Challenges in Insurance
May 5, 2004
• Pre Litigation Opinions on Underwriting
and Coverage Issues
– Does the Policy Cover the Damage Claimed?
– Did the Damage Occur within the policy
What is Insurance?
• Insurance is a special kind of contract
• Insurance is heavily regulated
• Three elements:
– Risk Distribution
– Among a substantial number of members
– Through an insurer engaged primarily in the
business of insurance
• Risk: According to Black’s
• The chance of injury, damage, or loss
• The chance or degree of probability of loss to
the subject matter of an insurance policy
• The amount that an insurer stands to lose
• A person or thing that an insuraer considers a
• The type of loss covered by a policy
Who will suffer the risk?
• Without insurance, the unlucky person
who suffers the misfortune
• A person who intentionally or negligently
proximately causes the misfortune to
occur to others
• Under certain statutory schemes, the party
the legislature decides should bear the
loss (Workers’ Compensation, e.g)
What risk can be transferred
• Obviously, the actual misfortune cannot be
transferred. If someone runs over me in
the parking lot and breaks my leg, I can’t
transfer the broken leg to him
• Economic loss, and economic
compensation for other losses is all we can
Insurance transfers risk
• Insurer work on the basis of statistics
• Actuaries calculate the risk of certain
eventualities over the population of the
• Insurers fix premium rates to cover losses,
administrative costs, and other costs
– Bonuses for insurance executives, for example
Factors in calculating risk/cost
• To figure out a premium the actuary has
– What is the risk to be covered?
– How frequently will the risk occur?
– How much will it cost to cover the risk?
– What will it cost to administer the program?
• Primarily in the business of insurance
• Compare warranties on merchandise
– An insurer is in the business of insuring
against risk of loss
– A manufacturer can guarantee that its widgets
will work. There is always a risk that the
widgets won’t work. If that risk occurs, the
insurer will replace the widgets. But the
manufacturer isn’t really an insurer
Insurers act as underwriters
• Underwriting in this context is just the act
of assuming a risk by insuring it
• The insurer assumes liability to pay the
proceeds on loss
• Historically, there were mutual assessment
associations. Sometimes it was hard to
collect when members were assessed.
That’s where the underwriter came in.
• Lloyd’s Coffee House in
London, 1600’s, shippers
would pass around a slip of
paper with relevant facts.
Interested person would
write on the slip the amount
of insurance, the rate, and
his initials. Hence:
So what must the insurer do?
• Gather data to fix premiums
• Determine what losses it will cover
• Drafting insurance contracts consistent
with the law
• Investigate and pay (or not pay) claims
– It’s the “or not pay” that is why we’re here
Types of Insurance
• In theory just about anything legal could
• In practice most insurance actually written
can be categorized as:
– Life Insurance
– Fire and Casualty Insurance
– Marine and Inland Marine Insurance
• Pay on death—easy enough
• Who is involved:
– “Owner” of the policy—who can change
– “Owner” often is, but is not always the
subject of the policy, the cestui que vie
– “Beneficiary” Who is paid in the event of loss
Fire and Casualty
– Pretty simple concept
– Except that by now this
insurance also can
cover other losses such
as weather (lightning,
water, etc). There is
also earthquake, riot,
etc. insurance available.
• Property damage
• Workers Compensation
• Fidelity and surety bonds
• Car insurance
• Boat / airplane insurance
• “Perils of the sea”
• Fairly comprehensive, covering all losses
except those excluded.
• Similar, Inland Marine Insurance, covers
gaps between seas and docks.
Yacht Insurance Policy
• Upon the Hull, Spars, Sails, Tackle, Apparel, Machinery, Boats, and
other Furniture of and in the Yacht hereby insured.
• Touching the adventures and perils which we, the Assurers, are
contented to bear, and do take upon us, they are of the
• seas, men-of-war, fire, enemies, pirates, rovers, assailing thieves,
jettisons, letters of mart and countermart, reprisals,
• takings at sea, arrests, restraints and detainments of all kings,
princes and people, of what nation, condition or quality
• soever, barratry of the Master and Mariners, and of all other like
perils, losses and misfortunes, that have or shall
• come to the hurt, detriment or damage of said Yacht or any part
• All risk insurance on personal property not
situated at a fixed location. Another kind
of inland marine insurance.
No fault Compensation
• Workers’ Compensation
• Automobile No Fault
Policy language: Liability Insurance
• The company will pay on behalf of the
insured all sums which the insured shall
become legally obligated to pay as
damages because of ... the property
damage to which this insurance applies,
caused by an occurrence.
