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Outline - Insurance Law

Class Note of Insurance Law, Professor Mary Hylton

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Law (LW349)

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Temple University

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Outline of Principles of Insurance Law

Module 1. Introduction

A. functions of insurance:

1. Insurance = Minimization of Risk:

a. Risk-transfer: Transfer risk from risk-adverse to risk-neutral person. (This is efficient because this encourages actions otherwise not taken.)

b. Risk-pooling: Pool the risk. (Diversification - whole risk is smaller than sum of its parts.)

c. Risk-allocation: Insurers can create incentive for Insured to optimize the degree of the risk they pose even when insurance is available.

2. On the assumption that there is a group of the same risk individuals:

a. Insurance turns “Unpredictable risk for individual” into “predictable risk for insurance company.”

b. However, each event of accident must be independent or unrelated.

B. Problem of imperfect information:

1. Moral Hazard:

a. risk that a party with insurance will increase risky behavior because the cost will be borne by the insurer.

Simple policy and high charge v. With exclusion/limitation clause 1 and low charge, but high administration cost:

Moral hazard raises probability of accident and cost of premium (cost analysis). Therefore, Insurer tries to exclude or limit liability in case of immorality, otherwise Insurer can’t keep low premium.

b. Pro-Insured argument:

Insured may argue Reasonable Expectation doctrine.

2. Adverse Selection:

a. function of asymmetric information. Consumer selects insurance because of asymmetric information.

No category/classification v. Category/classification If there is no category or classification, high-risker gains from low-risker. This is a kind of subsidization by lower-risker to higher-risker. (cost analysis).

b. Category/classification, however, is not necessarily good:

Insurer must take into account fairness in classifying against such as disability.

3. Policy-driven toward coverage:

Insurance law is different from contract law in sense policy-driven toward coverage.

1 Deductible Clause/Coinsurance also work to reduce Moral Hazard.

4. Summary:

Both moral hazard and adverse selection arise from asymmetric information and market fairness.

C. Warranty: a guarantee or promise (from insured to insurer) that provides assurance by one party to another that specific facts or conditions are true or will happen.

D. Representation: not part of insurance contract, collateral to it. Only if a representation is material to the risk to be insured is the contract for insurance voided. Materiality is irrelevant to a warranty.

1. To combat Adverse Selection and Moral Hazard, Insurer requires Insured to disclose inherent risk which Insured know better than Insurer.

a. If tested perfectly to get insurance, cost and time-consuming.

However, the Insured’s failure to disclose is not dispositive.

2. Misrepresentation can be immaterial or material

a. immaterial: insurer cannot deny coverage under the policy.

b. material: insurer may deny coverage for specific claim

Test: to look back – go back and ask what the piece of inaccurate or dishonest information was and was it related to the actual loss

E. Contra Proferentem

1. Contra Proferentem: Ambiguous language in a contract of adhesion is to be construed against the drafting party.

a. only applies to contract of adhesion.

b. an ambiguous provision is interpretated in favor of the non-drafting party

c. ambiguous means subject to two or more reasonable interpretations

Justification: One justification for contra proferentum is that the insurer has complete control of the language of the contract of adhesion, because they draft the contract without negotiating. Thus, they are in the best position to make sure that the contract language is clear. Another justification for contra proferentum is that the insurer has superior bargaining power (due to the take it or leave it nature of the contract) and is generally more sophisticated than the policyholders.

Cases

Vlastos v. Sumitomo Marine & Fire Insurance Company

Rule of Law: If a warranty in an insurance policy is ambiguous, the warranty should be construed against the insurer and in favor of insurance coverage.

Issue : If a warranty in an insurance policy is ambiguous, should the warranty be construed

misrepresentation. We do not know whether the agent properly asked questions on application and recorded the answer correctly. Here, Neill’s signature on the application is not enough to find misrepresentation , but is probative in determining whether Neill made a material misrepresentation on the application. Because there is a question of fact as to whether the insurance agent misstated facts on the application, the trial court’s grant of summary judgment in favor of Nationwide is reversed.

Taken-away questions:

Did Neil need to read before signing it? ( Duty to read ?)
Did the agent have incentives to misrepresent?
How do we know whether the applicant or the agent is lying (the relationship between the two)?

