1247
Chapter 51
Insurance
See Separate Lecture Outline System
INTRODUCTION
This chapter discusses topics related to the concept of private ownership of property: insurance. Individuals and busi-
nesses establish plans to protect their personal and financial interests against events that threaten to undermine their security.
This concept is risk management. The most common method of risk management is the transfer of risk from an individual or a
business to an insurance company. The first part of this chapter outlines aspects of the law concerning insurance.
ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 51.
CHAPTER 51: INSURANCE 1249
CHAPTER OUTLINE
I. Insurance Terminology and Concepts
A. INSURANCE TERMINOLOGY
As with other areas of law, the area of insurance has its own special concepts and terminology. A number of
these are defined in the text. It is also pointed out that when a broker deals with an applicant for insurance, the
broker is, in effect, the applicant’s agent, but that an insurance agent is an agent of the insurer, not an agent of
the applicant.
B. CLASSIFICATIONS OF INSURANCE
Insurance is classified according to the nature of the risk involved. The classifications include automobile, health,
homeowners’, life, mortgage, and title insurance.
ADDITIONAL BACKGROUND—
Title Insurance
Title insurance companies issue title insurance policies to insure title to real property against defects that might
otherwise render title unmarketable. The amount of the policy is usually equal to the purchase price of the property
being purchased. Typically, title insurance companies issue title insurance policies after a title search of the property
has been conducted but before closing has occurred. A title insurance policy does not affect the quality of the title
being purchased but simply provides a guarantee of accuracy regarding the quality of title to the land itself. A property
owner could file an action against the title insurance company if some defect that was not disclosed in the title in-
the title insurance company simply because its investigation revealed that there are defects in the title.
purchasers of the land must purchase their own policies.
C. INSURABLE INTEREST
A person can insure anything in which he or she has an insurable interest.
1. Life Insurance
3. Property Insurance
In the case of property, an insurable interest exists when one would sustain a pecuniary loss from its
destruction. This interest must exist when the loss occurs.
II. The Insurance Contract
Insurance policies generally are in standard form; and in some states, standardization of forms is required.
A. APPLICATION FOR INSURANCE
information in the application, misstatements or misrepresentations can void a policy.
B. EFFECTIVE DATE
An insurance applicant may be protected between the time an application is received and the time the insurance
company either accepts or rejects it, or an applicant may not be protected until a formal written policy is issued.
1. Brokers v. Agents
2. Binders and Conditions
1. Provisions Mandated by Statute
A policy includes whatever a statute requires, even if the policy does not expressly include it.
2. Incontestability Clauses
3. Coinsurance Clauses
These provide that if a property owner insures the property up to a specified percentage of its value, the
4. Appraisal and Arbitration Clauses
5. Multiple Insurance Coverage
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—
• The insurer may extend the insurance for a period of time.
• The insurer may issue a policy with less coverage to match the amount of the payments.
• The insurer may pay to the insured the policy’s cash surrender value.
ADDITIONAL BACKGROUND—
Provisions and Clauses
Insurance underwriting developed at Edward Lloyds’s coffee house in London, England, in the seventeenth
century, when shipowners and other merchants sought insurance for their ships or their cargo. The merchants were
usually at least as wealthy as the individuals from whom they sought insurance, and thus, the insurance contracts were
entered into between persons of relatively equal bargaining power. Also, a merchant often prepared the contract to
submit to the insurers, who would agree to insure the risk described in the document by writing their names, one
beneath another, at the bottom of the proposal (which is why insurers came to be called “underwriters”), with each
determined the terms in insurance contracts. Normally, a consumer chooses only a type of coverage and an amount.
and, even when they do, often do not understand the provisions. In those cases, the courts may determine that if the
ENHANCING YOUR LECTURE—
RECOVERING FOR THE LOSS OF COMPUTER DATA
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
1252 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
(capable of being touched). Although the court recognized that other judges have focused on this distinction, in this
case, the plain terms of the policy expressly covered electronic records and storage media. Hence, the court held that
the language of the policy dictated a finding that the data losses Lambrecht suffered were “physical” as a matter of
is not physical.a Only in rare circumstances have courts held that general business insurance policies cover the loss of
computerized information.
