978-1285770178 Lecture Note BL ComLaw 1e IM-Ch30 Part 1

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whole or in part.

Insurance

law concerning insurance.

CHAPTER OUTLINE

• Insured—the person or party covered by the insurance policy.

• Agent—an insurance company representative who works for the insurer.

• Broker—an independent contractor who sells insurance policies.

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whole or in part.

When a broker deals with an applicant for insurance, the broker is, in effect, the applicant’s agent, but an

insurance agent is not an agent of the applicant but an agent of the insurer, to whom the agent owes fiduciary

A. CLASSIFICATIONS OF INSURANCE

Insurance is classified according to the nature of the risk involved. The classifications include

automobile, fire, health, homeowners’, life, and mortgage insurance.

2. Key-Person Life Insurance

This is insurance an organization obtains on the life of a person important to it.

3. Property Insurance

A. APPLICATION FOR INSURANCE

The application is part of the insurance contract. Because an insurance company evaluates the risk

based on the information in the application, misstatements or misrepresentations can void a policy.

B. EFFECTIVE DATE

2. Life Insurance

An insurance applicant may be protected from the time he or she pays the first premium, or an

applicant may not be protected until he or she passes a physical exam.

After a policy has been in effect for a statutorily mandated period, the insurer cannot contest

statements made in the application.

CHAPTER 30: INSURANCE 3

less, the owner suffers a proportionate share of the loss. Students might find it helpful to work

through a few examples of coinsurance clauses.

4. Appraisal and Arbitration Clauses

Under these clauses, if the parties cannot agree on the amount of a loss, an appraisal can be

6. Antilapse Clauses

A policy may not automatically lapse if a payment is not made on the due date—i.e., there may be a

grace period under an antilapse clause. If no payment is made after the grace period, the policy

may be cancelled, or—

ADDITIONAL BACKGROUND—

Provisions and Clauses

Insurance underwriting developed at Edward Lloyds’s coffee house in London, England, in the

subscribed. As the insurance business developed, insurers more frequently prepared the contracts according

to their needs. In the United States, for two hundred years, insurers have determined the terms in insurance

contracts. Normally, a consumer chooses only a type of coverage and an amount. These developments have

had a significant effect on the resolution of disputes between the insurers and the insured.

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whole or in part.

Over the past decade, hackers have spread numerous viruses that can cause computer systems to fail

and stored data to be lost. When a business’s computer system comes under attack, often the damage is

extensive. Yet traditional business insurance policies usually do not specifically cover the risks associated

with the loss of computer information. Typically, business insurance covers only “physical loss,” and a number

of courts have held that computer information is not physical.a Only in rare circumstances have courts held

equipped with certain prepackaged software programs, such as MS Office and Norton Anti-Virus. One day

when the employees came to work, they discovered the computers were having difficulty booting up and were

performing strange operations. Ultimately, the entire system froze up, and all of the information that had

previously been stored on the system was deleted. As a result, Lambrecht’s employees were unable to use

their computers to communicate with prospective employers and employees, and the business lost income. In

Lambrecht had a business insurance policy that provided coverage for “accidental direct physical loss to

business personal property.” In addition, Lambrecht had purchased $100,000 of additional coverage for

replacement of valuable “papers or records, including those which exist on electronic or magnetic media,”

provided that the loss is not “caused by an error in programming.” State Farm contended that the damage to

Lambrecht’s computer system with a virus was voluntary and intentional. The state appellate court, however,

held that the question of whether an occurrence was “accidental” should be determined by looking at the

incident from the perspective of the insured. Here, there was no evidence to indicate “that Lambrecht was

involved in any voluntary or intentional conduct or took any action which caused the damage Lambrecht

suffered.” Thus, the court held that the damage was unexpected and accidental.

CHAPTER 30: INSURANCE 5

whole or in part.

a. See, for example, America Online, Inc. v. St. Paul Mercury Insurance Co., 207 F.Supp.2d 459 (E.D.Va. 2002).

b. Lambrecht & Associates, Inc. v. State Farm Lloyd’s, 119 S.W.3d 16 (Tex.App. 2003).

CASE SYNOPSIS—

Case 30.1: Valero v. Florida Insurance Guaranty Association, Inc.

Alberto and Karelli Mila were insured under a liability policy that, in “exclusion k,” excluded coverage for

A state intermediate appellate court affirmed. The exclusion was clear and unambiguous, and precluded

coverage. The Milas pointed out that a different exclusion, exclusion l, used the phrase “by any person” and

exclusion k did not. According to the Milas, this meant that it was not clear whether exclusion k applied only to

acts caused by an insured. The court concluded that, in the context of all of the exclusions, the phrase in

Could Valero and the Milas have successfully maintained a bad faith action against FIGA?

