ExplanatoryINSURANCE FINAL OUTLINE – SPRING 2005 - ABRAHAM

INSURANCE

Homeowner’s PolicyLife Insurance PolicyCGL PolicyAuto Policy

IMPERFECT INFORMATION

NATURE & FUNCTIONS OF INSURANCE

A. Risk-Transfer From comparatively risk-averse to less risk averse (insured to insurer); risk averse prefer a large risk

(100%) of suffering a small loss (premium)

B. Risk-Pooling (Diversification) Insurer can reduce amount of variance in expected loss Predictability increases Overall combined risk is decreased (risk-averse parties share risk)

C. Risk-Allocation Insurers set a price that is proportional to the degree of risk posed by each insured (risk classification)

ADVERSE SELECTION / MORAL HAZARD

A. Adverse Selection Higher risk people are more likely to seek insurance→ if insurers can’t figure out which people are a

bigger risk, they can’t charge the correct amount Using an average price makes low risk people seek insurance to a lesser rate and high risk

people to seek insurance at a higher rate

B. Moral Hazard Once a person obtains insurance, they have less incentives to be careful

Both problems are products of imperfect information→ insurers are forced to make estimates To combat these problems, insureds employ the following techniques:

a. Screen Applicants (ex ante)b. Experience Rating (ex poste) → look at frequency and severity of claimsc. Deductible Features→ insured becomes a partner w/ the insurer by having to pay alsod. Losses Caused by Risky Behavior are Excluded→ covers intentional damages and other risky

behavior

BREACH OF WARRANTY (6)

Has to say warranty to be a warranty. But even if it says it, might be interpreted as a misrepresentation.From Strict Liability Materiality

Common Law Rule→ even an immaterial breach of a warranty voids coverage

Devices for mitigating harsh effects of common law rule:1. Contra Proferentem (“against the drafter”)2. Interpret as affirmative, not promissory warranties

Interpret warranties seemingly related to future facts as relating only to present facts

Warranty must be true only at the time it was made→ Vlastos (pretty dumb since both insured and insurer expected this promise would run for policy period)

3. Collapse distinction b/t warranties and representations by statute

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Explanatory Representation must be material to void coverage (relied upon and caused

detriment)Statutory Alternatives1. False representation must increase risk (most pro-insurer)2. False representation has to contribute to loss (pro-insured)1. Statements must be fraudulently made in order to be considered warranty→ if not fraudulent, then

they will be considered false By implication, this means under 1 or 2 knowledge of falsity is irrelevant

2. Combination of some or all of the above

Vlastos v. Sumitomo Marine & Fire Insurance Company (1983) – p.6 “Warranted that the 3rd floor is occupied as a janitor’s residence” What bearing does the misrepresentation that the 3rd floor is a janitor’s residence have on the risk

posed? Court suggests there could be some bearing

Suppose that at the time of the fire, no one was on the 3rd floor?→ two ways to look at the problem:1. Contribute to Loss→ if misrepresentation didn’t contribute to loss, it should be

meaningless2. Increase of Risk→ if the misrepresentation simply made the risk greater in general, it is

material (regardless or whether it contributed to loss) Ct explains that the breach of a warranty voids insurance→ very harsh result w/ origins in Lloyd’s

coffee BUT, at the time in Eng., warranties only covered material things which increased the risk You would never have a wholly irrelevant warranty that didn’t increase risk

Ct acknowledges that using warranties analyzed through increase of risk approach→ only workable way to allow insured to protect themselves

Trial court read in “exclusively” into the warranty, but appellate court reversed General Rule→ interpret ambiguous language in favor of coverage

Given the general rule, as long as a janitor occupied some of the 3rd floor on the date the contract was signed, insured prevails→ remanded only for determination whether janitor occupied any part 3rd floor

MISREPRESENTATION VS. CONCEALMENT (13) Definition: A representation a statement, either oral or written, made by the insured to the insurer which forms

at least part of the basis on which the insurer decides to enter into the contract A representation voids coverage if: (1) it is untrue or misleading, (2) is material to the risk, and (3) is relied upon

by the insurer.o These elements are usually examined through an objective test. But is this fair to the insurer with above

average risk calculations. Conceptions of Materiality:

o Contribute to the loss: if the fact misrepresented had been true, the loss would not have occurred. pro-insured

Insurers argue that the decision to offer insurance is an ex-ante calculation and thus this ex post concept of materiality shouldn’t be used.

o Increase the risk: if the fact misrepresented had been true, the loss would have been less likely to occur. Insurers argue that this concept of materiality is more appropriate, because it decreases lying and

results in lower premiums (a benefit to the policyholder).

A. Process of Obtaining Insurance 1. Point of Application2. Point of Sale3. Point of Claim

Almost always an intermediary involved→ some type of salesperson who is a sales instrument for the seller This agent also acts as a pipeline for information from the applicant to insurer

B. Case Law

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ExplanatoryNeill v. Nationwide Mutual Insurance Co.

Policyholder is not typically liable for false statements in application completed by agent unless he was complicit in the agent’s misrepresentation.

Facts: This is a “pre-point of application” case. Neil had experienced previous fire losses. Applied for homeowners insurance. Neil claims:

He gave the correct answers to the questions he was asked Agent asks about previous fire claims. P says “3” and agent says “that won’t matter.”

His agent completed the application Agent writes “none” under previous fire losses section.

Neil didn’t carefully review the final document Any misrepresentation must have been the responsibility of the agent

Holding: The policyholder is not liable if he was unaware of the misrepresentation. Policyholder might be liable if he believed the agent was trying to mislead the company. Issue is thus whether policyholder was complicit in the misrepresentation of an agent.

The question as to whether the agent was the sole source of misrepresentation quickly devolves into a he-said, she-said situation.

The problem is multiplied in a life insurance case because one of the parties who is supposed to testify is dead.

There are a lot of different permutations on the agent (agent that identifies with the company, agent that really wants to see the widow paid out, etc.) but none of them really cut in favor of the truth.

MacKenzie v. Prudential Insur. Co. of America (1969) – p.20 – POST-APPLICATION MISREPRESENTATION

Applicant answers application questions accurately, but before policy is delivered, he is diagnosed w/ high BP→ he does not disclose this fact when agent delivering the policy asks if anything had changed

Ct→ you must disclose is new condition is “obviously material” regardless of being asked Not that hard in this case, but in more difficult ones, will people know what need to

disclose? *Might be better to not have rule of affirmative duty to disclose, but a defense for insurer in

the insurer makes an inquiry KA→ can’t we just say that people want insurance immediately, so we can extend coverage from the

point of application – no problem of adverse selection after the application PROBLEMS→ still problem of adverse selection if people apply when they are sick

suspecting a problem, but before diagnosis *Policy question is do we want to prevent those who take advantage or protect

those in good faith that have a change before delivery but after application – which situation prevails more?→ we can’t tell so it’s hard to make a choice

In addition, there is lapse period b/t application and delivery where some people re-think→ those who find a new problem are much less likely to recant

So adverse selection does not go away

CONTRACT FORMATION & MEANING (24)

THE ROLE OF STANDARDIZED FORMS (24)

The Policy Drafting Process and General Insights Property/casualty insurance policies are dominated by standardized forms – health and life are not since

they come from group employment policies Policies among competing companies are the same – no where else to go for a different contract

1. The History of ISO (Insurance Services Office) Drafts the standard form policies

There were multiple regional, state, and even local “rating bureaus” in the 19th and 20th century

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Explanatory Insurance companies get together and compare loss statistics (helps refine policies and set a

reasonable premium not charging too much or too little)→ ratings bureaus did this work Trouble is from this point it is only a very small step to collusion→ cartel would be easy

Undermining the cartel non-existent b/c to get the needed data, one must charge the cartel price

Once the data is pooled, all the groups must be selling the same thing in order for the data to work Thus, competition was only over price not over what the policy says

Eventually, these bureaus become 2a. One for the stock and the other mutual companies – National Bureau of Casualty

Underwriters (NBCU) which became the Insurance Rating Board (IRB)b. Mutual Insurance and Rating Bureau (MIRB)

These two combine in 1970 to form ISO

Contra Proferentem (28)

1. The Linguistic Dimension A policy is ambiguous when it is susceptible to 2 reasonable interpretations

Cynical view is Ct decides who it wants to win and uses ambiguity as excuse for their decision

Courts goes one of two ways when there is imperfect language:1. Strict Liability 2. Negligence Liability (Vargas, Pan Am)→ liability only if reasonably perfectible language

Abraham’s predictive test: division in the courts about what evidence you can look at Some courts hold that if the provisions are unambiguous on its face, then can’t look at extrinsic

evidence (Williston parol evidence view) Other courts say that you can look at extrinsic evidence to prove ambiguity (Corbin view).

You would think that under either approach, once ambiguity is found, contra proferentem would say it goes against the insurer. Some judges actually try to figure the thing out and contra proferentem is used as a tiebreaker of last resort. Abraham tells us what he thinks is going on under the table.

What do they take into account: actual statements of the parties, two main factors1. how perfectible the language is.2. whether people would actually want the coverage that the court is interpreting the policy to

provide (perhaps because they think they are already getting it).

Vargas v. Insurance Company of North America (1981) Negligence Liability (p. 28) Does coverage of all of U.S. and Bahamas include air over water connecting states to islands? There were just so many ways for the insurer to make the policy clearer

Since the language was perfectible, P wins even under negligence standard Alternate interpretations were not commercially reasonable

Trial court held opposite because just went with dictionary terms of coverage, which would argue in favor of insurance company.

World Trade Center Properties v. Hartford Fire Insurance Company(2003) (32) The definition of a single “occurrence” is significant, frequently litigated, and often quite unclear. 2 plane crashes a single “occurrence”? Traveler’s requests that the coverage drafted on the WillProp 2000 form.

o WillProp defines an “occurrence” as not only a single event but a series of similar causes.

o Ex-ante pro-policyholder because it mitigated deductibles. Came up huge for the insurance company here.

Insurers other than Travelers agreed to be bound by the WillProp form or simply said nothing. Travelers, on the other hand, rejected the WillProp form and said “we’ll submit our own policy.”

o But never sent anything else. o All Silverstein had were agreements to agree. o On Sept. 14, Traveler’s issues policy providing coverage on a per-occurrence basis

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Explanatory but there is no definition of an “occurrence.”

Silverstein’s lawyers argued that term was unambiguous:o defined by a series of NY cases as “the immediate cause of the loss”

therefore under NY law = 2 causes of loss. Court found there was no unambiguous definition of “occurrence” under NY law. If the term “occurrence” as referenced in the Traveller’s binder is ambiguous, what role does a

finding that it is ambiguous play? Jury instructions involve no help.

Many courts do not use contra proferentem whenever an applicable provision is ambiguous. Rather, they apply it as a tiebreaker when other sources of extrinsic meaning do not provide a single answer.

The only principled test for the number of causes looks at the last possible thing that the insured could have done to prevent the loss and the number of these is the number of causes – it is not clear that this is right, but it explains the result in (Michigan Chemical, which we didn’t read).

2. The Demand Dimension Would the policyholder/a majority of policyholders want the coverage at issue at a fair price?

Penalty Standard (Rustoven)→ penalize insurer for bad language Criticism→ doesn’t account for fact that if a Ct finds coverage in a given case,

insurers will raise premiums to cover for the loss and policyholders will end up paying for it

Criticism→ when courts fail to apply majoritarian standard, they penalize policyholders because basically the decision for coverage in 1 case = every policyholder is now buying they may not want

Criticism→ does NOT honor reasonable expectations of policyholders. Majoritarian Standard (Vargas)→ would a majority of policyholders want this coverage?

This standard protects insurers since ambiguities will only be against insurer if the policyholder would have expected the coverage→ Rusthoven would lose here

3. Abraham Overview Courts often uses all four interpretations to decide cases→ almost like a flowchart First – is the language perfectible?

YES→ is the result outrageous (policyholder would not reasonable expect such coverage) OR would the policyholder have expected such coverage?

NO→ find for insurer unless invoking a strict liability standard

A. Honoring Reasonable Expectations of the Insured In contrast to contra proferentem, this principle is not interpretive and requires honoring expectations

despite unambiguous language→ only around 10-15 jurisdictions follow this rule and it is decelerating in popularity

Honoring reasonable expectations is simply a factor in favor of insured (especially when using other doctrines)→ this is not the sole determinant of cases (as a doctrine would be)

How is this rule justified?

Atwood v. Hartford Accident. (1976) – p.39 Repairman looks for insurance coverage for negligently installed thermostat that causes death Painstaking review of policy language shows possible coverage for ongoing operations and

completed operations→ P only bought ongoing coverage→ no ambiguity here! Ct invokes reasonable expectations doctrine premised on nearly universal expectation (all would

expect this coverage) that a Ct can identify w/o an evidentiary hearing Limiting provision “buried” among irrelevant and expected subclauses. Not a factual question→ this doctrine only works as a matter of law

This case seems to come out ok→ this repairman almost certainly wanted and expected this coverage But why should thinking you have coverage get you coverage?→ IF everyone who buys this

expects this coverage, they are probably willing to pay a premium for a policy w/ this coverage and are probably being charged such a premium

Arguably you already paid for what you think you have Operating justification is the assumption that virtually all electricians in Atwood’s

situation would want the completed operations coverage

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Explanatory

Atwater Creamery Co. v. Western National Mutual Insurance Company (1985) – p.42 Keeton’s Principle: “the objectively reasonable expectations of applicants and intended

beneficiaries regarding the terms of insurance contracts will be honored… even though painstaking study of the policy provisions would have negated those

expectations.” Here there is a strong, BUT not necessarily a universal expectation→ difficult to know which people

would want to purchase the coverage if they knew it was not included Policy requiring physical marks of entry are cheaper→ no chance of paying for inside jobs

and there is no fact questions to answer Ct. holds that evidence-of-forcible-entry requirement has only two rational justifications

Prevention of coverage for inside job Encouragement to insured to secure premises In instant case, neither justification applied.

But do most people expect this exemption from coverage?→ no way for Ct to know! If YES→ then we may make people pay for things they don’t want If NO→ insurer needs to make absolutely sure people know what they are getting – very

hard! But , if people want other type (without exemption), why not already being sold? → possible that

most people want it & think they have it already (Atwood) OR more likely just too hard to explain to people difference in coverage!

If it wasn’t that hard to explain, both types would already be being sold→ market tells us if people all expect a certain type of coverage

Problem that exemption reduces administrative / litigation costs and makes policies cheaper. Ct. in effect finds that majority would prefer extra coverage to those savings.

Abraham→ cases like this are “judge made” insurance. Traditional rule: reasonable expectations + contract ambiguity = coverage. Keeton’s view: reasonable expectations = coverage.

THE ROLE OF INTERMEDIARIES (47)

A. The Authority of the Agent (49) Agent is one who helps applicant assess needs and chose the right coverage→ in both Atwater and

Atwood, agent is likely to blame for the problems Agents act with either:

1. Actual Authoritya. Expressb. Implied→ inferred from facts

2. Apparent Authority Appears to have authority, but does not→ binds principle to 3rd party

Elmer Tallant Agency, Inc. v. Bailey Wood Products, Inc. (1979) – p.49 Agent’s authority to bind principle was restricted to prior approval by Zurich Insurance Company

Agent binds Z w/o approval Applicant sues both agent and insurance company on apparent authority→ Ct agree there was

apparent Decision is right, but nothing Z can do to avoid this result→ just needs to pick better agents

But, can go after agent for breach of contract Is the authority “apparent” or “automatic”?→ apparent simply comes from picking them as an

agent, nothing else! (this is a very different type of apparent authority then use in other contexts) In general, once you give an insurance agent a position of being an agent, you automatically

give him the apparent authority to do what normal agents do→ regardless of restriction you use

*Benefits to having agent have apparent authority: Applicants should not have to investigate authority of every insurance agent

1. Although agent may occasionally exceed scope of authority, insurance companies want agents to produce business for them (i.e. to have the authority to bind them)→ NECESSITY

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ExplanatoryB. Fraud, Waiver and Estoppel (53)

Wolinetz v. Berkshire Life (2004) – p53Discovery Rule: Statute of limitations tolls from date when P has enough info to suggest injury by D’s conduct. Facts: Berkshire agent sold P “vanishing premium” life insurance policy (death benefit: $3B). Vanishing premium policies require the insured to pay a certain number of premiums before the policy

becomes self funding (once cash value reaches a certain level, future premiums are simply paid from it) Agent explained that after paying 14 years of $20K premiums, the policy would become self funding.

o Agent’s estimates based on historical rates of return. o Original illustration of projections came with a disclaimer, emphasizing estimates not

guaranteed. P purchased the policy in 1987. P received reports from Berkshire about underperformance. Broker of another insurer suggested that D’s projections were incorrect, P sued (in 1997) under a number of

contract claims (dismissed and not pursued) and tort claims (that the original projections were based on fraudulent information, etc.). Statutes of limitations for these policies were three and four years.

Issue: When did the statute of limitations on P’s tort claims begin to run? Discovery rule: Statute tolls from date when P has enough information to suggest injury by D’s conduct.

o P argues: The meeting with the other insurance broker in 1996. Claim of fraud inherently unknowable at inception of policy.

D argues: P received “sufficient storm warnings” to put him on notice before that discussion. o Original disclaimer in 1987, annual reports between 1991-1994 , cash value/dividend statements

for 1991-1994, form letters in 1992 stating that vanishing premium holders might have to pay additional premiums.

1st Cir. finds:o With regard to the original disclaimer: P knew the premium promise was not guaranteed, but

could not have thought that the promise was based on fraudulent data at the policy’s inception.o With regard to the annual reports, letter, and cash value statements: The information P received

showing that his policy was underperforming was not sufficiently suggestive of fraud.

