Prior to the September 11, 2001, attacks that destroyed the World Trade Center (WTC) towers, 22 insurance companies had issued property insurance binders covering the WTC complex. These binders were issued to Silverstein Properties, Inc., the holder of a 99-year lease of the WTC complex under an agreement with the Port Authority of New York and New Jersey. A binder is a temporary contract of insurance that is in force until a formal insurance policy is issued by the insurer. The 22 insurers intended to issue formal insurance policies to Silverstein, but very few had done so as of 9/11. Therefore, the binders established and limited their obligations to pay Silverstein after the destruction of the WTC complex. In the litigation that ensued, a federal court agreed with an argument made by insurers Hartford, Royal, and St. Paul: that their binders should be interpreted as containing the terms set forth in a form binder known as the “WilProp form,” which had been circulated among many of the various insurers. The WilProp form made the insurance coverage applicable on a peroccurrence basis and contained a specific definition of occurrence. The court then addressed the critical issue: whether, for purposes of the binders at issue, the two plane attacks that destroyed the WTC towers on 9/11 were one occurrence or, instead, two occurrences. The district court held that in view of the WilProp form’s definition of occurrence, the two plane attacks on the WTC were one occurrence for purposes of those companies’ binders. Another insurer (Traveler’s) had a binder that did not define “occurence” and the district court concluded that there were genuine issues of material fact to be resolved by a jury in regard to the plane attacks on the WTC and whether the attacks were one occurrence or two. The lessor of the building challenged the court’s ruling. The Second Circuit Court concluded: “[W]e are not called upon here to decide whether there was one occurrence or two [for purposes of the Travelers binder]. [Instead, we must determine] only whether the district court properly concluded that because there is no well-settled definition of the term occurrence under New York law, the Travelers binder was sufficiently ambiguous to preclude summary judgment and to permit the factfinder to consider extrinsic evidence of the parties’ intent. [We agree with the district court and hold that] the meaning of the undefined term occurrence is an open question as to which reasonable finders of fact could reach different conclusions. District court’s grant of summary judgment for Hartford, Royal, and St. Paul affirmed; district court’s denial of Silverstein’s motion for summary judgment against Travelers affirmed; case remanded for further proceedings.”
Photo is of fishing boats after Hurricane Katrina hit South Plaquemines Parish, Louisiana.
The certificate of death is the typical proof of loss required for payment on a life insurance policy.
Basically, a person has an insurable interest if s/he would suffer a financial loss in the event of harm to the subject property
Photo is of Mount St. Helens, which erupted on 5-18-80 in Washington state. As a result of the eruption, 57 people were killed (21 never recovered). Damages included the destruction of more than 200 houses and cabins, leaving many people homeless. “Many tens of thousands of acres of prime forest, as well as recreational sites, bridges, roads, and trails, were destroyed or heavily damaged. More than 185 miles of highways and roads and 15 miles of railways were destroyed or extensively damaged. Trees amounting to more than 4 billion board feet of salable timber were damaged or destroyed.” In addition, “nearly 7,000 big game animals (deer, elk, and bear) perished in the area most affected by the eruption, as well as all birds and most small mammals…. [and] 12 million Chinook and Coho salmon fingerlings were killed when hatcheries were destroyed; these might have developed into about 360,000 adult salmon.” (see http ://vulcan.wr.usgs.gov/Volcanoes/MSH/May18/description_economic_impact.html)
Lessees of real estate would be wise to obtain insurance policies to cover their personal property in the leased premises since lessor’s policy may not cover lessee’s personal property.
The hyperlink is to the Eighth Circuit’s opinion. The facts set forth were as stipulated (i.e., as agreed to) by the parties. While residing in Saudi Arabia, Maples contracted for the construction of a single-family retirement home in Arkansas. Maples purchased homeowner’s insurance from Shelter, whose policy, issued in November 2000, was in full effect at all times relevant to the case. The two-story residence, which had a wooden frame and a basement made of concrete, was largely complete as of November 2000. Maples, who remained in Saudi Arabia, took reasonable precautions for winter weather by leaving a key with the contractor and asking him to winterize the residence. At some unknown time, a water pipe froze and burst. As a result, between four to six inches of water stood continuously in the basement until the contractor discovered the problem in April 2001. The standing water caused only minimal structural damage to the basement, but the humidity from the standing water caused mold to form on all of the interior surfaces of the residence. As a result of the mold, the residence became uninhabitable and had to be demolished. Maples reported the loss to Shelter
Shelter Mutual Insurance Co. brought a declaratory judgment action against Tommy and Bessie Maples (referred to collectively as “Maples”) in the United States District Court for the Western District of Arkansas. Shelter asked the court to declare that Shelter had no obligation to pay a claim made by Maples under a homeowner’s insurance policy issued by Shelter. After the federal district court granted summary judgment in favor of Shelter, Maples appealed to the United States Court of Appeals for the Eighth Circuit, which reviewed the policy de novo.
