INS_outline.txt 2014-04-22 1 ৺৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৽ 2 ৷ 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 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 , 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 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 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 negotiations 167 168 MIN RULE - Reasonable Expectations of the Insured (REotI) 169 - ct might find another interpretation, but find it unreasonable 170 - POLICY - REotI = vehicle for creating "judge made insurance" ? 171 172 POLICY - ambiguity doctrine 173 (+) works as a tie-breaker 174 (+) reflects social preference for coverage over non-coverage 175 (+) incentivizes insurers to draft clearer policies 176 (?) flows from conversation between courts and insurers 177 178 [Vargas] - no longer relevant as a matter of law 179 - NB: TC and CA differ so drastically - based on what they are willing to consider 180 - TC looks only to word "within", interpreting it to mean "inside" 181 - CA looks to reasonable expectations and standard practices 182 - insurers prefer to stick to the words, o/w insured can introduce appealing pro-coverage ev 183 184 POLICY - ambiguous provisions mislead policyholders 185 - insurer as drafter has the capacity to make the policy language clear 186 - on the other hand, can argue that because insureds do not read their policies, the interaction of ins drafting and jud interp create a barrier to the use of new, clearer policy language 187 - but they are not misled in any meaningful way - they have not relied, because they do not see the words until after purchase 188 189 190 [World Trade Center] 191 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 192 - [DEF] binder = provides coverage after application and before issuance of policy; specifies expressly or by reference the basic terms and conditions of coverage 193 194 [F] provision = "'occurrence' shall mean all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes . . . the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which the losses occur." 195 196 [I] definition of "occurrence" under policy - 1x = $3.5B v. 2x = $7B 197 198 [H] for those binders that subscribed to the WilProp form, this was one occurrence 199 [H] Travelers' binder contained no definition, but court rules it ambiguous as to "occurrence" 200 - Silverstein wanted policy ruled unambiguous - would lead to "occurrence" definition under NY law - two immediate causes here 201 - Travelers' wanted policy ruled ambiguous - extrinsic ev was favorable 202 - NY RULE - generally interpret ins in light of the business purposes sought to be achieved by the parties and the plain meaning of the words chosen by them to effect those purposes 203 - ambiguity is a matter of law 204 - court points to lack of consistent body of caselaw 205 - [Newmont Mines] - meaning on "occurrence" must be interpreted in the context of the specific policy and facts of the case 206 - ABRAHAM - this is a strained reading of the relevant caselaw 207 208 POLICY - CA2 did not want to decide whether the towers would be rebuilt, sent it back to the TC / jury 209 - instruction - "under all the ev presented, what did the parties intend the term 'occurrence' to mean?" 210 - should such questions be decided by judges or by juries? 211 (-) predictability - should have a default rule instead 212 (-) admin costs - highly costly litigation to even reach the jury 213 (-) contra proferentem - allowed adm of extrinsic ev here, but the doctrine was never given full force 214 - either [1] shows parties had no intent [2] parties had different intents [3] parties had same intent 215 - the JI here did not leave the jury the possibility of finding that the

Page 4 INS_outline.txt 2014-04-22 parties had differing intents or no intent - the court should have instructed the jury that if it found this to be the case, it should have construed the provision against the insurer based on contra proferentem 216 217 218 Contra Proferentem v. REotI 219 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 220 Approaches: 221 [1] REotI is a limit on interpretation 222 [2] provision interpreted however the language will bear 223 224 REotI = RULE = [1] shield for insurer if provision is ambiguous (hx) = an interpretive tool 225 REotI = MIN RULE = [2] sword for insured despite unambiguous provision (!hx) = a tool despite interpretation 226 - in perhaps ten states 227 - even in those ten states, doctrine might not be viable in every context 228 - the clearer / more reasonable the expectation and the more hidden / surprising the policy language, more likely the doctrine will apply 229 230 Origin of REotI = Keeton drew the doctrine from collected cases = jud activism / consumer protection 231 232 POLICY - Theory behind REotI 233 - - misrepresentation - misleading action by insurer? - failure to disabuse of mistaken impression = blameworthy? 234 - this sounds like a tort, but where is the causation? 235 - and if misimpression were corrected, what could insured do? 236 - K - promissory estoppel 237 - K - unconscionability 238 - but when REotI is applied, it doesn't seem to have any of these underlying elements 239 240 POLICY - REotI 241 (+) insurer has misrepresentated in some way the contents of the policy 242 (+) estoppel - insured has labored under a misimpression about the policy's contents 243 (+) unconscionable to omit covered that insured reas expects 244 (+) PL thm? - defective language in policy = defective product? 245 (-) what if the expected coverage is not available in the market? 246 (-) if no one reads, does it matter whether the exclusion may be easily understood from reading? 247 248 [Atwood] - RULE - honor electrician's objective REotI even if study of the policy provisions negates 249 - [H] policy fails to give fair notice to P - P on reading the front page / heading would have assumed completed operations were covered 250 - [R] P's 20-yr insurance agent also thought the policy covered completed operations 251 252 POLICY - optimal solution here would be for agent to be competent - this agent was either incompetent or committed perjury 253 POLICY - does court know how electrician thinks about the risks and his ins against them? >> court must know this in order to determine how reasonable the electrician's expectations were 254 POLICY - isn't question of reasonableness a mixed question of law and fact? an evaluative question? 255 256 (+) electricians would not divide up liability world into "in-progress operations" and "completed operations" 257 (+) electricians would want completed ops coverage - this is the VAST majority of their risk 258 259 (?) how to evaluate reasonableness of expectations? 260 (-) it is not easy to distinguish cases of obj/reas expectations from far-less-clear cases of expectations 261 (?) causation - notice from prior decisions >> molds expectations 262 (+) the instant policy was an aberration, and thus application of REotI is appropriate here

Page 5 INS_outline.txt 2014-04-22 263 264 [Atwater] - "ev of forcible entry" 265 - [H] insured could have reas expected coverage for burglary, where burglary was proven to be an outside job 266 - [H] where the technical definition of burglary in a burglary ins policy is, in effect, an exclusion from coverage, it will not be interpreted so as to defeat the REotI 267 - [R] here, law enf det this was not an inside job, and the premises were secured 268 - thus construing provision against insured will not effectuate the policy goals of the visible-marks-of-forced-entry requirement 269 - but insurer has a right to limit the risks against which it will indemnify insured 270 271 POLICY - visible-marks-of-forced-entry requirement: 272 [1] protect insurer against inside jobs / fraud 273 [2] encourage insured to reas secure the premises 274 275 POLICY - purchasers expect to be covered against burglarly, including skillful/markless burglaries 276 POLICY - coverage should not turn simply on the skill of the burglar 277 278 POLICY - REotI places burden on insurer to communicate coverage and exclusions of policies accurately and clearly 279 280 (+) ev req here more administrable, lowers litigation costs 281 (?) should courts make decisions on the basis of assumptions about consumer preferences? 282 (?) some courts have accepted ev of availability of separate insurance for expected benefit to establish unreasonableness of insured's expectations 283 284 285 [Atwood] v. [Atwater] 286 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 287 (+) now, purchasers who know their rights will be getting the broad-form policy >> insurer will adjust prices 288 (-) however, purchasers must take broad-form policy now 289 - NB: too costly to customize everything, and thus sometimes the law must make a choice, and purchasers do not get the choices 290 - NB: court cannot know whether more purchasers want broad-form or narrow-form >> and when court doesn't know, isn't it best to just default to the language the market has accepted? 291 292 THEME - judicial regulation of the terms of coverage v. market mechanisms 293 - market product comes with some presumption of legitimacy 294 295 POLICY - REotI is aspirational / reading between the lines 296 297 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 298 [Agency] 299 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 300 301 [DEF] broker = obtains coverage for policyholder, represents policyholder; some auth from insurers 302 [DEF] agent = represents insurer; markets coverage, files applications, processes claims 303 304 [I] how much authority does the agent have? what is he entitled to do? 305 306 [1] Actual Authority 307 [1] express 308 [2] implied 309 [2] Apparent Authority 310 - where P has caused authority to be apparent ("clothed the agent with authority"), P bears responsibility (== estoppel) 311 312 [Elmer Tallant] - apparent authority binds insurer 313 - [F] General Agency - with limitations 314 - prior approval required for risks declined by other insurers within past 3yr

