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Introduction to Insurance Law
Insurance is a method of mitigating the risk associated with a particular situation or transaction. This chapter introduces the concept of insurance and its importance to individuals and businesses. It explains the mechanics for establishing insurance coverage for specific occurrences. It outlines the rights and obligations of the insurer and insured. It then introduces the most common types of insurance coverage and relevant terms of such coverage. For further written and video explanation, discussion and practice questions, see Insurance Law (Intro)
What is “Insurance Law”?
Insurance is a risk management and mitigation relationship between an insurer and the insured party. The primary participants and characteristics of the relationship are as follows: Insured - The insured allocates the contingent risk of loss in a particular situation to an insurer. Insurer - The insurer is a business entity that agrees to bear the burden of potential losses and to indemnify the insured from a degree of personal loss. “Indemnify” generally means to hold a person harmless by paying any costs or expenses incurred. Premiums - The insurer receives some form of compensation for assuming the insured party’s risk, known as a “premium”. The insurer assesses the extent or severity of the contingent risk through a process or system known as “actuarial science”. The premium that the insurer charges to the insured is documented through a contract known as an “insurance policy”. Coverage & Policy Limits - An insurance policy contract is the legal document evidencing each party’s right and obligations in the insurance relationship. It will cover or establish terms of indemnification of an insured for losses suffered as a result of a specific occurrence. It will identify specific limits on the amount of indemnification payable upon the occurrence of a specific risk. Insurance policies are a specific type of contract with unique attributes. For further written and video explanation, discussion and practice questions, see What is "insurance"?
What is an “Insurance Contract”?
An insurance contract, or “insurance policy”, establishes the legal relationship between the insurer and the insured. A potential insured makes an offer to the insurer to purchase the insurer’s services. In the application, the insurer will reveal all information relevant to the insurance relationship. The insurance relationship begins when the insurer accepts the insured’s offer to purchase coverage, which is the “effective date” of the insurance policy. The insurance contract lays out the extent to which the parties allocate or transfer the contingent risk of loss to the insurer. It will detail the rights and obligations of the parties, as well as the types of situation giving rise to loss and the limits of the insurer’s responsibility to pay for losses incurred. For further written and video explanation, discussion and practice questions, see What is an "insurance contract"?
What is an “Insurable Interest”?
For a party to seek insurance against a potential loss, the insured must have some form of interest in the insured property or be subject to a particular loss from an occurrence or event affecting the insured property or individual. This is known as having an “insurable interest”. An insurable interest may be any form or legal or equitable interest in the property, including security interests in the property as collateral. Individuals may have an insurable interest in the life of other persons, but the individual whose life is subject to the policy must agree to such coverage. In some situations, contractual rights or the potential to suffer damages from non-performance of a contract may give rise to an insurable interest. This is the case for professional liability coverage. For further written and video explanation, discussion and practice questions, see What is an "insurable interest"?
Common categories of insurance
Individual vs Group - Insurance policies may cover individuals or groups of individuals for identified risk(s). Personal vs Commercial - Insurance policies may cover personal or commercial activity or property. Liability Insurance - Liability insurance policies may indemnify the insured or categories of third parties from potential liability for losses incurred in a specific instance or situation. It is commonly associated with losses suffered as a result of negligent conduct, but also may cover property damages. Property & Casualty Insurance - Property and casualty insurance generally insures against damage to the subject property. A policy may cover any or all of the above types of contingent risk. For further written and video explanation, discussion and practice questions, see What are the common categorizations of insurance?
Individuals may purchase insurance coverage for nearly any foreseeable risk. The following are common types of insurance policies: Automobile Insurance - Vehicle insurance covers damages suffered by either the individual or automobile pursuant to any number of risks. Common risks covered in vehicle insurance policies include the following: Liability Coverage - This type of policy covers, up to the policy amount, the costs and damages suffered by third parties as a result of operating the insured vehicle. Collision Coverage - This is a form of property insurance that will pay the value of the damages suffered to a vehicle in a crash, up to a stated amount or up to the total value of the vehicle. Comprehensive Coverage - This type of insurance coverage insures the vehicle against forms of damage other than collision, such as vandalism, theft, hazardous weather, etc. Uninsured (& Underinsured) Motorist Coverage - This type of insurance coverage provides indemnification for injuries suffered by the driver and passengers of the covered automobile when another party without insurance causes personal injury in a crash. Other Coverage - Other insurance coverage in a vehicle policy may include towing and rental car expenses, additional medical payment coverage, and accidental death coverage. For further written and video explanation, discussion and practice questions, see Vehicle insurance?