Roseth v. St. Paul Property & Liability Insurance Company (1985) – p.58 P’s livestock are hurt in accident and agent suggests selling the hurt livestock→ P then makes claim

and then finds out only has coverage for dead livestock→ argues he wouldn’t have sold less agent’s advice.

Allegedly, Wattlesworth of Black Hills (reseller, essentially) allowed Roseth to go on thinking the coverage existed. Possible he never had the policy in the first place. Black Hills should have made at least the uncertainty clear up-front. Not necessarily negligent, but not good.

Unlike Tallant, this involves post-loss conduct – estoppel or not? (estopping conduct) P is arguing that conversation gave him coverage he never had

There are 2 main rules concerning estoppel: RULE A (MAJORITY)→ estoppel cannot expand coverage (but what else could it ever

do?) Maybe estoppel can only negate restrictions of policy (conditions subsequent), but

not expand policy. Can only give coverage that your own actions would have diminished.

RULE A (MINORITY) (this court)→ estoppel can expand coverage and negate restrictions This rule is growing in popularity

RULE B→ estoppel can operate only if agent’s conduct occurred at inception of policy, not after policy is consummated. So misrepresentation only expands before policy issuance.

Ct here follows this rule → rule makes little sense (maybe reflexive concern about apparent authority since insurer can do little to limit scope of agent authority post contract, rule says even if apparent authority, no binding effect→ drawing the line)

A thinks this is splitting the baby at the exact wrong place. Turns the Parol Evidence rule on its head (idea that contract supersedes). Seems to get it exactly backwards. But this is the rule.

C. Group Insurance (61) Usually sold through an employer. Economies of scale & competition to provide top benefits. Less

adverse selection. Tax benefit (benefits not taxable as income).

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Explanatory Tough decision whether to cut off agent or take risk that he will exceed authority (he gets you business so

it is a tough decision) To what extent is the employer “an agent” of the insurer? ERISA addresses this, but has exemption for preemption by state insurance regulation.

Unsystematically, ERISA trumps state rules “influencing” insurance. Here insurer relies on employer for clerical functions→ makes market for group insurance very

competitive In shopping, employer looks for limited liability→ makes it tough for insurer to limit the

employer

PUBLIC POL. RESTR. ON CONTRACT TERMS (64) In this area, we move passed issues of meaning to those of validity 3 bases of validity (public policy) concerns:

a. Violation of Constitution or statuteb. Encouragement of Moral Hazard (most cases fall here – coverage of punitive damages?)

ASK→ 1. When can punitive damages be awarded? 2. Do some awards fall below level of public policy concern?

c. Promotion of Unreasonable Behavior

Hartford Casualty Insurance Company v. Powell (1998) - 64 Insurance void for public policy reasons – MAJORITY RULE H sought declaratory judgment that it didn’t have to insure Powell under policy issued to her employer – she

was drunk, in a wreck, faced punitive damages. Court made Erie guess that TX’s purpose in punitive damages is punishment and deterrence…

o contracts (insurance contracts) mitigating that punishment would be against public policy Under state law, what can punitive damages be awarded for?→ only when intent to cause harm or substantial

certainty you will cause harm→ given this, you can never be insured for punitive damages

First Bank – Billings v. Transamerica Insurance Company (1984) – p.81 Under state law, you can sometimes get punitive damages for something below high level of

blameworthiness, so as a rule, you can’t always say you can’t be insured for punitive damages

Strickland v. Gulf Life Insurance Co. (1978) - 76

INSURANCE REGULATION (82)

THE ALLOCATION OF POWERS (82) In Paul v. Virginia (1869), the Sup. Ct found that Congress had no power to regulate insurance This case was overruled in price fixing situation South-Eastern Underwriters (1944) and found Congress

could regulate under commerce power and all anti-trust statutes now directly impacted the insurance industry Insurance Companies wanted a way out of this decision→ look to Congress to decline this power...

Implication was they weren’t even allowed to share loss data or write standardized policies.

McCarran – Ferguson Act (1945) – p.83 Congress indicates it is refraining from insurance regulation even though it has Constitutional power to

do so No implied federal preemption of state insurance regulations *Federal anti-trust laws are inapplicable to the extent that “business of insurance” is “regulated” by a

state What does it mean to be “business of insurance”? “Regulated”? What is scope of exception Antitrust prohibitions apply to “boycott, coercion, or intimidation”

What is “boycott, coercion, or intimidation”? After this Act passed, states jumped at the chance to regulate.

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ExplanatoryTHE STATE REGULATORY RESPONSE (85)

A. Overview of State Regulation Regulations created an Insurance Commissioner to assure that rates are not “excessive, inadequate, or

unfairly discriminatory” Policy language is subject to approval Insurance Commissioners may regulate deceptive, misleading, or unfair practices Solvency of individual insurers is to be monitored

B. Regulations to Assure Solvency (85) First virtue of an insurance company is its solvency→ Commissioners attempt to assure it through audit

by requiring:1. Minimal capital requirements2. SAP (overly conservative) and Risk-based capital valuation3. Investment criteria4. Filings and periodic examination5. Guaranty funds→ designed to afford policyholders of an insolvent company a right to funds in

the guaranty fund (this is all states except NY which has no fund, but will create one post insolvency)

Problem w/ guaranty funds is that consumers don’t choose company based on stability since they are guaranteed money anyway.

Creates moral hazard because risky investments produce greater upside but downside limited by guaranty funds. Nobody worries about whether their claim is going to get paid.

Insolvency happens anyway sometimes because of fraud, poorly performing investments, etc.

C. Rate Regulations (89) PPT slides online Insurance companies are in 2 businesses:

1. Underwriting Function2. Investment Profit

Operating profit = underwriting profit/loss + investment profit/loss In a competitive market, premiums will be bid down based on both aspects of insurance Underwriting Profit = sum of premiums – (losses + expenses)

Loss Ratio = losses compared to premiums (e.g. 90→ for every dollar you take in you pay out .90)

Expense Ratio = expenses compared to premiums Combined Ratio = losses + expenses compared to premiums (a combined ratio > 100 indicates

an underwriting loss) Long-Tail Insurance (medical malpractice)→ those types of insurance with underwriting loss tend to be

companies that hold onto the premiums longer (more investment)→ investment offsets underwriting loss Short-Tail Insurance (fire, theft)→ just the opposite In a competitive market, rates discipline themselves→ ex. one insurer tries to make big profit due to high

interest rates, another will charge lower and still make profit Trending and Development

Loss Trend→ the pattern of annual loss increases or decreases in a given line of insurance Loss Development→ rate at which loss under a given year’s line of insurance accumulate

To come up w/ premiums, company has to use these trends to predict how things will work out in future Problems is that to set a rate for 2001, you can use more reliable 1996 data w/ 5 years of loss tracking,

BUT this is older policy, or you can use 2000 which is much more similar in time, BUT only has one year of data

Actuaries can help, but they assume things will change in the same way they did in the past→ thus, insurance companies use actuaries in addition to guesses about future changes in the world

*Key question is not how rates get set, but WHO gets to decide how much→ insurers, states, IC, Courts? State insurance regulators are confronted with the same data as the insurance companies.

Trade-off between completeness of data and recency of data. State insurance commissioner’s have notoriously thin staffs. Few attempts to apply term “unfairly discriminatory.” Most of the most unfair bases (race,

etc.) have been screened out. When issue comes up, usually decided by legislature.

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Explanatory

Commissioner of Insurance v. North Carolina Rate Bureau (1996) – p.92 For practical purposes, Commissioners have much discretion→ decision are almost never overruled

on substantive grounds – if anything, they are remanded for procedural reasons This case is a perfect example→ Ct just says write a better opinion

Ct will almost always differ to the expert→ as long as it is not arbitrary or capricious State appeals courts don’t want these cases. Just want to find “enough evidence” in the 3500

page record to get rid of it and “go through the motions.”

Two Models of Rate Regulation1. Traditional Public Utility

Nature of monopoly is lack of competition, so some commission need to allocate resources to determining a fair rate

2. Competition To the extent there is competition, why employ a public utility model?→ market regulates

prices just fine (saves on someone having to construct a “fair” price) Allocate resources to ensuring competition

Calfarm Insurance Company v. Deukmejian (1989) – p.116

Explanations for Increases in Auto Insurancea. Rising Cost Base→ health care costs, vehicle repair, fraud, increasing number of accidents as

population density risesb. Anti-competitive Behavior→ by insurers, evidence by:

Market structure (concentration) Market conduct (collusion) Market performance (excess profitability)

In CA, there was little evidence of anti-competitive behavior, BUT the premise behind prop 103 (rate rollbacks) has to be anti-competitive behavior→ makes little sense

Supposing prop 103 got it wrong→ what happens when this rollback occurs to prices that didn’t need it?

Something you sell has to shrink, so coverage is slower, more disputes over payouts, etc. In large states like CA, the regulator may be able to enforce restrictively low prices, BUT in other

smaller states, insurers will just leave and the state would be in big trouble So in effect, CA residents get a big tax break

D. “Unfairly Discriminatory” Rates (97) Charging different rates for different people is fine b/c risk classification helps combat adverse

selection and moral hazard→ BUT, when do they go too far?

Allstate v. Schmidt (2004) – 99Unfairly discriminatory classifications—plain language holding. HI.

Facts: Allstate has “one year with a driver’s license” requirement for applicants and rejected those who didn’t meet it. Applicant who was denied on this basis complained, and insurance commissioner (Schmidt) issues a Cease and Desist Order, disallowing Allstate’s requirement for rejection under HI statute prohibiting such discrimination.

Issue: Does the HI statute apply to ratemaking only, or to the underwriting decision? Supreme Court of Hawaii finds:

o In construing statutes, court must look to plain language first, legislative history second. When construing plain meaning, court attempts to render no clauses or words superfluous.

o Statute refers to “any standard or rating plan” in prohibiting certain discrimination. Applying the above rule, “standard” must refer to something different than “rating plan,” or it would be superfluous.

“Standards” includes underwriting standards. Holding: Schmidt wins. What classifications are unfairly discriminatory? Those that are:

o Non-causal. Variable that is basis for classification may be merely correlated with probability of loss because it is merely a proxy for something that is causal.

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Explanatoryo Non-controllable. Tendency of the law is not to punish people for immutable characteristics. Should the

results of the “natural lottery” be a factor for insurers to consider? That is, there are less problems in charging more to someone who chooses to skydive than in charging more to someone with arthritis.

o Suspect classifications for non-insurance reasons. Race, religion, gender, and probably genetic factors (banned or limited in over half the states)

1. Actuarially unsupported rate classes are discriminatory→ this is true, but not exclusive This almost never happens – i.e. charge Catholics more than Protestants Insurers will naturally gravitate towards the plan that is most cost effective for them Role of Commissioner is to take rate categories which are supported by data, but unacceptable for

other reasons—nothing wrong with making people pay a little more to cut out classifications. When, though?

Human Genome Project and Life Insurance Question is who should bear economic burden of some people being susceptible to certain diseases? Two issues:

a. Cost of genetic testing is still prohibitively highb. There are genetic tests for most diseases

We tell issuers they can’t take any such tests into account when setting rates→ but this says nothing about whether they can refuse insurance

Even if insureds don’t ask for such tests, people will still get them on their own if they have to disclose a family history of disease and will attach if negative results

We are getting to the fear of high adverse selection if we always want to charge the same for all people

E. The Contingent-Commission Controversy (105) Spitzer Testimony

RESIDUAL FEDERAL REGULATION (111)

A. What Is “Business of Insurance”? (112)

Practice has the effect of spreading or transferring risk Practice is part of the policy relationship Practice is limited to entities within the insurance industry

1. Background We know that under Southeastern, insurance is considered interstate commerce and therefore, the

Sherman Act should apply to insurance industry Insurance industry complains and Congress passes McCarron to exempt insurance from federal anti-

trust regulation to the extent it comes at the state level (not a question of regulation or not, but by whom)

Is this just a power allocation statute (federalism) or an immunity statute?→ no answer

Union Labor Life v. Pireno (1982) TEST – p.112 1st need to know what McCarron was really about→ insurance companies need to collaborate on

rates Three Prongs to determine if practice is the “business of insurance”:

a. Does the practice involve the spreading of the policyholder’s risk? This is an “indispensable characteristic of insurance” Business of insurance is not the business of insurance companies.

b. Does the practice involve the insurer/insured relationship? How close is the practice to rate making?

Ct→ chiropractic committee not integral to this relationship KA→ yes it is!

c. *Does the practice have an impact on non-insurance market? Even if insurance business needs standard rate-making and immunity from

cooperative behavior, does not mean this immunity can carry over to other markets

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Explanatory Pireno→ using outside board has an adverse impact in chiropractic market (would

seem to fall outside of the category of “benign” activities) KA thinks this is the most important prong

Not very satisfactory test b/c real question is: “is this kind of thing benign and something the industry needs an antitrust exemption for?” But the test doesn’t really have much to say about that.

B. What Is “Regulation” by the States? (120) As long as a state has a systematic regulatory scheme in place, sufficient to satisfy the requirement that

the state is regulating insurance. Test: regulatory scheme has to be “more than just a sham.” State just has to be regulating

some features of insurance.

C. What Is “Boycott, Coercion, or Intimidation”? (120 bottom) There is one exception from McCarron exemption→ any agreement to “boycott, coerce, or intimidate” Fixing rates is not prohibitive, BUT forcing people to fix rates is prohibitive

SUMMARY OF BOYCOTT Barry→ “concerted refusal to deal” – in that case, refusal to deal on any terms Hartford→ refusal to deal, whether on any terms or on specified terms, in aid of achieving a purpose

in connection w/ another transaction – that is, an enforcement technique

St. Paul Fire & Marine Insurance Co. v. Barry (1978) – p.121 During 1970’s, after years of steady claims and severity of claims, the climate for medical

malpractice changed and things became much less stable. Frequency & severity of claims accelerated → much harder to project coverage and make

rates. To combat this, companies switched from “occurrence-made” to “claims-made” policy→ this way,

claims are resolved more quickly after the close of the policy year→ doctors hated this - greater risk It was alleged that St. Paul stopped selling occurrence-made policies AND told other 3 companies in

the city to not sell to their customers at all→ they agree This forces St. Paul customers to stay with them and buy claims-made policies

This is certainly a Sherman violation, IF it applies→ is this arrangement a “boycott”? Turns out that boycott is a term of art with a less than concrete definition. Ct. says boycott applies to a concerted refusal to deal on any terms→ whether

competitor, someone else, or customer→ NOT just limited to refusal to deal w/ competitor In this case, companies are refusing to deal at all in order to allow St. Paul’s to

gain leverage in a separate transaction. Critical point is that refusal is not made for it’s own sake. That is using

the boycott as an enforcement mechanism—refusing to do something not because you don’t want to do it, but as a means to a separate end.

Ex: Can’t refuse to sell refrigerator unless customer joins Elks Club.

Open question: in this case, refusal to deal w/ consumers on any terms is a boycott; BUT if other insurance companies refused to sell consumers occurrence policies, but were willing to sell claims-made, then maybe no boycott (still anticompetitive).

*Question is always whether what is alleged would constitute a boycott? Question of is the allegations actually happened is a question of fact for trial.

Hartford Fire Insurance Company v. California (1993) – p.126 Is a refusal to deal on specified terms, not all terms, still a “boycott”? There was an effort to revise the standard CGL policy→ given high interest rates, you didn’t have to

charge a lot to gain a high return 4 issues discussed in relation to the revision of CGL:

1. Should insurance industry shift from occurrence policies to claims policies?2. Insurers wanted retroactive dates used w/ claims made policies

W/out the restriction, any injury occurring anytime prior, that this type of insurance covers, is covered (very hard to estimate the risk since we need to know everything that happened in the past)

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Explanatory Restriction would set an arbitrary date before which no claims are covered

3. Absolute pollution exclusion in CGL policies4. Defense w/in limits (all the suits w/ no defense limit was costing insurer a ton)→ this

method would take every $ spent by insurer on defense and detract that amount from liability coverage

Allegation in this case was that big 4 insurance companies were unsuccessful in convincing the ISO committee to enact the 4 changes to CGL→ instead of giving up, they allegedly boycotted by:

a. Going to reinsurers and convincing them the ISO policy needs to be revised in order to allowing them better predictability (reinsurers go to ISO and say they won’t reinsure w/out changes)

This is really a refusal to deal on specified terms in target transactionb. Back up their threat by saying if they don’t change CGL policies, reinsurers won’t reinsure

CGL polices OR any other ISO policies This is a conditional refusal to deal in another transaction

Are either of these threats a “boycott”? One may look to Barry and say a boycott must be a refusal to deal on any terms→ Scalia

rejects this idea and says boycott is much broader *Scalia says a boycott is a refusal to deal, whether on any or all terms, in aid of another

transaction, not the one at issue So, refusing to sell reinsurance to ISO CGL policies is highly anti-competitive, but

it is not a boycott→ BUT, refusing to reinsure other polices is a boycott *So, we need a refusal to deal AND in aid of another transaction

You will almost never find a case where someone refuses to deal on any terms if they are not engaging in a boycott

When there is refusal to deal on specified terms, there is a high chance that there is no boycott→ this is likely just bargaining

Congress is so concerned over boycotts b/c they screw up multiple markets, not just insurance market If the allegations were true, why were insurers unable to get what they wanted out of ISO (why did

they have to use the reinsurers)1. Possibly the rest of the insurance industry did not feel the same way

Why care what the rest of the insurers think given their volume of the market?2. Big 4 knew they wouldn’t be able to sell the new policies if other people still sold the old

type (Even if they charged a lot less b/c under-priced occurrence coverage is too hard to beat)

This is a much more plausible argument On the supply side, the rest of the insurance industry was pricing the old policies

too low (price war given good interest rates)→ big 4 knew this was a big mistake and everyone would eventually go broke on these policies

So, if we remove the thing you are charging too little for, the problem is solved In the end, the attempted boycott did not succeed→ they failed at goals 1,2, and 4, but did get the

pollution exclusion added

FIRE AND PROPERTY INSURANCE (136)

