Chapter 35
INSURANCE
RESTATEMENT
Insurance is a contract by which one party, in exchange for agreed upon consideration, will pay to another party a
sum of money on the destruction of, loss of, or injury to something or someone in which the other party has an
interest.
The promisor in an insurance contract is the insurer or underwriter, and the person to whom the promise is made
is the insured. Their written contract is called a policy. An insurance agent works directly for an insurance
company, and an insurance broker is an independent contractor who works to sell insurance policies for several
different companies.
An insurable interest in property exists if the insured person has a legal or equitable interest in the property at the
time of the loss. An insurable interest in a person must exist at the time the policy is written. Relatives, partners,
and business enterprises have insurable interests in their relatives, partners and key executives, respectively.
Applications for insurance are generally attached to the policy so that the statements made there are binding on
the parties. Payment of premiums is required, however, most states have antilapse statutes that prevent
cancellation of policies until a grace period has passed.
Modifications of insurance contracts require consent and are represented by an endorsement on the policy or the
execution of a separate rider. Contract interpretation rules apply to the interpretation of insurance contracts.
However, courts construe the policies from the perspective of the average person.
A claim for loss and proof of the claim is the responsibility of the policyholder and must be brought within the time
specified by statute or in the contract. However, once the claim is established, the insurer has an obligation to
pay, and refusal to pay a valid claim can result in punitive damages against an insurer for bad faith refusal to pay.
The types of insurance include business liability insurance, marine insurance, fire insurance, homeowners
insurance, auto insurance, life insurance, and disability insurance.
STUDENT LEARNING OUTCOMES
LO.1: Explain the necessity of having an insurable interest to obtain an insurance policy.
LO.2: Recognize that the formation of a contract is governed by the general principles of contract law.
LO.3: Explain why courts strictly construe insurance policies against insurance companies.
LO.4: List and explain the five major categories of insurance.
LO.5: Explain coinsurance and its purpose.
LO.6: Explain incontestability clauses.
INSTRUCTOR’S INSIGHTS
Break the chapter down into two components – related Learning Outcomes are indicated in ( ):
1. What does the insurance contract do and what are the rights of the parties?
Define insurable interest (LO.1)
List the parties to the insurable interest
Explain antilapse and cancellation statutes and provisions
2. What are the kinds of insurance?
Cover business liability, marine, fire, homeowners, automobile and life insurance (LO.4)
CHAPTER OUTLINE
I. What Does the Insurance Contract Do and What are the Rights of the Parties?
A. Explain the sharing of risk concept by using an example. Life insurance is probably the easiest for the
students to understand. Mention how the insurance company determines the odds of the occurrence of
B. The parties
1. Insurer or underwriter – promisor
2. Insured – beneficiary
5. Insurance broker
C. Insurable interest
1. The insured must have an insurable interest
2. Insurable interest in property
CASE BRIEF: Morgan v. American Security Insurance Co.
522 So. 2d 454 (Fla. App. 1988)
FACTS: While Dorothy and James Morgan were still married, Dorothy purchased insurance on their
home from American Security Insurance Co. The policy was issued on November 3, 1981,
listing the “insured” as Dorothy L. Morgan. Shortly thereafter the Morgans entered into a
separation agreement under which Dorothy deeded her interest in the house to James. The
Morgans were divorced on August 26, 1982. On November 28, 1982, the house was destroyed
by fire. American Security refused to pay on the policy, claiming that Dorothy had no insurable
interest in the property at the time of the loss. The Morgans sued the insurer, contending that
they were entitled to payment under the policy issued to Dorothy.
ISSUE: Does the transfer of property end the insurable interest?
REASONING: In the case of property insurance, the insurable interest must exist at the time of the loss. If the
insured parts with all interest in the property prior to the loss, that individual is not covered.
Dorothy had conveyed her interest in the property prior to the loss. She did not have an
insurable interest at the time of the loss and therefore could not recover on the policy. James
Morgan was not insured under the policy.