• An accident, including continuous
repeated exposure to conditions, which
results in bodily injury or property
damage, neither expected nor intended
from the standpoint of insured.
Language of Insurance Policies
• Legal Language is a dialect of English
– Special meaning of words--jargon
– Special constructions
• Subjunctive more common
• Struggle for more precision in language
• Use of “magic words”
Talking about legal writing
• What is it that makes the language of
contracts, including insurance contracts,
so difficult for not only the lay person, but
the lawyer as well?
• In the most carefully crafted language,
insurance policy forms, educated lawyers
and judges can disagree greatly about the
meaning of words, phrases, clauses, and
Characteristics of Legal Writing
– Word choice
– Avoid Legalese where possible
• In functional writing, legalese is often preferable
• In persuasive writing you can get by with it when
you have to
• In “informative” writing it will seldom do much
Characteristics of Legal Writing
– Strunk’s advice, “Make each word tell.”
– Sometimes you have to balance the need for
completeness and the need for concise writing
– Avoid repetition
Characteristics of Legal Writing
– The goal is to be precise and understandable.
– Ambiguity works against the insurer.
• Letters to client
– Not necessarily “simple” but not “legalese”
– Explain terms
• Interoffice memoranda
• Opinion letter
– Vary in complexity
– Probably the most time consuming of all
– Different concerns with
• Trial Courts
• Appellate Courts
• Administrative Agencies
• Settlement Brochures
• This kind of document is one which is supposed
to create a result
– Power of Attorney
– Real Estate Documents and, for our purposes
– INSURANCE POLICY
Pre Litigation Opinions
• Locate and read all relevant policies
– Sometimes more than one policy may apply
• Especially in business cases
– Coordination of benefits
• Who’s primary?
• Excess coverage?
• Umbrella coverage?
Read the Policy
• , "Read the Statute
and Read the Policy."
State Farm Mut. Auto.
Ins. Co. v. Beavers,
321 Ark. 292, 295,
901 S.W.2d 13 (1995)
• Insurance policies typically have notice
– Notice of “occurrence”
– Notice of “claim”
– Notice of “suit.”
Notice of loss
• The insurance policy provides:
1. What To Do In Case Of Loss. If a covered loss occurs, the insured
(a) give us immediate written notice. In case of theft, also notify the
(d) send to us, within 60 days after loss, a proof of loss signed and
sworn to by the insured, including:
10. Suit Against Us. We may not be sued unless there is full
compliance with all the terms of this policy. Suit must be brought
within one year (in Kansas 5 years) after the loss or damage occurs.
Ripley v. Shelter Mut. Ins. Co. 1991 WL 89652, *1
• Duties After Loss. In case of an accident or occurrence, the insured shall
perform the following duties that apply. You shall cooperate with us in
seeing that these duties are performed:
• a. Give written notice to us or our agent as soon as practicable, which sets
• the identity of this policy and insured;
• reasonably available information on the time, place and circumstances of
the accident or occurrence; and
• names and addresses of any claimants and available witnesses;
• b. Immediately forward to us every notice, demand, summons or other
process relating to the accident or occurrence.
• "Immediately" means within a reasonable time under the circumstances.
With most losses, the circumstances are that damage has been done, and
evidence of how the damage was done, and how much damage was done,
is quickly disappearing.
Definition of Damage
• Property damage in the policy is defined as:
• (1) Physical injury to or destruction of tangible
property which occurs during the policy period,
including the loss of use thereof at any time
resulting therefrom, or
• (2) Loss of use of tangible property which has
not been physically injured or destroyed
provided such loss of use is caused by an
occurrence during the policy period.
• Open a dialog with the insurer/insured if
• Sometimes it’s a waste of time, but if both
parties are willing to resolve the dispute,
it’s in both parties’ best interest to do it
sooner rather than later.
Whether a Policy Covers the
• Hit-and-run automobile means an
automobile which causes bodily injury to
an insured arising out of physical contact
of such automobile with the insured or
with an automobile which the insured is
occupying at the time of the accident,
provided: (1) there cannot be ascertained
the identity of either the operator or
owner of such "hit-and-run automobile. . .
Broad “Personal Injury” coverage
under Commercial and General
• “Personal injury" means injury, other than "bodily injury," arising
out of certain enumerated "offenses." These include:
• a. False arrest, detention or imprisonment;
• b. Malicious prosecution;
• c. The wrongful eviction from, wrongful entry into, or invasion of
the right of private occupancy of a room, dwelling or premises that
a person occupies by or on behalf of its owner, landlord or lessor;
• d. Oral or written publication of material that slanders or libels a
person or organization or disparages a person's or organization's
goods, products or services; or
• e. Oral or written publication of material that violates a person's
right of privacy
• This insurance does not apply to:
• (1) "Bodily injury" or "property damage" arising out of the
actual, alleged or threatened discharge, dispersal, release or escape
of pollutants at or from premises owned, rented or occupied by the
• (2) Any loss, cost or expense arising out of any governmental
direction or request that the named insured test for, monitor, clean
up, remove, contain, treat, detoxify or neutralize pollutants.