A COMPUTER VIRUS CAUSED SIGNIFICANT DAMAGE
In one case, the operating system of an employment agency, Lambrecht & Associates, Inc., was attacked by a
computer virus. All of Lambrecht’s employees were networked into a large central server that was 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 addition, Lambrecht had to replace its server, buy a new
operating system and new software, and manually reenter a large amount of data. When Lambrecht filed a claim with
its insurer, State Farm Lloyd’s, State Farm denied coverage. Lambrecht filed suit, but the trial court agreed with the
insurer that the loss was not covered. Lambrecht appealed.
THE EXACT LANGUAGE OF THE INSURANCE POLICY
personal property.” In addition, Lambrecht had purchased $100,000 of additional coverage for replacement of
“caused by an error in programming.” State Farm contended that the damage to Lambrecht’s computer system was
THE MEANING OF “ACCIDENTAL” AND “PHYSICAL” LOSS
According to State Farm, the damage was not accidental because the hacker’s act of infecting 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.
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D. INTERPRETING PROVISIONS OF AN INSURANCE CONTRACT
The words in an insurance contract have their ordinary meanings and are interpreted by courts in light of the
nature of the coverage involved. Ambiguities and uncertainties are interpreted against the insurance company.
CASE SYNOPSIS—
Case 51.1: Cary v. United of Omaha Life Insurance Co.
Dena Cary shot herself under the chin in an unsuccessful suicide attempt while suffering from a diagnosed bipolar
disorder. Dena’s father, Thomas Cary, filed an insurance claim. The insurer argued that coverage was excluded under a
provision that provided “[i]njury does not include self-inflicted bodily injury, either while sane or insane.” The Carys
filed a suit in a Colorado state court against the insurer for bad-faith denial of coverage. The court held that the policy
covered the injury. A state intermediate appellate court reversed. The Carys appealed.
nonetheless would be excluded from coverage if it is self-inflicted.”
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Notes and Questions
There were two separate dissents from the majority decision. Both dissents found the policy to be unambiguous.
One stated, “[T]he Plan makes clear its purpose to exclude self-inflicted bodily injuries regardless of the claimant’s
mental condition at the time the injury occurred.” The other stated, “[T]he terms of this insurance policy clearly
exclude from coverage the treatment of self-inflicted injuries that result from suicide attempts.” Does the relevant
phrasing in this policy seem clear or ambiguous to your students? If the phrasing is clear, why did the majority rule in
the insured’s favor? Who can most easily bear the extensive medical costs to treat the injuries in this case?
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 51.1
interpretation. Would the result have been different? Explain. The ambiguity in this policy and its susceptibility to two
reasonable interpretations were the bases for the court’s conclusion in this case that the policy covered Dena’s injury.
directed a result for the insurer, the court would likely have ruled that the policy did not cover the injury. If the
and the result would not have been different.
1254 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 51.1
Should insurance policy provisions be read to avoid ambiguities if possible Why or why not? Yes. In the words of a
dissenting opinion in the Cary case, “the language should not be tortured to create ambiguities. . . . [T]he guiding
fundamental principle of contract interpretation [is] that while ambiguities are reconciled in the insured’s favor, courts
may not invent ambiguity and have no warrant to stretch language, through strained construction, to find against the
insurer.” No, because while ambiguities should not be “invented,” they should not be ignored when most likely they
were created by the insurer to the detriment of the insured.
E. CANCELLATION
An insured can cancel a policy at any time; an insuree can cancel only on written notice. The reasons for
cancellation depend somewhat on the type of insurance, but generally policies are canceled for nonpayment of
premiums or anything that materially affects the risk insured against—fraud, misrepresentation, gross negligence,
crimes by the insured, and so on. The text discusses such reasons in more detail and includes examples of invalid
reasons for cancellation.
F. DUTIES AND OBLIGATIONS OF THE PARTIES
The insured and the insurer have an implied duty to act in good faith.
1. Duties of the Insured
An applicant must disclose all material facts (whatever an insurer would consider in determining a premium
2. Duties of the Insurer
3. Bad Faith Actions
If an insurer’s denial of a claim or refusal to settle a claim for a reasonable amount within a policy’s limits is
in bad faith, the insured may recover damages, including punitive damages, in tort.