Overview

First Party Insurance→ victim’s insurance Person protects against losses to themselves (fire, property, health, disability)

Third Party Insurance→ injurer’s insurance Person protects themselves if they are legally liable for another’s injury

SAMPLE HOMEOWNER’S POLICY (136)Crib Sheet Most insurance policies give coverage and then take some away in exclusions Think of homeowner’s agreement as CPL→ comprehensive personal liability

This is basically insurance against everything w/ many exclusions

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ExplanatoryBasic Setup

a. Declarations Sheet (138) Basically a data page→ info on the insured and coverage amounts Most policies have deductibles (amount insured pays himself) which covers:

1. Administrative costs of claims2. Protect against moral hazard

b. Insuring’s Agreement (insurer affirmatively makes promise→ contract)c. Definitions (139)

People covered→ all residents of the household Property Damage→ very broad but does not include loss of value (need physical loss)

d. Property Insured (141) Property covered = dwelling, other structures, personal property (w/ limits to guard against

adverse selection)→ then exclusions take some coverage away.e. Perils Insured Against (146)

All Risk/Open Peril Coverage→ insures all property covered against all injury except the one in the list of exclusions (this is the type of policy in the book)

List of exclusions tends to suggest the damage needs to come from the outside (property can’t just fall down or rot away)

Specified Risk/Named Peril Coverage→ only cover damage occurring in the following ways f. Exclusions (149)

Even if only part of the loss is caused by something excluded, no coverage at all There is no negligence provision→ this is part of the insurance (just no intentionally)

You also have a duty to mitigate damages once things happeng. Conditions (151)

These are really conditions and other related provisions There is a mortgage clause→ gives rights to mortgagee is there is a loss

h. Section II – Liability Coverage i. Section I and II Conditions

REQUIREMENT OF AN INSURABLE INTEREST (161)

Follows from the principle of indemnity→ protect policyholder from suffering a loss, NOT to give them a gain

Leads to the insurable interest requirement→ to be permitted to insure, the insured must have a lawful and substantial economic interest in preserving the subject matter insured

This doctrine is primarily to combat moral hazard→ the public policy served here is so compelling that in most states, an insurer cannot waive the requirement or be estopped from invoking it

The doctrine was developed by Cts, but subsequently put into statutes by many states Satisfied by:

a. Legal interest→ ownership, etc.b. Factual expectation→ not clear what will satisfy this standard

Policyholder seems to need some sort of real expectation of ownershipc. Contractual interest→ means you have an obligation to purchase or take a legal interest in the

propertyd. Potential liability

Given all this you are almost always better off to have the property never get damaged

Policyholders want coverage, even when it results from carelessness, but it leads to moral hazard problem and so insurers want

Richard Gossett and Margaret D. Gossett v. Farmers Insurance Company of Washington (1997) – p.186

Examine the 4 factors: Ct can’t find that Ps have any legal interest in the property – trustee deed had the property They had no contractual interest→ not obliged to buy anything They had no factual expectation→ at best it was a hope (no high likelihood)

Given this situation, Ps are much better off if something happens to the property!→ only not better off if they have an obligation to buy from trustee deed, but they don’t

This is a bad failure in lawyering

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Explanatory Ct holds Ps get SJ→ BUT insurable interest is limited to the improvements they made Why is a policy given where there is no insurable interest?

Insurance company is never estopped from arguing no insurable interest exists Policy is to protect public, not insurance company

TRIGGER & OCCURRENCE ISSUES (166)

BUSINESS INTERRUPTION COVERAGE (167)

Duane Reade v. St. Paul Fire & Marine Insurance (2003) - 167 Facts: P purchased property insurance policy from D which included business interruption coverage. Policy

contained “period of restoration” clause under which payment by D was to continue only as long as would reasonably be required for insured to rebuild, repair or replace the destroyed property—designed to give insured an incentive to mitigate losses. After 9/11 attacks, P’s store in the WTC was lost.

Issue: What is the extent of coverage under the “period of restoration” clause? P argues: Actual period that would be required to restore P’s operations to the level that existed at the WTC Store

prior to the attacks coterminous with rebuilding of complex that will replace WTC. D argues: Period expired when P could’ve restored operations somewhere else. S.D.N.Y. finds:

o Neither interpretation is right. D’s interpretation would not provide coverage unless ALL of P’s stores were lost (DR is a

chain), or only until business at all other P stores picked up to return overall business to pre-9/11 level.

P’s interpretation is wrong because the clause does not speak to the period that would be required to reconstruct the complex surrounding the store, only the store itself.

o Court’s interpretation: Once P could resume functionally equivalent operations in the same location where the WTC store stood, the restoration period was over. (closer to P’s interpretation).

EXCLUSIONS AND EXCEPTIONS (172)

A. Reason for Exclusions a. Avoiding catastrophic loss for insurer→ correlated risks (never insure all houses on one block)b. Combat moral hazardc. Limit adverse selectiond. Prevent duplication of coverage (don’t include autos in homeowners, b/c auto policy covers it)

B. The Problem of Causation → 2 causes of a loss – one is covered and one is expressly excluded?

The Problem of Intrinsic LossChute v. North River Insurance (1927) - 172

State Farm Fire and Casualty Company v. Bongen (1996) – p.174 One covered cause (3rd party negligence) and excluded one (mudflow) Policy says as long as loss is even partly or indirectly caused by an excluded clause = no coverage Ct says this language is fine→ it means what it says - they are avoiding legal doctrine and they can!

So, since the policy says coverage is excluded when mudflow, then no coverage here Minority says there is a rule that the main (or “efficient proximate clause”) cause

of the loss is what controls, AND no policy language can override this rule KA→ what does this mean? This is an all-risk policy!

All causes are covered unless excluded – so what does it mean to say that there is concurrent causation? (you will always have a covered cause w/ all-risk → the whole point of having an exclusion is to prevent coverage when that thing happens!)

So, minority rule is simply a bad insurance rule

Liristis v. American Family Mutual (179) - 2002Problem of causation

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Explanatory Does homeowner’s insurance policy cover mold contamination of the home allegedly caused by water used to

extinguish an accidental fire? Policy excludes mold contamination. Policy covers “risks of accidental direct physical loss to property unless the loss is excluded in this policy.” Policy does not cover “loss to the property… resulting directly or indirectly from or caused by mold” P’s argument

o Mold damage is an accidental direct physical loss to the home caused by the water. Court: If P can prove the causal connection with the fire, then the mold damage is covered. If P cannot prove

causal connection, then there is no coverage. Jury question.o An insurance company that wishes to limit coverage must use language that clearly

communicates the limitation

C. The Problem of Increased Risk (183) There is a tension in property insurance b/t desirability of covering loss caused by accident and loss

caused by negligence→ need to draw a line somewhere when the moral hazard becomes too great Most increase of harm provision have temporal element→ if increased risk ends, you have

coverage

Rosen v. State Farm General Insurance Company (2003) – p.183Problem of Increased Risk Insurance policy (clearly and unambiguously) insured against collapse as defined as “actually falling down” Insured replaced decks on rec. of contractor that collapse was “imminent.” State Farm refused to cover. Court of Appeals said public policy overrides what State Farm was trying to do (personal injury grounds), but But Supreme Court of CA reversed.

One idea (moral hazard) is that policyholders will just claim all sorts of things are imminent and make repairs—once repairs are made, it’s difficult for insurer to prove what was and was not imminent.

Cost of repairing imminent damage typically is covered on commercial properties.

Dynasty v. Princeton Insurance Co. (2000) – p.187“Increase of Hazard Provision” General Principle: If the hazard is increased by something in the “knowledge OR control” of the

policyholder, coverage is void. Plaintiff’s nightclub goes up in blazes—financial trouble and sprinkler system was in the

“off” position even though it was inspected as being in the “on” position. What real difference between trial court’s instruction and instruction insurer wanted given

the knowledge AND control interpretation. Both mean—if the insured knew something about this, he could have done something about it.

This area is very squishy and Cts will often bend standards to produce a certain outcome Technically means no coverage at all while the risk is increased, but… 4 ways in which “harsh effect” of limitation on coverage is made more flexible by the Ct:

a. Ct reads knowledge OR control to mean = knowledge AND controlb. Increase of hazard must be substantial in duration and magnitudec. Who is insured is flexibled. The above are questions of fact for the jury (juries more sympathetic than judges)

THE MEASURE OF RECOVERY (193)

A. Actual Cash Value This type of recovery is good for businesses, but not for personal insurance since it does not give enough

coverage to replace the lost item Ways to measure actual cash value:

1. Market value Look to comparable properties. Works in robust market.

2. Replacement cost minus depreciation 3. The broad evidence rule

Must Ct follow this rule in order to overcome the shortcoming of 1 and 2 and look at multiple factors→ anything that help determine actual cash value can be considered

Different from replacement cost.

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Explanatory Can see why insurance companies don’t want replacement cost—can’t get your fender and door

replaced when the car is “totaled.” Replacement cost is something most homeowners buy because their particular house has sentimental

and use value. Commercial property-holders don’t typically buy this because their property has only economic value to them.

Zochert v. National Farmers Union Property & Casualty Co. (1998)—p. 193 Zocherts had wind damage to silos

o Nat’l Farmers deducted for depreciation when calculating the repair costo Zocherts claimed that actual cash value meant that value without any allowance for depreciation

court disagreed with Zs, saying that the policy distinguishes o a greater than 80% loss (yielding full replacement cost without depreciation) o and a less than 80% loss (yielding actual cash value),

showing that the two are not equal, and thus for the Zocherts to get full replacement cost would give them more than they paid for under the policy

B. Problems 1. Moral Hazard

Insured will be economically better when house burns down because have replacement costs coverage than if the house is left standing.

Insurers tolerate this because (1) notwithstanding you’re “better off” people don’t have incentive to capture excess value because it’s a pain to deal with your house burning down; (2) requirement that you build it and move into it, so it’s a pain in the ass

Also, people suffer more than economic costs when property is destroyed2. Replacement Costs

Much better for personal losses since it help people replace lost item w/out expending any money

Problem is moral hazard→ people can gain lots of money by destroying property Nonetheless, insurers are willing to take this risk→ some try and prevent the moral

hazard by only giving replacement cost if the lost item is actually rebuilt

C. Coinsurance Application of Clause C on p. 151-152 → don’t need to know the math for the exam Property insurers charge the same rate per $1000 of value insured, regardless of ratio of insurance to the

total value of property→ avoids high cost of calibrated rating BUT, this simple approach is not justified by the probability of loss→ in fact, the marginal cost of

additional increments of insurance should decline Insuring for less than full value of the property therefore is a better bargain than insuring for the full

value→ really an incentive for people to buy less than full insurance and take a risk But insurers don’t like this

*Antidote→ provide for only partial recovery if less than full value is insured→ coinsurance requirement

If policyholder buys less than 80% of replacement cost, he gets only partial reimbursement (higher of): Actual cash value, or Pro-rated replacement cost at:

You only get (% coverage) / 80ths coverage. If you buy 60% coverage on a $100,000 policy, you only have 60/80ths coverage =

75%. Means there is 25% coinsurance.

SUBROGATION (199)

Originally an equitable doctrine→ put insurer in shoes of insured when loss was caused by wrongful act of 3rd party→ KA sees 2 kinds of subrogation:

a. “Active” Subrogation Insurer pays insured, but insured has claim against 3rd party Insurer is active party: steps into shoes of insured and brings tort claim for amount 3rd

party owes insuredb. “Passive” Subrogation

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Explanatory Insurer pays insured, insured sues and recovers, then insured reimburses insurer Insured is required by law to reimburse insurer Insured’s incentive to do this is if insurer did not fully compensate or there are pain and

suffering claims Availability of subrogation is a valuable tool for insurers

Purposes = indemnity & combating moral hazard (windfall)→ BUT it’s also a valuable asset of insurers

*RULE→ when insured interferes w/right of subrogation, coverage is voided But this only applies when third-party is not aware of insurer’s rights Insurer will have a cause of action against insured if they settle Exception applies most often in cases where release of liability occurs AFTER the accident

Great Northern Oil Company v. St. Paul Fire and Marine Insurance Company (1971) – p.200 Policyholder & contractor agree to build on policyholder’s property→ contract contains release of

liability for negligently caused damage Policyholder interferes w/its property insurer’s right of subrogation before loss No question that there was interference (indeed, extinguishment) of subrogation→ issue is as to timing.

*ANSWER→ where there’s an express subrogation provision in the policy & that provision doesn’t say that you’re prohibited w/interfering w/subrogation rights before loss, then apply the provision as written→ only interference after loss voids the policy

Solution→ avoid this outcome by not interfering w/subrogation rights ever (both before & after loss) It’s rare that this will occur→ after loss people focus on recovery, not trying to avoid insurance coverage

Ex→ dry cleaners limit = $100/item. But homeowners insurance should cover you; there’s a limit on insurance co’s ability to subrogate from dry cleaner. Don’t want ppl to be voiding their insurance coverage w/o knowing it (b/c no one reads the dry cleaners limit)

*Bottom line→ say whatever you want about this in the contract - this is what court will enforce “Exemplary fair dealing” rule (dumb rule)→ can’t mean anything more than the contract rule

Contracting party got insurance from St Paul w/o paying for it→ got lower price for construction by signing the exculpatory clause and split the surplus & laid the risk that something would happen on the insurer.

Solution→ you can do this absent a provision in the policy that expressly prevents it. this is the efficient solution→ insurers know about rule & should charge everyone for it or

contract around it early if they are that worried Rule that even after coverage in place, insurance rights will constrain your ability to

enter into contract is not efficient→ if it was policies would have changed after this decision

MORTGAGES - LIMITED INTERESTS (205)

Two situations:1. Straight Forward→ insured is covered subject to a mortgage on his property2. Complicated→ mortgage loan on property, but owner has done something to void coverage

Mortgage Clause (p.178) If there’s a mortgagee (i.e bank) named on the Dec sheet of policy, then we will pay proceeds of

insurance if there’s a loss to the lender, as interests appear. Lender gets “first dibs” on the proceeds of the property (whether sold or as a result of insurance proceeds) up to the outstanding balance of the loan—the rest goes to policyholder

SO if property burns w/a $100 policy & $80 mortgage, 80 goes to bank & 20 goes to insured

1. Straight forward→ INSURED IS COVERED Property is destroyed 3 parties: Bank, Insured, insurance co. Insurance proceeds→ bank gets paid first, if anything is left over, insured gets paid

Insurance pays just like a purchaser of the property would pay—Bank gets paid first

2. Complicated→ INSURED IS NOT COVERED b/c he did something to void coverage (Althauser) Material misrepresentation on application; arson; etc so insured is no longer covered for this loss if insured is not covered; mortgagee still is Same 3 parties: Bank, Insured, insurance co.

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Explanatory Insurance proceeds→ bank gets paid first, insurance co subrogates (that amount) against insured

Under “Mortgage Clause” insurer subrogation claim against insured - insured will shoulder full amount of the loss – the exact thing that happens when someone suffers a loss & is not insured

Northwest Farm Bureau Insurance v. Althauser (1988) - 206 NW insured A, A misrepresented, NW voided policy so when A’s house burned, NW paid mortgagee and claimed subrogation to mortgagee’s interests, pursuant to the

policy then when A didn’t pay mortgage payments to NW, NW moved for foreclosure – court ruled that being subrogated

means that NW could start collecting mortgage payments

LIFE INSURANCE (226)

There is no standard form life insurance policy Two main kinds:

1. Term Insurance This simply life insurance and nothing else As you get older the premium goes up since your risk of death is rising – amount of

coverage stay the same however2. Whole Life Insurance

This form combines insurance with a savings element from interest collected on premiums

There was a big advantage to this prior to 1977 b/c individual investors could not invest in high return gov’t bond funds (whole life was a way to do it)→ now you can in other ways

SAMPLE TERM LIFE INSURANCE POLICY (226)Crib Sheet Important Provisions

1. Declarations Pages – p.227 Need an insured, an owner (here it is the insured), and a beneficiary

2. Insuring Agreement – p.231 Beware of §1.4 (incontestability) and §1.5 (suicide)

3. Ownership, Premiums, and Conversion – pp.231 Policy always insured the CQV, but ownership may change Conversion→ most policies let you convert the policy

4. Beneficiaries – p.234 Specifies how to change beneficiary and provides tax advantages

5. Options for Payment of Benefits – p.2356. Completed Application – p.239

In some jurisdictions, a misrepresentations on the application does not coverage unless it is attached to the policy

THE APPLICATION (246)

Gaunt v. John Hancock Mutual Life Insurance Company (1947) – p.246 Problem stems from difficulty in selling life insurance→ to get more people to buy in, you take the

first premium w/ the application b/c they are more likely to stick w/ it once they are invested In return policyholder gets binder that if insured pays 1st premium he is guaranteed coverage if:

1. Satisfaction of insurability2. Approval prior to death

If met, insurance as of date of completion of part B→ in effect back dating coverage But what does this mean?