Court: “It appears to us, then, that the determinative question is a factual one: whether the frozen pipe or the mold was the dominant and efficient cause of the loss. …Because the parties’ factual stipulation does not answer this question, we conclude [that] a material issue of fact remains, and [that] summary judgment was improper. District court’s grant of summary judgment in favor of Shelter reversed; case remanded for consideration of causation issue.”
How would coverage for a house fire differ for a renter compared to an owner? Co-owners? What is the insurable interest of a mortgage company? If your house is worth less than the coverage due to the poor economy, what is the expected result of an insurance claim? What if the house is far more valuable due to the housing market than the insurable interest?
What if an insured stores hazardous or dangerous materials in their garage?
Hyperlink is to the court’s opinion in pdf. Brandy Harvey, age 16, and Toby Gearheart, age 19, were at a Wabash River boat ramp one evening. When a disagreement arose, Brandy moved toward Gearheart and pushed him toward the water more than once. When she again approached Gearheart, he put his hands on her shoulders and pushed her. Brandy lost her balance and fell off the boat ramp, down a rocky embankment, and into the river, where she drowned. In a criminal proceeding concerning the incident, Gearheart pleaded guilty to involuntary manslaughter. Acting as co-personal representatives of Brandy’s estate, her parents, Jon Harvey and Misty Johnson, filed a wrongful death action against Gearheart in an Indiana trial court. They contended in their complaint that Gearheart’s “negligence and recklessness” had caused Brandy’s death. Harvey and Johnson also named Auto-Owners Insurance Co. as a defendant on the theory that because of the liability insurance portion of a homeowners’ insurance policy issued to Gearheart’s parents, Auto-Owners would be obligated to pay any judgment entered against Gearheart (who still lived in his parents’ home and was therefore an insured person under the policy). The court concluded that the record showed a plea agreement, but the evidence “is definitely not so overwhelming as to mandate us to conclude that Gearheart must have intended to harm Brandy. Because Auto-Owners has failed to demonstrate the absence of a genuine issue of material fact regarding Gearheart’s intent to harm Brandy, the trial court was correct to deny summary judgment on Auto-Owners’ claimed application of the coverage exclusion. [We therefore conclude that the Court of Appeals erred in reversing the trial court’s decision.]”
The hyperlink is to the Seventh Circuit’s opinion on the Findlaw.com website.
The Vining case furnishes an example of behavior that triggers bad faith liability. In late May 1993, Milford suffered a heart attack and died. His surviving spouse, Billie Vining (Vining), filed a claim with Enterprise for death benefits of approximately $10,000 under Milfordís credit life policy. Enterprise refused to pay the claim and rescinded the policy on the supposed ground that Milford had misrepresented his health history in his application for the credit life policy. After unsuccessfully contesting the rescission, Vining sued Enterprise for breach of contract and for rescinding the policy in bad faith. In defense, Enterprise maintained that it had a legitimate basis for contesting the claim and that Milford had made material misrepresentations in his application for the credit life policy. Vining presented evidence designed to show that Enterprise routinely rescinded credit life policies after insureds’ deaths and that the rescission of Milford’s policy fit into this pattern. The jury returned a verdict in Vining’s favor, awarding her $400,000 in compensatory damages for financial losses, emotional distress, and related harms. In addition, the jury assessed $400,000 in punitive damages against Enterprise, which appealed to the U.S. Court of Appeals for the Tenth Circuit. On appeal, the court affirmed.
False. The premium paid by the insured and the promise to pay upon the occurrence of the covered event are the consideration. True. False. Proof of loss refers to a sworn statement by the insured about the loss and resulting damage that is often required by the policy.
False. An i nsurable interest is a legal or equitable interest in the property that translates into an economic stake at the time of the loss and since Paul owns the house, he has an insurable interest. True. False. Insurers tend to either (a) specify covered events (perils) for which the insured will be paid for resulting losses, or (b) broadly state coverage and specify excluded perils for which no payment will be made
The correct answer is (b).
The correct answer is (b). An increase of hazard clause states that the insurer’s liability will be terminated if the insured takes action materially increasing insurer’s risk .
Opportunity to discuss the conflicting interests of (a) insurers, (b) property owners, renters, and business owners, and (c) government entities after a natural disaster. The photo is of a neighborhood in New Orleans after Hurricane Katrina in 2005.
