P A R T P A R T Property Personal Property and Bailments Real Property Landlord and Tenant Estates and Trusts Insurance Law 5 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Insurance Law PA E TR HC 27 “If anything can go wrong, it will.” Anonymous (1950s), known as Murphy’s Law

Learning Objectives  Insurance policies as contracts  Property insurance  Liability insurance  Bad faith breach of insurance contract

 In an insurance agreement, the party who risks a particular loss ( insured ) transfers that risk – along with consideration ( premium ) – to another party ( insurer ) which bears the financial consequences if the particular risk (perils) materializes as an actual event  Person to whom insurance proceeds are payable is the beneficiary Overview

 Insurance policies must satisfy all of the elements required for a binding contract  Insured’s misrepresentation, if relied on by the insurer, renders the contract voidable  If a dispute arises over policy language, courts interpret provisions as an average person would understand them and construe ambiguities against the insurer  See Property Owners Insurance Co. v. Cope Specifics of Insurance

 A binder is an agreement for temporary insurance pending the insurer’s decision to accept or reject the risk  Example: World Trade Center Properties, LLC v. Hartford Fire Insurance Co. is about interpretation of property insurance binders issued shortly before the September 11, 2001, plane attacks on the World Trade Center Towers The Insurance Binder

 Within specified time, insured (beneficiary for life insurance) seeking benefits of an insurance policy must notify insurer a covered event occurred  Insured (or beneficiary) must furnish reasonable proof of the loss-causing event Proof of Loss & Time Limits

 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  For property insurance, insured must have insurable interest  Some perils (events) may be excluded  Insured may sue insurer for breach of contract for wrongful refusal to pay for covered loss Insurer’s Performance & Breach

 Real property insurance may also cover personal property inside a building  Personal property insurance policies for specific items are indemnity contracts with policy limits  Under right of subrogation, an insurer obtains insured’s rights to pursue legal remedies against anyone who negligently or intentionally caused harm to the property Personal Property Insurance

 Pro rata clause: apportions loss among insurers if several insurance policies cover the property  Coinsurance clause: requires insured to buy coverage in amount equal to a percentage of fair market value to recover full cost of partial losses  Increase of hazard clause: insurer’s liability will be terminated if insured takes action to materially increase insurer’s risk Special Contract Clauses

 Liability insurance (personal, business, professional) allows insured the ability to transfer liability risks to insurer  Protects against insured’s liability for negligence, but not deliberate wrongful acts  If insured is sued for a risk contemplated by a liability insurance policy, the insurer has a duty to defend insured and win, settle the case, or pay any resulting award of damages Liability Insurance

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

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

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

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

Thought Question  How should insurance claims be handled in major disasters, such as the damage caused by Hurricane Katrina along the Gulf Coast?