For Compensation of Damages / Loss;

I. Introduction

INSURANCE DEFINED
Risk-distribution arrangement;
For compensation of damages / loss;
Entered into by one party as its B;
Rather than as an incident to another B transaction

TYPES OF INSURANCE
First Party
Protects iD a/g loss suffered himself; files claim & receives pmt
Fire, property, life, health disability
Third Party
Protects iD from legal liability to 3rdparty as result of iD’s actions; iR pays 3rd party
Ex: liability & auto (1st & 3rd)
Group v. Individual
Individual most common
Common HI is group through e’er

LINES OF INSURANCE
Property / Casualty
Casualty = liability
Includes med mal, PL, homeowners, multi-peril, commercial liab / prop, & auto
Life / Health
Health: group individual coverage
Often, individual is cheaper than group

TYPES OF iRS
Stock Companies
SH owned; may be publicly traded, e.g. can  capital by selling more stock (advantage)
May be pressure to issue dividends
Mutual
Owned by PHs / iDs; premiums theoretically lower b/c no dividends issued; iRs get surplus
Main goal is for company to remain solvent
Ex: Med Mal in MS
Loyds of London
Underwriters take small piece of each risk
Government
Ex: Social security, Medicare / Medicaid, flood / crop insurance
In MS, windpool for southern most 6 counties
Argument that NOT true insurance, b/c subsidized by gov’t
Note
Type doesn’t affect policy interpretation

F(x)s OF INSURANCE
In general, protects PH from future loss. How?
Risk Transfer from comparatively risk averse to less risk averse / risk-neutral parties
Expected Value: Probability * Magnitude of Loss; risk averse party will pay sum > EV of given risk to transfer
More likely to insure big ticket items
Risk Pooling b/c iRs not intrinsically risk-neutral
By insuring many iDs, can more accurately predict risk involved,  cost of insurance
 variance in expected losses
Larger the pool, less of a risk
Risk insured must be indep and relatively homogeneous
Risk Allocation (Diversification)
iRs classify risk posed by iD & price coverage accordingly; iRs have better info than iD

PROBLEMS CAUSED BY IMPERFECT INFO
Adverse Selection
High risk of loss  more likely to seek insurance than if facing low risk of loss
Problem  if potential PHs have better info
If charging flat rate, iR must  premiums; t/f, lower-risk iDs buy less, which  average risk, thereby forcing another  in premiums
Moral Hazard
Arose at English CL, where could buy insurance on anyone
iD’s tendency to exercise less care to avoid insured loss than if loss was uninsured
Methods of Addressing Problems
Lengthy application / screening process
Classify iDs by risk & charge accordingly
Experience rate (how many claims?)
 deductibles, require co-ins & dollar limits so all losses not fully insured
Exclude unusual risks
Coverage limits (pre-existing conditions)
Require insurable interest
Insurance warranty
Void b/c of misrep
Important Questions
Is policy promoting its f(x)?
Is policy trying to prevent problems?

WARRANTY
Types
Affirmative: fact warranted at time policy made
Promissory: “” at ALL times of coverage
Breach of Warranty
CL: strict compliance req
Why so strict? If boat sank, couldn’t discover why.
If iD breaches warranty  void
If term is rep, must be material
Legislative Approach: NO distinction b/t warranties and rep
E.g. breach voids ONLY if material
What is material?
 Risk of Loss (majority)
Whether risk involved in actual loss irrelevant
Contribute to Loss
Risk misrep a/b actually contributed to loss
Fraudulent Misrep (fraud req)
Today, have exclusions rather than warranties
Judicial Methods of Mitigating Harsh Effects
Treat as rep (iR must prove materiality)
Treat as affirmative (relates to present facts) rather than promissory (future “”)
Contra proferentem: construe ambiguity a/g drafter (Vlastos)
Interpret warranty as satisfied if have substantial compliance w/ terms
Vlastos - effect of a breach of warranty; ambiguity
Building burned; iR denied coverage as warranty breached b/c janitor not only T; iD argued language was ambiguous
Rule: warranty’s materiality irrelevant; if fact not as warranted, may void policy
If term is rep, must be material
Ambiguity Test: RPP, in context of entire policy, would honestly differ as to meaning
Determined @ time K made (affirmative)
Holding: no exclusivity language, t/f warranty was ambiguous; construe in favor of coverage

