Insurance 3 5 Policy
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INS_outline.txt 2014-04-22 1 ৺৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৽ 2 ৷ INSURANCE ৷ 3 ╚৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶╝ 4 5 POLICY - insurance: 6 (+) reduces risk 7 (+) cushions economic hardship 8 (+) encourages productive investment 9 10 [DEF] insurance = a risk-distribution arrangement for the compensation of damages or loss that is entered into by one party as its business, rather than as an incident of another business transaction 11 12 Functions of insurance 13 [1] risk transfer 14 - from risk-averse to less risk-averse or risk-neutral parties 15 - [DEF] risk-neutral = indifferent as between a small risk of suffering a large loss and greater risk of suffering a small loss, when each risk has the same expected value 16 [2] risk pooling 17 - insuring a large number of homogeneous and independent risks reduces the variance of expected losses 18 - NB: risks must be independent or uncorrelated 19 [3] risk allocation 20 21 22 RUBRIC / POLICY 23 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 24 Always ask: 25 - how does AS/MH figure in determining what is covered under this claim? 26 27 THEME - delay 28 - most insureds do not receive policies until they agree to buy them 29 - most insureds do not read their policies 30 - most insurers do not carefully investigate content/answers of applications until insurer files a claim 31 32 POLICY - punitive damages - is insuring for liability against punitive dmgs against public policy? 33 - most ins policies cover damages, and do not specify "compensatory" or "punitive" 34 - MOSTLY YES - against public policy 35 [1] EXCEPTION - few states where liability for punitive dmgs may be imposed for gross negligence, and under such circ insurance for such liability is not against public policy 36 [2] EXCEPTION - respondeat superior / VL - may be a fact-specific det 37 [3] EXCEPTION - offshore ins companies - but such policies may not be enf in U.S. 38 39 TAKEAWAY - rigid formalisms have a benefit >> question is always whether the benefit (notice/consistency/administrability) outweighs the detriment (underinclusivity/overinclusivity) 40 41 42 [Information] 43 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 44 - info flowing from insured to insurer 45 - sale of promise to pay 46 - insurer - trying to sell at lowest cost-covering price 47 - insured - trying to get a good deal 48 49 Insurers face PROBLEMS: 50 [1] have to predict the future 51 - ex ante / ex post problems - how to determine materiality ex post (once there has been a loss)? 52 [2] adverse selection 53 == the more likely you are to need ins, the more likely you are to buy ins 54 - on the other hand, if you have no idea what risk you pose, you are more likely to be overcharged for ins 55 [3] moral hazard Page 1 INS_outline.txt 2014-04-22 56 == insured's incentive to deliberately destroy the subject matter insured 57 - insuff incentives to exercise optimal care 58 - remedy - insurers adjust premiums in future policy periods 59 - remedy - insurers structure charges in such a way as to maintain the insured's incentive to avoid loss 60 - remedy - policy limits - all policies have some dollar limit 61 62 - scope of coverage - not arbitrary line drawing - insurer seeks to draw rational line, often driven by AS/MH 63 64 [Vlastos] - "Warranted that the 3rd floor is occupied as [a] Janitor's residence" 65 - RULE - breach of even an immaterial warranty is a coverage defense 66 - BUT there will never be an immaterial warranty - market fn, waste of time, &c 67 - includes breaches of warranty that, viewed ex ante, merely INCREASE THE RISK of loss, w/ort whether the breach CAUSES the loss 68 - NB: RELEVANCE is !nec the same as MATERIALITY 69 70 POLICY - which RULE is better? [1] "increase of risk" or [2] "contribute to loss" ? 71 POLICY - what is insurance? 72 [1] an arr between insurer and insured 73 [2] an arr among group of insureds, who merely select the insurer as their agent through which they share risks 74 (-) creates incentives for everyone not to tell the truth - results in subsidy from honest to dishonest insureds 75 (-) introduces a fact-specific inquiry into the investigation - raises litigation costs, insurers' costs all around 76 (-) impossible to verify in ORIGINAL CONTEXT / MARITIME LAW 77 78 RULE - the words mean what they say 79 RULE - contra proferentem - ambiguous language in an insurance contract is construed against the drafter 80 - [DEF] ambiguity - reas intelligent persons on considering it in the context of the entire policy would honestly differ as to its meaning 81 - POLICY outcome = pro-coverage bias >> there