• Pollutants means solid, liquid, gaseous or thermal irritant or
contaminant, including smoke, vapor, soot, fumes, acids, alkalis,
chemicals and waste. Waste includes materials to be recycled,
reconditioned or reclaimed.
Another Pollution Exclusion
• In consideration of the premium charged, it is
hereby agreed and declared that this policy shall
not apply to bodily injury of property damage
arising out of the discharge, dispersal, release or
escape of smoke, vapors, soot, fumes, acids,
alkalis, toxic chemicals, liquids or gases, waste
materials or other irritants, contaminants or
pollutants into or upon land, the atmosphere, or
any water course or body of water.
• 2. a "hit and run" land motor vehicle
whose owner or driver remains unknown
and which strikes:
• a. the insured; or
• b. the vehicle the insured is occupying and
is the proximate cause of bodily injury to
Uninsured Motorist—Contact Rule
• Still good law, probably
• State Farm Mutual Ins. Co. v. Henderson,
___ Ark. ___ , ___ S.W.3d ___, 2004
WL 396355 (Mar. 4, 2004).
There may be a way out
• Additionally, Henderson urges us to consider a recent act of the
legislature, Act 1043 of 2003, which amended Ark.Code Ann. §
27-19-503 (Repl.2004) to provide a presumption that both a
motorist and the vehicle itself are uninsured if the motorist fails to
file a certificate of insurance within ninety days of an accident. Prior
to that change, section 27-19-503 only provided such a presumption
to the motorist, but not to the vehicle. Henderson asserts that this
change relieves him of the burden to prove that the other vehicle
was uninsured, as required in Ward, 259 Ark. 696, 535 S.W.2d 830.
[FN1] We do not address this argument, as the amendment to
section 27-19-503 was not made until some three years after the
issuance of Henderson's policy and the date of his accident. This
court has previously recognized that an insurance policy is governed
by statutes in effect at the time of its issuance.
Whether the damage occurred
during the policy period
An occurrence policy provides coverage if
the event insured against takes place
within the policy period, regardless of
when the claim is presented. The "claims
made" policy provides coverage only if a
claim is made during the policy period.
Duty to Defend
• Can be broader than duty to indemnify
• "As a general matter, the duty to defend is
determined by comparing the allegations in the
underlying complaint to the scope of the
coverage provided by the insurance policy. If
injury or damage within the policy coverage
could result from the underlying suit, the duty to
defend arises." Union Insurance Company v. The
Knife Company, 897 F.Supp. 1213 (W.D.Ark.
Duty to Defend
• ... the company shall have the right
and duty to defend any suit against the
insured seeking damages on account of
such bodily injury or property damage,
even if any of the allegations of the suit
are groundless, false, or fraudulent ...
Comprehensive General Liability
• In examining the duty to defend, this court has
recognized the general rule that the allegations
in the pleadings *176 against the insured
determine the insurer's duty to defend.
Murphy Oil USA, Inc. v. Unigard Security Ins.
Co. 347 Ark. 167, 175-176, 61 S.W.3d 807,
Duty to defend broader
• Additionally, this court has recognized that the duty to
defend is broader than the duty to indemnify. See
Commercial Union Ins. Co. of America v. Henshall, supra.
However, the duty to defend arises when there is a
possibility that the injury or damage may fall within the
policy coverage. See Home Indemnity Co. v. City of
Marianna, 291 Ark. 610, 727 S.W.2d 375 (1987).
Conversely, where there is no possibility that the damage
alleged in the complaint may fall within the policy
coverage, there would be no duty to defend.
Murphy Oil USA, Inc. v. Unigard Security Ins. Co. 347
Ark. 167, 176, 61 S.W.3d 807,812 - 13 (2001)
If the possibility of damages exists,
the duty to defend arises
• Home's secondary argument is that genuine issues of
material fact remain. We are not persuaded that that is
so. One fact assertedly undecided deals with the issue of
whether damages will result in the federal suit. But the
duty to defend is broader than the duty to pay damages
and as we have seen, it is enough if the possibility of
damages exists. If injury or damage within the policy
coverage could result, the duty to defend arises.