3. MacKenzie v. Prudential Insurance Company of America United States Court of Appeals for the Sixth Circuit, 411 F 781 (6th Cir. 1969)

Rule of Law: An applicant for insurance has a duty to disclose a change in health if this failure to disclose would amount to a material misrepresentation.

Facts:

Marcella MacKenzie (plaintiff) sought to collect as a beneficiary under a life insurance policy issued to her husband, Jerome MacKenzie, by Prudential Insurance Company of America (Prudential) (defendant). Prudential refused to pay Marcella the proceeds of the policy. In order for the insurance policy to take effect, Jerome was required to truthfully answer if he had suffered or ever been treated for heart problems, including high blood pressure. At the time Jerome applied for the policy, he had never suffered from any heart problems. After the application was complete, but before it was delivered, Jerome was treated for high blood pressure. Jerome did not disclose this high blood pressure to his Prudential agent when the policy was delivered. According to Prudential, if Jerome had told the truth about his heart problems when the policy was delivered, Prudential would have either declined to issue the policy or increased the insurance premium. Prudential asserted that Jerome’s omission of this information constituted a material misrepresentation that voided the policy. Marcella brought an action against Prudential in Kentucky state court. The action was removed to federal district court due to diversity of citizenship. The district court granted summary judgment to Prudential. MacKenzie appealed.

Issue

Does an applicant for insurance have a duty to disclose a change in health, and if so, did the failure constitute a material misrepresentation?

Holding and Reasoning (Combs, J.) Yes. An applicant for insurance is required to disclose a change in health after signing an application for insurance if this change would cause the insurer to decline to issue the policy or increase the premium for the policy. Under Kentucky law, a misrepresentation on

an application must be either material or fraudulently made in order to prevent recovery under an insurance policy. Here, Prudential claims that because Jerome’s omission was material, Prudential is not required to demonstrate that the omission was fraudulently made. This court agrees with Prudential that Jerome’s omission is material. The Court further stated that the failure of an applicant to disclose this information would permit the insurance company to refuse to issue a policy. If a policy was already issued, the applicant’s omission would give the insurance company a valid defense to a suit to enforce payment under the policy. Under Stipcich , Jerome’s failure to disclose his high blood pressure is material because this omission would have caused Prudential to either refuse to issue the policy or increase Jerome’s insurance premium. Because Jerome’s omission is a material misrepresentation, his insurance policy is void, and Marcella may not recover under the policy. The judgment of the district court is affirmed.

Courts note that even an unsophisticated insured would have known that the kind of information at issue here was critical and therefore required disclosure. – Mackenzine Rule.

Misrepresentation defenses typically:

form of insures push back against adverse selection
can be complicated by insured claims of agent error/malfeasance
raise questions about duty to read
raise questions about duty to disclose

extended territorial coverage to the Bahama Islands. Khurey and his family were killed in a plane crash 25 miles west of Puerto Rico while flying from Haiti to Puerto Rico. This was the last leg of their overall trip from New York to Puerto Rico. INA declined coverage, claiming that the policy only covered losses occurring in certain defined covered locations, which included the three miles adjacent to the coasts of these locations. The plane crash occurred outside of the covered locations. Daniel Vargas (plaintiff), the personal representative of one of the Khureys, argued that the policy covered losses occurring while the plane was traveling between two covered locations. Vargas brought a declaratory- judgment action to determine whether INA was liable under the insurance policy. The district court granted summary judgment on behalf of INA. Vargas appealed.

Issue:

Can insurer deny coverage on the ground that loss did not occur within the US and its territories or possessions?

Should an ambiguous provision in an insurance policy be construed in favor of the insurer if the insurer can establish that its interpretation is the only reasonable and fair construction of the provision?

Holding and Reasoning (Sofaer, J.): Court says that policy language is ambiguous and under NY law contra proferentem applies.