CASE SYNOPSIS—
Case 51.2: Woo v. Fireman’s Fund Insurance Co.
Tina Alberts worked for Robert Woo as a dental surgical assistant. Her family also raised potbellied pigs. Alberts
asked Woo to replace two of her teeth with implants. While Alberts was anesthetized, Woo installed teeth shaped like
boar tusks, as a joke, and took photos. Before Alberts regained consciousness, he inserted normal teeth. Alberts filed a
suit in a Washington state court against Woo, alleging battery and other torts. 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
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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 liability
provision of his policy. “[T]he professional liability provision covers ownership, maintenance, or operation of an office
for the practice of dentistry.” The “insertion of boar tusk [teeth] in Alberts’ mouth conceivably fell within the policy’s
broad definition of the practice of dentistry.” The state supreme court reversed the decision of the lower court.
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Notes and Questions
the rule regarding the rule to defend? No, said the Washington Supreme Court. “[W]hat a reasonable patient would
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 51.2
Are the acts of the principal parties—Woo, Alberts, and Fireman’s—ethically justifiable in the circumstances of this
case? Discuss. Woo’s boar-tusk joke was not ethically justifiable if he knew that 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
refusal to defend may be least supportable in the circumstances because the insurer wrote the policy and presumably
to higher insurance premiums for health professionals and higher health coats for consumers.)
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 51.2
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 Washington Supreme Court
1256 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases considering whether an insurer acted in bad faith include the following.
• Dimmitt v. Progressive Casualty Insurance Co., __ S.W.2d __, 2003 WL 115231 (Mo. 2003) (a buyer of a mobile
home under a contract for deed had an insurable interest in the home and its contents, despite a failure to comply with
statutory requirements to sign the certificate of title and apply for a new certificate).
companies have no duty to refrain from issuing life insurance policies to the person whose life is being insured, who
may then designate a beneficiary without an insurable interest).
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—
III. Types of Insurance
The text notes five general categories of insurance coverage—life insurance, fire and homeowners’ insurance,
automobile insurance, marine insurance, and business liability insurance—and discusses basic types of policies for each
category in detail, with special emphasis on life and fire insurance policies.
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
2. Adjustment Due to Misstatement of Age
3. Assignment
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4. Creditors’ Rights
5. Termination
The insured can cancel the policy but the insurer cannot unless the insured defaults or dies (and benefits are
paid), or the term expires.
B. FIRE AND HOMEOWNERS’ INSURANCE
1. Standard Fire Insurance Policies
These protect against fire and lightning, and damage from smoke and a fire department’s water.
a. Liability
Most policies limit recovery to losses from hostile fires (e.g., a defective electrical outlet). Different
amounts are recoverable, depending on whether a policy is valued (the amount specified in the policy)
or open (the actual cost of the loss).
CASE SYNOPSIS—
Case 51.3: Estate of Luster v. Allstate Insurance Co.
Wavie Luster obtained a homeowners’ insurance policy from Allstate Insurance Co on her house in Merrillville,
Indiana. She fell, was admitted to an extended-care facility, and less than five years later died without returning to her
home. Still later, when the house was damaged in a fire, Luster’s attorney Rick Gikas filed a claim with Allstate. The
insurer purported to cancel the policy retroactively to the date of Luster’s fall, arguing that the unoccupied house
increased the “hazard.” On behalf of Luster’s estate, Gikas filed a suit in a federal district court against Allstate.
Accepting the insurer’s argument, the court issued a summary judgment in Allstate’s favor. Gikas appealed.
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Notes and Questions
CHAPTER 51: INSURANCE 1259
Why wasn’t Luster’s intent to return to her home when her health permitted sufficient to constitute occupancy? In
the eyes of the insurer and both courts, her absence displaced her intent. The appellate court stated, “Regardless of
the owner’s intentions, * * * four and a half years of continuous absence of human occupation constitutes a change in
occupancy.” But the court faulted the lower court and the insurer for concluding, respectively, that leaving a house
unoccupied for any period of time or for more than thirty days increased the hazard to the insurer. The appellate court
pointed out that “houses are rarely occupied continuously,” and that when they are unoccupied, they may be secured
by alarms or other measures.