Page 6 INS_outline.txt 2014-04-22 315 - prior approval required for certain classes of business 316 - [F] both limitations violated here; Tallant declared Bailey "bound" immediately 317 - undisclosed principal 318 - apparent auth? - yes 319 - RULE - P bound when TP contracts with A within the customary scope of such an A's authority 320 - RULE - this holds even where A represents several insurers, when A has designated one insurer for coverage 321 - actual auth? - NO - thus A liable to P for P's loss 322 323 POLICY - P has advantages of selection of A, and must bear burdens if it chooses an unfaithful A 324 POLICY - custom and practice of the ins industry may make limiting apparent authority impossible, since most general agents have unrestricted auth to bind coverage 325 326 [Roseth] 327 - RULE - estoppel reqs: 328 [1] generally broad coverage 329 [2] exclusion not within the terms the insured ordered 330 [3] exclusion not within the coverage insured was led to believe was contained in the policy 331 - MAJ RULE - estoppel cannot expand coverage >> agent can't alter policy through use of apparent authority 332 - MIN RULE - estoppel can create coverage not explicitly provided for in the policy 333 334 RULE - estoppel can alter conditions, if the conditions do not expand coverage 335 POLICY - this rule makes less sense 336 RULE - estoppel may only be invoked for pre-contract statements, but not for post-contract or post-loss statements 337 POLICY - no explanation for this distinction 338 339 TREND - ABRAHAM - these distinctions will eventually be obliterated - unary rule for application of estoppel 340 341 ৺৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৽ 342 ৷ GROUP INSURANCE ৷ 343 ╚৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶╝ 344 345 (+) favorable tax treatment 346 HX: started due to post-WWII wage regulation 347 (-) premiums not taxable to employee 348 (-) premiums deductible to employer 349 (+) economies of scale 350 (+) marketing 351 (+) administration 352 (+) no individual underwriting 353 354 ৺৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৽ 355 ৷ [II] INSURABLE INTERESTS ৷ 356 ╚৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶╝ 357 358 [DEF] insurable interest = any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage 359 360 RULE - principle of indemnity - fully restore, no more 361 (+) combats MH 362 (+) avoids societal waste 363 (+) avoids use of ins as gambling/wagering chip where party has no interest 364 365 Insurable Interests - TESTS 366 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 367 [1] legal or equitable interest 368 - MIN RULE - interest must have some value 369 [2] factual expediency - [Gossett] 370 - legalistic approach? 371 - or *actual* expectations?

Page 7 INS_outline.txt 2014-04-22 372 [3] contract right - right depending on continued existence of property, EX: secured creditors 373 [4] legal liability - potential of suffering legal liability for property's destruction 374 375 TREND - many jurisdictions have adopted all four tests 376 377 RULE - most courts today require only that an insurable interest exist at time of loss 378 379 POLICY - insurable interest 380 (+) combats moral hazard 381 (+) prevents insurance from morphing into a wagering/gambling mechanism 382 (+) provides remedy to insurers who have been deceived during application process 383 (-) might there be other remedies for insurers that do this work more effectively? (fraud, estoppel, mistake) 384 (-) hard to identify II 385 (-) II unpredictable - more like a standard than a rule 386 (-) at the margin, insurers have incentive to issue morally hazardous policies anyway, if they know the II defense is available 387 (-) II an imperfect proxy for MH? - the link between II and MH is often uncertain 388 389 POLICY - Insurable Interest Alternatives 390 - could give TPs standing to raise II issue - raises risk that insurers will investigate before paying 391 - could make insurers liable for negligence where they insure where there is no II and harm results 392 393 [Gossett] 394 - RULE - an insured with a partial interest in a property can generally recover only to the extent of that interest 395 - [H] Gossetts have no insurable interest in house beyond improvements 396 - POLICY - o/w would incentivize ins fraud and arson 397 - [F] - policy issued under assumption that Gossetts were legal owners of unfinished home, yet they had not obtained long-term financing, and the deed was held by another - no ev that Gossetts had an obligation to buy the property 398 - [F] - payment limited to "insured's interest" OR "applicable limit of insurance" 399 400 RULE - expectations that do not materialize do not constitute an II 401 402 MIN RULE - in other states, the facts supporting a factual expectation here would be enough to find an II 403 404 POLICY - [Gossett] is a strict interpretation of what constitutes an insurable interest 405 POLICY - court is telling Gossett's lawyers that they really screwed up 406 - usually, there is a way to set up a transaction so that there will be an II 407 - design of doctrine is to prevent risky people from buying insurance 408 409 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 410 [IIL] Insurable Interests - Life Insurance 411 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 412 413 RULE - policyholder must have [1] a substantial interest engendered by love and affection OR [2] a lawful and substantial economic interest 414 415 RULE - in debtor/creditor situation, II only extends to debt owed, and policy must not be "grossly disproportionate" 416 417 MIN RULE - half the states have statutes allowing insured, executor, or insured's 's administrator a cause of action for proceeds against the beneficiary of a policy issued in violation of the II requirement 418 419 420 [Ryan v. Tickle] - good-faith life ins policies of business partners upheld 421 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 422 [F] business partners take out $50K policies on one another for their joint lives - thus $100K payable to survivor

Page 8 INS_outline.txt 2014-04-22 423 424 STATUTE - [DEF] insurable interest as including a reas expectation of benefit from continued life due to pecuniary relation 425 426 [H] following purposes of agreement, Ryan & Tickle made $100K estimate in good faith 427 [H] P lacks standing - only insurer may raise objection of want of an insurable interest 428 429 ABRAHAM: court would have upheld arr if it reached the merits - facts show that the business expanded after Ryan entered the venture and this ins arr was completed - thus Tickle had an economic interest in Ryan's continued life 430 - presume that such an interest exists for business partners? 431 - or require ev that partner's continued life adds to venture? 432 - courts are deferential in the business context as to the details of magnitude of interest 433 434 (?) RULE - II must only exist at time of policy issuance 435 (?) RULE - will not limit insured's recovery to the amount of insured's investment in the policy when insured's investment is large both quantitatively and relatively 436 437 ৺৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৽ 438 ৷ [REG] INSURANCE REGULATION ৷ 439 ╚৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶╝ 440 441 POLICY GOALS 442 - ensure solvency of insurers 443 - control prices insurers charge 444 - influence insurers' policy terms (= product quality) 445 446 HX - Federalism - Allocation 447 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 448 MC-F (McCarran-Ferguson Act) 449 [1] no dormant CC pre-emption 450 - states may regulate 451 [2] no implied pre-emption 452 - federal states will not be interpreted to pre-empt state ins regulation unless explicitly stated 453 - explicit examples: ERISA, Gramm-Leach-Bliley 454 [3] exemption from federal ATR if a state regulates 455 - temporary 18mo exemption 456 - permanent exemption if state regulates 457 [4] exception to the exemption 458 - $F enforced via boycott is still an ATR violation 459 - boycott, coercion, intimidation = ATR 460 461 POLICY - MC-F leaves 3x open questions 462 [1] what counts as "the business of insurance"? 463 [2] what counts as "regulation" - how much regulation needed? 464 [3] what is the meaning of the boycott/coercion/intimidation exception? 465 466 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 467 Nature and Scope of State Regulation 468 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 469 470 GENERALLY - regulation is "medium-strong" in some places, "weaker" in others 471 472 State IC - Powers 473 - rate oversight - "not excessive, inadequate, or unfairly discriminatory" 474 - approval of policies 475 - typically light due to volume 476 - important only for major changes 477 - deceptive, misleading, or unfair practices - typically patterns of practice 478 - monitor solvency 479 - monitor forms 480 - complaint processing 481 482 NAIC = Nat'l Ass'n of Ins Comm'rs 483 - promotes uniformity