Under New York law, an ambiguous insurance-policy provision will be construed in favor of the insured unless the insurer can establish that a reasonable person could not interpret the insurance policy in the same way as the insured, and that the insurer’s interpretation of the policy is the only possible interpretation. Here, INA’s interpretation of the policy, which limits coverage to the areas explicitly described in the policy and the three miles adjacent to the coast of these areas, is not the only reasonable and fair construction as a matter of law. INA’s interpretation of the policy includes only the covered locations, and not the areas that must be traveled to move from one covered location to another. A reasonable interpretation of the policy includes the areas in between covered locations if the applicant is flying from one covered location to another on an ordinary and customary route. The policy must be analyzed in light of the endorsement, which includes locations that are not explicitly covered by the policy, but that must be crossed in order to go from one covered location to another. Because this endorsement includes the areas that must be crossed when traveling to and from the Bahamas, a covered location, the entire policy should be interpreted to include the areas that must be crossed when traveling from one covered location to another. Further, if INA wanted to exclude these additional areas, the policy could have been drafted to exclude the areas. In light of the purpose of the policy, INA’s interpretation, which excludes areas in between covered areas, is unreasonable. Adhering to this interpretation would require a pilot to follow unsafe and economically unsound routes to avoid losing coverage. Because INA’s interpretation is not reasonable and fair as a matter of law, the district court’s grant of summary judgment is reversed, and the case is remanded for further proceedings.

B. Patent and latent ambiguity

1. Patent ambiguity

a. apparent from reading the insurance contract itself

b. can be established with reference only to contract

2. Latent ambiguity:

a. although insurance contract is clear on its face, a party knowing background would know that it does not mean what it seems to mean.

b. must be established by extrinsic evidence.

Case:

Stone Container Corporation v. Hartford Steam Boiler Inspection and Insurance Company United States Court of Appeals for the Seventh Circuit, 165 F 1157 (7th Cir. 1999)

Rule of Law: Where an insurance policy is ambiguous, the insured is not entitled to a judgment in its favor before the insurance company has had an opportunity to clarify the ambiguity.

Facts: Stone Container Corporation (Stone) (plaintiff) manufactured pulp, paper, and paper products. To manufacture pulp, Stone placed wood chips in steel tanks called pulp digesters. The pulp digesters were sealed. Heat and steam were used in the pulp digesters to decompose the wood chips into pulp.. Stone made a claim on its policy with Hartford, and Hartford denied the claim. Stone sued Hartford to compel Hartford to pay on its policy. The district court granted summary judgment in favor of Stone, holding that the exceptions to the exclusion were ambiguous and therefore should be interpreted in favor of Stone. Hartford appealed.

Issue: is policy excluding pulp digester explosions ambiguous or enforceable?

Where an insurance policy is ambiguous, is the insured entitled to a judgment in its favor before the insurance company has had an opportunity to clarify the ambiguity**?**

Holding and Reasoning (Posner, C.): No. Although the general rule is that ambiguities in an insurance policy should be resolved in favor of the insured, this rule only applies after the insurance company has had the opportunity to clarify those ambiguities. The court notes that the drafting party is entitled to an opportunity to present extrinsic evidence to disambiguate the ambiguity before the application of contra proferentem. Here, “explosion” is to be given its ordinary meaning, and the policy is not ambiguous on its face, therefore, the insurer effectively excluded the coverage.

Stock Burglary Policy (policy). The definition of burglary in the policy required that there be “evidence of forcible entry.” Between April 9 and April 11, 1977, chemicals worth $15,586 were stolen from an Atwater building during a burglary. Two of three storage- bin doors were open, and the doors’ padlocks were missing. The turnbuckles on one of the doors had been loosened. Following the burglary, Atwater filed a claim with Western under the policy. Western denied the claim because there was no evidence of forcible entry as required by the policy. Although Western’s insurance agent testified that he had told Atwater that the policy included a forcible-entry requirement, none of the members of the Atwater board of directors remembered being told about this requirement or reading the policy in full. Atwater filed suit against Western for the $15,586 loss and for $7,500 in business losses, costs, disbursements, and attorney’s fees. The trial court ordered judgment in favor of Western. Atwater appealed.

Issue:

Will the reasonable expectation of an insured as to coverage under an insurance policy defeat the literal language of the policy that exclude coverage for burglaries without evidence of forceable entry?

Holding and Reasoning (Wahl, J.) Yes. Court says that that kind of language is a “classic example of a provision that should be and has been interpreted according to reasonable expectations of the insured.” Court says that policy must cover losses incurred during the burglary.