ANSWERS TO QUESTIONS AT THE END OF CASE 51.3
1. Why did the court conclude that an unoccupied house did not necessarily create a substantial increase in hazard?
court, “there is no rule that moving out of a house per se increases the hazards against which the insurance company
2. Why did the court hold that Allstate’s cancellation of the policy, retroactive to November 2001 (when Luster
moved to an extended-care facility), was ineffective? The court noted that the policy expressly authorized the insurer
d. Assignment
A fire insurance policy is not assignable without the insurer’s consent.
2. Homeowners’ Policies
a. Property Coverage
Property coverage includes structures on the insured’s lot and personal possessions, wherever they
are, with exceptions and limits, especially for floods. Perils include fire, lightning, wind, hail, vandalism,
1260 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
Renters’ insurance covers personal possessions in some circumstances and may include living
expenses.
C. AUTOMOBILE INSURANCE
1. Liability Insurance
2. Collision and Comprehensive Insurance
3. Other Automobile Insurance
• Some states require that all drivers carry uninsured motorist coverage.
• Double indemnity, or accidental death benefits, pays if the insured dies in an automobile accident.
• Medical payment coverage may pay hospital, medical, and funeral expenses for everyone in a vehicle
when the insured is driving.
D. BUSINESS LIABILITY INSURANCE
1. General Liability
Besides a key-person insurance policy, a business may have a general liability policy (to cover virtually any
risk the insurer agrees to cover).
3. Professional Malpractice
A malpractice policy protects professionals against negligence claims.
TEACHING SUGGESTIONS
1. Ask students to discuss whether insurance companies should be prevented from testing for any sort of disease
before issuing a policy. Because all diseases presumably influence the calculations of life expectancies and, hence, the
premiums to be charged for coverage, is it fair to exempt testing for certain diseases as the costs of covering these
diseases will presumably be passed on to all consumers?
2. In some states, the law is technical regarding such particulars as the number of persons to whom to send notice of
the cancellation of a policy. Even those whose job is to comply with such technicalities sometimes make mistakes. For
example, an employer who acts as an administrator for a group plan may fail to notify the insurer of a new employee or
may fail to pay the part of the premium for the employee’s coverage. In those cases, what is the key issue? The key
issue is who bears the effect of the mistake—the employer, the insurer, or the employee. When coverage provided
under a group plan terminates altogether, notice is generally required to the individuals who were insured under the
plan. Suppose an employer who acts as an administrator for a group plan fails to provide that notice. What is the issue
in that case? The issue concerns who bears the effect of that failure—the employer or the insured.
3. Many automobile owners drive without auto insurance because they have either allowed their original policies to
changed so as to ensure that all car owners carry up-to-date insurance.
4. Bring copies of different types of insurance policies for students to read. Discuss the differences between the
provisions of the policies. Why are these contracts full of legalese and “boiler plate” language?
Cyberlaw Link
What effect might the Web have on the competitiveness of insurance rates? Which insurance policies might cover
injuries or damage caused by computer viruses and hackers?
DISCUSSION QUESTIONS
1. What is insurance? Insurance is an arrangement for transferring or allocating risk which is made pursuant to an
2. Discuss the concept of risk pooling. All types of insurance companies use the concept of risk pooling in that they
3. Can anyone claim to have an insurable interest in a particular person or property? No, because such a state of affairs
4. Who may be insured by a key-person insurance policy? Key person insurance is usually taken out by an organization
5. How is the effective date of an insurance policy usually determined? Coverage on an insurance policy can begin when
6. In what circumstances may an insurer cancel a policy? An insurance company can cancel an insurance policy—after
7. What information must be provided by one who is applying for an insurance policy? The applicant is obliged to act in
8. What sort of defenses may an insurance company raise against payment on a claim? An insurance company can raise
any of the defenses that would be valid in an ordinary action on a contract as well as some defenses that do not apply in
ordinary contract actions. If the insurance company can show that the policy was procured by fraud, misrepresentation, or
violation of warranties, it may have a valid defense for not paying on a claim. Improper actions, such as those that are against
public policy or that are otherwise illegal, can also give the insurance company a defense against the payment of a claim or
allow it to rescind the contract.
