it to deny coverage.

Notes

you can=t use waiver or estoppel to extend or create coverage.

Non Waiver agreement or reservation of rights

when the insurance is under a duty to investigate, then it may be held that it has waived his rights o deny coverage.

Under a consensual non waiver agreement, the insuere will not be precluded from asserting a defense.

With a reservation of rights, it is a unilateral notice that the insurance reserved the right to raise a defense.

FIRST UNITED BANK OF BELLEVUE v. FIRST AMERICAN TITLE INSURANCE CO 1993 (Neb)

facts above

whether there was estoppel

the court held that to have estoppel there must be a showing of prejudice. The court held when there is no reservation of rights, then the insurance is estopped from denying liability after.

Notes

a mutual agreement means that the insurer will pay the costs of the defense.

Delay in tender of return payment.

DARYLAND INSURANCE CO v. KAMMERER 1982 (Neb)

there was an accident and the driver forgot to state that a person was a member of her household. The trial court found she fraudulently misrepresented and denied coverage.

whether it could deny of not.

the court reversed.

the court held by asking for cancellation of the policy as well as retaining the payments it recognized the existence of the policy at the time of the accident. Thus it was estopped from alleging fraud.

Notes

the insurance should return all the premiums back.

a general agent will bind the insurance by any of his acts.

but a limited agent will not bind the insurance unless consent.

if a general agent explains a provision to the insured then it will bind the insurance.

Election

It restricts usually the insurer to a choice from among a limitd number of legal options.

HOWARD v. RESERVE INSURANCE COMPANY 1969 (Ill)

there was fire damage to the property. The insured has some repaired some of the damage but the insurance denied to pay back.

the court held that the letter sent by the insurance is not a clear choice of what they were doing thus the it goes in favor of the insured. The court said that t was necessary to make the repair thus the insured won.

Notes

the election must be clear and unambiguous.

if the insurer elects to repair then the insurance contract is tranformed into a construction contract.

Contract reformation

It is an extraordinary remedy that the courts used rarely.

It only works when there is a mutual mistake.

BOARD OF TRUSTEES OF THE UNIVERSITY OF ILLINOIS v. INSURANCE CORPORATION OF IRELAND, LTD 1992

the university asked for liabilities insurance. There was a dispute concerning the limit of the coverage. The court held that the intent of the of the parties was to have the coverage applying to the two liabilities. The court granted the motion for summary judgment for the university and there was reformation of the contract.

Notes

NONE

CHAPTER 5 COVERAGE AND EXCLUSIONS TO COVERAGE: CAUSATION ISSUES

Introduction

Insurance warranties and the likes are usually determined under the theory of materiality. Insurance coverage and exclusions are usually determined under the theory of causation.

Exclusions or limitations to coverage can either be conclusive or inconclusive.

Conclusive means:

if the insurance can prove that the loss was due by a limitation, then it=s not liable.

Inconclusive means:

if the policy says the loss may not be caused by an event but the event is the cause of another one, the insurance will be liable.

The but for causation is the basic test but the additional requirement of a proximate cause is also necessary.

But because insurance is based on contract law, the standard is less stringent than the one in Tort law.

Concurrent causes

The majority view is that if multiple causes contributed to the loss, and a dominant cause was a covered peril, then insurance coverage would exist for the entire loss.

Determination of coverage

Direct v. Remote ( loss= loss caused by or resulting from actual and proximate cause without superseding, intervening cause).

Standard property and fire insurance policies often provide coverage to the insured against all direct loss or damage by fire.

MARSHALL PRODUCE C v. ST PAUL FIRE & MARINE INSURANCE CO 1959 (Minn)

the plaintiff was a milk producer and was dehydrating eggs. It had a contract with the Army to provide for dehydrated eggs and milk. A fire occurred in a building not far from where the milk and eggs were stored. The smoke went into the manufacture and the Army then refused the package, even though conformed to what it had stipulated. Thus, the company suffered a loss as it couldn=t sell them at the same price. It filed claimed with the insurance but it refused to pay coverage as they said that the loss was not due from fire. The trial court held in favor of the plaintiff.

Whether it was excluded from coverage or not?

The court affirmed the trial court decision.

The court said that it did not that the loss was due to fire directly. It only had to be the proximate cause.

Notes:

there is proximate cause when the loss has been caused by a force set force in motion by fire, without the intervention of any new and independent force.

The Marshall court held that the direct in the policy meant immediate or proximate as distinguished from remote.