1. You die prior to approval You haven’t satisfied 2nd condition, so you get no back-dating

2. You die after approval

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Explanatory So what!→ you getting nothing additional since you were alive b/t time of part B

and time of approval→ you got additional insurance but you didn’t need it *Either way, you gained nothing!→ Ct says make people think they are getting something b/c

language is misleading CONCURRING (Clark)→ language says what it says and is not misleading, we really mean to say

that this is unconscionable KA→ but if anyone who attaches a check gets immediate coverage, this encourages adverse

selection Insurance agents would have to make sure never to take a check w/ the application Subsequent decisions have shown that not every case w/ a check means immediate coverage

THE REQUIREMENT OF INSURABLE INTEREST (250) In most states, this requirement was set forth by Cts and then codified in statutes Requires “a substantial interest engendered by love & affection or a substantial and lawful economic

interest” This is a very fact specific inquiry

First need to distinguish b/t owner, CQV (party whose life is insured – may be owner), and beneficiary If owner is CQV→ beneficiary needs no insurable interest If owner is not CQV→ owner must have an insurable interest If owner is not CQV→ beneficiary must also have an insurable interest

Some jurisdictions go further to requires that CQV must consent to the chosen beneficiary (minority view)

Timing→ insurable interest has to be present at time the policy is made – if it then disappears, the policy does not become invalid (this just isn’t a worrisome moral hazard)

Ryan v. Tickle (1982) – p.251 2 business partners w/ insurance on each other→ it is clear they each have an insurable interest in

each other, but question is how much they can have in each other P suggests that although D had insurable interest, given the large amount insured, he has a strong

incentive to see his partner dead→ indemnity is violated Ct rejects this saying that given that the business profited more w/ both of them around, they were

still better off having each other around KA→ basically, Ct will not get into it unless the amount is way too much or there are

“presumptive shenanigans”

Wal-Mart (Mayo v. Hartford Life) (2004) – 256Must have an “insurable interest” to buy life insurance on someone else’s life, either as family, a creditor, or an expectation of financial gain from their continued life. An ordinary employer-EE relationship doesn’t count.

Wal-Mart took out LI policies on behalf of its EEs, and named itself as beneficiary (motivated by tax reasons). Decent was a Wal-Mart “associate” until death in 1998. His estate discovered the existence of the policy and sued

Wal-Mart for violating the Texas insurable interest doctrine—estate sought to be paid the proceeds from the policy.

Holding:o The employer/EE relationship does not satisfy the requirements of the insurable interest doctrine.

Public policy for Insurable Interest Doctrine: without a proper interest people might use life insurance to gamble/prospect on people’s deaths.

Texas courts recognize three categories of individuals who have insurable interests:o Family – close relativeso Creditors – if you die, they get nothingo Those having an expectation of financial gain from the insured’s continued life.

Wal-Mart tried to argue that it fell into the 3rd category for its EEs, because must to pay benefits, train new employees, etc., upon death, but lost because TX was very clear with it’s statute.

o Some exceptions though.

CHANGE OF BENEFICIARY & ASSIGNMENT (260)

1. Change of Beneficiary

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ExplanatoryEngelman v. Connecticut General Life Insurance Company (1997) – p.261

Policy owned by Mr. Ryder, CQV is Mrs. Ryder, and beneficiary is cousin→ owner dies, but policy remains in effect and someone becomes a successive owner (here happens to be CQV)

CQV sends a letter saying she wants to change beneficiary→ company sends her a change of beneficiary form and since she never returns it, D refuses to pay new person after death based on strict compliance

Benefit to strict compliance standard is everyone knows what to do AND insurance company definitively knows who is the beneficiary

When insurance company doesn’t know who to pay, they file an interpleader and pay the court→ in this case they were so sure cousin (Zinc) was right person, they just paid him (real miscalculation)

The closer to substantial compliance; the less likely INSco knows who to pay more likely to use interpleader and cause litigation

All courts say it must be “intention plus” which means intention plus some action. Types of substantial compliance:

a. All-in-her-power test → owner does everything in power to make the change (intent clear)

b. Substantial affirmative action test→ Ct uses this test *Result→ using substantial compliance leads to a move from payment to interpleader litigation

2. Assignment As you get older, the value of your life insurance policy increases→ when life expectancy is

predictability lower than the premiums being paid, you have an asset Assignment is more valuable than being named beneficiary b/c you are in control of the policy—

can’t lose your interest by re-designation or non-payment of premiums by the policyholder.

Grigsby v. Russell (1911) – p.266 Owner and CQV sells ownership rights to someone else→ new owner wants to change

beneficiary to himself→ is this ok since new owner does not have an insurable interest in the CQV?

*Ct says assignee of a “good faith purchaser” is a lawful assignee. If transaction is legitimate at outset, subsequent assignment to a party w/o an insurable interest is lawful→ idea is that moral hazard is much less – owner must know who to trust.

Implication: we’re not going to make you wait until your policy value is 100% (ie. death) to sell it.

BUT, Ct doesn’t seem fully convinced of rationale→ why is wager assumed to be gone?

At best moral hazard is reduced and checked by interest of the person assigning

This rule is not entirely consistent w/ the next rule we discuss.

LIMITATIONS ON RECOVERY BY BENEFICIARIES

New England Mutual Life Insurance Company v. Null (1979) – p.269 CQV seeks coverage and the day after policy is issued, he assigned the policy→ next day he is killed CQV purchased the policy in insistence of Calverts and his intention all along was to assign to

someone who didn’t have an insurable interest in the first place *Ct: since intention from the outset was to get around the lack of an insurable interest rule,

the transaction is void: Calverts get nothing. Since transaction is void, Mrs. Null can’t recover the money either.

But this rule means insurance company has an incentive to sell to people without insurable interest.

Some courts say there is cause for negligence against insurer for issuing w/o insurable interest where they should know “shenanigans are afoot” and creating incentive for death of CQV. This “overplugs” incentive problem.

So, we need to determine whether this assignment was planned to determine what rule to follow

Viaticals

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Explanatory Some companies called “viaticals” will purchase insurance policies from those w/ a terminal illness

under the Grigsby rule in order to give the dying person some $ while they are alive A “wet viatical” is one in which the ink on the policy hasn’t dried yet→ company first finances

purchase of new policy then pay them a percentage of face value for an immediate assignment Reason these companies want as assignment instead of being the beneficiary is some you have

control over the payment of the premiums

State Mutual Life Assurance Company of America v. Hampton (1985) – p.273 Sometimes even when insurable interest requirements are met, people are not allowed to recover

*Conviction of murder 1 or 2 deprives beneficiary of recovery –even if valid policy at inception

*Acquittal or other disposition leaves issue open for resolution in civil action *Secondary beneficiary or estate receives proceeds if civil action finds requisite scienter

Some jurisdictions allow negligence action against INSco for negligently issuing a policy when they knew moral hazard was high, even if insurable interest was satisfied.

Generally, Abraham favors bright-line rules, but no justifiable complaints in a case like this.

INCONTESTABILITY (279) Originated by insurance companies to give insureds more assurance and to compete w/ other companies

Gave insured assurance that after 2 years, payment on the policy became incontestable States liked these so much, they all adopted a requirement that all policies have this clause Acts like a contractual statute of limitations→ both on innocent misrepresentation AND fraud

Why?→ concern for innocent beneficiaries and difficulty of beneficiary in disproving fraud long after it happened

Tradeoff is that some policies will be procured by fraud→ make company investigate carefully Exactly what becomes incontestable?

Classic distinction is “conditions of coverage” become incontestable – ex. do you fly airplanes? If you die 3 years later riding a bike and lied about flying airplanes, you’re fine.

“Limitations of the risk” do not – ex. No coverage if you are killed while flying an airplane BUT, these are often hard to distinguish

Amex Life Assurance Company v. Superior Court (1997) – p. 279 Owner/CQV applies for coverage and sends an imposter for the blood test – clearly fraud

It is a condition of coverage that the blood be the CQVs Ct says insurer does not have a defense regardless of fraud→ Ct also points out how easy it would

have been to detect this fraud early (person didn’t even look the same) Distinction b/t present fact and future fact – the fraud was still about a fact in existence at

the time the policy was issued Simpson TEST→ is basis of insurer’s defense discoverable at the time of issuance?

YES→ not contestable NO→ always contestable

*BUT, this just means whether is was discoverable – no inquiry into how hard it was to discover, just needs to be a present fact, not a future fact. Discoverability isn’t really the test: If twin brother was sent as imposter→ rule is still the same!

This test is overbroad b/c there will be present facts no one could discover→ still incontestable. Tradeoff of accuracy for fairness: giving coverage to Morales, who is totally undeserving, is

necessary to protect the interests of honest policyholders in Morales’ position.

LIMITATIONS OF RISK (283)

Silverstein v. Metropolitan Life Insur. Co. (1930) – p.283 Coverage good under an accidental death policy when policyholder slipped and a milk can went

into his stomach even though he had a small ulcer and policy excluded coverage for an accident “in whole or part caused by a disease”

*Ct say “accidental” means subject to rule of reasonable expectations → steps outside policy language

Charney v. Illinois Mutual Life (1985) – p.286 Suicide clause in policy applies even if CQV is insane→ Ct refuses to step outside policy language

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Explanatory KA—no adverse selection here because he was fine when he bought coverage and committed hari-

kiri because of a drug he was taking.

Comparison of the 2 Cases How these Ct decide these two different ways?→ Silverstein does not read the language rigidly and

gives a very flexible reading, whereas Charney says the language says what it says – very rigid KA→ cases are decided correctly b/c both follow reasonable expectation of insured

People buying accident insurance want to share the risk that there is some undiscovered condition that will contribute externally that will cause accidental death

BUT, most people who buy life insurance don’t want to share against risk of suicide→ if they did, insurers would sell this (this is a business that wants to sell to make $)!

So, these decision are just generally giving people what they want This is a good lead-in to health insurance where coverage is often interpreted the same way.

Some health limitations are there because people don’t want to pay for the coverage that would be provided if the limitations weren’t there.

HEALTH INSURANCE (293)

General Overview Consider in connection w/discussion re health care policy—it’s a TOOL in the struggle, but not the

centerpiece of the debate→ more a means to an end Three Major Issues in Health Care

1. Access to coverage→ move to universal health care?2. Cost→ in 1981-1994 cost of medical care increased at a rate in excess of inflation in every

single year result of all those increases: Managed Care→ a device for controlling costs3. Quality

*These goals are in tension w/each other—that’s why there’s a debate w/o a solution

1. ACCESS TO CARE (293) From insurance POV, this is a transitional era: from era where health insurance (like burglary insurance)

is a privately purchased, discretionary good; to an era where health insurance is merely one of the mechanisms we use to guaranty health care to everyone. A long era—began in 1938, and continues still

Not possible to have health insurers as private businesses making profit AND everyone having access Sources of Health Insurance :

i. Private insurance Mainly employment-based, privately-purchased group insurance

Main cause was economic during WW2, 2 things combine to produce employer-based private health insurance→ wage/price controls and labor shortage

Also, tax system encourages & subsidizes→ ER’s can deduct health insurance expenses and EE’s are not taxed on these benefits

Other 30%→ non-employer based Group insurance & privately purchased ii. Medicare

Federal program pays for health care for elderly→ must be 62 and have paid in 99% of elderly have this: the problem of access is not one for the elderly

iii. Medicaid Federally authorized, state-operated program for the very poor

Approximately 85% of Americans have health insurance coverage Who are the 15-20% who aren’t covered?→ mostly young, working poor

Arguments for Universal Coverage: That 15-20% is not covered That they ought to be forced to help pay for their coverage by being forced to buy insurance

Everyone has access to care in one sense→ public hospitals will take everyone when they’re sick or injured

2 Major Doctrinal Issues re Access: Portability→ the transferability of coverage (a little of a misnomer) Changes in terms of coverage

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Explanatory

A. Pre-Existing Conditions (PEC) (294) PEC designed to deal w/adverse selection→ don’t want people seeking coverage after already sick “HIPPA”: Health Insurance Portability and Accountability Act of 1996 (the Kennedy-Kassabaum

Act) Does not really makes coverage portable→ instead w/ respect to any health plan covered by

the act (exception for group health insurance policies that cover 6 or less or individuals) There is a maximum 12 month pre-existing condition limitation. Once you’re covered for 12 months, no more limitations.

Mandatory credit for time covered under prior policy (of pre-existing condition limitation) Does not mean your old policy is portable—means you are portable.

Doesn’t do jack for you if the new policy simply doesn’t cover the condition.

SO, if you were covered for 11 months at old job, you’re only subject to PEC for 1 month – if at old job 14 months, no PEC at new job.

Anti-discrimination rules regarding eligibility and rates But, individually-purchased insurance exempt.

This act only has to do w/ pre-existing conditions!→ new policy will provide new coverage SO, no guarantee new employer will offer you the same coverage or same price Makes act practically useless

General problem you’ve got a as a health insurer is that they have to be able to do something to preclude adverse selection—otherwise no one will apply for coverage until they get sick.

But courts would say we don’t care as much about adverse selection for health insurance as with the so-called discretionary insurances like life insurance.

HIPPA has nothing to do with privately-purchased insurance, like Lawson.

Lawson v. Forts Insurance Co. (2002) – p.295 What happens when insured had pre-existing condition (leukemia) she didn’t know about?

Depends on the language of the policy—Policy could say, essentially, “we don’t care—our prohibition is bright-line”

Lawson’s doesn’t go that far—says if you were “treated for a pre-existing condition,” no coverage.

Ct. (not surprisingly) finds presupposition that treatment means there was some knowledge that the condition exists.

If insurer wants to preclude coverage, it has to draft its document better. Case signifies transition from understanding health insurance as discretionary coverage (like life

insurance) to viewing it as one f the means we use to guarantee a certain minimum level of health care in the country. Although this view is not really stated anywhere, the idea that healthcare is imbued with the public interest underlies court decisions.

B. ERISA (300) Process not substance. ERISA was designed to provide uniform federal regulation of employee benefits (Congress had in

mind pension benefits) What ERISA does→ pre-empts state laws regulating employee benefits and substitutes a uniform

federal scheme. Mandates that all employees be treated the same, that is, can’t give some employees

coverage for AIDS treatment and deny it to other employees Gives those covered a federal cause of action for breach of contract involving employee

benefits. Remedy for denial of benefits and attorney’s fees under ERISA—that’s about it.

What ERISA does not do→ doesn’t specify what can be covered and what can be excluded→ it regulates process, not substance.

Things get crazy when state substantive regulations are involved (see Davila). If the core of the plaintiff’s complaint was denial of coverage, state law claims are

pre-empted; state law claims alleging poor quality of treatment are not. (Quantity of treatment pre-empted; quality of treatment not pre-empted).

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Explanatory You can clearly bring a state malpractice suit against a physician, and

probably okay to impose vicarious liability on the HMO for the malpractice of a participating physician

A suit for “denial of benefits” isn’t looking so hot. Patients’ Bills of Rights would allow for extra-contractual damages. Notion is that

HMOs don’t have an incentive to provide benefits if their only penalty for not providing benefits is the payment of those benefits.

Aetna Health, Inc. v. Davila (U.S. 2004) – p. 301If could have brought a claim under ERISA, then state-law cause of action is completely pre-empted.

Plaintiffs were denied coverage by HMO—they believe wrongly—and got hurt from alternatives to preferred treatment covered by Aetna. Claim that result was worsened medical condition.

No cause of action under ERISA. There was a cause of action in Texas (HMO must exercise “ordinary care” in treatment

decisions. Ps are trying to maintain that their cause of action under Texas law has not been pre-empted because they

want more damages than simply the benefits themselves. Court says if the case is about denial of benefits, then it’s pre-empted. The fact that plaintiffs allege the denial was “negligent” doesn’t change fact of pre-emption. Holding: ERISA preempts state-provided cause of action for failure to exercise reasonable care in

coverage. Any state-law cause of action that “duplicates, supplements, or supplants” the ERISA civil enforcement

remedy conflicts with the clear congressional intent to make the ERISA remedy exclusive, and is pre-empted.

C. Changing the Terms of Coverage ERISA says you can’t discriminate in the denial of benefits—but that’s after you’ve decided what

benefits to provide. Only covers things during the policy period. For people who developed conditions that last past their policy period ERISA is no help.

This is a potential problem if an employer is causing a burden on the employer’s health insurance costs.

Employer will say—hey, sorry about your kidney dialysis needs, but the insurance company is going to jack our rates $100K for this. I can’t pay an extra $100K for it, and I can’t ask your co-workers to foot $5K each for your bill. So I’m going to throw exclusion in our new policy for next year that excepts dialysis treatments.

This is really only a problem with small group policies. What about “occurrence” policy that says “if you come down with something during the policy

period, we’ll cover you out in perpetuity”? Insurance companies can’t really predict that kind of thing, so they don’t like it.

Alternative is national health care or state laws mandating certain minimum sets of coverage in health insurance policies.

As over time the minimum sets of coverage grow, the cost of bare-bones health insurance policies go up and small employers can no longer afford to provide healthcare to their workers.

McGann v. H.H. Company (1991) – p.308 AIDS case (but can think of it with less-charged example of dialysis) Nothing in ERISA excludes employer from changing the terms of the policy at the expiration of

the policy→ no one ever cares about this unless they have a condition that will last past the expiration of the policy.

How do we address this problem?→ no federal statute and it would be hard to draft one. ERISA protects against individual discrimination, NOT action involving a plan in general.

2. COST CONTAINMENT (316)

A. Managed Care (316) Effort by party who holds the health care dollar to limit costs incurred in providing health care Before managed care there was “fee-for-service” insurance

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Explanatory Health care financing and health care delivery were separate

Managed health care combines these services into one institution (ex. HMOs) with an incentive to compare cost of financing and cost of treatment

HMOs are organizations which require insureds to seek treatment from preferred providers who agree to abide by HMOs standards for treatment

Preferred providers, in essence, agree to provide less care and thus to receive less payment. PPOs (Preferred Provider Organizations) are organizations like HMOs which gives patient a few

more options→ if you go to a preferred provided you get either lowers charges or more benefits, BUT you have the option to go outside

Two additional devices used by all of the above:a. Only medically necessary services & no payment for experimental treatment (see Fuja).b. Coordination of Coverage

B. Medically Necessary Services (317) Don’t get coverage for service, unless the service is medically necessary→ this is the big fight b/t

doctors and health care providers

Fuja v. Benefit Trust Life Insurance Company (1994) – p.317 Experimental treatment limitation seems clear and the decision seems correct→ no coverage for

this type of cancer treatment b/c it was clearly considered research and experimental But, it seems as though this ought to be covered and market should have responded to this desire

Almost by accident a system other than private insurance has developed where the gov’t funds experimental treatment

This system benefits well-connected upper-middle class individuals who know physicians, etc. and can “work the system”

C. Coordination of Coverage (322) Given the popularity of insurance these days, it is very common for there to be multiple insurance

policies that will cover costs→ esp. given employer provided insurance and insurance where primary insured can add dependants

Harris Corp. v. Humana Health of FL (2001) – p.323Ignore Medicare when looking at priority of coverage between two other parties. Woman files claim—has three types of coverage: one from her former work (Harris), one from her husband’s

work (Humana), and Medicare. Humana had a coordination of benefits provision which would come second compared to Harris’ “non-duplication” clause (not a “coordination” clause). Medicare has an MSP (Medicare second payer) clause, which is secondary to policies of current employers (she counts as “current employee” under Humana, not Harris).