C H A P T E R 27 Insurance Law If anything can go wrong, it will. Anonymous (1950s) known as Murphy’s Law 27-1
Learning Objectives• Explain contractual relationship between insurer and insured• Learn how to interpret policy clauses• Understand insurance terminology and concepts: subrogation, insurable interest, coinsurance, bad faith, duty to defend• Identify types of liability insurance 27-2
Overview• Each day, every person and every business faces the risk of physical and financial loss• In an insurance agreement, the party who would normally risk a particular loss (the insured) transfers – along with consideration (the premium) – that risk to another party (the insurer) which bears financial consequences if the particular risks materialize in the form of actual events (perils) 27-3
Specifics of Insurance• An insured is the person who acquires insurance on real or personal property or insurance against liability, or, in the case of life or health insurance, the person whose life or health is the focus of the policy, but the person to whom the insurance proceeds are payable is the beneficiary – Except for life insurance, the insured and the beneficiary generally are the same 27-4
Specifics of Insurance• Insurance policies must satisfy all of the elements required for a binding contract – Person makes application (offer) to insurance company for insurance coverage – If the insurance company accepts the offer, an insurance contract arises • Insured’s initial premium payment and future premium payments furnish consideration for the insurer’s promises of coverage 27-5
Specifics of Insurance• State law governs whether insurance contracts are covered by the statute of frauds – Once written, the policy generally is enforceable as written• If a dispute arises over policy language, courts interpret the provisions as an average person would understand them and construe ambiguities against the insurer 27-6
The Insurance Binder• A binder is an agreement for temporary insurance pending the insurer’s decision to accept or reject the risk• World Trade Center Properties, LLC v. Hartford Fire Insurance Co. concerns the interpretation of property insurance binders issued shortly before the September 11, 2001, airplane attacks on the World Trade Center Towers – One occurrence or two? 27-7
Misrepresentation• Applicants for insurance have a duty to disclose all material facts about the risk so an insurer may make an intelligent decision about whether to accept the risk• An insured’s misrepresentation, if relied on by the insurer, is like any other contract: the contract is voidable at the election of the insurer 27-8
Proof of Loss & Time Limits• Within a specified time, the insured (for life insurance, a beneficiary) who seeks to obtain the benefits of an insurance policy must notify the insurer that an event covered by the policy has occurred 27-9
Proof of Loss & Time Limits• The insured (or beneficiary) must furnish reasonable proof of the loss-causing event – A sworn statement by the insured (called a proof of loss) about the loss and resulting damage is often required by the policy 27-10
Insurer’s Performance & Breach• Insurers perform obligations by paying out sums and taking other actions under the policy’s terms within a reasonable time after the occurrence of a covered event• If the insurer refuses to pay despite the occurrence of the covered event, the insured may sue the insurer for breach of contract – Compensatory and consequential damages – Perhaps punitive damages if denial in bad faith 27-11
Specifics of Property Insurance• An enforceable property insurance policy requires the person who purchases the policy (policy owner) to have an insurable interest in the property being insured• Insurable interest is a legal or equitable interest in the property that translates into an economic stake at the time of the loss 27-12
Covered & Excluded Perils• Insurers tend to (a) specify covered events (perils) for which the insured will be paid for resulting losses, or (b) broadly state coverage and specify excluded perils for which no payment will be madeVolcano damage is rarely covered 27-13
Personal Property Insurance• Real property insurance typically covers not only harm to a residential or commercial building, but also to personal property inside the real property – Lessees of real property may obtain renter’s insurance to cover their personal property• Personal property insurance for a specific item, such as a vehicle, is available 27-14
Shelter Mutual Ins. Co. v. Maples• Facts: – While residing overseas, Maples contracted to have a home built in Arkansas and purchased homeowner’s insurance from Shelter – Maples took reasonable precautions to winterize the residence, but a water pipe froze and burst, leaving several inches of standing water – By the time of discovery months later, mold covered the interior surfaces of the residence and the house had to be demolished – Maples reported the loss to Shelter 27-15
Shelter Mutual Ins. Co. v. Maples• Procedural History and Legal Reasoning: – Shelter brought suit to deny coverage – District court found in favor of Shelter, reasoning that the policy language clearly provided that any loss due to mold was not covered – Appellate court: “Here, a covered peril, frozen pipes, caused an excluded peril, mold, which resulted in the loss….We disagree with the court’s reading of the policy…the plain language of the policy does not automatically preclude coverage.” 27-16
Shelter Mutual Ins. Co. v. Maples• Holding: – “…determinative question is a factual one: whether the frozen pipe or the mold was the dominant and efficient cause of the loss… [thus] we conclude a material issue of fact remains, and summary judgment was improper.” – Reversed and remanded 27-17
