6. What are the primary obligations of the 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.
⁃ Example: Lynn gets into an automobile accident that is his fault. The insurance carrier may be obligated to pay the cost of Lynn’s injuries, the injuries to the other driver, and the cost of damages to both Lynn and the other driver’s car.
• 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.
⁃ Example: Hank has professional liability insurance for his accounting practice, the insurer will be obligated to defend Hank if a client brings a civil action against Hank alleging negligence in his accounting services.
• 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”.
• Discussion: How do you feel about the duties of an insurer? What should be the rights of an insured if an insurer fails to perform its duties, such as pay the insured’s losses or defend the insured in a legal action? Should an insured have the option of paying a claim or defending a legal action? Why or why not?
• Practice Question: Eric has an automobile liability coverage policy with ABC insurance. Eric gets into a wreck with another car, which the police deem to be Eric’s fault. The other drive sues Eric. Generally, what are ABC’s obligations in this situation?