will be more coverage overall 82 - POLICY assumption - ceteris paribus, it is preferable for the insured to be covered by the policy they purchased 83 84 85 [Misrepresentation] 86 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 87 Judicial practice / responses: 88 [1] construe warranties as representations where possible 89 [2] construe warranties as promissory rather than affirmative 90 91 Legislative responses: 92 [1] warranty treated as representation; breach of warranty treated as misrepresentation 93 - if material, require scienter on part of insured 94 - demonstrates power of insurance lobby 95 - demonstrates importance of transmitting information from insured to insurer 96 - TREND - rare to see case like this when insured innocently makes a false stmt 97 [2] increase of risk std VERSUS contribution to loss std 98 99 POLICY - ABRAHAM prefers different rules for consumer insureds versus commercial insuredS 100 - consumer insureds - innocent misrepresentations DO NOT void coverage 101 - commercial insureds - innocent misrepresentations DO void coverage 102 103 104 [Concealment] 105 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 106 - scienter generally required for rescission / voiding of coverage 107 108 Timeline: 109 - application 110 - applicant discovers change 111 - policy issues 112 - insured makes claim Page 2 INS_outline.txt 2014-04-22 113 114 [Neill] - RULE - agent's fraudulent misstatement is not a misrepresentation by the insured unless they cooperate 115 - RULE - where the cooperation of the applicant is in dispute, no SJ will be granted 116 - ABRAHAM - arson suspected 117 - ABRAHAM - idea of cooperating in fraud is fuzzy, requires precise testimony from people who either do not remember / not alive to testify 118 - POLICY (-) cannot return insured to status quo ante, because at this point they have already suffered a loss 119 120 ABRAHAM - the purpose of asking questions on applications is to combat AS by high-risk insureds - thus, after point of application, change in condition should not void insurance 121 (-) incentive effect - go to doctor right after filling out application - that is, point of discovery may occur BEFORE point of application 122 (-) there is still adverse selection going on until the point of issue - low-risk applicants may lapse; high-risk applicants may not lapse 123 (-) lapsing can occur at any point during the coverage period - just don't pay the premium 124 (?) when is the contract binding? - adding in agency concern makes the inquiry more difficult 125 (?) if just a snapshot, does it matter what point we choose as long as it is uniform and set by regulation? 126 127 ৺৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৽ 128 ৷ [Standardization] ৷ 129 ╚৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶╝ 130 131 HX - price wars, eventually harming solvency 132 TREND - data pooling, requiring data standardization, requiring coverage standardization 133 HX - insurers went too far, establishing ACP rating bureaus 134 TREND - raw loss data still pooled, policies still standardized 135 136 POLICY - standardized policies 137 (+) availability of pooled data reduces barriers to entry in the insurance mkt 138 (+) enhances predictability - precedents 139 (+) enhances clarity of meaning - precedents 140 (-) inhibits innovation 141 (-) easier to establish parallel pricing (though many submarkets are highly competitive) 142 143 TENSION - to the extent that individual circ are taken into account in deciding what provisions mean, we have std language but not std meaning 144 - precedents (inflexible) versus particularized circ (flexibility desirable) 145 146 147 [Ambiguity] 148 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 149 - MAJ RULE - half the states - you cannot look to external ev when the provision is clear 150 - can still look within the four corners of the policy 151 - can look to dictionaries 152 - can look to purpose 153 - perfectability - could the provision have been stated more clearly? 154 - MIN RULE - even when provision is unambiguous on its face, you can look to extrinsic ev to show an ambiguity exists 155 - trade custom 156 - course of dealing between the parties 157 - practical construction of K - how did the parties interpret it before? 158 - pre-K negotiations 159 160 TREND - contra proferentem has gained priority over other means of interp - other sources of meaning extrinsic to the policy - course of dealing, trade usage, &c 161 162 RULE - if provision is ambiguous, look to: 163 - trade custom 164 - course of dealing between the parties Page 3 INS_outline.txt 2014-04-22 165 - practical construction of K - how did the parties interpret it before? 166 - pre-K