3. Insurable interest in life
a. The beneficiary who obtains the policy must have an insurable interest in the life insured
CASE BRIEF: Graves v. Norred
510 So. 2d 816 (Ala. 1987)
FACTS: James Norred and Clyde Graves were business partners for ten years. Graves and Norred
took out life insurance policies, with Graves being the beneficiary of Norred ’s policy and Norred
being the beneficiary of Graves’s policy. The premiums were paid out of partnership funds. The
partners divided partnership assets, but did not perform a customary dissolution of the
partnership. Graves became the owner of the business, and he continued to pay the life
insurance premiums. Several months later, Norred died, and his spouse sued Graves for the
insurance policy proceeds, alleging that Graves had no insurable interest in the life of Norred at
the time of his death. She also alleged that the proceeds should go to the estate as payments
for Norred’s interest in the partnership. Judgment was for the estate. Graves appealed.
ISSUES: 1. Does a partner have an insurable interest in the life of another partner?
2. Was the surviving partner required to remit the insurance proceeds to the estate of the
deceased partner?
HOLDING: 1. Yes, there was an insurable in each of the partners’ lives at the time the policies were
2. No. Each partner had an insurable interest in the life of the other partner. The insurance
policy was clear in designating the beneficiary as Graves. There was insufficient evidence
REASONING: The taking out of insurance policies is not limited to partners taking out policies on each other.
The firm itself can insure its partners or key employees for the benefit of the firm since the firm
itself has an insurable interest in these key people. Also, the firm can take out more than one
policy on its partners or key employees, one for the benefit of the firm, another to benefit the
surviving family.
D. The contract
1. It includes general contract principles and usually must be written
DISCUSSION POINTS: E-Commerce & Cyberlaw
Insurance Contracts & E-Sign
Can sign for policies electronically. Insurers cannot cancel policies electronically.
2. The application as part of the contract
E. Antilapse and cancellation statutes and provisions
CASE BRIEF: Vietzen v. Victoria Automobile Insurance Co.
9 N.E. 3d 500 (Ohio App. 2014).
FACTS: On September 6, 2009, Robert Vietzen was injured in an automobile accident when a car driven
by Dean Mandell, and owned by Paulette Henry, collided with his vehicle. Victoria Automobile
Insurance Company (“Victoria Insurance”) had issued an insurance policy for Ms. Henry’s
vehicle. Vietzen obtained a judgment against Ms. Henry in the amount of $97,000.00. Victoria
Insurance refused to satisfy the judgment based on its assertion that it had cancelled Ms.
Henry’s policy at 12:01 a.m. on September 6, 2009, for nonpayment of the premium. Victoria
Insurance had mailed a billing statement to Ms. Henry on August 24, 2009, stating that a
minimum payment of $198.39 was due on September 5, 2009, with notice that if payment is not
received on the due date, the policy cancels on September 6, at 12:01 a.m. Vietzen sued
Victoria Insurance for failure to pay the judgment.
ISSUE: Was it proper for Victoria Insurance to cancel Ms. Henry’s policy on the day after the
due date for payment?
REASONING: State law provides a grace period of ten days during which an insured may cure her failure to
pay a premium by its due date. An insurance company must wait until the insured has actually
failed to pay her premium before mailing notice of cancellation of the policy, which can take
place no fewer than ten days after the mailing of the notice.
F. Modification of contract
1. Has the insurer reserved the right to modify?
G. Interpretation of contract
H. Burden of proof
I. Insurer bad faith
1. Proof of claim is valid; failure to pay can produce liability
CASE BRIEF: Leland v. Lafayette Insurance Co.
77 So. 3d 1078 (La. App. 2011)
FACTS: The plaintiffs, Don and Myna Leland, owned property that was insured by Lafayette
Insurance Co. During Hurricane Rita the property was damaged and the Leland’s subsequently
filed a claim. Two years later, the Leland’s brought an action against Lafayette Insurance Co.
alleging breach of good faith and fair dealing in adjusting losses.
ISSUE: Was there a breach of good faith and fair dealing?
REASONING: The jury determined that the insurer failed to initiate a loss adjustment on time; acted arbitrarily
and capriciously when they failed to pay the claim; did not offer to settle the claim after proof of
loss was provided; and misrepresented facts and policy provisions.
J. Time limitations on insured
K. Subrogation of insurer (See Figure 35-1 in text)
1. The insurer acquires the claim of the insured against the third party
2. Emphasize the importance of subrogation. This is a very important right because it gives the
insurance company all of the legal rights that its insured has against a third person. This is
DISCUSSION POINTS: Ethics & the Law
September 11, 2001
For insurance purposes the acts committed on September 11th do not constitute an “act of war.” Notwithstanding
certain words regarding “war” by President Bush, on September 18, 2001, the President recognized that our
enemy, terrorism, “knows no borders” and “has no capitals.” The word “war” implies physical conflict between two
geographically representative political bodies which did not exist on September 11, 2001.