Commercial Union Ins. Co. v. Henshall, 262 Ark. 117,
553 S.W.2d 274 (1977).
Claim for reimbursement of
Defense and Settlement Costs
• An insured who is forced to defend and
settle a case may have a cause of action
against an insurer which wrongfully denied
• An insurer which defended an action
under reservation of rights may have a
claim for reimbursement against the
• Brady & Handleman, INSURER'S RIGHT TO
REIMBURSEMENT: NEGLECTED BUT VALUABLE
REMEDY, 59 Def.Cou.J. 547 (Oct 1992)
• Dennis Wall, 68 INSURED'S REIMBURSEMENT OF
INSURERS'S DEFENSE EXPENSES: SOME PRACTICAL
• STEPS, 65 Def.Cou.J. 68 (1998)
• Melinda Kirk, THE INSURER'S RIGHT TO SEEK
REIMBURSEMENT: WILL THE BUSS STOP IN
• OKLAHOMA?, 38 Tulsa L.J. 599 (2000)
– Interesting because it’s from another state that has not
developed much law on the subject.
– Buss refers to a seminal California case
• There are some practical difficulties
– Insured probably won’t have the money
– Insurer’s duty to defend is broader than duty
to cover the losses.
Insurer’s right to withdraw defense
• Arguably, if circumstances change in the
course of litigation and it becomes clear
that there is no conceivable liability
covered by the policy, an insurer might
• If so, it does so at its own risk.
Actions that Trigger Coverage
– Means an accident, including continuous or
repeated exposure to substantially the same
general harmful conditions
• Read the statute and read the policy
• Who is the insured
• What is covered
• What is excluded
• How much is payable?
Identifying the Insured
• Named Insured
• Defined Insured
• Insured under “omnibus clause”
• Since plain language came into effect, it’s
usually something like, “Throughout this
policy the words “you” and “your” refer to
the Named Insured in the Declarations.
The words “we,” “us,” and “our” refer to
the Company providing this insurance.
• --”and a spouse if a resident of the same
• “Insured means you and the following
persons if permanent residents of your
– Your relatives
– Anyone under the age of 21
Commercial General Liability,
• "your employees, other than your
executive directors, but only for acts
within the course and scope of their
employment by you." Tri-State Ins. Co. v.
Sing, 41 Ark. App. 142, 850 S.W.2d 6
• Any person using your covered auto
• Permission issues
– Hell or High Water rule
Drafting a Reservation of Rights
• There are a lot of cases nationwide that
hold that an insurer must state all possible
grounds for claims denial in the
reservation of rights letter.
– Colorado Lawyer article, 26-AUG Colo. Law.
93 (Robinson and Powers)
Robinson and Powers
• If the issue of coverage is anything but certain,
it is advisable that the insurer provide a
defense for its insured under a reservation of
rights and, if appropriate, institute a declaratory
judgment action to determine the insurer's
obligations. A reservation of rights letter
should be sent as soon as a coverage question is
recognized, and it must inform the insured in
detail of all the potential defenses to coverage
the insurer has discovered from its
investigation and analysis of the claim or suit.
Robinson and Powers, continued
• Defenses known to the insurer, or those that
the insurer reasonably should have known, that
are omitted from the reservation of rights
letter may be waived by the insurer. However,
if additional grounds come to the knowledge of
the insurer during its continued investigation of
the claim or during discovery in the underlying
lawsuit, the insurer can supplement its
reservation of rights letter to add the newly
discovered coverage defenses.
Robinson and Powers, Continued
• The reservation of rights letter should make specific
reference to the insurance policy and should quote from
the actual policy provisions that are the basis for the
insurer's decision to reserve the right to assert that
there is no coverage for the claim under the policy. The
reservation of rights letter should be sent to each
person or entity that may assert a right to be considered
a named insured or additional insured under the policy.
Additionally, because an insured is entitled to know the
excess insurer's position regarding coverage, the excess
insurer should issue a reservation of rights letter to
preserve the right to deny coverage.
Robinson and Powers, continued
• Finally, the insurer should include in the reservation of rights
letter a statement that it is reserving any and all rights that it might
have under the pertinent insurance policy. This phrase was recently
scrutinized in Employers' Fire Ins. v. Western Guaranty Fund, [in which
the court held that while Employers' participated in the defense of its
insured, it expressly reserved "any and all rights" which it might have
under the policy to later contest the existence of any duty it may have
to provide a defense. While the court refused to determine whether
such language was sufficient to allow Employers' to seek
reimbursement from the insured for defense costs, it found that the
reservation of rights letter made it clear that the insurer's
participation in the defense of its insured could not be construed as a
waiver of its right to contest its duty to defend under the policy.