Insurance Law

Fall 2014

Cassidy Thomson

Table of ContentsI.INTRODUCTION31.Basic Insurance Theory3Insurance Theory3Definition of Insurance Contract4Insurance Contract Distinguished from General Contract Law5Expectations of Insurance72.Distinguishing Insurance from Wagering83.Regulation of the Insurance Industry9II.NATURE OF INSURANCE CONTRACTS121.Indemnity and Non-Indemnity122.First and Third Party133.Classification of Insurance Contracts13III.INSURABLE INTEREST151.Character and Timing of Insurable Interest152.Insuring Other Interests173.Joint Venture, Sub-Contractors, etc17IV.MAKING AN INSURANCE CONTRACT181.Requirements for a Valid Contract192.Contents of Insurance Policy213.Duration of Insurance Contract23V.DUTY OF GOOD FAITH AND OBLIGATION OF FULL DISCLOSURE261.Introduction262.Duty of Disclosure27Test for Materiality27Extent of Insureds Disclosure Duty283.Limits on the Insurers Risk Control: Statutory Modifications29General Insurance Contracts - BCIA, Pt 229Property Insurance29Automobile Insurance30Life and Accident & Sickness Insurance314.Material Change in Risk335. Proving Breach of Insureds Disclosure Obligations336.Proof of Materiality357.Effects and Consequences of Breach of the Insureds Duty of Disclosure358.Causation, Fairness and the Insureds Duty of Disclosure379. Legal Liability of Insurance Intermediaries37VI.SELECTED ISSUES IN INTERPRETING INSURANCE POLICIES391.Policy Interpretation,392.Loss Caused by Accident433.Loss Caused by Intentional/Criminal Acts454.Automobile Insurance47Who is Covered?47Loss Arsing from Use or Operation of a Motor Vehicle48VII.PUBLIC POLICY RESTRICTIONS51VIII. CLAIMS PROCESS541.Introduction542.Obligations of an Insured Making a Claim54Notice of Loss54Proof of Loss56Duty to Cooperate58Fraud by Insured593.Excusing Insureds Breach of Contract60Introduction60Relief against Forfeiture and Termination61Waiver and Estoppel634.Insurers Obligation to Respond to Claims in Good Faith655. Insurers Duty to Defend under Liability Insurance Policy676.Duty to Settle within Policy Limits71IX. OVERLAPPING POLICIES AND OTHER CONSEQUENCES OF INDEMNITY73X.SUBROGATION78XI.VALUATION81Valued vs. Open Policies81Method of Valuation81Extent of Loss83Terms Affecting Recovery83Disputes Over Valuation85

I.INTRODUCTION

1.Basic Insurance TheoryInsurance Theory

Issue

Where

Ratio

What is Insurance?

BCIA s. 1

"insurance" means the undertaking by one person to indemnify another person against loss or liability for loss in respect of a certain risk or peril to which the object of the insurance may be exposed, or to pay a sum of money or other thing of value on the happening of a certain event.

Purpose of Insurance

Lecture

Mechanism for managing risk in modern society

Financial protection for insured

Reflects neo-liberalism

Promotes self-reliance

Role of Modern Corporations & Financial Institutions

Lecture

Ability to collect and analyze information

Accurate prediction re nature and probability of risks materializing

Effective underwriting decisions

Sophisticated systems of banking and investments

Private Insurance Industry

Lecture

Business model

Risk segmentation

Disconnect between sales and claims visions of insurance

Government as Insurer

Lecture

Why should governments be involved in provision of insurance services?

Limits to individual self-reliance

Socialization of risks

Part of social safety net

Adequate protection for specific risks, e.g. highway

Eliminating/reducing socio-economic inequalities, e.g. employment insurance

Cost spreading re vital services, e.g. health insurance

Public v. Private Insurer

Lecture

What risks should be Insured by Public Insurers?

Relevant factors include:

Nature of risk often highly unpredictable, e.g. employment insurance

Difficulties determining insurers ability to pay in event of loss

Possibility of higher premiums; raises affordability concerns

How are Government Able to Provide Effective Insurance in these Areas?