The literal language of an insurance policy will not be interpreted in a way that defeats the expectations of the policy holder. The requirement that a burglary include visible forcible entry is intended to protect an insurance company from fraud and inside jobs. However, even if there is no evidence of fraud or an inside job, this definition can act as an exclusion. Thus, in situations where the burglary definition would prevent the insured from collecting under an insurance policy following a burglary, courts have analyzed the policy according to the reasonable expectations of the parties. The analysis of a policy in light of the reasonable expectations of the parties gives credence to the disparity in bargaining power between the insurance company and the insured, the insured’s inability to understand the policy, and the insured’s reliance on the insurance company to provide a suitable policy that meets the insured’s needs. Here, the policy is properly analyzed in light of the reasonable expectation of Atwater, the insured, even though this interpretation contradicts the literal language of the policy. When Atwater obtained the policy, Atwater’s expectation was that burglaries would be covered regardless of whether there were signs of visible forcible entry. Because the policy’s literal definition of burglary defeated the reasonable expectations of Atwater when Atwater obtained the policy, coverage under the policy is proper. Accordingly, the trial court’s decision as to the policy is reversed.

G. Intermediaries (also known as producers):

1. Agent: typically represent the insurer and is authorized to solicit and

prepare coverage applications.

a. 2 types:

i) Captive agents sell exclusively for one insurer and may be employee or independent contractor. ii) Independent agents sell for multiple insurers and are always independent contractors

b. In a case of false statement in application through agent, general rule: “knowledge of agent imputed to Insurer itself.” However another test can be applicable:

i) If Insured would have expected kind of fraud, Insured lose. ii) If no chance to know the agent’s fraud and misrepresentation, Insured win, because Reasonable Expectation of Insured comes in.

2. Broker:

Primarily operates on behalf of individuals and entities seeking coverage.

3. Basic agency law / master-servant doctrine governs intermediaries

a. If insurer grants an agent actual authority to enter into contracts on its behalf, then agent can bind principal insurer.

b. if agent only has only apparent authority, then it can still bind the insurer if the agent has spoken or acted in a way that would cause a reasonable insured to believe that the agent has actual authority.

 an agent with apparent authority can bind an insurer, such as some cases.  when insurer is bound because of agent’s apparent authority, insurer has cause of action against agent for breach of contract; and insurer will typically recover from agent’s surety bond or errors and omissions coverage.

4. Authority issue: Similar to ordinary contract.

a. Actual authority:

b. Apparent authority:

i) Need some kind of connection between two parties to create the relationship; but once they have connection, it's up to policyholder's perception. ii) Insurer's ability to limit agent's authority is quite narrow; Insurer can't expect instruction to be followed either Insured or agent.

duty to procure insurance. Determining whether an insurance agent has an expanded duty requires an evaluation of the relationship between the parties, including the parties’ prior dealings, the types of discussions between the parties, the client’s knowledge about insurance, additional compensation received by the agent, and whether the agent represents that she is solely an insurance agent or an insurance specialist. Here, the relationship between the Langwiths and Fitzgerald created an implied agreement between the parties that expanded Fitzgerald’s duties. The Langwiths depended on Fitzgerald to not only to procure insurance for them, but also to make sure that the Langwiths and their children were properly covered. When Susan met with Fitzgerald after Ben’s driver’s license was reinstated, Susan specifically asked Fitzgerald about coverage for Ben. This expanded relationship created an implied agreement that expanded Fitzgerald’s duty beyond a mere requirement to procure insurance for the Langwiths. Because the relationship between the Langwiths and Fitzgerald was expanded to include an implied agreement that Fitzgerald would provide professional guidance regarding insurance, Fitzgerald had a duty to advise the Langwiths about Ben’s lack of coverage. Accordingly, the trial court’s summary judgment on behalf of Fitzgerald for this claim is reversed. However, court agrees that the agent did not breach duty of care when she failed to suggest parent to transfer car titles as she never agreed to help them avoid risk.

Note: less than a year, the Langwiths case was overridden and the state legislature adopted the limited approach as relieving the agent’s duty unless there was evidence of an expanded agency agreement.

H. Waiver and Estoppel:

1. Waiver: Look at conduct of Insurer if Insurer voluntary relinquished.

2. Estoppel: Look at conduct of Insurer’s representation and Insured’s change of position.

a. In estoppel, Insurer’s representation in 3 situations:

i) When contract made: There is reliance. ii) After contract but before loss: There is reliance. iii) After loss: No reliance. If after loss, estoppel is rarely applied. Reasonable Expectation helps Insured any way.