Health Insurance - Health insurance pays the medical expenses incurred by an individual pursuant to treatment of covered health risks. Health plans may include medical, pharmaceutical, dental, and vision services by health providers. A health insurer will often disclaim or limit coverage for known conditions of the insured present within a stated period of time prior to purchasing insurance. This is known as excluding “preexisting conditions”. Most health insurers are limited in the ability to exclude preexisting conditions for more than two years following issuance of the policy. The Affordable Care Act of 2010 (ACA) limits the ability for insurers to exclude preexisting conditions, while placing additional tax burdens on those who do not purchase a qualified health insurance plan. It also authorizes the establishment of state and federal insurance exchanges where individuals can purchase an insurance plan. This system allows individuals to purchase insurance plans at rates comparable to those of large, employer-sponsored, insurance plans. As part of an insurance plan, an insured may be responsible for: Premiums, Deductibles, Co-Insurance, and Co-pays. Common types of health insurance include: Preferred Provider Organizations (PPO); Health Maintenance Organization (HMO); Exclusive Provider Organization (EPO); Point of Service (POS) Plans; High Deductible Health Plan (HDHP); Health Savings Account (HSA), and Flexible Spending Account (FSA). For further written and video explanation, discussion and practice questions, see Health insurance?
Disability insurance provides financial benefits to someone who becomes disabled and is unable to continue working in a given profession or function. Disability insurance coverage is generally divided into short-term and long-term disability. For further written and video explanation, discussion and practice questions, see Disability Insurance?
Life Insurance - Life insurance provides financial benefits in the event a covered individual passes away. The beneficiaries of the policy are generally third parties rather than the insured or the insured’s estate. An insured must provide permission or consent for a third-party to purchase a policy covering her. The following are common categories of life insurance: Whole-Life Plan; Limited-Payment Life; Term-Life Policy; Endowment Insurance; Life Annuity Policy; Universal Life Policy. These policies often exclude specific causes of death, such as suicide, war, criminal death sentence, or murder of the insured by the beneficiary. For further written and video explanation, discussion and practice questions, see Life Insurance?
Homeowners, Renters, and Fire Insurance
Homeowner’s & Renter’s Insurance - Homeowner and renter’s insurance are combination policies that protects property as well as individuals present on the property. The primary characteristics of a homeowner and renter’s policies are as follows: Property Coverage; Liability Coverage; Fire Insurance. For further written and video explanation, discussion and practice questions, see Homeowners, Renters, and Fire Insurance?
Business Liability Insurance
Business Liability Insurance: Business liability insurance can have any number of property and liability protections. The most common form of business liability insurance is a “comprehensive general liability” (CGL) policy. These policies will insure any number of risks commonly faced by businesses, such as premises liability, product liability, professional malpractice, negligence, environmental liability, etc. Professional Liability Insurance - Professional liability insurance, often called “malpractice insurance”, protects the insured from losses incurred as a result of a specific type of negligent professional practice. A specific type of professional liability insurance is “director & officer liability” insurance, which is purchased by a business to indemnify its officers and directors from losses suffered in the performance of their business duties. Others - Other common types of insurance include: crime, flood, pollution, mortgage insurance, title insurance, worker’s compensation, unemployment, cyber privacy, etc. An individual or business may purchase any of the above-referenced types of insurance, as well as many other common types of insurance. Some of the types of insurance may be required by law or by professional trade industry in a given jurisdiction. For further written and video explanation, discussion and practice questions, see Business Liability Insurance?