Page 9 INS_outline.txt 2014-04-22 484 - model state laws 485 - centralization of regulatory fns 486 - EX: IIRPC for life insurance 487 - facilitates coordination 488 - (+) eco of scale 489 - (+) decreased compliance costs 490 - (+) ability to identify interstate trends 491 - state solvency accreditation - ins only domicile in accredited states 492 - state market conduct accreditation 493 - much less success at coordination, due to the nature of market conduct regs 494 - services ins regulators and consumers 495 - data analytics on insurers' finances 496 - research services 497 498 499 [1] Solvency Regulation 500 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 501 - diagnostic financial ratios 502 - premium-to-surplus ratio - available capital v. coverage obligations 503 - Statutory Accounting Principles (SAP) more conservative than GAAP 504 - Risk-Based Capital Reporting - all capital by risk grade 505 - investment criteria - types/riskiness of investments permitted 506 - detailed investigation - designation for special regulatory attention 507 508 Guaranty Funds - backstop if insurer becomes insolvent 509 [1] Coordination of Recovery and Out-of-State Claimants 510 - GOAL = prevent duplication of coverage between states 511 - claimant must be a resident of state 512 - insurer must be licensed in state 513 - many deny coverage to out-of-state members of in-state purchasing groups 514 [2] Settlements 515 - good-faith settlements must generally be honored 516 [3] Limited Corporate Recovery 517 - half of states - no first-party claim payments to companies > $25M 518 - generally upheld by courts 519 [4] Fund Structure 520 - Who contributes? On what basis? 521 - insurers licensed to sell lines of ins covered by a state's fund 522 - subject to assessments based on premium volume AFTER insolvency occurs 523 - Who recovers? On what basis? 524 - limited to residents of the state, or property within the state 525 [1] recovery limited per claim - [DEF] of "claim" important 526 [2] another solvent insurer must not be available to pay the claim 527 [3] payments only to policyholders, not to insurers 528 [4] guaranty funds not liable for FD breach claims, counsel fees, UFTA regs 529 - but may be liable for breaching the duty to defend 530 RULE - guaranty fund is not liable for any claim against an insolvent insurer which is not literally a claim under an ins policy 531 532 POLICY - causes of insolvency 533 - usual cause is insurer not charging enough for their product 534 - difficult to forecast liability claims - some forecast too low 535 - difficult to forecase any long-tail line of insurance 536 - ins bus is over-crowded 537 - ins bus is price-competitive 538 - some incompetence and fraud, but more so decline 539 (-) insolvency inherent to competition, impossible to prevent? 540 541 AIG Bailout 542 ‾‾‾‾‾‾‾‾‾‾‾ 543 - credit default swaps - arguably ins, and their regulation as such might have prevented the need for the bailout 544 - AIG Financial Products posed "systemic risk," necessitating the bailout 545 - the same did not happen to AIG's ins companies, due to reg reqs that they hold healthy reserves 546 547 POLICY - are credit default swaps insurance? 548 Y - hedging against risk of default = character of ins-like transaction

Page 10 INS_outline.txt 2014-04-22 549 N - ownership not required to take out swap 550 551 552 [2] Rate Regulation 553 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 554 RATEMAKING 555 ‾‾‾‾‾‾‾‾‾‾ 556 Operating profit = underwriting profit (loss) + investment profit (loss) 557 558 Underwriting profit = (premiums) - (losses + expenses) 559 560 Loss ratio = losses compared to premiums (e.g., 90) 561 562 Expense ratio = expenses compared to premiums (e.g., 15) 563 564 Combined ratio = (losses + expenses) compared to premiums. 565 NB: A combined ratio greater than 100 indicates an underwriting loss. 566 567 Extrapolating / Predicting 568 - inherent tradeoff between reliability and completeness 569 - complete data is often older 570 - newest data is incomplete / sparse 571 572 Rate Regulation 573 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 574 - Ins Comm'r must engage in this same process to evaluate rates 575 576 TREND - property/casualty regulated more closely than life and health 577 578 Methods of regulation: 579 [1] state prescription of rates (rare) 580 [2] prior approval - file, effective unless disapproved within 90 days 581 [3] file and use - effective immediately 582 [4] flex rating - freedom within rate range; file and use beyond the range 583 [5] open competition - IC has residual regulatory auth 584 585 [North Carolina Rate Bureau] - ct deference to state ICs 586 - STDREV - whether IC's conclusions of law are supported by material and substantial in light of the whole record 587 - [H] IC can employ SAP instead of GAAP if he so chooses 588 - [H] some of IC's findings wrt ev are insufficiently specific - remanded to IC for more-specific findings and reasoning 589 590 POLICY - it is very hard for courts to scrutinize the conduct of ICs 591 - courts review admin agencies' decisions for clear error only 592 - admin agency's decision stands unless arbitrary or capricious or contrary to law 593 - of , ICs must be selective in their examination of rates 594 595 POLICY - Why this deference to administrative agencies? 596 (+) expertise 597 (+) inst competence 598 (-) danger of capture 599 (-) revolving door phenomenon 600 (?) hard for courts - thousands of pages filed - how to weigh the ev? 601 602 TAKEAWAY - all the action in insurance is at the adminstrative agency level 603 604 POLICY - what model of rate regulation? 605 - public utility model - priority given to rate increases that most affect the public; emphasis on fair level of profit 606 - competition model - assure that competition effectively regulates rates - degree of competition in a line of insurance determines the level of regulative scrutiny 607 608 609 [3] Discriminatory Rate Regulation 610 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 611 TREND - most IC decisions are not overturned on discrimination bases, because:

Page 11 INS_outline.txt 2014-04-22 612 [1] obvious bases (race/religion) are not used 613 [2] other bases are difficult - ICs do not feel tech/pol qualified to make such dets - ethical/policy question 614 615 Is this rate discriminatory? 616 - Dimensions of assessment - broad to narrow: 617 [1] actuarially inaccurate 618 [2] non-causal = mere correlation 619 (-) often hides component causational factors 620 (-) the causational factors may be too expensive for insurers to use, and would raise rates for those discriminated against 621 (-) non-causal = objectionable morally/ethically 622 (+/-) you can rule out some criteria on this basis, but you may introduce more AS/MH into the system 623 [3] non-controllable 624 (-) might individuals with the best genetics elect not to purchase insurance? 625 (?) are good genetic traits assets of individuals or of society? 626 (?) our attitude may vary based on the amount of AS occurring 627 (?) many shades of controllability (e.g. Type II Diabetes, Lung Cancer) 628 [4] immutable - EX: age is mutable, length of driving exp is mutable 629 [5] otherwise suspect - race, religion, gender, genetics 630 (?) usage of these bounded by hx exp of discrimination 631 (?) factors correlated with income or race, EX: credit ratings 632 633 POLICY - insurers discriminate to combat AS/MH 634 POLICY - insurers discriminate to remain competitive 635 636 POLICY - risk classification is costly, and thus at the margin insurers will risk classify only to the point where the competitive advantage equals the cost of risk classification 637 - attendant danger that startup costs of implementing a new classification will accrue benefits to competitors 638 639 [Schmidt] 640 - [F] state statute forbids discrimination on length of driving experience 641 - [I] does the state's anti-discrimination provision prohibit discrimination merely in rate-making, or in underwriting as well? 642 - STDREV - IC's decision carries presumption of validity, and P must meet heavy burden, making a convincing showing that the decision is invalid because unauthorized, made upon unlawful procedure, erroneous, arbitrary, or capricious 643 - [H] no impromptu rulemaking or abuse of discretion - statute upheld 644 645 INTERPRETATION - rubric 646 - first plain language, then legislative intent as evinced through language and statutory context 647 - construe so as to give all clauses and words effect = no superfluity 648 - if ambiguous, may look to leg hx 649 - court may have read statute incorrectly: "standard or rating plan" could also mean associated criteria 650 651 POLICY - avoid double-counting - lack of experience v. recklessness of youth - both may be at play 652 653 POLICY - why can't Allstate just sell auto ins to experienced drivers? 654 - auto liability ins imbued with the public interest - it is a community asset as well as an individual asset 655 - protects victims, providing means of compensation 656 657 POLICY - why don't insurers treat people as individuals, taking all particularized factors into account? 658 - ins is all about treating people not as individuals, but as combinations of risk factors, as group members 659 - information problem - usually there is not sufficient data to make individual characteristics into bases for pricing - foundation here is the law of large numbers - can only comprehend risk trends among groups 660 - if we could reach complete information, insurance would disappear 661 662 RULE - EMPLOYERS under Title VII cannot gender-discriminate in contribution

Page 12 INS_outline.txt 2014-04-22 requirements or benefit payouts based on differential life expectancies, though INSURERS may 663 RULE - ADA - insurers are permitted to draw distinctions that burden the disabled if supported by actuarial data, as opposed to being designed to unfairly discriminate or to discourage the disabled from seeking insurance 664 665 666 [4] Contingent-Commission Controversy 667 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 668 [DEF] contingent-commission = bonus that insurer pays to brokers/agents who reach pre-specified benchmarks wrt the business they direct to the insurer 669 670 (-) COI for broker/agent trying to effectuate applicant's interests 671 (+) can motivate broker/agent to ferret out adverse selectors 672 (-) adverse selection is a minimal problem in consumer markets 673 (-) disclosure of commissions doesn't solve info problems small applicants face 674 (-) might impair competition among insurers - broker/agent without commission will shop around 675 (-) signalling - applicants who select non-commission brokers/agents may unintentionally/inaccurately signal to insurers that they carry higher risk 676 (-) may erode trust between applicants and brokers 677 678 RULE - 12 states require disclosure 679 TREND - large insurers do not commission; small/independent insurers do commission 680 681 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 682 Open Questions left by Federal law 683 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 684 685 TEST == whether a particular feature of that scheme would be invalidated, impaired, or superseded by fed law 686 TEST != whether state has enacted an ins reg scheme 687 688 [1] What Constitutes the "Business of Insurance"? 689 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 690 [Pireno] - three-factor balancing test 691 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 692 [F] NYSCA chiropractors' peer review committee advises insurer (ULL) on what treatments/fees were nec/reas 693 - alleged ATR restraint = $F 694 695 RULE - construe exemptions from ATR laws narrowly 696 697 PRECEDENT - [Royal Drug] - alleged $F and boycott 698 - RULE = McFA s 2(b) exempts three aspects of ins bus: 699 [1] whether the practice has the effect of underwriting or spreading a policyholder's risk 700 [2] whether the practice is an integral part of the policy relationship between the insurer and the insured 701 - factors: relationship, type of policy, reliability, interp, enf 702 [3] whether the practice is limited to entities within the insurance industry 703 - EX: cooperative ratemaking efforts 704 705 APPLICATION 706 [1] NO - review happens only after risk has been transferred - no logical or temporal connection 707 [2] NO - a contract distinct from ULL's contracts with policyholders - only "bus of ins" exempt, not the "bus of ins companies" 708 [3] NO - involves outside TPs (the chiropractors) 709 - arrangements with non-ins parties has potential to restrain competition in non-ins markets 710 711 ABRAHAM - [I] does the practice fall within the purposes for which Congress passed the McFA? 712 ABRAHAM - criterion should be = does this practice primarily affect insurance markets or non-insurance markets? 713 714 [D!] REHNQUIST - substance over form