Roseth v. St. Paul Property & Liability Insurance Company Supreme Court of South Dakota, 374 N. 2d 105 (S. 1985)

Rule of Law

The doctrine of equitable estoppel does not prevent an insurance company from denying coverage to an insured if the estopping activity occurred after the inception of the insurance policy.

Facts

On November 12, 1979, Richard Miller was in an accident on U. Highway 83 in South Dakota while transporting 109 calves from Idaho to a buyer in Nebraska. Miller was transporting the calves pursuant to an agreement with Jerry Roseth (plaintiff). Under the agreement, Miller was to transport livestock for Roseth using Roseth’s trailer, and Roseth was to receive 20 percent of the trucking payment. During the accident, 14 calves were either killed or lost. Roseth reported the accident to Black Hills Agency (Black Hills) (defendant). Roseth had purchased an insurance policy with St. Paul Property & Liability Insurance Company (St. Paul) (defendant) from Black Hills. Roseth’s insurance policy with St. Paul covered livestock mortality, but contained an exclusion for livestock that survived but were injured. James Wattleworth, St. Paul’s adjuster, contacted Roseth. Roseth told Wattleworth that the surviving calves were in poor shape and that Roseth’s insurance policy would cover the loss of these injured calves. Wattleworth admitted to Roseth that he did not have a copy of Roseth’s policy, but told Roseth that St. Paul would perform under the policy. To minimize loss, Roseth and Wattleworth agreed that Roseth should sell the calves immediately. The calves were sold at an $8,865 loss. St. Paul paid Roseth only for the 14 calves that were either killed or lost. Roseth filed suit against St. Paul and Black Hills for the $8,865 loss that he suffered when he sold the injured calves. Roseth claimed that St. Paul was estopped from enforcing the exclusion because Wattleworth had failed to correct Roseth’s misconception about his coverage under the insurance policy. Roseth claimed that, as a result, he was led to believe that he would be reimbursed for his losses from the injured calves. The trial court found that St. Paul was estopped from denying coverage because of Wattleworth’s actions. St. Paul appealed.

Issue

Roseth asserted that the adjuster failed to correct his misimpression that the policy covered injured claves, and that he only sold the injured calves on the assumption that the insurer would reimburse him for the diminished value.

Does the doctrine of equitable estoppel prevent an insurance company from denying coverage to an insured if the estopping activity occurred after the inception of the insurance policy?

Silberg v. California Life Insurance Company Supreme Court of California, 11 Cal 452 (1974)

Rule of Law

The covenant of good faith and fair dealing, which exists in every insurance contract, requires an insurance company to accept a reasonable settlement to absolve the insured of liability to a third person.

Facts

Enrique Silberg (plaintiff) owned and operated a dry-cleaning business. His landlord owned a laundromat that Silberg sporadically worked at in exchange for reduced rent. On July 17, 1966, Silberg was injured in an accident at the laundromat and admitted to a hospital. Silberg told the hospital that he was insured by California Life Insurance Company (CLIC) (defendant). Silberg’s policy with CLIC contained an exclusion for losses that would be payable under workmen’s compensation. Silberg later notified and filed claims with CLIC for his injury. In his claim forms, Silberg declared that he was self-employed and would be seeking workmen’s compensation. Silberg was hospitalized two more times for injuries stemming from the same accident. Because CLIC failed to pay any of Silberg’s medical bills, he had to go to different hospitals each time. Silberg notified each hospital that he was insured by CLIC. However, when Silberg sought to collect workmen’s compensation, his claim was denied. According to the Workmen’s Compensation Appeals Board (Board), Silberg was not an employee. Silberg’s workmen’s-compensation claim was later settled without a determination as to Silberg’s employment status. Silberg filed suit against CLIC, seeking a declaration that CLIC was liable under the policy because the Board had not formally found that Silberg’s injury was covered by workmen’s compensation. At trial, the manager of CLIC’s claims department testified that CLIC had failed to pay Silberg’s claims because CLIC was awaiting the findings of the Board before determining whether the exclusion applied. The trial court found that Silberg’s policy with CLIC was ambiguous, and issued an order requiring CLIC to pay Silberg’s medical costs. CLIC appealed.