Medicare and Humana – Humana first Medicare and Harris – Medicare first

Transitive would suggest: Humana Medicare Harris. But as per Humana and Harris: Humana is second? Is there circularity here?

Court: Medicare secondary payer is supposed to protect the public and nothing more. In this case, Medicare has no interest, ergo the MSP does not apply.

MSP does not prioritize contracts vis-a-vis each other (don’t consider transitive). So Harris pays first.

Associated Hospital Service of Philadelphia v. Pustilnik (1979) – p.330→ SUBROGATION PROBLEM Payment was made after treatment→ after lawsuits, D gets money through settlement

Hypo→ $100K loss, $20K from insurance, $70K in settlement Insurance wants reimbursement and D argues no since he hasn’t been fully compensated Ct said insurer gets reimbursement since that is what contract said→ contractual subrogation Alternative theories:

a. Pro-rata approach→ someone getting 70% compensation gives 70% in reimbursement to insurance company (insurer gets $14K)

b. Insurer recovers only after insured is fully indemnified→ (insurer gets $0) *Problem is that the 2 alternatives are more fair, but much harder to implement

How do you determine the total amount of losses?→ this will be heavily disputed and will force us to adjudicate the very thing that settlement allows us not to do!

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Explanatory

Quality Assurance Ongoing controversy over what rights patients should have to deal w/ under-provision of care provided

by HMOs→ stumbling block was rights patient should have to sue for lack of care based on cost grounds Patients have a right under ERISA to sue for payment and claims for extra-contractual damages

are preempted by ERISA

3. DISABILITY INSURANCE (335)

Not nearly as prevalent or controversial as health insurance→ why? There are non-discretionary forms of disability benefits – ex. social security

No real reason to purchase this insurance unless you think you will suffer injuries beyond what is covered by SS or worker’s comp.→ attractive for above average wage earner

Since this is such a low demand for this insurance, anyone applying is suspect and prices are high High moral hazard since many injuries are subjective (ex. bad back)→ again, higher premiums Determining partial disability is extremely hard→ so, most policies only cover total disability Different forms of disability insurance (many provide both):

a. Occupational Disability→ insurance against inability to perform your job→ easy fact questionb. General Disability→ provides coverage if can’t do anything which you are reasonably qualified

Most litigation is about general disability→ what does it mean to be unable to engage in any occupation? MAJORITY→ if there is a job you can do that’s not beneath you, you’re not disabled (i.e., you’re

disabled if there is no job available requiring equivalent-NOT less or more- education) MINORITY→ if there is any job you can do (even if it requires less education) you are not disabled.

Mossa v. Provident Life and Casualty Insurance Company (1999) – p.336 Training, salary history, education, etc. should be taken into account in deciding whether he should have

to work in a lower level job→ not much of a rule and seems like it could be more bright-line Old Rule: After full benefits are paid for two years, disabled must demonstrate that he can’t do any

gainful occupation which is reasonably expected b/c of education, training, or experience. Insured argues that the equation should include reference to the salary history and a comparable

wage analysis. Held: Court agrees that other jobs are suitable only f the compare economically. The reasonable expectations of a policy holder are to insure against not making the same wage. The fact

finder can consider evidence of the previous salary.

Heller v. the Equitable Life Assurance Society of the United States (1987) – p.342 When policy does say that you have to get surgery, Ct won’t make you→ why did this case get so far? Insurance company probably suspected cheating→ since he is a doctor, they think he knew he was getting

carpal tunnel before he got the insurance They want to make this hard for the doctor even if they lose

May be a problem of selective enforcement→ very broad provisions which insurers only selectively invoke

Insurers only invoke the clause on people they think are cheating system – even if can’t prove it In favor of this practice→ those who don’t cheat like keeping premiums down by stopping

cheaters Against this practice→ sense that we expect regularity in an insurance companies processes

4. LIABILITY FOR BAD-FAITH BREACH BY INSURER (346)

Why does insurance ever pay if after a breach the remedy is simply to pay what you should have paid?a. Reputationb. Efforts by policyholders who rights were denied to not only recover payment of policy but also

consequential damages 30-40 years ago most Cts still said that emotional damages were not permitted

c. Policy holders tried to bring tort actions Current Approaches:

a. Independent tort (ex. fraud or intentional infliction of emotional distress) OR (consequential) damages necessary

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Explanatoryb. Tort of bad-faith (independent tort not necessary)→ MAJORITY RULE

Gives insurers a strong reason to comply with contract Tough part is defining bad-faith→ and then when does punitive damage kick in?

When threat of compensatory is not enough Extreme egregious or malicious breaches

Possible tests for liability (what is bad faith?):a. Absence of affirmative good faith→ near-fiduciary duty (Silberg)

KA→ law doesn’t agree w/ this – insurer doesn’t have to bend over backwardsb. Egregiously wrong coverage denialc. Coverage not “ fairly debatable ”→ this is the dominant test

If existence of coverage is fairly debatable, then no extra contractual damagesd. *A lot of these cases involve something else going on→ another way in which the insurer is sticking

it to the policyholder→ see Silberg (not paying claim until workman’s comp. case was settled caused many problems in P not being able to pay for more surgeries – no reason as insurance would have gotten reimbursed after comp. case)

This makes it more likely that claims that might not be coverable will be covered for fear of damages for bad faith if a jury finds it should have been paid

*BUT, this is common law applicable to 1st party cases→ ERISA covers ones provided as fringe benefits of employment and has something to say about these causes of action

See Notes on 353 – Nature of Cause of Action, Insurer Misbehavior Requirement.

Silberg v. CA Life (1974) - 346 D refused coverage because it was waiting for worker’s comp determination on status. Insured suffered

lots of other damages as a result of not having coverage that he ended up being entitled to, but payment can be years late

Court finds that there is an implied covenant of good faith in every policy, and that there was bad faith here. Insurer acted differently than industry custom

Court awards compensatory damages to cover damages resulting from bad faith. Did not award punitive damages – must show ‘oppression, fraud, or malice’ – intent to vex, injure, or annoy, with conscious disregard of insurer’s rights

Pilot Life Insurance Company v. Dedeaux (1987) – p.356→ ERISA IN THIS CONTEST ERISA pre-empts state laws relating to employee benefits→ BUT, there is an exception to preemption for

laws that “regulate insurance” Employer can escape state insurance regulations by self-insuring→ provide benefits on a self-financed

basis Suit for denial of benefits and bad faith breach→ but employer argues that this state law for bad faith is

not one concerned w/ regulating insurance (it applies to any kind of contract) and thus pre-empted by ERISA

*Term of law “relating” to employee benefits really means as long as suit relates to employee benefits

Ct agrees w/ this argument so this cause is pre-empted and the only remedy is under ERISA *Scope of this decision is in effect to say that there is no cause of action for bad faith breach of an

insurance policy subject to ERISA→ this is very significant Trying to change this decision by amending ERISA has been a hotly debated issue as of late ERISA gives causes of action, BUT not to get extra-contract damages

What about suits against HMO for: Denial of treatment→ PRE-EMPTED Malpractice→ NOT PRE-EMPTED (providing benefits negligently)

LIABILITY INSURANCE (364)

1. COMMERCIAL GENERAL LIABILITY (CGL) INSURANCE (364)Crib Sheet. Also See Explanatory on this one. It’s awesome.

General Overview 1940→ 1st standard form CGL (Comprehensive General Liability) policy was enacted→ now

“commercial”

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Explanatory This was originally know as an “accident” policy→ in 1966 it changed to “occurrence” policy

A. Sample CGL Policy (365) Not really a “comprehensive” policy anymore given how hefty the exclusion section has gotten.

i. Declarations Page (365) Indicates policy period, specifies limits of liability for coverage A & B Not a claims made policy→ could be made into one w/ a retroactive date

ii. Coverage A→ Bodily Injury and Property Damage (367) Insuring Agreement (so-called “plain language” policy) (367)

Almost every phrase in this part has been the subject of litigation Needs to be a “legal obligation”→ judgment holding liability? What about settlements?

Obligation imposed by regulations? What about building a sound-proof kennel for your dogs to avoid nuisance

suit? Must be obligated to pay “as damages”→ so, obligation to help pay for repair of streets

in a subdivision does not count nor would taxes count “as damages” are words of limitation. Not all legal obligations—just those

that are damages. “because of” “bodily injury” or “property damage”

“Because of” is broader than “for” – could apply to consequential damages.

“bodily injury” and “property damage” are in quotes—terms of art. Insurer has right and duty to defend→ so, insured can not tell insurer to not defend

Only obligated to defend “suits” and insurers may settle any claim or suit Insurer decides whether to risk its money on its own behalf, so can decide

to settle or not to settle. Obligation to defend ends when insurance limit is paid→ only if P takes the $

Insurer can’t cut and run with a $100K check. Also, if liability limit of insurer is $100K, can’t secure a $200K settlement and run away. To get released it has to have a judgment entered against it for $100K or + or pay $100K in return for extinguishment of a claim.

Insurance only covers “coverage territory”→ usually all of US or world (b)(1) “Occurrence”→ really means anything that happens accidentally

Continuous accident is single occurrence to prevent “broken slot machine” problem” where INS just keeps paying out.

(b)(2) “Trigger of Coverage”→ injury or damage must occur during the policy period Whole body of cases on what “during” means.

(b)(3) Stonewall Case – Question in the case about whether there is an implied “known loss” defense to covereage. (b)(3) is INS's attempt to write a “known loss” defense in.

Exclusions (368) (something like 5 to 6 times longer in print than coverage section) Designed to do one or all of the following 4 things:

Guard against adverse selection Combat moral hazard Avid covering correlated losses Avoid duplication of coverage

Expected or Intended Injury from the standpoint of insured→ used to combat moral hazard

Contractual Liability Liquor Liability→ people owning bars have to buy special insurance (combat adverse) Worker’s Comp & Employer Liability→ get a special policy (combat adverse

selection) Pollution (“ exclusion f ”) → (very important) called absolute pollution exclusion (369)

Problem is that this is not absolutely absolute→ need to read in detail Principle difference is off-site pollution is covered (ex. pollution from a

product such as an insulator that is toxic) Definition of “pollutant” is so broad it could cover almost any substance that

causes harm (ex. tobasco sauce fits definition) See Koloms case.

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Explanatory Aircraft, Auto, or Watercraft→ gets special policy War Damage to Property (“Owned Property Exclusion”)

How can you be liable for something you own → well, it can happen Business Risk Exclusions (k,l,m)

If you make shoddy merchandise, that’s a business risk. We don’t insure you against that, unless the crummy product causes bodily injury to people.

Weedo case Recall of Products, Work, or Impaired Property→ get special policy

So-called “Tylenol exclusion” or the “sister ship exclusion”iii. Coverage B→ Personal and Advertising Injury (371)

This coverage has been shrinking over time→ almost nothing is covered under this Problem is that most things covered under this require intentional harm and what gets taken

away in the exclusions section is intentional acts.iv. Conditions (§IV) (376)

Par. 1: Bankruptcy of insured does not affect insurer’s duties (376) Par. 2: Insured has duties after loss in order to get full benefit of insurance (notice, cooperation,

testify, etc.) Insured loses coverage only if insurer is prejudiced by the breach of these conditions 3 – no action clause; 8 – subrogation clause, etc.

v. Definitions (§V) (378) 8. Impaired Property (379) 9. Insured Contract Occurrence

KA→ really means anything that happens that causes an accident Insurers argue it only means accident, but this is not the case

Personal and Advertising Injury (380) Property Damage 18. Suit→ precludes administrative proceeding and other things not initiated by a complaint,

even if the liability that would be incurred by the proceeding would be covered.

Choice of law problems: Insurance is state law. So the case law interpreting the provisions is all state law, but the policies are all bought by multi-state corporations. So the place where the tort occurs isn’t always the state that governs the meaning of the policy. Coverage suits are breach of coverage suits—just because you sue your insurer in state A doesn’t mean it’s state A’s law that applies. But state A’s law on choice of law decides which state’s laws apply. Guidelines: 1) If you have some actual relationship with the state you’re suing in, you’ve got a good chance at the trial judge applying his own law because he knows that and doesn’t know other state’s laws, 2) Otherwise, it will usually be the law of the state where you received the policy, i.e. your corporate headquarters (not DE where you’re incorporated). That’ll be NY law a lot of the time.

B. The Insuring Agreement (383)

i. Meaning of “Damages” and “Property Damage” (383) The whole works is based on pollution damage cases (Love Canal) Congressional Act, CERCLA, (“the superfund”)→ created a fund for gov’t to use to clean up sites

CERCLA designated “responsible parties” are anyone who has owned, operated, transported to, or basically had anything to do with the site. No real defenses.

CERCLA imposed strict, joint-and-several, retroactive liability. Structure of CERCLA→ gov’t has $ to clean-up on its own and then sue past owner, present owner,

people sending material to the site (strict liability standard, is joint and several, and is retroactive) Statute was amended in 1985→ clarified that everyone is liable Satirically nicknamed RACHEL (Rules Amendments Clarifying How Everyone is Liable)

CERCLA gives EPA 3 ways to impose liability on responsible parties:(a) Govt. can clean up site and then sue responsible parties→ cost of response = cleanup

costs (looks like damages)(b) Govt. seeks an order from fed court directing responsible parties to clean up

Prior to injunction, company can litigate defenses(c) Govt. issues non-judicial administrative order directing responsible parties to clean up

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Explanatory Insurance takes one look at this program and says “fuck!—we need to find ways to avoid paying for

this.” INSCOs never anticipated paying these expenses, so they wrote in a whole host of

qualifications and exclusions to make a superfund claim harder to recover on.

Case: N.Y. McDonald Industries, Inc. v. Insurance Company of North America (1991) – p.384<<See the below point on this one.>> Brought in federal Ct, but law governing is state law b/c contract diversity suit Gov’t tells P to clean-up by sending notice and threatening an order or injunction P negotiates a consent order specifying exactly what they have to do P’s insurers deny liability and raises 2 defenses:

a. Liability incurred is not payable as “damages” (good argument)b. Liability is not incurred b/c of property damage (ridiculous argument)

Ct rejects both and finds for P→ acknowledges split of authority on damage question, but hold that these are damages under the policy language

11 states agree and say damages, 3 say not damages. Courts don’t want to call one thing damages and the other thing not damages (see below).

Issue Regarding Damages QuestionThis was a make-or-break issue for policyholders. If they couldn’t win on these things being damages, they were in big trouble. There would then be no way for a policyholder to recover. So decision it was damages was somewhat agnostic—ruling these things were damages was something of a wait-and-see approach.

a. Injunction v. Cost Recovery Weird issue is that when EPA makes a company clean w/ injunction it doesn’t look like

damages, BUT when the gov’t cleans up and then seeks reimbursement it does. Do we want to give incentives for companies to have gov’t clean up and

reimburse?→ this may undermine whole CERCLA scheme. *Seems better for Ct to view both in same way whether it be for or against

coverageb. Equitable v. Legal

Some argue that government is not one harmed so it’s not really damages, but more like restitution. CERLCA cost recovery is really a unique thing that is not restitution or damages→ problem is that this analysis seems to lead to a no coverage conclusion.1

Thus, Ct stretches and calls this damages anywayc. Cost May Exceed Property Value

Normally, the ceiling of damages is the value of the property→ CERCLA alters the ceiling and can far exceed the value of the property.

d. Cost Recovery v. Natural Resource “Damages” CERCLA uses “damages” to refer to something other than cost recovery→ so insurers also

argue that language of statute shows cost recovery isn’t payable as damages Cts. response to that was that Congress’s choice of terminology does not establish what is

damages in legal context of insurance.

F & H Construction v. ITT Hartford Insurance Company (2004) p. 392 Split of authority as to whether property holder is liable for property damage when property has been

diminished in value by the incorporation of material physically into it, but when there hasn’t been any material change to the property.

o CGL policy doesn’t say you have to do the property damage, just has to say you have to be liable for it.

Construction pins of wrong strength delivered—contractor had to amend cap and spend lots of money to retrofit so property wouldn’t collapse. Wound up missing bonus and sued.

o The use of inadequate caps did not constitute physical injury.o Use of a defective component ≠ damages until it causes physical injury to someone.

“Ticking time bomb” analogy inapt. Does not equal physical injury.o CGL not intended to be a performance guarantee.o Replacement and repair more in control of insured.

1 Measure of recovery in restitution is amount of ill-gotten gained. Government’s loss is amount of cleanup. So ordinary difference between restitution and damages just doesn’t exist.

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Explanatoryo The piles weren’t touched by the cap so there was no damage to the piles, themselves,

only to the performance of the welded structures. No loss of use of the water facility. Loss of use = amount someone must spend when he can’t stay at his place.

o No loss of use here – finished on time.

Bright line between when property is not actually damaged and cases where it is: more reason to think that market forces will control the replacement of shoddy merchandise. And frequency of having to replace shoddy merchandise means you aren’t going to get away with it. On the other hand, shoddy merchandise causing physical injury is much less frequent, so market forces aren’t as likely to control it which is why there’s a role for the court. But the bright line works—it’s self applying whether it makes sense or not (The Slade “nut cluster with wood” case is in the minority) meaning you can’t preemptively fix and expect CGL coverage.

ii. The Trigger(399) Trigger of coverage→ must be occurrence of bodily injury or property damage during insurance

period So there are questions about when you incurred the injury. This during the policy period is

in any non claims-made policy.