In fact, terrorism is now a foreseeable risk for insurance providers and they are unwilling to offer commercial
policies without a terrorism exclusion. This has had a chilling effect on the commercial mortgage market in New
York City and some other major U. S. cities because lenders require protection of their investment against
terrorists acts. It may be necessary for Congress to provide a solution for insurers and lenders to deal with the
new reality of terrorism in our country. It does not seem fair or just or good for our economy to leave matters to
individuals or businesses to resolve. Precedent may be found in the Air Transportation Safety and Systems
Stabilization Act of 2001, Pub. L No. 107-42, 115 Stat. 230 which has provided several forms of monetary relief to
the aviation industry after the September 11, 2001 attacks.
II. What are the Kinds of Insurance?
A. Business liability insurance
CASE BRIEF: American States Insurance Co. v. Travelers Property Casualty Co. of America
167 Cal. Rptr. 3d 288 (Cal. App. 2014)
FACTS : Royal Catering Company (Royal) leased its food trucks to operators who drove from site to site
selling food. Royal leased one of these trucks to Esmeragdo Gomez, who, along with his wife,
Irais Gomez, operated the truck. The food truck was equipped with a specially designed deep
fryer, grill, steam table, oven, refrigerator, and coffee maker. That equipment was built into the
truck and was not designed to be used apart from the truck. On the day of the accident, Mr.
Gomez was driving the food truck. A guest sat in the truck’s passenger seat, and Mrs. Gomez
stood in the rear of the truck. At an intersection, Mr. Gomez swerved to avoid an approaching
truck. Mr. Gomez’s evasive action failed to avoid a collision. Just prior to the collision, hot oil
splashed on and burned Mrs. Gomez. The Gomezes and the passenger in their truck brought
an action against Royal Catering for injuries sustained in connection with the accident, including
a product liability claim for a defective deep fryer basket. American States Insurance Company
issued automobile insurance policies to Royal and Travelers Insurance provided Royal
commercial general liability coverage (Travelers CGL). The automobile insurer, American
States, claims that the injuries should be covered under the Traveler CGL policy that, although
excluding coverage for injuries arising out of the use of automobiles, covers “mobile
equipment,” defined as vehicles used for a primary purpose other than transporting persons or
cargo.
ISSUE: Which insurance provider is liable to cover the claims for injury in this case, the auto
insurer, American States or the CGL insurer, Travelers?
HOLDING: The CGL insurer, Travelers.
REASONING: Although the Traveler’s CGL policy excluded coverage for injuries arising out of the use of
automobiles, the policy contained an exception for “mobile equipment”, including vehicles
“maintained primarily for purposes other than transportation of persons or cargo.” The primary
purpose of the food truck was to serve as a mobile kitchen and not transport persons or cargo.
Like a fire truck, a food truck may transport persons and cargo (i.e., food), but its core functional
identity emerges when it operates a mobile kitchen at specified locations.
3. Liability insurance for director and officers; product liability; malpractice
B. Marine insurance
1. Ocean marine – hull, cargo, liability, and freight
CASE BRIEF: Commodities Reserve Co. v. St. Paul Fire & Marine Ins. Co.
879 F. 2d 640 (9th Cir. 1989)
FACTS: Commodities contracted to sell beans and seeds purchased in Turkey to buyers in Venezuela.
Commodities chartered space on a ship, and the cargo was insured under an ocean marine
policy issued by St. Paul. Greek authorities seized the vessel for carrying munitions. The
captain refused to release Commodities’s cargo.
Commodities incurred legal expenses in obtaining a court order in Crete to release the cargo.
St. Paul refused to reimburse Commodities for the litigation costs. Judgment was for St. Paul.
Commodities appealed.
ISSUE: Does a maritime liability insurance policy cover legal expenses incurred that are the result of
the captain’s refusal to release the cargo?
HOLDING: Yes. Commodities seeks recovery under the sue and labor clause of its marine insurance
contract with St. Paul. This standard provision requires the insurer to reimburse the insured for
The detainment by Greek authorities was not the proximate cause of the litigation expenses. It
was not the detention that necessitated the litigation in Crete. The litigation expenses were
REASONING: Maritime insurance presents the clearest application of a forum selection clause in a contract.