Primary Obligations of Insurer
The primary duties of an insurer in an insurance contract are as follows: Payment for Losses - An insured is responsible for indemnifying the policyholder or paying for the losses suffered by the insured or a third party as a result of a covered risk. Duty to Defend - An insurer generally has the duty to defend or pay the legal expenses of an insured who is subject to a legal action for the covered risk. Subrogation - An insured inherits the identified interest of the insured based upon the occurrence of the covered risk. The insurer may then seek recovery or contribution for harm suffered (funds paid to the insured or third parties) based upon the harm to the insured’s interest. The majority of all civil litigation in the United States involves insurance coverage. Failure of an insurer to comply with its duties under an insurance policy is a common subject of litigation, known as “bad-faith refusal”. For further written and video explanation, discussion and practice questions, see What are the primary obligations of the insurer?
Primary Obligations of Insured
The primary duties of an insured in an insurance contract are as follows: Duty to Disclose Information - The insured must inform the insurer of any events relevant to the contingent risk transferred to the insurer. This includes disclosing information in the application for policy coverage and disclosing incidences of damage to the insured person or property or harms resulting from the insured’s conduct. A failure to disclose such information may lead to the loss of insurance coverage. Duty to Cooperate - An insured has a duty to cooperate with the insurer in the identification, investigation, and resolution of any event or circumstance giving rise to losses born by the insurer. For further written and video explanation, discussion and practice questions, see What are the primary obligations of the insured?
General Structure of an Insurance Contract
Declarations - The declarations section of an insurance contract identifies the parties to the contract and dictates that the following provisions constitute an insurance contract. It will generally state the intentions of the parties with regard to the subject-matter of the insurance, the term of the policy, the risks covered by the policy, the limits on payment in the event an insured risk occurs, and the financial obligations of the insured (premiums, deductibles, co-payments, etc.). Definitions - Most insurance contracts contain a defined terms section that provides the common understanding of certain terms or phrases used throughout the insurance agreement. This section can be very important for avoiding ambiguities in the agreement. Terms of Insurance - This section, often called the “insuring agreement”, lays out the promises of the insurance company to indemnify the insured against certain risks of loss. Specifically, it will describe the type of risks insured against and the person, property or subject matter covered under the policy. There are two basic forms of an insuring agreement: Named Perils Coverage - This form of agreement insures perils specifically listed in the policy. If the peril is not listed, it is not covered. All-Risk Coverage - This form of agreement insures all losses suffered to a person or specific property except those losses specifically excluded. If the loss is not excluded, it is covered. Exclusions - Exclusions are types of contingent risk that are not covered or insured under a policy. There are three major types of exclusions: Excluded Perils or Causes of Loss - For example, homeowner’s insurance may exclude damages caused by flooding. Excluded Losses - For example, an automobile policy may exclude normal wear and tear from everyday use. Excluded property - For example, a homeowner’s policy may not include certain personal property located within the home. Conditions - Conditions are contractual provisions that require a certain fact or circumstance come about before duties or obligations arise under the contract. If policy conditions are not met, the insurer is not obligated to insure against the loss that is subject to that condition. That is, the insurer will deny a claim for losses if an applicable condition in the policy is not satisfied. For example, the insurer may make filing a claim and providing proof of loss a condition to coverage. Endorsements - These are forms attached to the main insurance policy used to modify the duties or obligations under the policy. Often endorsements will place some condition on the insurer’s duty to indemnify the insured or cover a particular type of loss. They may also modify or delete express clauses present within the core of the insurance policy. This is the primary method by which underwriters tailor a specific policy to cover a particular insured. Policy riders - Policy riders are amendments to an existing policy. The rider contains the amended terms and becomes part of the original insurance contract. An insurer will use a rider any time that the terms of coverage change under an insured’s policy. Policy Jackets or Binders - Insurers often issue a policy within a policy jacket. The jacket is a cover, binder, envelope, or folder containing the policy. The binder will often contain boilerplate provisions of the insurance policy. Some insurers now append material to the insurance policy that contains the standard boilerplate provisions, instead of including those provisions on the jacket. For further written and video explanation, discussion and practice questions, see What is the general structure of an insurance contract?