Simple EventYear 1 Year 2 Year 3 Slip, fall, bodily injury (BI) More BI (infection, etc) More BI

Policy covering year one is the only one that will cover this injury, though it’d certainly be possible to think about it in other terms.

Administrative complicity—less expensive, etc. Under alternative rule, you’d have to inquire about all sorts of additional

things (what potential lawsuits are out there, what previous injuries have you suffered, etc.). This means more complicated fact-finding task and problem of adverse selection.

More Complicated Cases…Year1 Year 2 Year 20 Asbestos exposure, BI Exposure “in residence” Manifestation

Have to know when the bodily injury occurred→ b/c that triggers coverage. Not the cause, but the result is key→ when did he become “injured”

This is a very hard medical question When you breath asbestos, there is damage almost immediately.

Which policies cover?→ Cts that addressed this issue came to different conclusions Many Cts say there can be a multi-year trigger→ fibers cause injury every

year in which they are present Each policy year is trigger b/c as a matter of fact there is injury each year Some cts don’t say this, but say coverage is triggered by exposure

But here there could be cases where there is a trigger w/ no injury, which is a mistaken notion.

Another misnomer is the “continuous trigger”→ disease causing process occurs continuously (no problem if actual injury continuously, but may lead subsequent cts to think there is some weird rule).

Year1 Year 2 Year 20 Waste Deposit/leakage/migration Continued leakage Manifestation

So leakage through year 20, but all deposit occurred in year 1 Analogous to asbestos and most ct.s use a multi-year trigger approach

Even though could be conceptually thought of as “slip & fall”

Waste Deposit/leakage/migration Add’l deposits, leakage Manifestation Easier to see here how every year there is a trigger

You can treat cases two or three like 1 or like 4, but those middle cases tend to be treated like 4. Most courts have adopted multi-year triggers. This just means that the policies are eligible to provide coverage.

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Explanatory

Various Triggers Used by Courts1. Actual Injury in Fact (AHP Case)→ sound theory, but the cost of this is tremendous2. Continuous→ injury occurs every year b/t 1st year and manifestation3. Exposure something of a mistaken notion4. Manifestation→ rarely used b/c it make little sense and less likely to provide coverage. But

insurance companies love to try to argue this. Abraham calls it “weird”

American Home Products Corp. v. Liberty Mutual Ins. Co. (1983) – p.399 Debate over whether trigger should be exposure or manifestation→ Ct rejects both and says it

is simply the year(s) that the injury occurred May be that there is injury at year of exposure and each year subsequent, but there may be

substances that do not cause injury until years later→ this is a question of fact If there is a new injury each year, each policy is triggered→ multi-year trigger

This is just based on the facts of each particular case Second Cir. says if there’s an injury, that’s the year of trigger, regardless of whether diagnosable

or not.

In re Silicone Implant Coverage Litigation (2003) – p.408 Action by several 3M high-level, excess layer, occurrence-based policy issuers seeking

clarification of coverage on silicone mass tort litigation. Between 1977 and 1985 3M purchased significant amounts of occurrence-based

insurance for product liability exposure. Thus coverage depends on when BI occurs and pays all claims regardless of when

diagnosed or treated. Injury seen as being discrete at moment of implant, rather than continuous.

Rejects insurers argument that “trigger” is fictional moment of cell damage so continuous. Also argue “environmental pollution.”

This sort of runs against Abraham’s “most courts go with #4” explanation; here the courts decided to treat cases #2 & #3 like #1 (which doesn’t usually happen).

Why did the policyholder want the “discrete moment”? Why did INSCO want continuous? They want to get as much damage into the years before they’re going to be proved not

to have coverage (the horizontal problem). Also, if all of the injuries from silicone implants are one occurrence, the most

deductible you have to pay is eight years or one year, whereas if each implant is an occurrence, there might be no real coverage because of the deductible. (what went down?)

Consolidation is not always favorable or not favorable to policyholders—depends on whether floor vs. ceiling is binding: you won’t care about having to pay more deductibles if it means your ceiling of coverage for damage is $200M instead of $40M.

“Consistent with our actual-injury trigger theory, we hold that those insurers on the risk at the time of implantation are liable up to the limits of their respective policies for 3M’s losses arising from that implantation.”

iii. Cov. Allocation Among Triggered Parties This is how it goes down when the court doesn’t run with the Silicone theory. NOTE→ it makes a difference where you sue – pick place w/ favorable trigger Once we know there is a trigger, how do we determine who pays what amount? Ct appeals in Northern States said to decide as a matter of fact how much damage there was in each

year Problem is that you will almost always never have the facts to make such an analysis Often the damage is indivisible

Policy language will usually tell you nothing

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ExplanatoryFIGURE A: GRAPH OF COVERAGE PURCHASE VS. SUMS RECOVERABLE

So you can see how the policyholder can get screwed out of coverage by the horizontal method. He can’t “fill up” to the full extent of the liability because of the non-recoverable shaded area. Under vertical coverage, he could take the full bar from ’72-’74, which would allow him to “fill up” to a greater extent than with horizontal.

Different Approaches What to do when not possible to say what amount of damage occurred as a result of

actions/deposits/etc. in each year (damage indivisible by year).a. HORIZONTAL (2/3rds go with this)

1. Pro Rata (Northern States Supreme Ct and the majority view) Equal amount of coverage allocated to each triggered year and each insurer pays

for each year for which he gave coverage Divide amount of liability by # of triggered years, allocate equal responsibility to

each year (even though don’t know that) and then see if there is coverage to up the amount of allocation→ if not pay amount of policy limit.

2. Proportion of limits in year to sum of limits in all triggered years (Owens-Illinois) Thus, a year in which $50M in force is allocated twice as much responsibility as a

year where there is only $25M in forceb. VERTICAL (1/3 go with this)

Again, comes into play when damage is indivisible…1. Joint and Several (J.H. France and minority view)

Each triggered policy is liable in full (up to limits) for policy holders loss Gives policy holder many more ways to recover→ insurers don’t like this

Policyholder can pick whatever year it wants, and then keep picking until it either pays all its liability

This method will never be worse for the insured. Justified on grounds that old policies promised to pay “all sums” that policyholder

was liable to pay during policy period. But look on our policy—“all sums” is gone in favor of “those sums”

2. Pick One Year Only (Keene) Rarely used but adopted by an early case→ used in CA Version of limited joint and several→ just pick year w/ most coverage

Insurers tend to say, okay, sure, let the insured pick a year, but shouldn’t we get a right to contribution? Most courts say yeah, but insurers are unlikely to go for this because they don’t want their own argument for allocation used against them.

Summary None of these seems like the only plausible approach→ but, Cts don’t allow policyholder to pick Insurers have known about but not addressed this problem→ Ct still finds that this can’t mean

that joint and several is fair (just too great an advantage for insureds)

Theory Result Pro Rata $220 million

1966

horizontal

200M

Shaded not covered (hoz)

1972

Not covered (hoz) because pollution excl. inserted in ‘74

1980

You can get at this with vertical: 1972-73 = $200M each

20M

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ExplanatoryJoint and Several $400 million(Owens-Illinois) $23 millionPick 1 Year only $200 millionSee graph supra for visual depiction.

iv. Number of Occurrences (416) Only matters where there is per occurrence liability and a larger aggregate limit Tendency is for few occurrences→ most common is 1, 2nd most common is 2

Metropolitan Life Insurance v. Aetna (2001) – p. 416 Alleged breach of duty by Metropolitan to warn of what it knew about asbestos damage. Is that one occurrence, or is each asbestos claim distinct?

Matters because Aetna steps in after $25M of liability. So Metropolitan can cap its liability by getting this thing called a “single occurrence.”

In other contexts, a slew of single occurrences is bad news for policyholders because their deductibles deprive them of a lot of what they’d otherwise get.

CT Supremes just called it the way they saw it—one occurrence per injury. So not result oriented here, which is more the case as time goes by.

C. Exclusions and Conditions (422) Exclusions only takes away something that has been given→ there can be exceptions to an exclusion

(everyone is excluded, except x→ so x is still covered)

i. Expected or Intended Harm Most frequently used defense by insurers From “Accident” to “Occurrence”

Original CGL policies used the term “accident” (connoted something had to happen not on purpose→ but there was a dispute as to whether this was a short term event)

Result of these cases were inconclusive→ led to change based on market to “occurrence” language→ accidents and repeated exposure to longer term events neither “expected or intended” from the standpoint of the insured

Pre 1986, “neither expected or intended” limitation was included in definition of term insured “occurrence.” (moved there to hide it for merchandizing reasons).

Makes INSCOs arguments that location of language meant the burden of proving fell on insured is somewhat spurious.

Post 1986, the “neither expected, etc.” language was moved into an exclusion

Stonewall Insurance Co. v. Asbestos Claims Management Corp. – p.422 Who shoulders the burden of proving the “expected or intended” language applies or doesn’t apply?

Typically, insured bears burden of proving affirmative coverage, and insured had the burden of proving exceptions.

As noted above, INSCOs only crammed this thing in affirmative area for merchantability. Greater issue is—how on earth is the policyholder going to prove that he didn’t intend or

expect something. How do you prove the negative? Only thing that’s going on here is insurer presenting evidence that you did intend or expect and then an evaluation of that.

Subjective or Objective Test? Policy language suggests subjectivity→ unless you have “from the standpoint of”

Evidence is objective, but test is still subjective “What is intent, but a state of mind?”

Meaning of “Expected” *Dominant definition means at least a high probability of harm if not substantial

certainty Minority using objective test is whether you should have known→ a true test for objectivity

is whether the reasonable policyholder would have been aware Whose Expectation Counts?

Named insured only acts through emps→ can corp. be seen to have expectation if emp does?

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Explanatory Many Cts use the management complicity requirement→ expectation of emp won’t

preclude coverage unless management either knew or had reason to know, etc. Management can’t just cuts themselves off from communication or emps don’t

communicate→ needs to be a case of excusable ignorance Minority view is that expectation must be someone at management level

What Must Be Expected?

Unigard Mutual Insurance Co. v. Argonaut Insurance Co. (1978) - 428 Kid expected fire, but not damage to the rest of the school He expected some harm, just not the harm that happened→ Ct says no coverage Parents’ coverage was independent to that of the kid. Parents are not vicariously liable for the torts of

their children. So if parents are liable to the School Board in this case, it has to be because they committed

a tort in their own right. Parents have coverage for negligent damage, unless they expected or intended harm. There are two prongs—accident, and absence of intent or expect, but typically treated as the same.

But in Unigard, court notes that there may be cases where there is no intent or expect, but where there is no coverage because act causing harm is not “accidental.” KA is not so sure.

KA’s restaurant intentionally serving food that turns out to have e-coli. The serving was not accidental, but that can’t mean that there’s no coverage.

KA says what the court must really be trying to do is not distinguish it’s intentionality, but rather it’s intentional wrongfulness.

In it’s broadest conception, this case is wrong, but there is a little bit of jurisprudence developing on this question.

*Majority rule→ if you expect or intend some damage, damage resulting is excluded from coverage (probably an implied de minimus exception)

Minority rule→ if policyholder expects harm X, and harm Y actually occurs, then coverage for harm Y will not be excluded (e.g., damage to soil vs. groundwater; de minimis vs. large harm)

Difficulty here is that you have a fact question Who bears the burden of proof?

*Policyholder bear burden to show injury fall in the affirmative grant of coverage BUT insurer bears burden of showing exclusion applies

Cts use functional approach→ not where it appears in policy, but what language really means

Seems better approach is who has better access to the evidence Most Cts say insurer bears the burden of proof

Meaning of “Accident” Harm can’t be expected or intended, BUT neither cause nor result can be expected or

intended *Hard to see how this requirement can apply across the board→ so many things that are

done deliberately cause unintended results (ex. deliberately serve food that happened to be bad)

Majority→ cause does not have to be accidental and long as result is unintended

Known Loss Defense Is there justification for this?→ why not let people buy coverage for loss that is already

incurred as long as insurer knows about the loss? MGM Grand bought liability insurance after hotel burned to the ground in the 80s. Even though KA says this defense doesn’t make sense, it exists.

ii. The Owned-Property Exclusion (OPX) (432) Avoidance of duplication rationale→ no coverage for damage to your own property, property you

rent, or is in policyholder’s care, custody, or control

Hakim v. Massachusetts Insurers’ Insolvency Fund (1997) – p.432 Homeowner’s oil tank leaks→ large expense most does not involve damage to H’s own property

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Explanatory Property ins policy covers cost to repair the property BUT not to exceed actual market

value/replacement cost of property (prior to time of contamination, soil not worth much but cost of clean up is large)→ try to get recovery through their liability ins coverage

Possible Situations: a. No damage to third party property nor is such damage imminent

You repair. You turn to insurer and say “hey, I just saved you money – pay me for investing in safety.”

No, you don’t get this. All courts hold OPX applies and precludes coverage (any coverage will come under property ins policy subject to pollution exclusion)

b. No damage to third party property BUT damage is imminent Dominant rule is that OPX applies and precludes coverage (threat of damage

does not equal damage to third party property) Some courts will give you this one.

Approach may seem to give an incentive not to clean up but coverage is precluded anyway if expected or intended & legal liability can attach if required to clean up

c. Damage to third party property has occurred and further damage is imminent This is the Hakim situation Majority of courts hold OPX (own property exclusion) does not totally

preclude coverage of liability Once some damage to third party property occurs, question is not whether you

are covered, but for what are you covered What about the cost of cleaning up the owned property?

*Covered even for cost of cleaning up owned property TO THE EXTENT THAT the cleanup is undertaken to prevent further harm to already harmed third party property and not for your own darn good.

KA says he doesn’t have any idea how to apply this. Who determines the purpose of the clean up?

Authority that gives rise to the legal obligation to clean up Some type of apportionment scheme is created

The Significance of “Groundwater” and Who Owns It Under water, out of sight, takes time to decontaminate In some states, common law rules and statutes exist stating that groundwater is not owned

property - the owner has rights of use, BUT the state owns water as parens patrie Policy holders argue that given such rules when groundwater is contaminated→ property owned

by a third party has been damaged→ rule number 3 above is triggered

Apportionment Between Excluded and Non-Excluded Losses This question is difficult to resolve→ hard to determine how much of clean-up is for owned and

non-owned property

iii. The Business Risk Exclusion (437)

a. Scope - NO coverage for:1. Damage to insured’s product2. Damage to insured’s work3. Damage to impaired property

If you want insurance against the risk that what is yours is faulty, liability insurance does not cover this→ you need some other kind of insurance (ex. product recall insurance)

b. Function Abraham finds the rationales unsatisfactory Why don’t people want the coverage?

Policyholders who make good products don’t want to pay to ensure policyholders who make lousy products.

Weedo v. Stone - E- Brick (1979) - 437a. Policy is not designed to cover the harm at issue but does not give a reason why

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Explanatoryb. Abraham says idea that damage to third parties is unpredictable is ridiculous; maybe court is

trying to say it is more predictable to determine whether materials will be defective as opposed to whether third party injury will result (but this is still unconvincing)

c. *Maybe this scheme is a function of the market: in general policy holders want coverage for liability to damage to third party but do not want to pay for coverage for defective materials

(i) Insured is better risk bearer with respect to the risk the product may be of low quality

W/ a defective product or faulty work, some kind of replacement occurs & insured is in better position to determine whether/how to repair/replace

(ii) Absence of insurance resembles a commercial warranty to purchaser of product . Policy holders bear cost of replacing faulty products as a measure of their

confidence in the product (product is so good don’t need insurance against it)

(iii) Absence of insurance resembles a deductible Average cost of product replacement will be lower than damage to third

party Allocates to insured cost of comparatively small loss; large losses are

insured Maybe this is the rationale of Weedo.

2. Application of Coverage v. Exclusion is Clear If product self destructs→ no coverage if product self destructs and injures someone→ coverage

The Pollution Exclusion (447) CGL was originally accident based, but after 1966 was revised to occurrence based→ defined as an

accident caused by exposure to short term OR long term harm Hard to come up with something long term and injurious that is not pollution

Very quickly after this revision to include pollution, insurers recognize that they my be subject to tremendous liability→ exclusions start to pop up requiring “sudden and accidental” discharge

Ends up being qualified pollution exclusion→ after all this time to get accident out of the policy, in 1973 they put it back in!

Things stay quiet until 1980 when CERCLA kicks in→ Ct read the exclusion in different ways:a. About ½ of Cts looking at the exclusion said sudden means abruptb. The other ½ said that sudden is ambiguousc. Others said they can’t ignore insurers statement that new exclusion does not limit

coverage→ they will now be regulatory estopped from relying on it to diminish coverage INSCOs had justified new exclusion in an (impenetrable) letter to INS commissioners

saying the exclusion really didn’t do much. So don’ try to claim it does much now. So what were INSCOs even trying to do? Well, probably, idea is that question of

“expectation or intent” is a difficult one to adjudicate. So let’s create a proxy for that intent. So “sudden” is a proxy—much less likely that you know something is going to “go boom” as opposed to a gradual discharge, much more likely that someone expected it.

Insurers realized they were getting hammered and finally ISO agrees in 1985 to grant the absolute pollution exclusion

3 paths to avoid the Absolute PEC:a. The meaning of “pollutant”

Does this mean any “irritant” or “contaminant”?→ can’t mean tobasco sauce No one will apply it literally, but how far down that road will the Ct go Some Ct says it only covers “waste”→ seems like a poor reading of the language

b. What is a “discharge, dispersal, release, or escape”? Seems to cover anyway a pollutant would cause harm, but policyholders still argue

this point→ they say these words connote movement, so just putting something down would not be covered in the exclusion

If you put something in pit with clay lining thinking it is confined, any subsequent escape is likely to be accidental.