II. Misrepresentation & Concealment

MISREPRESENTATION
iD made false or misleadingstmt;
E.g. rep must be substantially true
Intent?
Maj: irrelevant, unless opinion or future promise (difficult to prove;  premiums)
Min: ALWAYS relevant
That was material;
Material?
Contributed to loss (iDs prefer);
 risk (iRs prefer);
If disclosed, would iR have deniedcoverage OR  premium /  coverage?
Objective or Subjective?
Maj: RP iR
Min: particular iR affected
Some: intentional, but immaterial, reps can void (others: materiality req)
Some states define by statute
In discovery, ask a/b industry standards
That induced justifiable reliance;
Closely related to materiality, e.g. iRs won’t rely on immaterial reps
Prevents voiding if iR knew rep was false
If some collusion, can still void
iR may have duty to investigate, especially where:
iD possibly misunderstood Q;
Agent knows rep is false
That caused iR damage
E.g. wouldn’t have issued policy, paid claim

CONCEALMENT
Common Scenarios
Failed to disclose relevant info
Didn’t give full A or A at all
Rule: iR must prove failure to disclose fact that applicant KNOWS is material
Neill
Home w/ previous fire damage damaged a/g; iD had not told iR (susceptible to fire, arson, etc.); iD claimed to not remember Q, but signed K.
Issue: false stmt alone void coverage? NO, b/c could be clerical error and iD didn’t read K
Rule: if iD answers truthfully but agent makes misrep, iR can NOT rely UNLESS iD engaged in fraud / collusion w/ agent
Knowledge imputed to iR absent collusion
Jury question
Duty to Read?
NONE
How can iR avoid problems?
Bring other testimony (expensive)
Fact of signature NOT dispositive (only probative)
BP: if had not been intermediary filling out app, would have been material misrep, & SJ granted
Hypo:
If app As truthfully, agent records incorrectly, app points out, agent says “not important”
“Who’s fault is it really?” test applied
Post Claim Underwriting
Ex: person dies w/ signif LI policy; iR looks through app to find misrep
Should there be a rule a/g?
Most policies don’t result in claims
If must investigate from outset, insurance costs  (still must prove misrep)
Relates to incontestability clause in HI
HIV
If don’t screen, have adverse selection;  rates
Regs attempt to ensure confidentiality
TX & Hawaii don’t allow Q a/b whether tested
PP: don’t want to discourage testing
Waxse
Qs to Ask
Who filed out app?
Who is to blame?
Is stmt more iD’s or agents?
Does app know misrep fraudulent?
Mackenzie
Stmton health condition made during app; later becomes false, doesn’t disclose change; policy req “all As continue to be true and complete”
Issue: duty to disclose change?
Rule: if while app processing, condition changes so that app not true, in FD, should disclose; otherwise, may void or use defense
Doesn’t req high level of sophistication
Concealment b/f delivery is material!
Min: no duty unless specifically asked (Siedler)
Answer:
Misrepresentation After Loss
Ex: after claim filed, iD lies a/b debts
Shows justifiable reliance / materiality, e.g. would have done further investigation
Treated diff, b/c iR didn’t detrimentally rely when entered policy, & may be other exclusion
Reasonable Inquiry Rule
Can NOT void coverage if easily discoverable