Problem:

Problem

The predominant cause doctrine ( the concurrent causes)

Minority rule

under this, if a covered cause combines with an excluded cause to produce the loss, the insured cannot recover under the policy.

Majority rule

the majority of courts have adopted a predominant or dominant causal doctrine.

if multiple concurrent causes exist, and if the dominant or predominant cause is covered, and if the predominant or dominant cause is a covered peril, then coverage would exist for the entire loss, even though other concurrent causes were not covered under the policy.

Old California rule: any covered concurrent cause

explained by itself.

STATE FARM FIRE AND CASUALTY CO. v. VON DER LIETH 1991 (Ca)

there was a problem with the soil which was sliding, negligence of the contractor and the permits.

it will not be covered if the cause is remote to the risks on the contrary if the cause is close to the risks then any risks even excluded will be covered. The court reversed the decision of the court below which said there was no coverage.

Notes

most courts have not gone as far as the california courts and still requires a predominant cause.

Accidental means v. accidental results

Scope and meaning of these terms

BURR v. COMMERCIAL TRAVELERS MUTUAL ACCIDENT ASSOCIATION 1946 (N.Y.)

the court said that there is no distinction made by accidental death and death by accidental means nor between accidental means and accidental results. There was overexertion, thus it was accidental and external.

notes

some courts do the distinction. But most courts have rejected the dichotomy.

The insured=s voluntary actions

HEARN v. SOUTHERN LIFE AND HEALTH INSURANCE CO 1084 (Ala)

the court said that to constitute an accidental death, it must have resulted from something unforeseen, unexpected and unusual. Or which happens as by chance, or which doe snot take place according to the usual course of things.

HAIRSTON v. LIBERTY NATIONAL LIFE INSURANCE CO. 1991 (Ala)

it is an accidental death or injury if the result is an accident whether due or not to accidental means.

Notes

it must be tested from the subjective point of view of the insured.

if the insured was insane when committed suicide it will be considered accidental except when the policy excludes insanity.

Preexisting conditions

HILL v. MUTUAL BENEFIT LIFE INSURANCE CO 1990

the mere fact that the insured is afflicted with some disease or infirmity at the time of the injury will not preclude recovery upon an accident insurance policy if an accident is the diect cause or proximate cuase of death or diability.

notes

if the pre-existing condition is a remote cuase it will preclude coverage.

Accidental death by external means

SPAID v. CAL-WESTERN STATES LIFE INSURANCE CO. 1982 (Ca)

the court made a distinction between external substance and internal substance. If it external ,then it is accidental. Internal it=s not acidental.

Automobile Insurance Policies

Scope of coverage and exclusions

The term insured

STATE FARM MUTUAL AUTOMOBILE INSURANCE CO v. EASTMAN 1984 ( Ca)

Eastman was involved in an accident with dune buggy belonging to his brother in law. There were some evidence that he used the buggy without he permission of the bother in law. The two insurances moved for a declaratory judgment in their favor. The trial court granted the motions to both insurance companies stating that because there was no permission given by the owner, Eastman could not be defended or covered.

Wether there was coverage?

the court reversed regarding one insurance.

The court said that the State Farm provisions were ambiguous. Because the permission provision is not defined in the non-owned part of the policy. Furthermore, he was a relative as such he didn=t need any permission.

Notes

there are three possible interpretations of the omnibus clauses:

the strict construction

the use of the vehicle by the permittee must be clearly within the scope of the named=s insured permission.

the liberal interpretation

the omnibus clause finds any use of the vehicle to be within the policy coverage, as long as the permittee received the named insured=s initial permission to drive the vehicle.

the majority view:

the minor deviation view

coverage would be defeated by a material, but not minor, deviation in the scope of permission intended by the named insured.

problem

Owned v. Non owned vehicles

policies often provide or limit coverage depending on whether the automobile is owned or non owned.

STEINBACHER v. PAGE 1991 ( Pa)

there was an accident between Page and Steinbacher. Page=s car was not covered yet because it was reserved for the son who couldn=t drive yet. But the other son=s car was not running, thus the father allowed the son to drive it intending to call the insurance to have it covered. But forgot and the accident occurred. The trial court found that there was no coverage and the insurance did not have to pay.

whether the car could be considered as covered?

the court affirmed.

the court stated that the fire bird could not be considered as a covered vehicle because it was not listed. It could not be considered as a substitute vehicle because a substitute car would be one not owned by the insured and the fire bird was actually owned by the insured.