Issue

Did the insurer’s failure to pay the benefits under the policy constitute bad faith?

Holding and Reasoning (Mosk, J.) Yes. The court concludes that failure to pay benefits was bad faith as a matter of law, especially considering the long delays and catastrophic effect of the delays on the insured.

Insurer says it was waiting for the state workers compensation board to make determination before making any payment to the insured. Court notes that insurer could have protected itself completely even if it made prompt payments to the insured and later learnt WC would cover his claims.

Insurer offers no explanation for failure to adopt this course of action which could have protected insured from financial ruin. “Under these circumstances, insurers’ failure to

afford relief to its insured against the very eventually insured against the policy amounts to violation as a matter of law of its duty of good faith and fair dealing implied in every policy.”

Summary of bad faith:

1. more than mere negligence

2. some courts say failure to pay when insured would have been entitled to a directed verdict is bad faith

3. In successful bad faith cases, courts may award punitive damages as well as damages for pain and suffering

Systematic bad faith:

There are some evidence that insuers have engaged in a pattern and practice of bad faith claims review.

J. Public Policy Restrictions: (state policies articulated or implied)

Most insurance regulation is state regulation. State policies can be articulated via statutes, state constitutions and judicial opinions. Often state policies are implicated by the drafting and/or interpretation of the insurance contracts.

1. Public Policy against insurance of intentional tort:

a. Moral Hazard is to combat against incentive to commit crime; Without/against Moral Hazard, no deterrence effect.

b. However, need of such insurance in, ex. Employer Insurance, where it is liable for Employee’s intentional torts and no incentive there.

cf. “Intent” is narrower in insurance law than in tort law. If intent to contact, no Moral Hazard: So can be Insured.

2. Public Policy against insurance of punitive damages:

a. Argument as to whether punishment or deterrence purpose:

Especially if former, insurance makes no sense.

b. Courts are split: majority uphold coverage.

3. Public Policy for insurance of loss caused beyond fixed period:

a. Public Policy discourage person to lose leg earlier after accident: let them try to fix it.

b. Insurer’s concern that causation is difficult to prove after long period; Evidence purpose. This is transfer of Burden of Proof.

purpose of those damages. If the insured wrongdoer is not forced to pay the punitive damages herself, she will not be deterred. Here, public policy would be violated if Hartford, an insurance company, paid Powell’s punitive damages. Permitting the insurance policy to cover Powell’s punitive damages would diminish the punishing effect of those punitive damages. Therefore, Powell’s coverage under Hartford as it relates to punitive damages is void and unenforceable. Accordingly, Hartford’s motion for partial summary judgment is granted.

Strickland v. Gulf Life Insurance Company Supreme Court of Georgia, 240 Ga. 723 (1978)

Rule of Law

A condition in an insurance policy may not set an arbitrary time limit after an injury within which the insured must recover under the policy.

Facts

Mr. Strickland (plaintiff) obtained a life-accident policy in 1946. This policy provided coverage for amputation of a limb if the amputation occurred within 90 days of the injury that led to it. Strickland injured his lower right leg. His doctors tried to save his leg but were unsuccessful, and Strickland’s leg was amputated 118 days after the injury occurred. Gulf Life Insurance Company (Gulf) (defendant) denied coverage to Strickland because his leg was amputated more than 90 days after the injury. Strickland sued Gulf for coverage under the life-accident policy. The trial court granted Gulf’s motion for summary judgment. The court of appeals affirmed. The Supreme Court of Georgia granted certiorari.

Issue

Is the 90-day requirement for amputation arbitrary and violative of the state’s public policy?

May a condition in an insurance policy set an arbitrary time limit after an injury within which the insured must recover under the policy?