After The Bremen v. Zapata Offshore, parties to an international contract (including insurance)
are free to, in the event of a dispute, chose the forum and the law that will be used to resolve
the conflict. In Commodities Reserve, that Ninth Circuit in San Francisco resolved a dispute
which occurred in Mediterranean waters was probably the result of a forum selection clause.
2. Inland marine – ocean marine to “overland” risks, inland waterways, and air
C. Fire and homeowners insurance
1. Fire insurance – actual, hostile fire
CASE BRIEF: Youse v. Employers Fire Insurance Co.
238 P. 2d 472 (Kan. 1951)
FACTS: Youse owned a ring that was insured with the Employers Fire Insurance Co. against loss,
including “all direct loss or damage by fire.” The ring was accidentally thrown by Youse into a
trash burner and was damaged when the trash was burned. He sued the insurer.
ISSUE: What is a hostile fire?
REASONING: A fire policy only covers loss caused by a hostile fire. The fire was not hostile, it burned in the
area in which it was intended to burn.
2. Uncontrollable, burns with excessive heat, or escapes from intended place
a. Coinsurance
Make sure the students understand the concept of coinsurance. This is something that many
people do not even realize exists. Why is the insurance company so concerned about the
d. Why coinsurance?
The following excerpt is from an excellent discussion of coinsurance on page 180 of Risk &
Insurance, 7th ed., by Greene & Trieschmann, South-Western (1988):
In property insurance, the coinsurance clause is a device to make the insured bear a
portion of every loss only when underinsured. Underinsurance is looked upon as
undesirable for two reasons. First, insurance companies are supposed to restore their
This follows because most losses are partial, and the probability of partial losses is higher than
the probability of total losses. Rates depend on the probability of loss. Consequently, it follows
3. Assignment – insured consent
4. Occupancy provisions strictly construed – rules on safety, etc.
D. Homeowners insurance
1. Discuss liability coverage when residents are away from home
2. Discuss theft coverage
3. Discuss residents of household coverage
4. It is important to advise your students that with regard to contents in the home, it is important to
know whether any loss suffered by the insured will be compensated by the insurer on the basis of
Finally, emphasize that photographs or a videotape of the contents of a residence is very important
in making a list to submit as a claim to the insurance company. After a loss has been suffered,
E. Automobile insurance
1. Personal automobile policy (PAP)
a. Perils covered – liability insurance; medical expenses; uninsured motorist; other -than-collision
losses
b. Covered persons – family members and the driver with permission
Of the topics in the chapter, automobile insurance is probably the easiest to start with. Most students have some
familiarity with this topic. Review the current statutes and regulations in your state regarding automobile
insurance. Mention that some states have laws that make the owner of a motor vehicle liable for damages that
occur while someone else operates the vehicle with the owner ’s permission. Many people believe that uninsured
F. Life insurance
1. Discuss the following: term; whole life; endowment; double indemnity clause; disability clause
2. Exclusions
a. Suicide
b. Narcotics
3. The beneficiary – change of beneficiary
4. Incontestability clause
CASE BRIEF: Allstate Life Ins. Co. v. Miller
424 F. 3d 1113 (11th Cir. 2005)
FACTS: The Allstate life insurance policy on which this case centers went into effect on September 20,
2000, insuring the life of John Miller. The policy stated that if the insured died while the policy
was in force, Allstate would pay a death benefit to the policy beneficiaries upon receiving proof
of death. As required by Fla. Stat. § 627,455, the policy further provided that it would become
incontestable after remaining in force during the lifetime of the insured for a period of two years
from its effective date. John Miller died on April 20, 2003, more than two years after the policy
went into effect. The beneficiaries, accordingly, filed statements seeking to collect benefits
under the policy. Rather than disburse the benefits, Allstate sought a declaratory judgment that
the policy was void, alleging that the application was completed using fraudulent information
and that an impostor had appeared at the medical exam in place of John Miller. The
beneficiaries counterclaimed, alleging breach of contract based on Allstate’s failure to pay
benefits upon proof of death in accordance with the insurance policy’s terms. Allstate appealed
from a judgment in favor of the beneficiaries.
ISSUE: Was the insurance contract void due to Allstate’s claims that an imposter underwent the medical
examination?