Indemnity Contracts• Property insurance policies are indemnity contracts, thus insurer must reimburse the insured for actual losses to insured property caused by a covered event, but reimbursement may not exceed the insurable interest or amount of coverage purchased (policy limits) 27-18
Special Issues• If real property insured under a valued policy is destroyed, the insured recovers the face amount of the policy regardless of property’s fair market value• Except for the valued policy, property insurance policies often contain a pro rata clause, which apportions loss among insurance companies if the insured purchased multiple insurance policies 27-19
Special Issues• A coinsurance clause states that for the insured to recover full cost of partial losses, the insured must buy property insurance in an amount equal to certain percentage (e.g., 80%) of the fair market value• An increase of hazard clause states that the insurer’s liability will be terminated if the insured takes action that materially increases insurer’s risk 27-20
Special Issues• Under the right of subrogation, the insurer obtains all of the insured’s rights to pursue legal remedies against anyone who negligently or intentionally caused harm to the property Apartment fire spread to other apartments 27-21
Liability Insurance• Liability insurance allows the insured the ability to transfer liability risks to insurer: – Personal liability – Business or comprehensive general liability – Professional liability or malpractice insurance – Workers’ compensation policies • Coverage for employers’ statutorily required obligation to pay benefits to injured workers 27-22
Liability Insurance• Liability policies generally protect against insured’s liability for negligence but do not cover deliberate wrongful acts• Auto-Owners Insurance Co. v. Harvey: a teenager pleaded guilty to involuntary manslaughter for the death of another teen. Court concluded that insurance covered the related civil suit because an intentional wrongful act had not been proven. 27-23
Liability Insurance• Under a workers’ compensation policy, injured employees need not prove negligence on the part of their employer in order to be entitled to benefits, thus the insurer’s obligation relates to liability the insured employer would face under state law rather than employer’s negligence 27-24
Insurer’s Obligations• If another party states a legal claim against the insured and the claim is such that the insurer would be obligated to cover the insured’s liability if the claim were proven, the insurer has a duty to defend insured – Insurer must furnish, at its expense, an attorney to represent insured in litigation resulting from the claim against insured 27-25
Medmarc Casualty Insurance Co. v. Av • Facts and Procedural History: – Medmarc Casualty obtained declaratory judgment that it had no duty to defend its insured (Avent America) from product liability suits arising from manufacture of children’s products containing Bisphenol-A (BPA), a harmful chemical – Policy covered claims arising from “bodily injury,” but suits claimed only economic damages 27-26
Medmarc Casualty Insurance Co. v. Av • Opinion: – Rule that insurer must provide defense if claims are potentially within the scope of the policy cannot apply; even if plaintiffs proved each factual allegation, they could never collect for a bodily injury that they never alleged in the complaint – Medmarc had no duty to defend 27-27
Insurer’s Obligations• If a claim against the insured falls within the liabilities covered by the policy and the claimant is awarded compensatory damages, the insurer must pay the amount held to be due from the insured to the claimant, including court costs – Payment obligations are subject to the policy limits of the insurance contract involved 27-28
Insurer’s Obligations• Insurance policies allow insurers to settle claims of third parties who have made liability claims against the insured – Generally, the insurer’s preference• Insurers that unjustifiably refuse to perform obligations under a policy may be liable for a bad faith breach of contract claim – See Vining v. Enterprise Financial Group, Inc. 27-29
Test Your Knowledge• True=A, False = B – Insurance policies are not like the typical contract and do not require consideration. – A binder is an agreement for temporary insurance pending the insurer’s decision to accept or reject the risk. – “Proof of loss” refers to the evidence in a lawsuit against an insured. 27-30
Test Your Knowledge• True=A, False = B – Paul owns a small house, but rents it to his cousin Deanna, so Paul does not have an insurable interest in the property. – A pro rata clause apportions loss among insurance companies if the insured purchased multiple insurance policies. – Insurers must specifically exclude all perils which will not be covered by the policy. 27-31
Test Your Knowledge• Multiple Choice – Dr. Philamena was sued for malpractice, but is covered under a liability policy from Big Insurance. Could Big Insurance settle the case without Dr. Philamena’s consent? a) Absolutely b) Yes, as long as the settlement was not in bad faith c) No, an insurer must have the insured’s consent d) None of the above 27-32
Test Your Knowledge• Multiple Choice – For 2 years, ChemCo had a 50% increase in the number of worker’s compensation claims because the company failed to install required safety equipment. Could the insurer terminate the policy? a) No, because once a policy is written, it must continue until terminated by the insured b) Yes, under an increase of hazard clause c) Yes, under the subrogation clause 27-33
Thought Question• How should insurance claims be handled in major natural disasters? Aerial view of flooding caused by Hurricane Katrina 27-34