Page 13 INS_outline.txt 2014-04-22 715 - NYSCA peer review committee = claims adjustor in this case 716 - a fair and eff means of claims resolution 717 - benefits both insurers and insureds 718 - [Royal Drug] distinguishable - mechanical payment processing versus claim validity analysis (a fundamental activity) 719 720 721 [2] What Constitutes "Regulation" by the States? 722 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 723 - state must have a statute creating auth to regulate the activity in question 724 - the regulation must be more than mere pretense 725 - explicit state approval of activity in question not required 726 727 728 [3] What Constitutes "Boycott, Coercion, or Intimidation"? 729 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 730 HX - system was stable after WWII, then started to change - PL / Nader / plaintiffs' lawyers 731 - litigations increase, damages awards increase 732 - unexpected shifts = lack of certainty = insurers realize they have not been charging enough 733 - insurers realize they cannot predict payouts with current policies, due to length of time horizon (policies' tails) 734 - insurers responded by shifting from occurrence policies to claims-made policies 735 - claims-made policy = upper time bound 736 - can also add *retroactive date* = lower time bound 737 738 NB: long-tail ins lines = PL, MedMal, CGL 739 740 POLICY - occurrence coverage shifts the risk of an uncertain claims future to the insurer 741 742 [Barry] - [H] McFA prohibits boycotts *independent* of any state regulation 743 - [F] three insurers refuse to accept applications from St. Paul's current clients, limiting them to the new claims-made policies 744 - CTX - medical societies disliked claims-made policies 745 - tremendous pol/mkt ferment as things began to change 746 - [H] is this practice a "boycott" for McFA purposes? YES 747 - [DEF] boycott = concerted refusal to deal 748 - the illegality is in the and combination of refusal 749 - practice does not fall under category of "agreements which can normally be made in the insurance business" 750 751 ABRAHAM - intent of Hartford/Aetna/Travelers is to force all policyholders into St. Paul's claims-made policies, then tit-for-tat, all four insurers will end up with their original policyholders, but converted to the new type of policy insurers favor 752 753 754 [Hartford Fire] - restricting the terms of new CGL policies not a boycott 755 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 756 HX TREND - 1978-1984 - level premiums in CGL and MedMal, despite crises/inflation 757 - but some (OBGYNs, daycares, &c) have great difficulty finding insurance 758 - then, sudden spike in prices - 2x-3x 759 - [1] "cash-flow underwriting" - insurers were so eager for premium dollars to invest - bonds were paying 11-12% 760 - [2] increasing cost base, while premiums remained level - the spike was just premiums trying to keep level 761 - [3] increased uncertainty - appearance and rise of mass torts 762 - [4] underwriting cycle - tax treatment of insurance reserves changes 763 ABRAHAM - no causal connection to [Hartford Fire], but part of the atmospherics 764 765 CTX - price war in the CGL insurance market - insurers are losing money 766 - long-tail liability coverage; mass torts; enactment of Superfund statute 767 - Superfund - toxic actions from 50s/60s/70s resulting in huge claims - solved with retroactive date provisions 768 769 - P alleges ATR conspiracy to restrict the terms of coverage of CGL ins available in the U.S.

Page 14 INS_outline.txt 2014-04-22 770 - four restrictions: 771 [1] claims-made basis 772 [2] retroactive date provision 773 [3] eliminate "sudden & accidental" pollution coverage 774 [4] legal defense costs count against coverage limit, and also capped 775 776 [F] 777 - attempts to pressure 1984 ISO CGL forms 778 - boycott = attempts to pressure US & UK re-insurers not to insure policies written with new 1984 ISO CGL forms 779 - success on [2] and [3], partial success on [1] - new 1986 ISO CGL forms 780 781 [DEF] "boycott" 782 - OED = "to combine in refusing to hold relations of any kind, social or commercial, public or private, with a neighbor, on account of political or other differences, so as to punish him for the position he has taken up, or to coerce him into abandoning it" 783 - partial - Webster's = includes PARTIAL refusals to deal 784 - conditional - refusal to deal need merely be *conditional*, !nec *absolute* 785 - boycott != cartalization; cartelization = concerted agreement to terms 786 - SCOTUS = seeking an objective COLLATERAL to the transactions at issue 787 - i.e. an *enforcing* transaction incident to a *target* transaction 788 - SCALIA - boycott != concerted refusal to engage in particular transactions until the terms of those transactions are agreeable 789 790 [St. Paul] - insisted-upon condition (claims-made policies) was COLLATERAL, in that it bore NO RELATION OR AN ARTIFICIAL RELATION to the proposed contracts of insurance that St. Paul's clients wished to conclude with St. Paul's competitors 791 792 [H] SCALIA - here, a direct relation between the primary-insurance terms and the activity: writing reinsurance - so no boycott 793 - if the agreement extended to refusals to write reinsurance on other forms, this would constitute a boycott 794 - if extended to other ISO forms, even other ISO CGL forms, with non-objectionable terms, then a boycott 795 796 POLICY - the alleged conspiracy 797 (+) claims-made policies with retroactive dates facilitate rational pricing because they are more predictable 798 (-) retroactive dates could force insureds not to switch insurers, due to threat of changing retroactive date 799 (-) increases barriers to entry - marketing new policies 800 (?) states can still prohibit the conduct in question via state ATR/INS laws 801 (?) boycott here is an enforcement technique not directed at another transaction 802 (?) SOUTER is worried about a group of re-insurers with market power dictating what coverage the market will provide - highly ACP, even if not a boycott 803 804 805 Future Reforms 806 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 807 [1] repeal of McFA ATR exemption 808 (-) years of litigation 809 (-) costly uncertainty 810 - POLICY PROPOSAL - repeal exemption and replace with activity-specific safe harbors 811 - ABRAHAM - insurers could get along without any ATR exemptions 812 813 [2] Federalization of regulation 814 - only forces to change state reg decisions are [1] fed gov [2] the market 815 (+) ins = interstate business with national efficiencies 816 (+) state regs often lax 817 (-) state regs have worked for over a century; start-up costs to fed regs 818 (-) experimentalism - states as laboratories of federalism 819 (-) precision - states can better address local issues 820 821 ৺৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৽ 822 ৷ [HOME] FIRE & PROPERTY INSURANCE ৷ 823 ╚৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶╝