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Ask each student to research and write a brief report about the causes of one of the so–called “insurance crises” (for
example, the one that began in the 1980s and continued into the 1990s, or the situation that precipitated the increase in term
life rates in 2000). Was it caused by bad investments by the insurance companies, poor risk assessments, high jury awards in
civil cases, high pay-outs on disaster claims, or other factors?
2. Ask students to research and discuss the reasons for the insurance industry’s exemption from the antitrust laws under
the federal McCarran-Ferguson Act of 1945.
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 1: ABM Industries, Inc., is an engineering and janitorial service contractor with office and storage space in
the World Trade Center (WTC). Zurich American Insurance Co. insured ABM against losses resulting from “business interruption
. . . caused by direct physical loss or damage . . . to property owned, controlled, used, leased or intended for use by the
Insured.” After the September 11, 2001, terrorist attacks on the WTC, ABM filed a claim. Zurich asked a court for a declaratory
judgment on the extent of its liability. The court issued a summary judgment in Zurich’s favor. ABM appealed. In Zurich
American Insurance Co. v. ABM Industries, Inc., the U.S. Court of Appeals for the Second Circuit reversed and awarded a
CHAPTER 51: INSURANCE 1263
Doesn’t extending ABM’s insurable interest under Zurich’s policy to include the common areas and leased premises of
the WTC give ABM direct damage coverage for these areas? No, although this is, in part, what Zurich argued. The U.S. Court of
Appeals for the Second Circuit reasoned, “To the contrary, ABM does not have and does not claim to have an insurable interest
in these properties for the purpose of direct damage coverage because it suffered no direct pecuniary loss of asset value. The
insurable interest requirement thus avoids absurd results by protecting only that in which ABM has a financial stake—its future
stream of income. Zurich further contends that ABM’s interest is only derivative from the property, and that it does not
constitute a direct interest in the property itself. In so arguing, Zurich unsuccessfully seeks to amend the text of [the applicable
New York state statute] by narrowing the definition of an insurable interest. The outer reaches of an interest that can be insured
clearly encompass an indirect economic interest in the property. Such an interest can be insured if, as is the case here, it falls
within the definitional boundaries set by the insurance policy.”
Suppose that before September 11, ABM had transferred its operations at the WTC to another firm. Additionally,
assume that it had sold its supplies and equipment to that firm but as of September 11, ABM had not notified Zurich to cancel
its insurance. Would the result have been different? Why or why not? If ABM had sold its business and its property in the WTC
to another firm before the terrorist attacks, ABM would not have had an insurable interest in the property at the time of its loss
in the WTC. This would have led the court to conclude that ABM was not entitled to recover under its policy with Zurich.
Footnote 3: Gary and Peggy Freeman owned and operated Circle F Trading Co. in Arkansas. The Freemans were
insured against losses to the building, its contents, continuing business expenses, and other coverage, under a policy with
Columbia National Insurance Co. When a fire damaged Circle F’s building and destroyed its inventory, the Freemans filed a claim
What evidence supported the jury’s award of $170,000? The court noted “evidence of underpayment in inventory,
costs to repair the building, loss of income, and normal operating expenses. . . . [T]here was evidence that appellees incurred
operating expenses in the amount of approximately $35,000 a year, based on the testimony of Wade Turner, appellees’
certified public accountant. Mr. Turner testified that appellees incurred $2,926 a month in normal operating expenses, and that
appellees lost $22,000 a year in net income for four years. The cost to repair the building was $32,725. Deducting the amount
paid by or tendered by appellant, there was evidence that the total of appellees’ compensatory damages exceeded $170,000.”