Is a deposit into a site a “discharge” etc?→ Cts go both ways

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Explanatory Question should be whether there is a reasonable expectation that the material

would stay in the area where it was discharged→ if so, it seems as though there was no discharge until the material leaks out of the containers

“Metaphysical moment” issue→ even what appears to gradual discharge is sudden

The moment the drop actually falls is always “sudden”→ most Cts reject this because there would be no such thing as non-sudden, but sometimes it gets to the jury

c. The relevance of the historical purpose of the exclusion Cts will only interpret this (absolute PEC) as insurers way to remedy

dissatisfaction with Ct’s interpretation of earlier language→ this is a poor approach since it ignores the language of the new exclusion.

Actual language is ridiculously preclusive of coverage. Would ketchup count?

LESSON→ never give up→ as a result of endless lawyering, the word sudden came to mean gradual Mostly, you get decisions that are arrived-at first, and then the court attempts to articulate a

rationale. So in a non-waste context (carbon monoxide, e.g.) courts go both ways.

American States Insurance Co. v. Koloms (1997) – p.447 Furnace at insurer’s factory leaked CO over time and made employees sick. Insurer argues that

pollution exclusion applies, since an irritant was released Court holds that exclusion does not apply – purpose of exclusion was to prevent environmental

pollution, not every release of an irritanto Must have a limit on what is excluded – otherwise any substance could be considered an irritant –

e.g., water in some cases

Note: What follow are not literally exclusions of coverage—they are limitations of coverage.

ii. Notice Conditions Almost all Cts have interpreted these provisions to mean w/in a reasonable time Two notice requirements in most policies:

1. Notice of occurrence→ “as soon as practicable” (LESS CLEAR)2. Notice of claim→ “prompt or immediate notice”

Notice looks like an effort to make insured forfeit coverage→ Cts hate this so they combat w/ 2 devices:

TYPICAL CASE→ jury looks to see if insured is trying to pull something or whether they had a good reason for delaying the claim

a. Reasonable Notice Requirement (455)

Mighty Midgets, Inc. v. Centennial Insurance (1979) – p.455 Notice was timely, but not to right person→ given to broker, not company Policy language says insured must give notice “as soon as practical”→ very fact driven Ct says insurer is not entitled to a ruling that notice was not given in a reasonable time –

why?a. If it was that giving notice to broker was enough then notice was timely; ORb. Was it that 9 month delay was reasonable

Chances are it was the latter but why? How do we know what counts as a good reason for delayed notice? *Key here is when is this going to be decided as a matter of law and when does a jury get to

decide what is reasonable?→ jury helps policyholder tremendously There is better chance that business, as opposed to a consumer, would be ruled

against as a matter of law since you had more reason to know that notice had to be timely

You may not know you have an occurrence→ more leeway here *Longer you wait, the worse off you are

ALL this case holds is that it is a question of fact for the jury whether notice was timely—given within a reasonable time.

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Explanatory

b. Prejudice Requirement (459)

West Bay Exploration v. AIG Specialty Agencies (1990) – p.459 Failure to give notice is necessary, but not sufficient→ also need prejudice

When is this decided as a matter of law? More fact dependant question than notice→ less likely to get SJ (summary

judgment?) Prejudice in what regard?

a. Conventional way→ insurer has duty to defend and longer delay in time when insurer can start to defend, the more prejudice (very fact dependant); AND/OR

b. Disappearance of evidence that would have helped show absence of coverage (this case) If you want SJ, insurer will likely have to point to some actual evidence that

disappeared→ in this case, insurer can actually point to barrel that is gone Rarely happens

Burden of proving prejudice extremely important since in many cases it is impossible to prove

Many states put it on insurer→ NY has gotten rid of prejudice requirement so choice of law becomes very important when NY could be involved.

2. CLAIM-MADE OTHER FORMS OF LIABILITY INSURANCE (465)

A. Professional Liability Insurance Covers liability arising out of the delivery of services For non-professionals, it is referred to as “Errors and Omissions” (E&O) insurance Typically written on a claims-made basis→ must be reported during policy period

Alstrin v. St. Paul Mercury Insurance (2002) – p.466 Dispute over directors’ and officers’ insurance (D&O insurance). Does plain language of exclusions apply? “Crime or deliberate fraud” exclusion:

Ps contend can’t read provision broadly because the policy purports to cover “securities claims” and exclusions should not be read to override an explicit grant of coverage.

Court agrees that if the deliberate fraud claim applied to securities fraud claims, there would be little or nothing left to cover so it cannot be upheld. The reasonable expectations of the purchaser are a factor.

“Illegal profit or advantage” exclusion: Key is the remedy that the plaintiff suing the directors is seeking Problem is not whether or not wrong committed involved taking an illegal profit or advantage. By

same reasoning as above, if exception were applied to securities fraud there’d be nothing left to cover.

“Insured vs. Insured” exclusion: P claims that estate suing is not “insured” within policy language. Court agrees that exclusion does

not apply to action by representative of bankruptcy estate against former D&Os of debtor because bankruptcy estate is separate entity.

Thoracic Cardiovascular Associates, Ltd. v. St. Paul Fire & Marine Insurance Company (1994) – 476 Plaintiff failed to purchase optional reporting coverage and got denied. No such thing as an impossibility defense to late reporting of claim→ this is the trigger of

coverage! In contrast to occurrence coverage, the reporting requirement in claims-made coverage is the

trigger. We should really call these things “claims and reported (during policy period)-based” coverage.

Ct. says that insurer can limit its coverage by clear and unambiguous language. If you don’t like it, just make sure you always have coverage. You might need to buy riders, etc. to

keep the window open.

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Explanatoryi. Directors and Officers Liability Insurance

Covers individuals for economic loss (not injury) Liability “wrongful acts”, broadly defined and corporations for liability in indemnifying Insureds→ directors and officers

The corporation is the indemnitor Major exclusions

Derivative suit – allegations of mismanagement Suits typically brought by corporation (shareholder) to recover damages for a bad decision

by officers and directors, and the officer is insured. You can’t indemnify yourself, so non-starter here. This is almost always a collusive suit

—corporation is not logically going to sue its CEO; only reason to sue insurer is to get money from insurer.

Fraud and knowing violation of law What you want is coverage to settle quack suits brought against you that happen to mention

the word “fraud.” Otherwise, who’s going to be a corporate director. You have to rely exclusively on the corporation to indemnify you. So insurance system has to tolerate quite a bit of moral hazard.

Regulatory liability Restitution: You’re not covered for the cost of giving back money you improperly took. KA - THESE TEND TO BE OVERBROAD EXCLUSIONS.

Coverage Side A: Individual Side B: Corporate Indemnification of Individual

Note this isn’t going to play in bankruptcy b/c corp. can’t indemnify. Side C: (some firms have started offering this) coverage for corp. itself. Usually not given.

Owens Corning v. National Union Fire of Pittsburg (2001) – p.472Larger Settlement Rule—Company (without side C) only has to allocate some settlement portion to itself when settlement is larger because of uninsured persons who were sued or may have contributed to suit. Facts: Owens Corning (OC) and 6 of its directors and officers sued in a class action lawsuit (LaValle suit).

Complaint alleged misrepresentation of future liability for asbestos suits. OC had Side B coverage (insurance for indemnifying directors and officers) but not Side C coverage

(insurance against corporate liability in its own right for claims arising out of wrongful acts). OC settles claim for roughly $10M. After indemnifying its Directors and Officers for defense and settlement

costs, OC requests reimbursement from National Union (for everything less $2.5 mil deductible). National denied coverage.

HOLDING: Court found National liable for coverage; case remanded to determine if OC was obligated to pay some of the settlement itself (allocation) (as opposed to National paying all costs for indemnifying the directors; National felt that OC should pay some of the settlement costs since it was a named defendant and no Side C)

Two applicable rules when corporation has Side B coverage but not Side C (neither is particularly satisfactory) Larger Settlement Rule: allows allocation of the costs of a settlement “only where the settlement is larger

b/c of the activities of uninsured persons who were sued or persons who were not sued but whose actions may have contributed to the suit.

o The court uses this rule in Owens Corning, and concludes that the activities of the corporation did not make the settlement larger.

o Not much law about exactly how you go about doing this. Relative Exposure Rule: Allocates a settlement based on comparing the potential exposure of the uninsured

and insured defendants if the litigation had proceeded (how would the jury have divided it up?)o National Union urged adoption of this rule b/c it calls for an elaborate inquiry into what

happened in a settlement and who really paid for what relief. Because allocation is a partial exclusion of an insurer’s liability, the court favors the larger settlement

rule (less exclusion of liability) in the absence of clear policy language to the contrary. Thus, National Union liable for coverage of the settlement except to the extent that

uninsured claims actually increased the insurer’s liability. Allocation provision is now in insurance contracts that you have to get together and talk about it.

It’s insurers way of saying, there’s going to be allocation, so don’t take the position that there’s not going to be allocation. Doesn’t serve much use, Basically a way to just smuggle

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Explanatorythe term “allocation” into the policy and prevent the escape that occurred here. (was an escape right?)

Abraham notes that both rules are based on speculation. How do you prove the first? With expert testimony on corporate liability litigation?

LIABILITY INS: DEFENSE & SETTLEMENT (484)

THE DUTY TO DEFEND AND THE CONSEQUENCES OF BREACH

1. Scope of the Duty (484) Imprecise language, so Cts have developed precedent to deal w/ these issues TEST→ insurer must defend any claim that would be covered if allegations are proved to be true

Termed “potentiality”, “scope-of-the-pleadings”, “4 corners”, or “8 corners” (complaint and policy)

Four available courses of action for insurer (doesn’t mean insurer can legally choose any in given situation):

1. Defend unconditionally (kind of what insurer in Beckwith – p.511 did for a while) Hornbook rule→ if you do this, you are estopped from denying coverage

Even if something new materialize that would have given you a right to lay down conditions if known on date you began defending.

2. Defend subject to a “reservation of rights” This entitles you to contest coverage later (Gray – p.520) Price of this is that defense costs paid even if it turns out the claim isn’t covered→ only

occasionally reimbursable (Buss) You always allege battery and negligence because the negligence is coverable

under liability coverage. So Gray says, it’s a conflict of interest if we have to defend because we’re either going to try to get the whole charge knocked out, or to argue battery instead of negligence. Court says, we don’t think so because outcome of tort case will have no bearing in action for coverage.

3. Refuse to defend Use this when even if suit is won, coverage will be denied on some basis Majority Rule

If no duty to defend, no liability If duty breached, liable for defense and estopped to deny duty to indemnify

(Gray, but see Burd(? Did we read this) This is a penalty, trying to create incentive for insurer to defend where it’s

unsure.4. Seek declaratory judgment as to duties, perhaps while defending subject to reservation (Lee,

Montrose – p.519) Advantage is you don’t have to wait for resolution of original case Montrose→ duty to defend until SJ in action saying you have no duty

Complication What does “potentially” covered mean?

How implicit (not explicit) in complaint does it have to be? *In many cases, real question is taking the allegation as true, is there definitely

coverage Collateral Estoppel?→ Gray says no (no factual determination in underlying tort suit has any

impact on coverage case), but… Not all Cts are fully committed to 2nd part of majority rule under #3 Even absent collateral estoppel, practical conflicts→ may learn info which aids later

assertion of no coverage & more doubts about coverage, less interest investing in defense

Beckwith Machinery v. Travelers (1986) – p.484 Insurer agreed to defend case on compensatory damages but not punitive damages. Insurer learned during

trial that the claim would not be covered, but continued to defend and did not reserve rights. Insurer then stops defense and tries to deny coverage. Insured argues that insurer is estopped to deny coverage

Court holds that insurer has duty to pay defense costs and cannot deny coverage

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Explanatory There was an initial duty to defend because claim was potentially covered. Insurer waived rights to deny coverage by not filing reservation of rights Insured relied on defense and was prejudiced

2. Conflicts of Interest and the Defense of “Mixed” Claims (491) Under-investment where there are doubts about coverage→ if insurer only believe they have a 10%

chance of paying, they have little reason to invest in expensive suit (conflict not erased by collateral estoppel rule)

What are the options here:1. Minority→ duty only to reimburse if covered – let policyholder defend (Burd)

Problem is that it leaves policyholder w/out a defense→ many Cts don’t like this idea and follow the approach of Gray

2. Majority→ duty to defend and ignore conflict→ Gray (policyholder left w/ defense)3. Some Cts says there is a duty to defend but allow policyholder option to choose

independent counsel if he feels conflict of interest or under-investment Make insurer pay, but keep control of counsel w/ policyholder

Receipt of adverse coverage information: does Parsons – p.503solve the problem – NO! In course of defending policyholder in tort suit, insurance company gets info that would help to

defeat coverage in subsequent suit We start w/ rule that lawyer is policyholder’s lawyer and has a duty of confidentiality→ BUT,

doesn’t always solve the problem to say loyalty is to policyholder Ct suggests that sometimes it is best for lawyer to withdraw from case→ this is horrible

for the policyholder b/c it alerts insurer that maybe there was a conflict and they can find a reason to deny coverage

So, are we back to letting insured get his own counsel and reimburse→ very expensive! *Message is that you can’t fully get rid of these conflicts→ it is a price of providing defense

Gray v. Zurich Insurance (1966) – p.491Pasted Notes—May Be Some Duplication of Above Insured is sued for tort that may have been intentional. Insurer denied coverage, and insured defended

himself and lost. Insurer argues that is had no duty to defends, as the outcome of the case shows Court holds that there was a duty to defend. Insurer must pay costs of defense and indemnity

Insurer must base its decision on the complaint and any potential liability it create, and if the complaint is true and would be covered they must defend

If complaint is narrow but liability is potentially broader, insurer must based on possibility of broader liability

Three conflicts of interest Insurer does not have incentive to invest resources in case that probably won’t be covered Insured does not have incentive to pursue self-defense claim, as it will void coverage Insurer does not have incentive to win suit if it wants to deny coverage in later case – collateral estoppel

argument Court rejects collateral estoppel argument – outcome from underlying tort case is not determinative of

coverage. Insurer is always free to contest coverage afterwards if it reserves rights, so it has no incentive not to win underlying tort case

o Alternatives to Gray rule Not required to defend if there is a conflict of interest, or if liability trial would leave coverage undetermined

– results in much less coverage Determine coverage in advance in declaratory judgment

Shoshone First Bank v. Pacific Employers Insurance (2000) – p.498 Facts: Employee fired from bank, files suit for 6 claims. Shoshone begins defense while Pacific investigates

whether it has a duty to defend, and in this time period, Shoshone files a counterclaim. Pacific finds that 1 of the 6 claims falls under its policy and takes over defense subject to a reservation of rights letter stating that it reserves the right to allocate expenses for defending uncovered claims and prosecuting counterclaim. Claim is settled for small amount but defense bills are huge. Pacific wishes to allocate, Shoshone says no.

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Explanatory Issue: Can Pacific allocate and recover for both the costs attributable for non-covered claims under the policy and

the costs attributable to a counterclaim? Pacific can’t allocate costs attributable for non-covered claims without specific policy language (in

this case they have none). (We don’t have that in our policy). Verify? Pacific can recover for costs attributable for counterclaim.

The allocation and recovery of costs attributable to the defense of claims that were not covered by the policy of insurance is not permitted under WY law so long as one or more of the claims alleged is covered by the insurance policy.

o Duty to defend one claim extends to the entire suit brought against an insured. An insurer cannot use the reservation of rights to change the language of a policy.

o Here, Pacific did not provide for allocation in policy. Court thinks problems will arise if insurer is permitted to pick and choose which claims to defend: takes time, and

to defend immediately it must defend entirely. o Further, there would be an added burden on insured to obtain separate counsel, and this would lead to

inefficiency. Pacific alleges that the majority rule allows allocation and recovery of non-covered costs. However, Abraham

notes that this is not really a majority rule. Buss (CA) limited the right of allocation to cases in which there was never any duty to defend the uncovered portion of a suit and the insurer specifically proved the cost of defending the uncovered portion.

o A rule emerging in some jurisdictions is that there is a right to reimbursement (when such right is expressly reserved by the insurer) where the insurer has provided a gratuitous defense, or done so under the rule that if any claim alleged in the complaint is potentially covered, then it must defend all claims, and the insurer can specify the separate costs.

Parsons v. Contingent National American (1976) – p.503 Insured lost tort suit defended by insurer. Insurer’s lawyer had access to confidential information from trail

that indicated that the liability is not covered. Insured argues that insurer should be estopped to deny coverage if it is based on confidential information

Court finds for insured – insurer cannot use confidential information from trial to deny coverage Based in fiduciary relationship owed by lawyer to insured – ethics rules require that he cannot harm primary

client’s interests, and should withdraw himself from case. Lawyer’s violation is a waiver of insurer’s rights to deny coverage

SETTLEMENT (510) Policy language provides the insurer w/ the option to settle, NOT duty Case law has developed to suggest there is a duty to settle when offer is reasonable – offer is reasonable

when an insured w/ no policy limits would accept the offer (Crisi) Suppose $10K policy limit; $9K offer, $200K potential liability

a. 7% chance of liability – expected value = $14K – therefore, offer is reasonable and insurer will normally accept if they follow the rule

Crisi says there is a duty to accept→ insurer is also held liable in tort for harm caused in rejecting the offer

Insurer must give consideration appropriate to probabilityb. 3% chance of liability – expected value = $6K – offer is not reasonable and insured should reject

*Acting reasonably is what somebody liable w/out limits would doc. If there is strict liability, insurer pays for above-limits judgment in both a and b – why won’t this

affect insurer’s reaction in b? Still going to reject offers not worth taking

Bad faith may be present, but is not required→ only a minority of jurisdictions have a bad faith requirement

Crisci v. Security Insurance of New Haven (1967) – p.510 DiM was injured when a stair broke in the apartment building owned by P, and the DiMs sued for damages,

much of it claiming that Mrs. DiM’s psychosis occurred as a result of the accident. P had $10k of CGL coverage with D, with a policy that

1) bound D by a duty to defend and 2) gave D the right to settle if reasonable terms were offered.