Page 15 INS_outline.txt 2014-04-22 824 825 [DEF] first-party ins = victim's ins = losses that insured suffers 826 [DEF] third-party ins = injurer's ins = losses that insured inflicts on others 827 828 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 829 Sample Homeowners Policy 830 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 831 832 [1] Dec Sheet 833 [2] Definitions 834 - "insured" - promisee and relatives resident and minors resident 835 - "occurrence" - only relevant to Section II, not the first-party coverage 836 - "property damage" = physical injury to, destruction of, or loss of use of tangible property 837 [3] Section I - First Party 838 [1] Property/Interests Covered 839 [1] Dwelling 840 - but not land - effect is not to cover pollution damage to land 841 [2] Other Structures 842 [3] Personal Property 843 - anywhere in the world 844 - limits on jewelry, securities, &c - to combat AS (adverse selection) 845 [4] Loss of Use 846 - can occur independent of physical damage 847 [5] Additional Coverages 848 - collapse - property must actually fall down, rather than be imminently about to fall down 849 [2] Perils Insured 850 - for dwelling, an "all-risk" or "open-peril" policy 851 - for personal property, a "specified-risk" or "specified-peril" policy 852 - POLICY - because greater MH associated with coverage of personal property, because it is *moveable* 853 [3] Exclusions 854 - [DEF] anti-concurrent causation clause = if one of the causes of loss is excluded, then no coverage 855 - earth movement / earthquake exclusion - to combat AS by owners in earthquake-prone areas - sell a separate earthquake policy 856 - flood exclusion; war exclusion - highly correlated losses 857 - "intrinsic loss" is not covered - there must be an external force ("peril") acting on the property to cause the loss 858 [4] Conditions - includes both conditions and general provisions 859 - mortgage clause - bank is paid first when there is a loss 860 - subrogation 861 [4] Section II - Liability 862 [1] Liability Coverages 863 [1] Personal Liability 864 [2] Medical Payments to Others 865 [2] Exclusions 866 [3] Additional Coverages 867 [4] Conditions 868 869 [Port Authority] - asbestos damage 870 - TEST for "direct physical loss or damage" = need to have a distinct and demonstrable physical alteration to the building OR loss of use 871 - RULE - first-party "all-risk" ins coverage does not protect against losses that are certain to happen 872 - would transform ins policy into maintenance contract - inevitable deterioration of asbestos materials 873 - RULE - loss in progress - only the policy in place at the time the loss is discovered or should be discovered provides coverage 874 875 [Duane Reade] - WTC business interruption 876 - [H] restoration period covers the theoretical time to rebuild the store itself, not the entire WTC complex 877 - [DEF] business interruption (BI) coverage v. contingent business interruption (CBI) coverage 878 - BI = the subject business 879 - CBI = the property of suppliers and customers

Page 16 INS_outline.txt 2014-04-22 880 - RULE - BI Requirements: 881 [1] damage to covered property 882 [2] caused by a covered peril 883 [3] resulting in a nec interruption of business 884 [4] as a consequence of which there is a covered loss 885 [5] which occurs during the period of "restoration" of the business 886 887 POLICY - insurers anchor their coverage in property damage, because extending coverage to economic shifts would be impracticable 888 889 TAKEAWAY - although there will be disputes about the meaning of coverage, after that, most of the work in calculating BI/CBI is the purview of accountants - and there is not one right answer, because this is not a strictly empirical question 890 891 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 892 Exclusions 893 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 894 895 Four possible reasons: 896 [1] avoiding catastrophic loss (correlated risks) 897 [2] combating MH 898 [3] combating AS 899 [4] preventing duplicative/overlapping coverage (mkt segmentation) 900 901 POLICY - the broader an exclusion... 902 (+) lower administrative costs / application costs 903 (-) less coverage 904 905 [Chute] - intrinsic loss 906 - RULE - intrinsic losses are not covered, unless the inherent deficiency or tendency was made active by a covered peril 907 - POLICY - would be hard to write ins whose payouts are determined by the level of insured's preventive maintenance 908 - POLICY - not true that things that are bound to happen aren't covered 909 - they can be covered, as long as there is no asymmetric information as to the probability that the things will happen 910 - as long as we do not know in advance what will happen, "what was bound to happen" is irrelevant (ex ante uncertainty) 911 912 [Rosen] - imminent collapse 913 - [DEF] collapse = actually fallen down, or fallen into pieces 914 - [H] provision here is unambiguous - cannot be construed in favor of insured 915 916 TREND - most commercial property policies cover repairs to prevent imminent losses, if the loss would be covered 917 PUZZLE - if collapse is imminent, we insure you against the costs of preventing the collapse - why is this cost covered under commercial policies but not under homeowners' policies? 918 - ABRAHAM: because commercial property is generally more valuable than residential property - not cost-effectively investigate residential 919 - explained by the differences between commercial property owners (specialists) and homeowners (laypersons) 920 - because commercial insurers also provide BI/CBI insurance - they do not want losses to materialize that will also result in BI/CBI claims 921 - commercial insureds may affect many more persons (occupants, lessees) 922 923 POLICY - sanctity of contract/policy v. ensuring repairs of imminent dangers 924 (+) saves insurers from greater liability? preventative repairs? 925 (+) "neglect" exclusion prevents insureds from allowing collapses 926 (-) SS - could convert life ins into health ins by the same logic 927 928 [Bongen] - concurrent causation 929 - [H] policy enforced as written - earth movement exclusion - no coverage if concurrent or in any sequence with other causes 930 - MAJ RULE - obligations of insurers are generally determined by the terms in their policies 931 - MIN RULE - efficient = if the efficient proximate cause (dominant cause) is a covered peril, insurer must pay

Page 17 INS_outline.txt 2014-04-22 932 - [D!] MATTHEWS - efficient proximate cause / REotI - where covered peril has acted as dominant force in a loss, expectation of coverage is reasonable 933 934 - NB: ABRAHAM - there is no tort doctrine for determining the sole proximate cause of a harm 935 - POLICY - in all-risk policies, there will always be a concurring non-excluded CIF, because all non-excluded causes (an infinite number) are covered 936 937 [Liristis] - mold from water used to extinguish accidental fire 938 - [H] mold damage caused by a covered event is covered under the policy in this case; however, losses caused by mold may be excluded 939 - [F] - policy does not exclude all mold, but merely losses "resulting directly or indirectly from or caused by" mold 940 941 POLICY - in 99% of the cases, mold itself will be the loss, rather than the cause of the loss 942 - cause of loss = mold causing ceiling to fall in 943 - loss itself = mold unhealthy, necessitating removal 944 945 [Broussard] - slab case - Katrina tornadic winds and storm surge 946 - [H] insurer introduced suff ev for reas jury to conclude that insured's home was destroyed by water - ACC applies 947 - [H] - ultimate allocation of concurrent wind and water damages is a question of fact for the jury 948 - RULE - "named peril" coverage - BOP is on insured to establish that the damage was incurred by a covered peril 949 - RULE - "open peril" coverage - BOP on insured to show right to recover; then BoP on insurer to prove that a particular peril falls within a policy exclusion - after insurer makes this showing, the BoP does not "shift back" to the insured 950 951 POLICY - ICs put pressure on insurers to pay out claims; courts ruled against the plain language of the policies - so now many insurers will not issue policies within two miles of the coast throughout the whole area 952 (-) insurers do not trust the authorities, when push comes to shove, to let them apply their policies as written 953 954 [Dynasty] - use as nightclub - the problem of increased risk 955 - [H] - increased risk is a jury question 956 - NB: ABRAHAM - court likely suspected arson here 957 - PROVISION - no coverage while the hazard is increased by any means within the knowledge or control of the insured 958 - this is potentially a harsh provision, but it is interpreted flexibly 959 - purpose = insured must not materially increase the risk the insurer bears 960 961 TREND - courts have moderated this in a number of ways: 962 - temporary and fairly ameliorated hazard does not count - must be substantial in duration, magnitude, or both 963 - mere negligence of insured does not count, unless it results in a change of some duration 964 - "or" means "and" >> "knowledge AND control" - fits with MH concerns 965 - make this a jury question (as the [Dynasty] court does) 966 967 968 The Measure of Recovery 969 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 970 POLICY - replacement cost v. actual cash value 971 - economic conception (restore net worth) versus functional conception (allow to rebuild) 972 (-) MH inherent to replacement cost; might violate principle of indemnity 973 (-) actual cash value may undercompensate - indemnity principle 974 975 TREND - most property policies now provide express replacement cost coverage, or if there is no actual replacement, actual cash value coverage 976 977 [Zochert] 978 - [F] insurer deducted depreciation value from silos in calculating the actual cash value 979 - [F] relevant provision - if policy amount is >=80% of dwelling's replacement