1264 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What is the concept of insurable interest and what is its effect on insurance payments? A person can insure anything in
which he or she has an insurable interest—an interest either in a person’s life or well-being or in property that is sufficiently
substantial that insuring against injury to the person or damage to the property does not amount to a mere wagering (betting)
contract. Life Insurance. In the case of life insurance, one must have a reasonable expectation of benefit from the continued
life of another to have an insurable interest in that person’s life. The benefit may be pecuniary (related to money), or it may be
founded upon the relationship between the parties (by blood or affinity). Close family relationships give a person an insurable
interest in the life of another. Generally, blood or marital relationships fit this category. A husband can take out an insurance
policy on his wife and vice versa; parents can take out life insurance policies on their children; brothers and sisters, on each
2. What are some of the types of insurance policies that businesses carry to protect themselves from risk? General
Liability. Comprehensive general liability insurance can cover virtually as many risks as the insurer agrees to cover. Among the
types of coverage that a business might wish to acquire, for example, is protection from liability for injuries arising from on-
premises events not otherwise insured against, such as company social functions. Some specialized establishments may be
subject to liability in individualized circumstances, and policies can be drafted to meet their needs. In many jurisdictions, for
example, statutes impose liability on a seller of intoxicating liquor when a buyer of the liquor, intoxicated as a result of the sale,
injures a third party. Legal protection may extend not only to immediately consequent injuries, such as quadriplegia in an
automobile accident, but also to the loss of support suffered by a family because of the injuries. Insurance can provide
CHAPTER 51: INSURANCE 1265
Compensation. Workers’ compensation insurance covers payments to employees who are injured in accidents arising out of
and in the course of employment (that is, on the job). Workers’ compensation is governed by state statutes which provide for
fixed awards to employees or their dependents without considering issues of proof or negligence. Such statutes make the em–
ployer strictly liable for the injuries of his employees but workers’ compensation is an exclusive remedy and will bar any
common-law remedies that the employee might otherwise have asserted.
REVIEWING—
INSURANCE
Provident Insurance, Inc., issued an insurance policy to a company providing an employee, Steve Matlin, with
disability insurance. Soon thereafter, Matlin was diagnosed with “panic disorder and phobia of returning to work.” He
lost his job and sought disability coverage. Provident denied coverage, doubting the diagnosis of disability. Matlin and
his employer sued Provident. During pretrial discovery, the insurer learned that Matlin had stated on the policy
application that he had never been treated for any “emotional, mental, nervous, urinary, or digestive disorder” or any
kind of heart disease. In fact, before Matlin filled out the application he had visited a physician for chest pains and
general anxiety, and the physician had prescribed an antidepressant and recommended that Matlin stop smoking. Ask
your students to answer the following questions, using the information presented in the chapter.
1. Did Matlin commit a misrepresentation on his policy application? If there is a clear record of physician treatment
for anxiety that resulted in drugs being prescribed, most people would understand that to fall under emotional, mental,
or nervous disorder. The application was broad in the questions asked, so the misrepresentation was clear.
2. If there any ambiguity on the application, should it be resolved in favor of the insured or the insurer? When the
terms in a policy are unclear courts generally interpret them against the insurance company. Since policies are often
3. Assuming that the policy is valid, does Matlin’s situation fall within the terms of the disability plan? Disorders such
as panic are recognized as real medical problems that can create disability. So long as there is adequate medical
evidence of a substantive problem, coverage would be due..
4. If Matlin is covered by the policy but is also disqualified by his misrepresentation on the application for coverage,
might the insurer still be liable for bad faith denial of coverage? Explain. Insurance is a contract; the courts interpret the
contract. However, if an insurer acts in bad faith in its treatment of a policy holder, there can be a tort. That kind of suit
is not common is would not seem likely to apply here, but it is possible.
DEBATE THIS:
Whenever an insurance company can prove fraud during the application process, it should never have to pay on
the policy. Whenever an applicant lies on an application for any type of insurance, especially life insurance, that
applicant is attempting to hide some fact that would either cause the insurance company to deny coverage or to
charge a higher premium. If, subsequent to the acceptance of the fraudulent application, there is a claim on the
policy, the insurance company should only be liable for returning all payments paid. Otherwise, all premiums for all
1266 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
those who pay for insurance will have to rise for all those covered by insurance.
Granted, it is unethical to lie on an insurance application, but after enough years have transpired since the
beginning of coverage, the insured will statistically become just like the average policyholder. Insurance companies