Probably not. An insurer has a duty to provide or pay an attorney to defend its insured when a complaint

alleges facts that could if proved impose liability on the insured within the policy’s language. And most states

recognize a “bad faith” tort action against insurers. If an insurer in bad faith denies coverage of a claim, the

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whole or in part.

consequent susceptibility to more than one reasonable interpretation could have been the basis for a

conclusion that the policy covered the claim. If a reasonable interpretation would have indicated a result for

the Milas, that would have likely been the court’s ruling, and the result would have been different.

the phrase “by any person” had appeared in exclusion k instead of exclusion l. The court’s reasoning with

respect to the superfluity of the phrase in exclusion l would most likely apply to its use in any of the twelve

exclusions, including exclusion k.

place—to avoid personal liability for the costs. Insurers spread the risk for certain events across their

policyholders in exchange for the payment of premiums. These amounts accrue to be available for the

payment of claims. Insureds, and those who seek payment through insureds, look to the insurers to cover the

costs of damage and injury.

insured’s driver’s license.

• Property insurance—This can be canceled for nonpayment of premiums.

• Life and health insurance—These may be canceled before the date of an incontestability clause for

false statements by the insured.

whole or in part.

• Cooperate with the insurer during an investigation or litigation.

CASE SYNOPSIS—

Woo’s insurer, Fireman’s Fund Insurance Co., refused to defend him. Woo settled the suit with Alberts for

$250,000 and filed a suit against Fireman’s. The court awarded him $750,000 in damages plus the amount of

the settlement and attorney’s fees and costs. A state intermediate appellate court reversed. Woo appealed.

The Washington Supreme Court held that Fireman’s had a duty to defend Woo under the professional

Notes and Questions

The state intermediate appellate court, in reversing the lower court’s award to Woo, concluded, “No

reasonable person could believe that a dentist would diagnose or treat a dental problem by placing boar tusks

ANSWER TO “THE ETHICAL DIMENSION”

QUESTION IN CASE 30.2

Alberts did not find his comments about her pigs to be “friendly.” This would conceivably be a transgression of

the Golden Rule. Alberts’s legal action in response to the joke is arguably excessive, considering that Woo

did not appear to act with malicious intent and tried to apologize. But Woo’s willingness to settle indicates a

concession that Alberts’s complaint was justified. Fireman’s refusal to defend may be least supportable in the

circumstances because the insurer wrote the policy and presumably was aware of the terms of the state

ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”

QUESTION IN CASE 30.2

In determining whether an insurer has a duty to defend an insured, should a court ask whether the

insured had a “reasonable expectation” of coverage? Explain. Fireman’s made this argument, but the

ADDITIONAL CASES ADDRESSING THIS ISSUE —

Other cases considering whether an insurer acted in bad faith include the following:

• Dimmitt v. Progressive Casualty Insurance Co., 92 S.W.2d 789 (Mo. 2003) (a buyer of a mobile home

with statutory requirements to sign the certificate of title and apply for a new certificate).

person whose life is being insured, who may then designate a beneficiary without an insurable interest).

2. Duties of the Insurer

Regarding a claim, an insurer has a duty to investigate the facts and to make reasonable efforts to

G. DEFENSES AGAINST PAYMENT

A incontestability clause may prevent an insurance company from asserting certain defenses. A

misstatement of age is not sufficient to void a policy. But an insurance company’s defenses to payment

include ordinary contract defenses and others—

whole or in part.

claim and the right to disaffirm or rescind the policy.

• Lack of insurable interest—This renders the policy void from the beginning.

• Acts that are illegal or violations of public policy—These may give the insurance company the

A. LIFE INSURANCE

Basic types include whole life, limited-payment life, term insurance, endowment insurance, and universal

life. The parties’ rights and liabilities depend on their contract.

1. Liability

it is not a sufficient material error to void the policy.

3. Assignment

An insured can change beneficiaries and can usually assign the rights to the policy on notice to the

insurer. Exceptions include the policy’s prohibition of assignment and the vesting of the

• Proceeds payable to anyone if payment of the premiums worked a fraud on creditors.

• Proceeds payable to a beneficiary whose rights have not vested.

5. Termination

The insured can cancel the policy but the insurer cannot unless—

1. Standard Fire Insurance Policies

These protect against fire and lightning, and damage from smoke and a fire department’s water.