Page 18 INS_outline.txt 2014-04-22 cost, insurer will not deduct for depreciation cost; if policy amount is <80% of the dwelling's replacement cost, insurer will pay actual cash value 980 - [H] thus "actual cash value" clearly contemplated as less than replacement cost; possibilities: 981 [1] actual cash value = market value 982 [2] actual cash value = replacement cost less depreciation 983 [3] (MAJ RULE) actual cash value = broad ev rule = all ev an expert would find relevant 984 NB: no matter the valuation option chosen, depreciation cost is a legitimate factor 985 986 POLICY - valued policy statutes - require payout of policy value when property is destroyed 987 (+) reduced cost of valuation after loss - trivial! 988 (+) equity - forces insurer to pay for level of insurance the insured has been paying premiums on 989 (-) can increase MH for policyholders 990 (-) does not incentivize better policing of agents by insurers 991 992 993 Co-Insurance 994 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 995 - if less than 80% insured, multiply loss by factor = (policy total / 80% cost of building) 996 997 POLICY - total loss of property is far LESS likely than partial loss 998 - don't want to have policyholders gambling on likelihood of partial losses by purchasing less ins 999 POLICY - property ins is priced proportionally (set amount per $1000 insured value) 1000 - this pricing scheme builds in some bias towards underinsurance - not charging enough for small amounts of insurance, while charging too much for large amounts of insurance 1001 1002 1003 Subrogation = one party stepping into the shoes of another 1004 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1005 - active subrogation - insurer sues 1006 - tortfeasor pays 1007 - insured fully compensated 1008 - insurer fully reimbursed 1009 - passive subrogation - insured sues 1010 - tortfeasor pays 1011 - insured fully compensated, but no more 1012 - insurer fully reimbursed 1013 1014 - equitable subrogation - arises by operation of law / equitable / supporting indemnity 1015 - contractual subrogation - arises by agreement of parties 1016 1017 GOALS 1018 [1] serves principle of indemnity - insured pays first, then seeks recovery only for this actual loss amount 1019 [2] allocates financial responsibility to the responsible party (e.g. the tortfeasor) - payments channeled through insurer instead of insured 1020 1021 [Great Northern Oil] 1022 - [F] Provision - subrogation of "all rights of recovery therefor against any person or organization" and "the insured shall do nothing after loss to prejudice such rights" 1023 - [H] insured may pursue recovery, since policy does not include a prohibition - insurer should have written this into the policy if he wanted to avoid it 1024 - RULE - insured's release of TP's liability defeats insurer's subrogation rights *unless* TP knows of insured's insurance 1025 1026 POLICY - eco effect here is to make the policyholder's insurer the liability insurer for the TP/contractor - why is this the rule? 1027 (+) this risk of TP liability was already reflected in the premium charged 1028 (+) this has to be the rule for individual policyholders - better for homeowners' insurers to have their subrogation rights interfered with (e.g. coat check receipt,

Page 19 INS_outline.txt 2014-04-22 drycleaning receipt), than to have litigation over all these little matters 1029 (+) info asymmetry: property insurers can more precisely risk-classify their insureds than liability insurers of construction contractors can risk-classify their insureds 1030 (-) holds insurer to a different risk than he contracted for - a greater risk - speculative? 1031 (-) if insured wanted this additional coverage, he should have had to pay an additional premium for it 1032 (?) POLICY - do we want one rule? - efficiency, difficult line-drawing (small v. large commercial policyholders) 1033 1034 POLICY - pre-loss, question is who is the best riskbearer - must be the policyholder's property insurer here 1035 1036 1037 Limited Interests 1038 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1039 [Althauser] - homeowner liable for remaining mortgage debt - due to material misreps made in connection with policy 1040 - RULE - even if insured breaches, insurer still covers mortgagee/bank and is subrogated to mortgagee/bank's rights 1041 - POLICY - once insured commits misrepresentation, in effect he is no longer an insured, thus insurer may then have subrogation against him 1042 1043 REMEDY - rescinding coverage after loss is a very harsh remedy 1044 - thus misrepresentation defense should only be available to insurer when insured is at fault - at least where insured is an individual 1045 1046 ৺৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৽ 1047 ৷ [LIFE] INSURANCE ৷ 1048 ╚৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶╝ 1049 1050 - typically "guaranteed renewable" - unique among most forms of insurance 1051 - insuring agreement (found in every ins policy) - payable on death 1052 - incontestability 1053 - RULE = the insurer can place whatever limits on coverage it wishes to place 1054 - ALT RULE = facts on which policy issuance is based become incontestable after some period (two years here) 1055 - APP - people can lie on their applications, and after two years defenses based on misrep/fraud are extinguished = striking a balance 1056 (+) the insured has died - no longer able to refute insurer's claims 1057 (+) money generally goes to innocent TP, who has relied for many years on the policy 1058 (+) two-year req minimizes chance of AS/MH 1059 1060 POLICY - tension between owner intent and public policy 1061 1062 1063 The Application 1064 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1065 [Gaunt] - temporary insurance vests on payment 1066 - [I] - when does ins take effect? 1067 - Application - Part B - Approval - Issue 1068 - initial payment starts coverage at date of "Part B" 1069 - [H] - binder language is misleading - most would think they had insurance 1070 - RULE - when you pay the first premium with the policy, you have temporary ins subject to divestment (insurer rejecting application) UNLESS this intricacy is pointed out to the applicant 1071 - TREND - courts converting condition precedent in binder/application to a condition subsequent 1072 1073 1074 Change of Beneficiary & Assignment 1075 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1076 [Engelman] 1077 - [F] - insured tries several times to change the beneficiary 1078 - [F] - insured's L never confirmed that insurer received change of beneficiary form - ineffective counsel

Page 20 INS_outline.txt 2014-04-22 1079 1080 - TREND - rule relaxed over time 1081 [1] HX RULE = full formality 1082 [2] everything in your power - might be strict or lax 1083 [3] MOD RULE = substantial compliance - need something formally equivalent / every reas/circ effort to comply 1084 1085 TEST for change of beneficiary: 1086 [1] owner clearly intended to change the beneficiary and to designate the new beneficiary 1087 [2] owner has taken substantial affirmative action to effectuate the change in the beneficiary 1088 1089 POLICY 1090 - tension between form and substance 1091 - fairness for a higher price - litigation more likely 1092 - better reflects the owner's intent 1093 1094 [Grigsby] 1095 - RULE - a policy that's assigned, when the original purpose at time of purchase was an assignment, is void ab initio 1096 - because too much MH 1097 - RULE - a policy procured in good faith that's assigned later is valid 1098 - but still MH here as well! 1099 1100 - workarounds 1101 - make a contract to make a will - enforceable in most jurisdictions 1102 - make an irrevocable will 1103 - assign an irrevocable beneficiary 1104 1105 1106 Limitations on Recovery by Beneficiaries 1107 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1108 [Hampton] 1109 - RULE - dispossessed of beneficiary rights for 1st/2nd murder or 1st manslaughter 1110 - RULE - might *still* be dispossessed of beneficiary rights for lesser conviction or for acquittal 1111 - in such case, payments flow to secondary beneficiary, or to insured's estate 1112 - procedure - std of proof on civil side is lower, so results may differ 1113 1114 ৺৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৽ 1115 ৷ [HEALTH] INSURANCE ৷ 1116 ╚৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶╝ 1117 1118 Types 1119 - employer-provided 1120 - direct Ks with insurers OR self-insurance 1121 (+) tax treatment 1122 (+) eco of scale 1123 (+) reduces AS - being hired non-correlative with health status 1124 - individual market 1125 - government programs - Medicare/Medicaid 1126 1127 RUBRIC: coordination of care / order of payment 1128 - look first to contracts under "coordination of care" or "other insurance" 1129 - provisions may conflict, preventing resolution on basis of contracts alone 1130 - look next to governing statute/regulation 1131 - look next to courts / CL rulings 1132 1133 POLICY 1134 (+) combats ex post MH - the risk that insureds will spend too much on healthcare once they become sick, because they do not pay the full cost of this healthcare 1135 (-) raises ex ante MH - insureds living less healthy lifestyles because protected 1136 (-) ACCESS - coverage does not ensure care, or the ability to pay for care 1137 (-) COST - high cost/spending - 1/6 of GDP and rising - driven by new tech; Medicare/Medicaid growth 1138 (-) QUALITY - U.S. fares poorly in some int'l rankings 1139 (-) costs transferred in non-optimal, hard-to-predict ways