DiMs offering to settle for around $10k (expected liability if guilty = $100K)o D refused to settle for more than $3k, because “going for the gold” – rejects offers of $10K and $9K

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Explanatoryo No settlement occurred, P found liable for $101K.

Court: Good faith implies that both parties to the policy will refrain from doing anything to injure the other’s rights, and thus insurers are required to accept reasonable offers as though no policy limits exist.

Insurer had a duty to accept the reasonable offer and is liable for the balance of the judgment. Also awards emotional distress damages.

1. Primary vs. Excess – Duty to Settle (517)

Companies buy insurance in layers. Pure Excess Coverage→ purely excess coverage over the primary “Umbrella” Coverage→ combines pure excess and some primary The “follow-form” idea→ higher level excess will just follow the form/terms of lower level policy by

reference There’s first level excess, second level excess, etc.

Commercial Union Assurance Companies v. Safeway Stores, Inc (1980) – p.544 Ct reiterates Crisci rule→ primary insurer must accept reasonable settlement offers

*Ct then adds that there is another rule that primary insurer also owes this same duty to an excess insurer→ stands in the shoes of a policyholder (equitable subrogation) Primary insurer has same duty to settle a claim to excess insurer that it would have to

the policyholder. SUPPOSE policyholder has a deductible (sometimes referred to as a “self-insured retention”) – first

layer may then become 1st layer excess (doesn’t matter what you call it) *Offer to settle below inception level of 1st level of coverage→ policyholder has no duty to

accept and protect insured at higher level No duty b/c no possibility of subrogation→ can’t have rights against yourself What you buy when you buy excess insurance is the right to reject reasonable

offers of settlement and risk the excess insurers money by not settling a claim within the amount of the self-insured retention.

In this case, self-insured layer is in the middle of primary and 1st excess Same reasoning applies and policyholder can’t have duty to yourself – no obligation to

accept Note no real reason for this, usually the company just can’t fill that layer of coverage.

This is just the default rule→ if excess want duty to accept reasonable offer, they can contract for it

2. Primary vs. Excess – Drop-Down Liability

Mission National Insurance Company v. Duke Transportation Company (1986) – p.522 Insurers in one or more layers is insolvent Is policyholder fully insured with higher level dropping down or is he self-insured?

*Ct says it depends on language in policy:1. Higher layer not responsible if it provides coverage only “by reason of payment”2. But if it says whenever a lower level is “not collectible”, then there is

responsibility Almost all policies say only drop down if payment

This will be a cheaper policy, of course.

*Lesson of both cases→ these are large commercial policies and Ct is just looking for appropriate default rule

AUTO INSURANCE (527)

SAMPLE POLICY (528)Crib Sheet Auto insurance is really a combination of multiple forms of insurance Cts are most pro-insured in auto insurance Relevant Parts (starting on 528)

Declaration Sheet

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Explanatory Definitions (529)

Note A1, A2 (you) & F (family member) Part A - Liability Coverage (530)

Back to “accident” based coverage as opposed to “occurrence” This is a plain language policy

Duty to defend very similar to CGL policy Insurance for any auto or trailer→ driving other cars means you are covered Omnibus coverage→ coverage continues when others drive your car

B1: This is the “DOC” coverage (covers when you drive other cars) B2: Covers others who have permission to use your car

Exclusions (530) No coverage for “intentional” (knowledge of substantial certainty ) Exclusion 8: doesn’t apply to people w/out reasonable belief of permission to use

car Part B - Medical Payments (532)

Amount typically small ($2000)—no fault coverage, typically for someone without medical coverage who doesn’t want to sue for a small injury

Part C - Uninsured Motorist Coverage (533) Covers what happens if you are hit and/or injured by someone who cannot pay you. Even covers hit and run vehicles (must be evidence you were hit by another vehicle)

Doesn’t cover car that “blinds” you with headlight, causes you to drive into tree, and then drives off. Not covered because of moral hazard problem—hard to distinguish legitimate claim from incident where you just ran into a tree.

Limits of Liability (534) Attempts to deal with the stacking problem.

Part D - Coverage for Damage to Your Auto (don’t worry about this) Collision and comprehensive coverage Limit of liability is actual cash value

Part E - Duties After Accident of Loss (538) Notice and cooperation

Part F - General Provisions (539) Accident (not the injury) must occur during policy period→ this is the trigger

LIABILITY COVERAGE (541)

Scope of Compulsory Insurance Requirements= Strength of the Victim Protection Goal Most states have mandatory insurance statutes to further this goal, not to protect drivers against liability

St. Paul Fire & Insurance v. Smith (2003) – p.541 Allan & June Smith add son William as covered driver to policy.

o St. Paul finds out Will has host of driving infractions (including 2 DUIs)o Removes Will from policy and requires parents to sign “named driver exclusion” meaning St. Paul not

liable for accident while Will is driving.o Will had his own auto liability policy issued by Valor

6 months later Will crashes his dad’s car into another vehicle, killing everyone.o Verdict in lawsuit filed against Will and parents’ estates for $5 million. Valor pays out $20K to each P

estate. Valor and Ds go after St. Paul: contend “named driver exclusion” violates public policy. Holding:

o Illinois statutes mandate that liability insurance policy must cover the named insured and “any other person using the vehicle with the named insured’s permission.”

o But legislature created a limited exception to mandatory insurance laws under which this exclusion falls.o Public policy supports upholding named driver exclusion. Allows drivers who happen to have a family

member who’s a terrible driver to obtain insurance at an affordable rate. Otherwise, the driver might not buy as much insurance or simply go uninsured.

DESIGNATED DRIVER PROVISION

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ExplanatoryWhy would there ever be any question that the designated driver provision would be valid? Auto insurance is the only form of coverage that is mandatory (two-rationales)

Obvious reason: we don’t want people who liable to face financial ruin. The most common way to face financial ruin is as an auto-owner. Not everyone is a doctor, or homeowner, etc. Paternalistic.

VICTIM PROTECTION MOTIVE: If people don’t have this insurance, then victims won’t have any source of recovery.

This motive does not exist to the same degree, if it exists at all, with respect to the other forms of insurance studied in this class.

If designated driver exemption is allowed, then injured parties won’t have any recovery. If you look at this case with an awareness of the public policy, then you see there’s going to be a real reluctance to enforce them.

These things were invalid because it would mean otherwise that anyone with a really bad driver living in his household would have to pay more for his own insurance—regardless of his own driving record. That’s a bad thing. Guy might not buy as much insurance or go naked. So the insurance provision probably had a rational justification, it just doesn’t carry the day.

On page 546, court held in squib that guy was insured when he used his car as a battering ram. Why? So that the victim could get some compensation.

The Omnibus Clause (547)

Curtis v. State Farm Mutual Automobile Insurance Company (1979) → OMNIBUS AND DOC CLAUSES (547)

Issue over omnibus (other drivers insured under your policy – IF reasonable belief of permission) and DOC clauses (your cover under your policy when driving other cars)→ how much authority needs to be given to drive?

Permission to drive can be express or implied Who has authority to give permission beyond named insured?

Can a permittee give permission?→ Cts hold 3 different views here:a. Liberal→ all people down the chain are insured (permission runs with the keys)b. Moderate→ look at what was actually impliedc. Strict→ must have expressly or impliedly given permission

Court here says you can go two levels down the chain, but that’s it (KA – I don’t know why you can’t go further down).

o Courts aren’t crazy—all a reflection of how strong the interest in victim protection is. What is the scope of permission once you get it?

Again, Cts hold different views here ranging from liberal to strict. (If you have permission to go to the drug store, but instead take a day trip.)

Sample Policy→ asks not whether permission, but whether driving w/ reasonable belief you had permission – policy language matters!

In this case, can Wallace really think he could get permission from a 14yr.old? Maybe court was barking up the wrong tree. Relatives of “named insured” are insured as

well—so maybe they can validly give permission. Has nothing to do with what parents thought.

Deborah would be covered even if she was a kid, not licensed, driving at 3 in the morning without permission. No question but that Deborah would be considered “insured.”

“Use” of a Vehicle (533)

Farm Bureau Mutual Insurance Co. v. Evans (1981) – p.533 → “USE OF VEHICLE” INTERPRETATIONS Insured threw a cherry bomb out of a car Old policies said coverage came out of ownership, operation, and maintenance of vehicle Today it is less clear b/c it says “accident” only→ question is whether this cherry bomb drive-by

arose out of or flowed from the use of the vehicle? – Ct says yes Question as to whether it was a mere coincidence that they were using the car

Argued that they were in the car because it was a shelter and that that’s a use of the car so that is a causal relation.

Not clear whether this is good law there has been a slight trend away from victim protection

Notice & Cooperation Conditions (556)

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ExplanatoryState Farm v. Davies (1983) – p.556 → PREJUDICE RULE FOR DUTY TO COOPERATE

Failure to cooperate must prejudice in order to void coverage If you totally screw over your insurer and keep it from recovering money, you’re going to

lose your coverage. Key question is prejudice in what respect:

a. Some impact on defenseb. Substantial and material impact (matter of degree)

Doesn’t have to be the thing that lost the case.c. Must show there would have been different result→ almost impossible to prove

This case helps define substantial→ whether you can get to the jury or not is substantial In this case, policyholder gave insurer information about accident that conflicted with testimony of P

and then disappeared so insurer had to defend case in absence of D. Insurer said it was substantially prejudiced by absence of D. VA Supremes say hey—was the absence of D the difference between going to the jury or not. If presence of testimony would have made out a jury question, but instead there was a directed verdict, then that’s prejudice.

Miller v. Shugart (1982) – p.562 Failure to cooperate must prejudice in order to void coverage

If you totally screw over your insurer and keep it from recovering money, you’re going to lose your coverage.

Key question is prejudice in what respect:d. Some impact on defensee. Substantial and material impact (matter of degree)

Doesn’t have to be the thing that lost the case.f. Must show there would have been different result→ almost impossible to prove

This case helps define substantial→ whether you can get to the jury or not is substantial In this case, policyholder gave insurer information about accident that conflicted with testimony of P

and then disappeared so insurer had to defend case in absence of D. Insurer said it was substantially prejudiced by absence of D. VA Supremes say hey—was the absence of D the difference between going to the jury or not. If presence of testimony would have made out a jury question, but instead there was a directed verdict, then that’s prejudice.

Other Insurance Clauses (567) Often multiple coverage→ your insurance and insurance of car you are driving Most policies say owner’s insurance policy is primary→ could be the other way, but as long as we have a

default rule we avoid litigation Types of other insurance clauses:

Pro Rata→ pays proportion of the lossExcess→ pays only after other policy has paid its limitsEscape→ does not pay at all if there is other insurance

1st Clause 2nd Clause Consistent?Excess Pro Rata SometimesPro Rata Pro Rata YesExcess Excess NoEscape Excess NoEscape Escape SometimesEscape Pro Rata Sometimes

Resolving ConflictsRead clauses to avoid conflictIgnore conflicting clauses, pro rata by limits (Lamb-Weston Doctrine)

This is still the majority ruleCarriers is the up and coming rule→ apportion equally up to limits of smaller policy

Carriers’ v. American Policyholders’ (1979) – p.567 Driver with his own insurance leased vehicles that were insured by lessor. Each policy had an excess other

insurance clause.

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Explanatory Court applied pro-rata split up to policy limits of lower policy, then other policy paid the rest. Court rejected

several other methods of allocation – use policy language, not understanding between parties, to determine the allocation. If language is mutually repugnant, court can ignore it apply its own rule

UNINSURED MOTORIST COVERAGE (581) Insures you against risk you will be injured by uninsured motorist from whom you could not recover a

judgment Most policies also cover underinsured motorists (policy pays the difference b/t the amount of ins the

underinsured motorist has and the amount legally required by the state statute)

Who is an Uninsured Motorist? 1. No liability insurance (despite the fact that the state may require it) -never purchased it or may not have

renewed the insurance2. Boynton→ what does UM cover?

Must be injured by an “uninsured” vehicle No insurance covering driver against liability to you in this case (insurance not available to

cover you in a certain situation - i.e. intentional injury or another exclusion is applicable) Party who purchases uninsured motorist coverage must be legally entitled to recover

Legally entitled means don’t have to go to judgment to trigger rights; can make an ins claim and show you are legally entitled to recover by proving in your ins claim the tort claim (D is the ins co in the tort claim)

*Liability insurer only liable for what the uninsured motorist would have been liable (i.e. if uninsured motorist was immune from liability (worker’s comp)→ you are not entitled to recover)

You are not purchasing insurance against the risk that someone else isn’t liable but that someone else may not have insurance

What Do Statutes Say? 1. Everyone who buys statutory minimum liability ins must purchase uninsured motorist coverage OR2. Everyone who buys statutory minimum must be presented with the option of purchasing uninsured

motorist coverage Some Cts have been asked to void uninsured motorist coverage as inconsistent w/the statute

Allstate v. Boyton (1986) – p.581 Mechanic was injured while working on a car that belonged to another company and was driven by his co-

worker. Mechanic sued co-worker but his policy would not cover, so he seeks uninsured motorist coverage from his own insurer.

Court holds that this is an uninsured vehicle, since the driver’s policy did not cover the incident. However, there is a statutory bar to recovery – worker’s compensation law will not allow recovery for injury at work. Court holds that uninsured motorist coverage is not responsible for covering this gap in coverage, since insured is not legally entitled to a recovery.

Simpson v. Farmers Insurance Company (1979) - p.588 Policy limits on UM exclusions requiring “physical contact” for hit and run vehicles

Hit and run vehicles Run without hit vehicles→ phantom headlights problem

*Ct says these are against public policy How can you invalidate exclusion from statute that only provides for uninsured motorist

coverage→ statute never says UM has to cover hit and run, just need to have UM! *Abraham says read the policy but remember your client may have rights at variance w/policy provisions

(reasonable expectations doctrine, prior case law construing policy as ambiguous)

Taft v. Cerwonka (1981) - p. 593 Can UM coverage can be “stacked?→ (stack limits of liability of the policies)

Inter-policy stacking - How is permission determined? Look at clauses of the policy; (p.563) and whether they are consistent (if conflict, can

be ignored under Lamb Weston)

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Explanatory Access to two sources of coverage may be contemplated

Intra-policy stacking (one policy – 2 cars covered under it)→ historically, courts held permitted Policies may be ambiguous (insurers rewrote to make clear; p. 563 - Limit of liability

a(1)) Some courts say regardless of ambiguity - if there are two premiums paid→ coverage is

greater, since you paid twice, can stack (Abraham says this is ridiculous b/c the question is what you paid twice for; if you bought premiums for no stacking regardless of whether there are two, you paid a lower premium)

Abraham says need to determine whether you paid for stacking in the premium

MEDICAL PAYMENTS (SEE POLICY) Started when liability ins and health ins not as pervasive; so this provides minimal medical ins Today seems like a duplicated waste, but it is the vehicle for the radical expansion of coverage into ‘no fault’

AUTO NO-FAULT (596)(been politically stalled for 20 years by plaintiff’s lawyers)

No Fault (O’Connell and Keeton) (598) Auto litigation is cumbersome and expensive→ so abolish tort liability (as in worker’s comp) Can’t be done on a third party basis, so abolish tort liability and substitute insurance (so everyone injured

in an auto accident will have a source of coverage) - this has never been enacted anywhere (pure no fault)

Real No Fault (adopted in 16 states) (599)

1. Mandatory purchase of personal injury protection (“PIP”) – amount varies Insuring driver, passengers, pedestrians Against medical costs and lost wages For injuries arising out of operation or use of vehicle

Everything but pain and suffering; no one buys this in first party ins

2. Limited abolition of tort liability When can and when can’t you sue? Your own PIP insurance covers you 1st, but IF you’re in a situation where you are allow to sue, you

can bring suit to cover the rest of your injuries Need to pass a threshold to warrant a suing in tort – two types:

a. Monetary thresholds→ vary a lotb. Verbal thresholds→ usually means “serious injury” (more than soft tissue)

*Trade off is automatic compensation for right to cover pain and suffering 2 explanations:

1. More serious injuries are more deserving of pain and suffering More serious injury means more negligent behavior in causing the

accident and more deserving someone is for being punished for this sort of driving

But really, threat of liability isn’t going to further deter someone who isn’t afraid of being hurt themselves

2. Practical politics→ plaintiff’s bar is powerful Take small cases out of system, but leave the big one to give lawyers

work

“Add-on” No-Fault (600)

THE 2NDARY MKT - RESIDUAL MKT MECHANISMS (601)Do we need to know any of this?

Residual Market Mechanisms are devices that states use to ensure the people needing insurance get in even when private insurers won’t give it too them→ 3 kinds:

a. Assigned Risk Pools

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Explanatory Person is assigned to a commercial insurer in state (companies get them in proportion to their

market share)b. Joint Underwriting Associations

Same thing, but this is an association of insurers (separate legal entity from insurance co.)→ still get hit in proportion to their market share)

c. State Reinsurance Facility Each insurer has to accept all comers, but you can pass on a certain amount of people to state

*These 3 kinds are all legally distinct, but economically identical→ insurers bear the cost of subsidy to high risk policyholders given “artificially” low premiums

When the pool runs at a loss, insurance companies bear loss and recoup costs as credit against premium taxes→ so, all taxpayers pay for really poor drivers

FUTURE OF INSURANCE

1. Globalization2. Centralization and Consolidation3. Revolution of the Auto, Population Sprawl

Likely to create new methods of insuring4. Managed Heath Care5. Increasing Share of Commercial Self-insurance

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