III. Insurance K Formation & Meaning

ROLE OF STANDARDIZED FORMS
Introduction
Insurance Ks are Ks of “super-adhesion”
Take it or leave it; uniform terms
Why? Reliable loss data from as large of pool possible; accurate across industry
Ins Service Office (ISO)
Drafts std polices; use to suggest rates, but accused of price fixing
Collects / analyzes loss data, gives members info
Life & HI NOT members (negotiate coverage)
Advantages
Easier price comparisons for consumers
Pricing / coverage limits only variables
Standardized language  precision / clarity; more consistent / predictable
Other j(x)s persuasive
Pooling claim data cheaper (economies of scale);  premiums
Disadvantages
Difficult to buy custom coverage
Even amendments standardized
Anti-competitive effect on substance/price
Discourage innovation
Principles of Court Interpretation
Provided by standard forms
Coverage interpreted broadly
Exclusions “” narrowly
Same terms in diff parts interpreted same
Terms get ordinary, NOT hyper technical meaning (when possible)
Contra proferentem: ambiguity construed a/g iR (drafter)
Limited by R expectations?
Vargas
Aviation ins only covered accidents w/in U.S. territories; crashed in route to PR; iR denied coverage
Arguments:
Δ: flight path more risky; policy clear
Π: endorsement sought b/c intended to fly that way
Rule: to refute R expectations, iR must show…
iD’s expectations UR
iR’s construction only one that fairly could be made
Holding: coverage extends to travel “to & from” locations (RP iD)
Note: flawed analysis, b/c didn’t compare $50  in premium to overall premium paid
Interpreting Binders
Binder: provide ins b/f expected policy issue date; coverage during interim period
WTC Properties
Coverage on “per occurrence” basis; iD said 2 separate occurrences, e.g. 2 planes; 3 of 4 iR had specimen policy, which did not define occurrence
Rule:
If issue binder based on specimen form, terms of that form govern
Here, “occurrence” ambiguous
Analysis:
Defined as “series of similar causes”
E.g. 9/11 was single occurrence
If ambiguous, use extrinsic evidence (industry custom not helpful here)
Held: SJ not proper; need more evidence / jury determination
Note: NOT obligated to use contra proferentem(iD didn’t want too, b/c brings in extrinsic evidence of intent)
R Expectations
When should ct ignore clear policy language?
“Honoring R expectations of iD”
“Vehicle of judge made ins”
Justification?
iR mislead / misrep policy meaning
iR can’t deny coverage b/c led on iD
Unconscionability
Products liab, e.g. “defective language”
Atwood
iD electrician possibly caused death; no coverage for completed operations
Rule: honor obj R expectations, even if technical provisions would negate such
Ask: would most iDs pay for?
Reasoning:
No notice / no endorsement offered
20 yr agent thought was covered, & exclusion buried in N/A provisions
Note:
Π loses if had reason to know
Ct here uses subj test (min)
Atwater
Denied coverage b/c no evidence of forcible entry (combating moral hazard)
Rule: if unequal bargaining power, K construed a/g drafter
If major exclusions hidden in definition §, iD held only to R knowledge of literal ones
PP: burden on iR to clearly comm. coverage and exclusions
Maj: doctrine requires ambiguity
Sophisticated iDs treated differently?
Yes: can read policy and better understand than lay person (min)
No: treating diff removes uniformity in coverage (maj)
Cts Mandating Coverage
 costs t/f  premiums, b/c coverage extended beyond what iR expected