REASONING: The incontestability clause works to the mutual advantage of the insured, giving the insured a
guarantee against expensive litigation to defeat the policy after it has been in effect during the
lifetime of the insured for a period of two years from its date of issue and giving the company a
reasonable time to ascertain whether the insurance contract should remain in force. Under
Florida law where the insured’s death occurred after the contestability period, Allstate could not
void the policy on the grounds that an impostor had undergone the precoverage physical
examination in the insured’s place.
Students are always curious about whether there is coverage if the applicant “fudges” or “lies” on the insurance
application. Have the students discuss whether the insurance company should have to pay on a claim when the
applicant was not “absolutely honest” in filling out the application.
ANSWERS TO QUESTIONS AND CASE PROBLEMS
1. Homeowner’s policy. Judgment for Keyes. Since Keyes, although still Thibodeaux’s spouse, was not residing
2. Interpretations of insurance contracts. Judgment for Belize. Adoption of Mount Vernon’s argument that its
liability extended only to carpentry operations would allow insurance companies to limit the scope of
Cir.)]
3. Automobile insurance coverage. Schiller’s injuries were incidental to, and a consequence of, the unloading of
the Loethens’ pickup truck. The injuries would not have occurred if the men had not been unloading the truck.
4. Insurable interest in life insurance. No. Foster had no insurable interest in the life of McClurkin, and
Authors’ Comment: When the policy is void for lack of insurable interest, the insurer is required to return the
5. Interpretation of homeowners policies. The shooting was covered by the policies because Allard did not
intend to shoot or hit Rowland with the shotgun, but only to stop him or bring him to his senses by firing into
Authors’ Comment: The instructor may wish to pursue a discussion of whether Allard would have a right to
pursue an action for bad-faith failure to pay the claim by the insured. The fact that Rowland was struck in the
6. Life insurance, incontestability clause. The insurer was liable. Incontestability clauses are strictly construed.
Where the statute says that life insurance policies are incontestable after they are in effect after two years,
7. Insurer bad faith. Judgment for Filasky. Filasky ’s claims were within the coverage of the policies issued by
the insurer. The insurer could establish no justification for its delay or for its raising objections of no merit.
8. Interpretation of insurance contracts. The policy is ambiguous. The insurance company argues that the truck
was not insured “while it is rented or leased to others”. The clause further provided that the exclusion did not
apply to use of the truck in “a share expense basis,” which Baurer relied on. Deciding for Baurer the court
9. Coverage of policy. Judgment for the estate of Collins. In order to defeat recovery under policies that contain
an exclusion or a limitation and under which death or injury results from failure on the part of the insured to
10. Fire coverage without burning of insured property; definition of total loss. Judgment for Marshall Produce
Company. Marshall’s fire insurance policy covered the damage done to its property by smoke from a remote
11. Change of beneficiary. Decision for Leticia Salinas and the other beneficiaries named in the policies. The
test for determining whether the requirements of a life insurance policy to change the beneficiary have been
12. Insurer’s liability, coinsurance. No. Spector is incorrect. Spector will receive $12,000 because the amount of
13. Marine insurance; subrogation. This case presents a common shipping transaction following the purchase of
heavy industrial machinery in a foreign market. Cargo marine insurance protects the cargo owner, Carman
Authors’ Comment: For an international focus for an advanced class, it may be pointed out that
containerization has revolutionized the international shipping business in many respects. Sellers may load a
container at its factory, and it may then be hauled by a truck tractor to a rail “intermodal” facility and there
In international shipping, the Carriage of Goods by Sea Act of 1936 (COGSA) is of great significance. COGSA
allows a carrier to limit its liability for loss or damage to cargo to $500 per package. Carriers have been
unsuccessful in courts, arguing that the entire container is to be denominated as a single package. However,
14. Interpretation of insurance contracts. Judgment against the insurance company. Vallot was struck by the
truck, even though the actual contact was with the tractor in which he was riding. Words used in a policy are
to be given their ordinary meaning. The policy did not limit coverage to the insured as a pedestrian. “Struck”
15. Business liability insurance: CGL policies. Judgment for ADC. The PRP letter issued by the EPA is the
functional equivalent of a “suit” brought in a court of law because the EPA’s extensive authority to determine
LAWFLIX
Double Indemnity (1944)
A Billy Wilder film in which Fred MacMurray (Steven Douglas eventually in My Three Sons) is an insurance
salesman coerced into a murder plot. Good coverage of insurable interest in life.
management system for classroom use.