Lecture

Mandatory insurance

Single insurer

Large customer base relative to probability of risk

Subsidization through general tax revenues

Definition of Insurance Contract

Issue

Where

Ratio

Notes

Definition of Insurance K

Lecture

Five Part Definition of Insurance K at Common-law:

1. An undertaking of one person

2. To indemnify another person

3. For an agreed consideration

4. From loss or liability in respect of an event,

5. The happening of which is uncertain

1. Undertaking

Lecture

The person who gives the undertaking is called the insurer

2. Promise of Indemnity

Lecture

The promise of indemnity is to compensate the person. The person receiving the promise is called the insured

a. Named and Unnamed insured, e.g. Automobile; homeowner

b. Personal Insurance life, accident, sickness

Assured/Primary person: purchaser

Insured: Person whose life is insured

Beneficiary: Receives insurance money; assured/primary person or 3rd party

3. Consideration

Lecture

The consideration given in exchange is called the premium

Premium amount is based on the likelihood of risk the higher the risk, the higher the premium.

4. Loss or Liability

Lecture

The event is defined, and loss/ liability is subject to policy limits and other contractual terms.

Contract may be Indemnity or Non-indemnity

a. Indemnity = recovery for actual loss, not put in better position than before lossinsured must prove event occurred and what the actual loss suffered was to recover insurance monies

b. Non-indemnity = no correlation between loss and compensationinsured need only prove event occurred, not what actual loss is. Ex: Life Insurance

Usually there is a policy limitinsurer not undertaking to indemnify ad infinitum

Other terms limit recovery e.g. deductiblewhich represents amount insured is self-insuredlikely to try to avoid risk if partially self-insured.

5. Fortuity

Lecture

The happening of the insured event must be uncertain because the purpose of insurance is to provide for uncertain lossnot known loss.

Even life insurance has element of uncertaintyyes it is known you will eventually die, but how and when is not known.

Insurance Contract Distinguished from General Contract Law

Issue

Where

Ratio

Notes

1. Purpose

Lecture

The purpose of an insurance contract is to transfer risk of random losses from the insured to the insurer

Unlike general contract law, where purpose is to make money or to have certainty in legal affairs

There is a unique level of mutual dependence in insurance Kb/c insurer requires insured to accurately tell the risk and insured depends on insurer to pay out if it occurs

NOT an arms-length transaction

Freedom of K severely curtailed in insurance Ks

Cant withhold info like you can in normal Ks

2. Duty of Utmost Good Faith

Lecture

Open and frank communication

Maintaining the integrity of the system

Insurer not to exploit insureds vulnerability

On both insured and insurer

Insured has duty at outset to disclose risk to insurer at time of claim (MUST tell)

Insurer has duty at time of claim, insured is very vulnerable then, insurer cant take advantage of this and try to withhold payment for real claim.

Also insurer cant allow insured to make a mistake at outset that could potentially void Ki.e. cant trap them

3. Fortuity

Lecture

Random losses uncertain which insured will suffer or timing of losses

Predictable loss, e.g. death but timing uncertain

Excludes normal wear and tear unless specifically provided in contract

So if someone engineers the loss, it is not fortuitous and the insurance K will not pay out.

4. Indemnity

Lecture

Insurance generally indemnity contracts

Recovery limited to insureds actual losses except in non-indemnity insurance contracts

Prevents moral hazarddont want to give people incentive to engineer loss b/c they will be better off. Will be the same after loss so no need to cause it.

Mechanisms to promote indemnity principle:

Notice of loss

Proof or lossmust show it was caused by insured risk, fraud to claim for things not caused by insured risk.

Subrogationafter insurer pays out, insured has no incentive to follow up and recover from third party actually responsible, so insurer has ability to subrogate and get this money.

Multiple insurance contracts contributionno double recovery from multiple insurance policies, and where there are multiple, insurance companies have to all contribute.

Constructive total loss: Insurer entitled to salvage value once insured is fully indemnified (i.e. insured doesnt get to sell wheel rims after car written off, b/c that would be putting you in a better position than you were before)

5. Consumer Protection

Lecture

Regulation and principles designed to protect consumers and public generally

Insureds reasonable expectations inform interpretation of insurance contracts

Statutory conditions: BCIA, s 29these have to be in the insurance K, cannot remove.

Misrepresentation materiality requirement