Commonly Disputed Provisions in Insurance Contract
State law requires that insurance contracts contain certain provisions protecting the rights of the insured against the insurer. These provisions are commonly the subjects of litigation. An insurer that fails to pay an insurance claim for which it is legally obligated may be subject to a “wrongful dishonor” action by the insured. Some of these common provisions in many types of insurance policy include: Incontestability Clauses - An “incontestability clause” protects the insured by preventing an insurer from denying coverage based upon certain misrepresentations by the insured when applying for the policy. These clauses generally do not protect against fraudulent statements made with the specific purpose of deceiving the insured into granting a policy. Incontestability clauses are effective after a stated period of time, the “contestability period”. The theory is that a misrepresentation that does not give rise to an issue in coverage within the stated period was not material at the time of the application for coverage. Anti-Lapse Clauses - An “anti-lapse clause” prevents an insurer from automatically canceling an insurance policy at the end of a specific policy term. In addition, state statutes require that the insurer give the insured sufficient notice of the policy’s termination date and inform the insured of what is required to continue coverage for a future coverage period. If the insurer fails to meet the notice and information requirements, the insured may be able to claim coverage or renew the policy beyond the posted termination date. Appraisal Clause - Appraisal clauses seek to avoid litigation of disputes as to the replacement or repair value of covered items. Specifically, these provisions require that the insured and insurer submit any disputes as to valuation to qualified third-party appraisers. These appraisers arrive at a value that binds both parties. The parties split the cost of hiring appraisers to determine the dispute. Duty to Preserve Clause and Notice of Claims - Nearly all insurance contracts require that the insured seek to preserve evidence surrounding a particular claim and provide notice to the insurer as soon as the insured has a reasonable belief that a claim has arisen. This is particularly true in an indemnification situation where the insurer is responsible for defending and paying any losses awarded through civil litigation. Preserve Evidence - The insured must preserve any evidence relevant to the situation once the insured reasonably anticipates litigation on the matter. Notice of Claims - These provisions require an insured to provide notice to its insurer of any circumstance that may give rise to a claim under the existing policy. Failure to provide a notice of claim prior to the end of the policy may diminish the ability of the insured to make a claim for injuries or losses incurred. Co-Insurance Clause - These provisions require that an insured purchase separate insurance on insured property up to a specific percentage of the insured property value. An insured who fails to purchase insurance to meet the required percentage of the property value may forfeit any or all of the coverage under a particular policy. Multiple Coverage Clause - These clauses limit the insurer’s responsibility to pay for losses when multiple insurance policies cover the same property or loss. Generally, these clauses provide that an insurer will be a secondary insurer to any existing insurance. Alternatively, these policies state that the insurer will pay only a pro rata share of losses along with the other insurer. Dispute Clause - Dispute clauses are provisions aimed at curbing insurance litigation. These provisions require the insured and insurer to submit any dispute to binding arbitration, rather than initiating a civil action. Many states will not enforce these provisions and allow parties to initiate litigation. For further written and video explanation, discussion and practice questions, see What are the common disputed provisions in an insurance contract?
Terminate an Insurance Contract
An insured may terminate an insurance policy at any time. Generally, it requires that the insured express intent to cancel the policy. This may include notifying the insurer in writing or discontinuing payment of premiums. If the insured stops paying the insurance premiums, the insurer must provide the insured with notice of its intention to cancel the policy. If the insurer fails to provide notice within the statutory period, the insured may be able to resume her insurance contract by resuming payments. An insurer is generally limited by statute in its ability to cancel a policy. Below are the common situations in which an insurer may cancel a policy. Void by Insurer - An insurer may void a contract if the insured supplies false or misleading information to the insurer to obtain insurance. To void the contract, the insurer must demonstrate that the insured made a fraudulent or material misrepresentation. Further, the insurer must demonstrate that it would not have entered into the insurance relationship with the insured if it had known of the misrepresented facts. Conditions in Policy - An insurance policy may contain any number of conditions that can cause cancellation of the insurance policy. These are normally limited by state law and rules of equity. End of Policy Term - An insurer may be able to terminate an insurance policy at the end of a stated insurance term. State law may limit the ability of the insurer to deny an insured the ability to renew a policy that has not lapsed. This is particularly true with health and life insurance policies. For further written and video explanation, discussion and practice questions, see What is required for termination of an insurance contract?
Flashcard - Study Practice
Flashcard – Study Practice