ROLE OF INTERMEDIARIES
Kinds of Intermediaries
Agents: sell ins; most salaried and also rec % of premium; owe duty to both iD and iR
Exclusive: saleonly one iR’s policies
Independent: contractor w/ multiple iRs
Broker: sophisticated iD hires to buy coverage
E’er / Group Ins
Some state’s deem e’er agent of HI co.
H/w, state law may be preempted
Elmer Tallant -Actual or Apparent Authority
Agent w/ authority to bind coverage tells iD he’s covered; iR later rejected coverage
Rule: oral ins K made by agent acting w/in scope of actual / apparent authority valid
Rule: undisclosed private limitations on agent’s authority do not bind unaware 3rd party
Rule: if agent reps several iRs, no K engendered b/t iD & particular iR until iR designated by agent
Held: apparent authority to create agency, t/f iR liable, even though iD unaware of iR’s ID
Notes:
iR has claim a/g agent for exceeding apparent authority (indemnification)
iR should put “agent can’t bind” in policy; require bond or error / omission ins
iD’s Claims a/g Agent
N Failure to Procure Coverage
Agent has duty to use R care
Failed to explain coverage
“” procure promised coverage
“” notify of possible coverage
Usually need expert to prove breach
Causation: must show could have gotten SAME coverage promised elsewhere
Damages: would have gotten coverage but for agent’s breach
Breach of K to Procure Coverage
Agent promised but didn’t
Waiver and Estoppel
When can agent alter coverage?
Depends on actions taken / not taken by agent
Waiver: voluntary relinquishment of known right
Estoppel: iD changes position b/c of some rep / act by iR (detrimental reliance)
Roseth – Estoppel
Cattle transp accident; agent told iD duty to minimize loss; sold hurt cattle for a loss
Maj Rule: estoppel can NOT be used to get coverage unavailable / non-existent
Evidence gets stale; fear of fraud
No incentive to train agent
Min Rule: can, if misrep and R detrimental reliance b/f or at K’s inception
iD may not understand fine print
Trend, even if misrep post policy
Analysis: selling cattle  damages
If using apparent authority, must show agent implied had authority to alter coverage terms
Disclaiming Agent’s Authority to Alter Policy
Some cts: enforce limits on agent’s authority even if iD didn’t read
Others: refuse to enforce. Why?
If app authority to bind/ alter K, also has app authority to change limits
iR cloaking agent w/ such can’t change agency law to relieve liab
Others: enforce w/r/t coverage, but not claims processing provisions

PP RESTRICTIONS ON K TERMS - INSURABLE INTEREST
Sample Policy: even if > 1 person has II in prop, will NOT pay > than…
(1) amt = to the II; OR
(2) applicable policy limit or ins
Statute: any lawful & substantial econ int in safety or preservation of subj of ins, free from loss, destruction, & pecuniary damages
NY: PH has “subs int engendered by love & affection” or above interest
Why require II?
MH: kill person or burn down house
Gambling: mainly in old days
Limits amt collectable to amt of insurable loss or policy limit
Maj Rule: must have at time of loss
Don’t want to give incentive to destroy prop
Tests (satisfying one typically enough):
Legal or Equitable Interest in Prop
Ex: fee simple, T, remainderman, but usually NOT an option (Gossett)
K Rights: secured creditor has int in security
Ex: deed, title, SI, mechanics lien, etc.
Legal Liability: iD has for destroying someone else’s prop or for breach of K to procure ins
Ex: bailee
Factual Expectancy: expect econ adv if iD prop continues existence (better off); expect econ loss if damaged (worse off)
Modern test
NO legal / recognized int req
Ex: parents by car, child buys ins; child has no legal int, but factual expectancy
Gossett - iD should NOT profit from loss
iD told agent were legal owner, listed T.D. as mortgage; assigned all int to T.D; house burned
Π: pd premiums and got quit claim deed
Holding: no deed yet, t/f NO II
Indemnity: may not gain more through proceeds than loss suffered
Prevents gambling & intentional destruction of prop
Although made improvements, doesn’t reach entire house value (equitable int)
Court: Does not matter that they paid premiums
Profit expectation not enough
No legal int in continued possession, as owner could kick out anytime
H/w, do have II in improvements
Note: even if iR knew lacked II, don’t have to prove not covered; but may be req to reimburse premiums