SIMON v. LUMBERMENS MUTUAL CASUALTY CO, 1981 ( Nassau)

Simon was hit by a car driven by someone who had the permission to drive the car insured. The policy included any member of the household and relative. The driver was a relative and a member of the household. But the policy included a provision that a person who drove a car not owned by the driver must not use regularly.

Whether the sister was using the car for regular use.

the court held in favor of the insurance.

the court said that because the driver had been using the vehicle regularly for the past few weeks. Thus, the insurance could not cover the driver as she was using the car regularly.

Notes

Arising out of

STATE FARM FIRE & CASUALTY CO. SALAS 1991 ( Ca)

Salas changed three tires on his car. But he had subsequent problems with the tires and the rim. He had to put a sealant on the tire and when he got back from his trip he gave it to a body shop without telling the guy that there was a flammable sealant. The guy was injured and they sued the sealant manufacturer and Salas. The insurance refused to pay because of the maintenance clause. The insurance move for summary judgment because t said that it was an exclusion. The motion was denied. The court granted the motion for the injured person.

Whether there was an exclusion or not?

the court reversed.

the court said that the exclusion provision for maintenance and use was not ambiguous.

Notes

problem

The omnibus clause and the permittee=s permittee

NATIONAL MUTUAL INS. CO. v. EWARD 1987 (Ind)

there was an implied permission from the owner, thus the permittee could give permission to the another one.

Notes

traditional view

the permission given does not give authority to give permission to a third person by the permittee.

if the insured delegates to a permittee the irght to select another driver, some courts have held that it would extend coverage under the omnibus clause.

middle ground

it is an implied authority, which makes it a determination to whether the initial grantor gave permission to another permittees.

liberal view:

if there was permission given, then there is no restriction to give permission by the permittee to others to drive.

problem:

you could say he is a permittee=s permittee. In the case, there was a genuine issue of facts thus no summary judgment. Was it a minor deviation of or not. Do not forget, the kid is 15, violation of state statute.

Loading and unloading: coming to rest and completed operation doctrines:

coming to rest:

loading and unloading the products that=s all you have to do.

completed operation:

unload but it is not a completed operation, then you could still be covered.

Notes

problem:

the loading or unloading in a negligent manner is the dominant cause.

Ownership, maintenance and use

Intro

PEMCO INSURANCE COMPANY v. SCHLEA 1991 ( Washinton)

The daughter was insured but she had an accident in another automobile.

the court said that there must be a causal link between the injury and the use of vehicle. There is a need a substantial causal nexus in this case.

there is no rule of thumb between the substantial causal nexus and minimal causal nexus.

Notes

problem:

there=s no substantial causal nexus

there is a causal nexus, it=s a minimal nexus but it=s Florida is a minimal causal nexus state.

Road rage: you need a more substantial causal nexus because the assault could have happened inside as in outside.

this should be a substantial causal nexus. it cannot come under the use, maintenance and use.

yes, because it was initially use of the car but the dragging was a superseding, intervening cause, and thus the homeowner=s policy was applicable.

it=s liberal view point of using it.

use of automobile

Entering and alighting

Uninsured and underinsured Motorist coverage

Scope of uninsured motorist coverage

it permits to have coverage when the other person involved is not insured.

CARDIN v. ROYAL INSURANCE CO. OF AMERICA 1985 (Mass)

the statute provide for a compulsory provision in the insurance to provide for uninsured motor vehicle insurance. It is then void for an insurance to exclude uninsured.

Notes

certain exclusions are authorized by statute.

Nature of underinsured motorist coverage

in 30 states, uninsured is supplemented by underinsurance.

if the injured insurance has insurance in excess of the third party tortfeasor and if the injuries exceed the tortfeasor coverage, the the injured policy will take over for the excess.

some states have it as compulsory requirement.

STATE FARM AUTO INSURANCE CO. v. ALEXANDER 1992( Ohio)

the court said that it is not because there was tort action that the insurance companies could eliminate underinsured and uninsured in the state.

Notes

now, they have family exclusions because th immunity does not apply anymore in insurance.

No-fault automobile insurance

intro

SMITH v. WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY 1993 ( dc)

Notes

Scope of property, life, accident, and liability insurance coverages

Property damage

RETAIL SYSTEMS, INC. v. INSURANCE COMPANIES 1991(Minn)

QUALLS v. COUNTRY MUTUAL INSURANCE CO 1984 (ILL)

Notes

What constitutes bodily injury and personal injury

HAMLIN v. WESTERN NATIONAL MUTUAL INS. CO 1990( Minn)

Notes

Intentional conduct of the insured

Expected or intended conduct of the insured

UNITED STATES FIRE INSURANCE CO. v. CNA INSURANCE COMPANIES 191 (Ill)

Notes

Who is an insured under such coverage?