Holding and Reasoning (Undercofler, J.) Court says yes, the 90-day requirement forces the insured to make an “ugly choice” – either continue treatment and hope leg improves or amputate in order to obtain insurance coverage. This insurance provision which imposes such a “gruesome choice” may be unreasonable and void as against public policy. However, the court does not reply on anything for the public policy. A condition in an insurance policy may not set an arbitrary time limit after an injury, after which the insured can no longer recover under the policy. Where a condition in an

insurance policy is arbitrary and forces the insured to avoid seeking medical treatment, the limitation may be void as against public policy. Previous holdings of the court of appeals have strictly interpreted time limitations. For example, in State Farm Mutual Automobile Insurance Co. v. Sewell , 153 S 432 (1967), and Georgia Life & Health Insurance Co. v. Sewell , 148 S 447 (1966), the plaintiff had a policy that only covered complete loss of vision. The insurance company refused to pay on the plaintiff’s claim because he had retained some of his vision. The court of appeals agreed that the policy was inapplicable because the policy required a complete loss of sight. Similarly, in Boyes v. Continental Insurance Co. , 229 S 75 (1976), the court of appeals determined that an insurance policy covering the loss of an appendage through amputation did not cover the total loss of use of the appendage. However, this strict interpretation of insurance policies places the insured in a difficult position where he must forego treatment in order to receive payment under the policy. Although parties should be allowed to contract to limit the ability of an insured to collect under a policy, courts can use public policy to determine whether those contracts should be enforced. Here, a strict interpretation of the life-accident policy is not proper. After his injury, Strickland could either have his leg amputated and collect on the policy, or attempt to save his leg but risk being unable to collect under the policy. Strickland chose to try to save his leg. The court of appeals did not determine whether the 90-day limit was enforceable based on public policy. Instead, the court of appeals relied on precedent from Sewell , Pratt , and Boyes , which strictly interpret time limitations. To determine whether Strickland’s life-accident policy is enforceable under public policy and whether the 90-day limit is reasonable, other factors must be considered, such as: (1) how long an injured leg would take to heal, (2) how likely an injured leg is to heal, (3) economic risk, and (4) causation. The court of appeals did not consider these factors. Thus, the decision of the court of appeals is reversed so that the trial court may evaluate these factors and the enforceability of Strickland’s life-accident policy in light of public policy.

Dissent (Bowles, J.) Note that dissent focuses on freedom of contract; public policy restrictions on contract terms are rare; and often it is hard to determine precisely what policy of the state the court focused on.

Because the insurance policy was unambiguous, the trial judge was not required to consider evidence. The majority is now requiring the trial judge to conduct an evidentiary hearing instead of making a determination based on his experience, his knowledge, and prior binding decisions. The majority is also relying on decisions from courts holding a minority view. The majority view accepts that some policies may violate public policy, but gives greater weight to the right of parties to enter contracts. Finally, the majority’s decision was made without justification and without compelling reason. The decision of the court of appeals should be affirmed.

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Outline - Insurance Law

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Outline of Principles of Insurance Law

Module 1. Introduction

A. functions of insurance:

1. Insurance = Minimization of Risk:

a. Risk-transfer: Transfer risk from risk-adverse to risk-neutral person. (This is

efficient because this encourages actions otherwise not taken.)

b. Risk-pooling: Pool the risk. (Diversification - whole risk is smaller than sum of its

parts.)

c. Risk-allocation: Insurers can create incentive for Insured to optimize the degree of

the risk they pose even when insurance is available.

2. On the assumption that there is a group of the same risk individuals:

a. Insurance turns “Unpredictable risk for individual” into “predictable risk for

insurance company.”

b. However, each event of accident must be independent or unrelated.

B. Problem of imperfect information:

1. Moral Hazard:

a. risk that a party with insurance will increase risky behavior because the cost will be

borne by the insurer.

Simple policy and high charge v. With exclusion/limitation clause1 and low charge,

but high administration cost:

Moral hazard raises probability of accident and cost of premium (cost analysis).

Therefore, Insurer tries to exclude or limit liability in case of immorality, otherwise Insurer

can’t keep low premium.

b. Pro-Insured argument:

Insured may argue Reasonable Expectation doctrine.

2. Adverse Selection:

a. function of asymmetric information. Consumer selects insurance because of

asymmetric information.

No category/classification v. Category/classification

If there is no category or classification, high-risker gains from low-risker. This is a

kind of subsidization by lower-risker to higher-risker. (cost analysis).

b. Category/classification, however, is not necessarily good:

Insurer must take into account fairness in classifying against such as disability.

3. Policy-driven toward coverage:

Insurance law is different from contract law in sense policy-driven toward coverage.

1 Deductible Clause/Coinsurance also work to reduce Moral Hazard.