IV. Fire & Property Insurance

POLICY PARTS
Understanding Policies
Know clause providing coverage
Personal prop  defined peril coverage
Things listed as not covered (diff from exclusions)
ACC clause b/f exclusions
Standard Homeowner’s Policy
Declarations: policy period, coverage, limits, premiums, residence insured
Section 1  1st Party
Coverage A: Dwelling
Coverage B: Other Structures (10% home’s value)
Coverage C: Personal Property
Named peril; may req special endorsement (ring)
Limit of 10% or 1K, whichever >
Coverage D: Loss of Use
Section 2 Liability (see infra)
Agreement:
Promise to provide coverage
Definitions
“Occurrence,” e.g. prop damage or bodily injury
“iD”
Property Coverage: kinds and int covered
Ex: dwelling, other structures, PP, loss of use, debris removal, R repairs, CC theft
Not Labeled Exclusions: limits on coverage
Perils Insured A/g
Main provision for Coverage’s A & B
Indicates causes of damages NOT covered
Req direct physical loss to prop; burden then shifts to iR to show exclusion
Express Limitations on Scope of Coverage
Open peril v. named peril
All risk v. specific risk; don’t cover freezing pipes, mold, wear & tear, etc.
Why? Insuring risks, NOT certainties
Exclusions
Act to limit coverage
If one excluded cause contributes to loss, entire loss excluded
Ex: law, earth movement, water / flood damage, neglect, war, intentional
Conditions
Insurable interest
Notice and proof of loss
Loss settlement: ACV or cost to replace
Coordination of Coverage / Coinsurance: if under insure by 20%, recovery limited
Other Ins and Service Agreement
Mortgage Clause: pay bank if iD has loan
Policy Period: policy applies to loss occurring during period
Cancellation: if haven’t pd premium, still require notice (material misrep of fact)
Subrogation: iR can sue neighbor who has BBQ and burns down your house
Collateral source rule NOT applied
Types of Policies
All-risk: cover all-risks of gen sort covered by policy; if risk not excluded, automatic inclusion
Modern: open peril
Specific-risk: only cover if risk specified in policy, subject to exclusions
Modern: named peril

TRIGGER OCCURRENCE ISSUES
Policy: covers risk of direct loss to specified prop, caused by any risk not excluded
“Occurrence”: accident, including continueous / repeated exposure, resulting during policy period in
“Bodily injury” OR
“Property damage”
“Property Damage”: physical injury to OR loss of use of tangible property
N: Computer hard drive IS tangible
Perils iD A/g: “direct physical loss to prop”
If lossprogressive, which policy triggered?
Policy period where loss discovered / should have been discovered (manifestation)
Danger: iR writes exclusion once notified
“” in which damage first occurred
Danger: trigger early policy w/ lower limit
All “” any damage actually occurred
Port Authority of N.Y. and N.J.- wear & tear
Π files suit for asbestos contamination a/g iRs w/ 1st party policies
Issue: physical loss or damage?
Rule: “distinct, demonstrable, & physical alteration of structure”
If cause unnoticeable to naked eye, higher std, e.g. eliminate f(x) by rendering unsafe
Holding:
If asbestos makes structure uninhabitable / unusable, owner has suffered distinct loss
If in parts of structure, but building not unusable, no such loss suffered
Economic / utility argument
PP:
Loss must be fortuitous, i.e accidental / unexpected
Ex: purchased w/out K of contamination

BUSINESS INTERRUPTION COVERAGE
Coverage Requirements
Damage to covered property
Caused by covered peril
Resulting in necessary BI
Causing covered loss
Occurring during “restoration period” (don’t get BI coverage forever)
Sometimes req complete cessation
Sometimes covered if B shut down by civil authority, even if no damage
Peril prevents egress / ingress over prop
May recover lost net profit + continuing XPs (payroll & OH)
Show what making b/f, and that would have continued post-loss
Coverage for Lost Earnings – Reade
Π’s WTC store destroyed; claims restoration period is time to rebuild entire WTC; iR says time to restore operations at other locations
Issue: period of restoration? Loss of mkt exclusion?
Holding: time to rebuild / replace WTC store at suitable location
Resume “R-ly equivalent operations” at “R-ly equivalent location”
Otherwise, Extended Recovery Period superfluous
Loss of Mkt Exclusion: econ changes d/t competition, demand shifts, etc.
NOT bar to loss of ordinary B caused by physical destruction / other covered peril
Recovery of Damages?
Lost Π from  demand after catastrophe?
b/c local econ destroyed “”?
Contingent Business Interruption Coverage
Covers risk resulting from loss d/t damage of uncovered property (ex: suppliers property)
Uncovered property typically must be damaged by peril covered under iD’s policy