ALLSTATE INSURANCE CO. v. ROELFS 1987 ( Al)

Notes

Do intentional acts necessarily cause intentional injuries

ALLSTATE INSURANCE CO. v. MUGAVERO 1992 ( N.Y.)

NORTH STAR MUTUAL INSURANCE CO v. T.F 1989 ( Minn)

Place of loss

VARGAS v. INSURANCE CO. OF NORTH AMERICA 1981.

Notes

Insurer=s liability for punitive damages

Liability to third parties

ST PAUL MERCURY INSURANCE CO v. DUKE UNIVERSITY 1987 (N. Car)

notes

Liability to the insured: bad faith determination

MOCK v. MICHIGAN MILLERS MUTUAL INSURANCE CO 1992 (Ca)

notes

Insurer=s liability for progressive injuries: products liability insurance, when does the injury occur?

Introduction:

It protects against products defectively manufactured, defectively designed, or defectively marketed. A consumer can bring an action under a negligence theory, a breach of warranty under the UCC or under a strict liability in tort.

AMERICAN HOME PRODUCTS CORP v. LIBERTY MUTUAL INSURANCE CO. 1983

Notes

Professional liability insurance coverage issues

Claims made v. Occurrence coverage

CONTINENTAL CASUALTY CO v. MAXWELL 1990 (Mis)

Notes

Health insurance issues

Preexisting conditions

Introduction

HARRELL v. OLD AMERICAN INSURANCE CO 1991

Note

ERISA

Preemption by ERISA

McMANUS v. TRAVELERS HEALTH NETWORK OF TEXAS 1990

Notes

Experimental medical treatment

ADAMS v. BLUE CROSS/BLUE SHIELD OF MARYLAND 1991

HOLDER v. PRUDENTIAL INSURANCE CO. OF AMERICA 1992

Notes

Coverage problems under CERCLA or state Pollution statutes

The pollution exclusion clause: interpreting sudden and accidental loss under CGL coverage

Introduction

NEW CASTLE COUNTY v. HARTFORD ACCIDENT AND INDEMNITY CO 1991

NORTHERN INSURANCE CO v. AARDVARK ASSOCIATES, INC. 1991

Notes

CHAPTER 6 WHEN LOSS OCCURS

Duties of the insured

Requirement of notice of loss: is prejudice to the insured necessary

MOLYNEAUX v. MOLYNEAUX 1989 ( NJ)

Notes

Form of notice; proof of loss distinguished

GOODWIN V. NATIONWIDE INSURANCE CO 1983(ID)

Notes

Requirement of assistance and cooperation by the insured

Introduction

AMERICAN GUARANTEE AND LIABILITYINSURANCE CO. v. CHANDLER MANUFACTURING CO., INC 1991(Iowa)

Notes

Collusion between the insured and claimant: rights of claimant

TRAVELERS INSURANCE CO. v. GODSEY 1971 (Md)

Notes

Duties of the insurer

The duty to defend: effect of failure to defend

STATE FARM FIRE & CASUALTY CO v. EDDY 1990 ( Ca)

Notes

When is there no duty to defend

CITY OF FORT PIERRE v. UNITED FIRE AND CASUALTY CO. ( S.Dak)

Notes

Duty to gain cooperation of the insured

PAWTUCKET MUTUAL INSURANCE CO. v. SOLER 1992 (N.Y.)

Duty of good faith and fair dealing

DEESE v. STATE FARM MUTUAL AUTO INS. CO 1992 ( Ar)

Notes

The duty to settle claims: standards of duty; effect of failure to settle

MID-AMERICA BANK & TRUST CO. v. COMMERCIAL UNION INSURANCE CO 1992 (Ill)

Notes

Subrogation

General explanation of subrogation; no subrogation to a volunteer

SHELTER INSURANCE COMPANY v. FROHLICK 1993 ( Neb)

Notes

No subrogation against an insured

REICH v. THARP 1988 ( Ill)

Notes

Effect of settlement between tortfeasor and insured on insurer=s subrogation right

GROUP HEALTH INC v. HEVER 1993 (Min)

Notes

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