Page 21 INS_outline.txt 2014-04-22 1140 (-) poor receive little preventive care, rely on free emergency room care 1141 (-) employers provide ins, but pay lower wages 1142 (-) sometimes prevents career mobility for those with poor health records 1143 1144 Reforms - drivers: 1145 - small-group / individual market - many not able to obtain insurance 1146 - consumer-driven care = market-based / shopping 1147 (+) reduces amount of care consumed 1148 (-) is reduction in nec or !nec care? 1149 (-) shifts excessive risk to low-income individuals 1150 - pre-existing conditions 1151 (+) exclusions limit AS 1152 (-) some insurers denied coverage by arguing that the patient had unknowingly received treatment for condition prior to acquiring coverage 1153 - insurers' abuse of rescission clauses 1154 - annual and lifetime coverage limits 1155 - loss of employer-sponsored coverage 1156 1157 1158 The ACA 1159 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1160 - coverage-oriented reforms 1161 - cost and quality reform experiments - less coherence/consensus 1162 1163 - private insurance reforms 1164 - pricing/offering/renewal of coverage 1165 - extension of dependent coverage 1166 - prohibition of rescissions 1167 - regulation of medical loss ratios (MLRs) - must rebate policyholders if MLR drops below 80%/85% thresholds 1168 - rate regulation - "unreasonable" rate increases called out 1169 - restrictions on discrimination in premium setting - ONLY age, geo, tobacco use, wellness program 1170 - guaranteed issue and renewal 1171 - content of coverage 1172 - prohibition on annual and lifetime limits 1173 - cost-sharing for preventative care 1174 - essential health benefits (EHBs) - certain coverage required in all plans 1175 - cost-sharing restrictions - limits on total out-of-pocket expenses 1176 - prohibition of preexisting condition exclusions 1177 - grandfathered plans 1178 - state exchanges 1179 - large group insurance - less restrictions - relying on market forces to constrain employers' insurance offerings 1180 - health insurance mandates, subsidies, and taxes 1181 - small employer subsidies 1182 - the individual mandate/tax - must purchase ins or pay a penalty 1183 - individual subsidies - sliding scale, up to 400% of fed poverty line 1184 - employer mandate/tax - must provide ins or pay a penalty 1185 - cadillac tax 1186 - public insurance reforms 1187 - medicaid eligibility = 133% of fed poverty line 1188 - medicare and medicaid payment reforms 1189 - outcome-based payments 1190 - Accountable Care Organizations (ACOs) - opp for providers to share in savings 1191 1192 POLICY 1193 - attempt to ensure universal access to healthcare 1194 - health status - plays no role in small-group and individual market >> thus requiring individual mandate to combat AS risk that more of the sick will seek coverage 1195 - a government-mandated redistribution scheme - premiums go up for some so that others can buy premiums at subsidized rates - in essence a tax 1196 - there is a lot more going on here that is essentially taxation 1197 - e.g. premiums based on insurance risk classifications 1198 - too complicated to make coherent predictions 1199 - may cause homogenization, but unclear to what extent 1200 - much will be driven by the quality of technology / state exchange websites

Page 22 INS_outline.txt 2014-04-22 1201 - alternatives - other countries ration through queueing, or criteria for eligibility 1202 1203 [Sebelius] - !Con under CC; Con under taxation power 1204 1205 1206 ERISA 1207 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1208 - ERISA prohibits all underwriting within employer groups 1209 - focused on PROCEDURAL fairness 1210 - does little to regulate the CONTENT of employer policies - precise terms offered or changes in terms 1211 - can sue for [1] breach of contract or [2] violation of ERISA 1212 1213 [McGann] - denial of AIDS coverage upheld 1214 - ERISA s510 claim - [1] retaliation for exercising plan right [2] interference with attainment of right 1215 - [I] = company's specific intent towards McGann 1216 - [H] company's intent was more general: to deny full AIDS coverage to any employee 1217 - [H] P fails to show a *promised benefit* - policy expressly allowed for termination or amendment by company at any time 1218 1219 - POLICY - Congress's intent that employers remain free to create, modify and terminate the terms and conditions of employee benefits plans without governmental interference 1220 - employers are free to discriminate between kinds of diseases under ERISA, just not against particular employees 1221 - POLICY - what McGann is requesting would convert his employer's policy into an *occurrence* policy, and it would be impossible to set premiums, since insurance is based on past actuarial data, not future trend prediction 1222 1223 Pre-emption 1224 - state laws relating to employer benefit plans pre-empted 1225 - exception for state laws regulating insurance 1226 - TEST = depends on whether the law is "specifically directed toward entities engaged in insurance" and "substantially affect[s] the risk pooling arrangement between the insurer and the insured" 1227 - hundreds of state laws mandating certain coverages be included in employer plans 1228 - self-insuring employers immune from state-level insurance regulation 1229 1230 Multiple Sources of Coverage 1231 - first-party (life/health/property) - called "coordination of coverage" 1232 - liability - called "other insurance" 1233 - tort settlements raise the same problem 1234 1235 - MAJ RULE = insured must be made whole before insurer can exercise subrogation right to reimbursement (this is also the ERISA default) 1236 - MIN RULE = [Pustilnik] 1237 1238 [Pustilnik] - coordination of coverage 1239 - RULE - where subrogor represents damages at a given amount and recovers that amount, subrogor must restore given amount to the subrogee 1240 - RULE - when subrogor settles instead of going to trial, he cannot defeat subrogee's claim by asserting that his loss exceeded the settlement recovery - POLICY - would encourage inconsistent arguments for high/low recovery 1241 - RULE - recovery reduced by attorney's fee - where the parties fail to agree on a fee, court must det what fee is reasonable 1242 - RULe - totally self-serving settlement agreement (e.g. "this is not a settlement for medical costs") will be rejected by court 1243 1244 - MIN RULE - some states have statutes preventing subrogation by insurers, or preventing subrogation for certain kinds of insurance until the insured has been made whole 1245 - RULE - settlement by insured voids coverage, unless the tortfeasor has notice of the insurer's interest 1246 1247 POLICY - alternative coverage coordination rules 1248 - POLICY - choice whether to emphasize tort or insurance as the most efficient method of compensation

Page 23 INS_outline.txt 2014-04-22 1249 [1] OFF-THE-TOP - [Pustilnik] - presume that settlement always fully compensates insured - incentivizes insured to give insurer a seat at the settlement negotiations 1250 (-) makes insurer whole at cost of making insured whole 1251 (-) discourages settlements 1252 [2] PRO-RATA - protects insurer's interest less strongly; focused on full indemnity for insured 1253 (+) balanced, equitable 1254 (-) no objective measure of insured's damages, unless case is tried to a verdict - thus this disincentivizes settlements - requires summary proceeding / dmgs trial / [Rimes] hearings - practically, brings health insurer into settlement negotiations, creating three-way negotiation 1255 - RULE - starting point is "rule of thirds" (P / P's L / insurer) 1256 [3] MAKE-WHOLE - MAJ RULE among the j's that have a rule - full indemnity for insured; weak protection of insurer's subrogation right 1257 (+)/(-) same as [2] 1258 1259 1260 Disability Insurance 1261 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1262 - tiny in comparison to health insurance, because: 1263 [1] people don't think about it - low odds (odds of six-month disability ~= odds of death) 1264 [2] low/mid incomes can't affort it, and have other sources of wage-loss protection 1265 [3] private disability ins is very expensive - because AS/MH 1266 [4] severe ex-post MH because disability is so subjective 1267 [5] disability insurers do not carefully calibrate their charges - things that disable some occupations will not disable others 1268 1269 Types 1270 [1] SSDI = Social Security Disability Insurance - for permanent, total disability 1271 [2] worker's compensation = work-related injury and disease - medical costs and lost wages 1272 1273 [Mossa] 1274 - [H] - disability insurance protects a *living wage*, not just any wage 1275 - [H] - must consider P's salary history and salaries of available occupations to interpret "gainful occupation" language in "other occupation" provision 1276 - "own occupation" (2yrs) and "other occupation" (until 65) provisions 1277 - TREND - "other occupation" clauses now include "education, training, or experience" qualifier to make policies less restrictive >> a floor, rather than a ceiling 1278 - [Tschida] RULE - must consider other occupations only with regard to fair remuneration, not financial equivalence 1279 - [Hoffert] RULE - must consider other occupations under availability and financial criteria 1280 1281 - partial disability problem - most policies cover for two or five years - also an administrative nightmare 1282 - subjective disability - some courts require objective medical ev of disability, some weigh all ev of disability 1283 - TREND - no clear rule for cases where disability results from insured's action or is partly insured's fault (e.g. exposing self to female patients) 1284 1285 [Heller] - insured ceases payments after doctor refuses to undergo surgery for disabling condition 1286 - [I] - does being "under" a physicians care include submitting to recommended surgery in the meaning of the policy? 1287 - [H] - NO - goes beyond clear and obvious language - policy fails to set forth any limitation requiring insured to submit to surgery for treatment of the condition causing the total disability 1288 - POLICY - purpose of this provision is to ensure insured remains actually disabled, is not malingering, and to prevent fraudulent claims 1289 - POLICY - surgery carries high risks, so insured should not be required to undergo it in the absence of a specific contractual req 1290 - POLICY - should insureds have a duty to mitigate their disabilities if possible? 1291 - POLICY - insurer likely suspects fraud, and wants to cultivate a reputation for toughness by pursuing this case 1292