GOALS OF EXCLUSIONS
Combat MH
Limit adverse selection
Avoid catastrophic loss (e.g. correlated covered losses suffered simultaneously by many PHs)
Avoid mkt segmentation (e.g. coverage duplication by diff kinds of policies)

INTRINSIC LOSS EXCLUSION
If sold on all-risk / open-peril basis, loss typically must be caused by indep / external force, NOT:
Inherent characteristic of damaged prop; OR
“” inherent in portion of prop damaged
Only cover fortuitous losses caused by external peril
Chute
iD argued coverage for cracking which occurred naturally in her fire opal
Rule: iRs not liable for prop destroyed d/t inherent deficiencies / tendencies, unless these become active / destructive by peril insured a/g
Not type of thing buy ins for (could buy ins / warranty from jeweler)
Holding: b/c insuring a/g fortuitous & extraneous events, can’t interpret ultra-literally
Policy not warranty a/g loss wholly from inherent susceptibility to dissolution
Would req express language indicating “auto deterioration alone” covered
Rosen - actual covered, imminent not
Policy covered only “actual collapse;” iD said interpret to include “imminent”
Rule:where policy language clear, can NOT rewrite to conform w/ PP or iD’s expectations
Held: unambiguous, t/f imminent not covered
PP present, but tort liab will counteract
N: why require “actual”?
Avoid IL coverage (wear & tear; failure to maintain)
iR guarding a/g MH (state of disrepair)
N: importance of language
Insure a/g “Risk of loss involving collapse”  imminent covered
“Direct physical loss” or “Loss caused by collapse”  NOT
Test: how broad / ambiguous lang?

THE PROBLEM OF CAUSATION
Excluding based on cause of loss (“perils iD a/g”); t/f, two Qs often arise…
What actually happened?
What if covered loss has > 1 cause, and some causes covered / excluded?
Efficient Proximate Cause Rule
If EPC covered  iD covered
Test: most dominate, important, or significant
FiT not required
Possible jury Q (good for iD)
Use where ACC clause absent (gap filer)
Bongen
iD’s house destroyed by mudslide caused by construction co’s N; coverage denied b/c earth movement excluded peril; iD said N covered
Rule: apply EPC ONLY where parties have not freely K-ed around it
Held: may expressly deny coverage if damage caused by both covered & excluded risk
Dissent: not consistent w/ R expectations
“Earth movement caused by nature”
Causation Provisions
Concurrent Causation: no coverage, regardless of sequence of perils or whether excluded peril merely “indirect” cause of loss
Ensuing Losses: covered if caused by iD peril & not o/w excluded, even if ensuing iD peril itself caused by uninsured peril
Ex: wear & tear causing fire
ACC clause in sample is in exclusion §, so arguably only applies to exclusions (EPC)
Liristis - mold damage v. damage by mold
Fire in home; water from fire fighting caused damage to roof, leaked  mold.
iR: policy exclusion for mold
iD: loss not caused by mold, but was mold
Analysis:
Purpose of exclusion?
Exclusion appearing in series?
Held: mold damage caused by covered peril covered, losses caused by mold excluded
Recover losses from mold damage caused by fire & water used (removal and repair)
iD must prove causal connection
Why exclude coverage?
Some mold extrinsic (damp area)
Ct likely used PP to find some coverage
Likely bad rule, b/c will  costs, & plain language says mold not covered
Causation in Auto Ins
Collision ins covers losses from collision, & excludes certain causes (fire, theft, windstorm)
Comprehensive covers loss other than collision
N: in MS, can NOT argue ambiguity or PP, b/c all policies approved by Ins.