Page 24 INS_outline.txt 2014-04-22 1293 1294 Bad-Faith Breach 1295 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1296 Nature of the bad-faith breach cause of action 1297 - contract? - only works if the damages are contemplated by the parties and economic in nature 1298 - tort? - MIN RULE - breach must constitute an independent tort, e.g. fraud, IIED 1299 - MAJ RULE - action in tort, but no independent tort necessary 1300 1301 Insurer misbehavior required 1302 - bad faith = objective negligence + awareness that claim is covered 1303 - TEST = bad faith if not "fairly debatable" whether the claim is covered 1304 - TEST = refusing to pay a claim when there is no reasonably arguable basis to deny it 1305 - typically, need more than mere unreasonable mininterpretation of policy terms 1306 - RULE - punitive damages require insurer's conduct be aggravated, outrageous, malicious, or fraudulent = "evil mind" 1307 - POLICY - this test has (+) effect of limiting judicial inquiry based on REotI, which is more difficult/messy 1308 (+) encourages insurers to pay valid claims 1309 (+) overinclusive - causes insurers to pay some marginal claims that they might not pay after litigation 1310 1311 [Silberg] - insurer has independent liability for bad-faith breach of policy 1312 - [F] - P left without coverage as insurer delays, using excuse of workers' comp exclusion 1313 - RULE - insurer has duty to weigh interests of insured at least as heavily as its own - this duty is not limited by industry practice (NB: ABRAHAM = this isn't the modern test; modern test is objective / "fairly debatable") 1314 - [H] D acted unreasonably - it should have paid, then if P was covered by workers' comp, D could have easily asserted a lien to recover 1315 - [H] D violated its duty of good faith and fair dealing to insured 1316 - RULE - for exemplary damages, insured needs to show oppression, fraud, or malice 1317 - [H] no punitive damages 1318 1319 [Dedeaux] - ERISA pre-empts state action 1320 - RULE - state laws relating to employee benefit plans pre-empted 1321 - EXCEPTION - for those state laws which regulate insurance 1322 - CAVEAT - state laws that purport to regulate ins cannot deem an employee benefit plan to be an insurance company 1323 - TEST [McFA] for "business of insurance" 1324 [1] effect of risk-spreading 1325 [2] integral part of the insurer/insured relationship 1326 [3] limited to ins industry entities 1327 - ct: common-sense interp = "regulates insurance" means specifically directed towards the insurance industry 1328 - ct: [McFA] test - [1] NO [2] perhaps, but not integral [3] NO 1329 - [H] Congress intended ERISA (which contains its own set of remedies) to be the exclusive vehicle for actions by ERISA-plan participants asserting improper processing of a claim for benefits - thus ERISA pre-empts state common law tort and contract actions against bad-faith insurers 1330 1331 MOD TEST = [1] state law must be specifically directed toward entities engaged in insurance [2] state law must substantially affect the risk pooling arrangement between the insurer and the insured 1332 1333 TEST for punitive damages against insurers in non-ERISA cases 1334 [1] degree of reprehensibility of D's conduct 1335 [2] disparity between the actual/potential harm suffered by P and the punitive damages award 1336 [3] disparity between the punitive damages awarded and civil penalties authorized/imposed in similar cases 1337 1338 ৺৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৽ 1339 ৷ [CGL] Liability Insurance ৷ 1340 ╚৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶╝ 1341 1342 HX

Page 25 INS_outline.txt 2014-04-22 1343 - init in mid-1880s post-war era - previously deemed against public policy 1344 - driven by industrialization >> increased accidental injuries 1345 - first, employers' liability insurance policies against liability to employees 1346 - later, liability to third parties = public liability insurance 1347 - 1910s - init workers' compensation >> obviates need for employers' tort liability insurance 1348 - types of liability divided by industry and activity - might have to purchase several 1349 - 1930s - combined into comprehensive liability policies 1350 - 1940s - first common form 1351 - high degree of continuity from 1886 to 1936 to today 1352 - revisions converting "per accident" to "per occurrence," adding limited pollution exclusions, &c 1353 - primarily occurrence policies = until the end of time 1354 1355 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 1356 CGL Insurance Policy 1357 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 1358 1359 Scope 1360 - BI + PD (bodily injury and personal damage >> caused by an occurrence) 1361 - PI + AI (personal injury liability coverage + advertising injury liability coverage) 1362 1363 Structure 1364 [1] dec sheet 1365 - coverage limits 1366 - per occurrence 1367 - for personal injury 1368 - aggregate (today, usually = per occurrence limit) 1369 - products liability 1370 [2] BI + PD 1371 - ins 1372 - "those sums" - no longer "all sums" 1373 - "legally obligated to pay" 1374 - "as damages" != as taxes, as restitution 1375 - "free" defense - money spent on defense does not erode the total amount available for liability 1376 - insurer can choose to settle when insured wants to continue suit 1377 - insurer can choose not to settle when insured wants to settle 1378 - right to defense continues until P agrees to settle 1379 - "known loss" provision - excludes injuries known at inception of policy period 1380 - your intent/kn as of time you committed the action to which you are being held liable (e.g. point of sale) 1381 - allocation provision - coverage for continuing harm telescoped into the first policy period in which it began 1382 - limits coverage to one policy-year 1383 - exclusions 1384 - injury the policyholder knows is substantially certain to occur 1385 - liabilities under insured contracts 1386 - others designed to deal with MH and market segmentation 1387 - "absolute" pollution exclusion 1388 - not entirely absolute 1389 - no coverage for cleanup costs 1390 - aircraft, auto, watercraft - AS/mktseg 1391 - "owned property" exclusion 1392 - business risk exclusions - dmg to work/product/impaired property - MH in shoddy products! 1393 - impaired property - no coverage unless your component part causes damage to the property 1394 - "sister ship" exclusion - recalls excluded 1395 - personal injury 1396 - coverage for intentional torts, but exclusions for intentional injury 1397 - ABRAHAM: occasionally, a claim under this coverage will succeed 1398 [3] who is an insured 1399 [4] limits of liability 1400 [5] conditions 1401 - bankruptcy does not affect coverage

Page 26 INS_outline.txt 2014-04-22 1402 - must give notice of occurrence or suit as soon as is practicable 1403 - "no action" clause - cannot sue insurer directly until you obtain judgment against insured 1404 - other insurance = coordination of benefits 1405 - subrogation rights 1406 [6] DEFs 1407 - bodily injury = injury, sickness, or disease - NOT mental distress alone 1408 - impaired property 1409 - occurrence = an accident, including continuous or repeated exposure to substantially the same general harmful conditions 1410 - must be fortuitous - just the cause, or also the result? 1411 - affects number of occurrences 1412 - personal injury 1413 - pollutants 1414 - suit 1415 [7] endorsements 1416 1417 [DEF] "occurrence" = an accident, including continuous or repeated exposure to conditions, which results during the policy period in bodily injury or property damage neither expected nor intended from the standpoint of the insured 1418 1419 TREND - courts divided on whether "bodily injury" includes pure emotional distress - many require that the distress be accompanied by physical symptoms 1420 1421 1422 The Meaning of "Damages" and "Property Damage" 1423 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1424 [McDonald] 1425 - [I] does the CGL provision cover env costs paid pursuant to decree? 1426 - [H] YES, government-mandated env response costs are "damages" 1427 - [H] "damages because of property damage" includes environmental restoration, which is essentially compensatory damages for injury to government property 1428 - RULE = preventive measures taken in response to continuing property damage are covered, but preventative measures to prevent future property damage are not covered 1429 - ct: "damages" ambiguous - subject to more than one reas interpretation - includes compensatory and punitive damages, may include equitable relief in addition to legal relief 1430 - POLICY - compliance with an injunction must be considered damages, or the statutory scheme will be frustrated - all-or-nothing question as to what constitutes damages under CERCLA 1431 - MOD RULE - yes, there is coverage (pro-policyholder) 1432 1433 CERCLA 1434 - EPA can [1] clean up itself then sue for recovery [2] obtain injunction [3] issue administrative order ($25K/day fine) 1435 - potentially responsible parties (PRPs) can also cleanup to preempt future EPA action 1436 - PRPs = owned, operated, occupied, generated @ site, deposited @ site, transported to/from site 1437 - practically, everyone is liable - only defense is mistaken accusation 1438 - if cleanup costs were not "damages", insurers would pay nothing for CERCLA liabilities 1439 - holding that cleanup costs are damages only obligates insurers to pay some cleanup costs 1440 - thus courts in effect crafting national environmental policy 1441 - insurers did not handle this issue by clarifying the definition of "damages" - rather, they inserted clear pollution and cleanup exclusions 1442 1443 [F&H Construction] - steel caps made from nonconforming steel are not PD 1444 - [I] - does welding inadequate pile caps onto driven piles constitute property damage under the CGL policy when there is no physical injury to the piles or other property, and the defective caps are ultimately modified to meet design specs? 1445 - [H] - NO - these were intangible economic damages rather than damages to tangible property - need a *physical injury* 1446 - RULE = the incorporation of a defective component or product into a larger structure does not constitute property damage unless and until the defective component causes physical injury to tangible property in at least some other part of the system

Page 27 INS_outline.txt 2014-04-22 1447 - RULE - same result when "property damage" defined as "injury to tangible property" 1448 - RULE - property damage is NOT: 1449 - failure to perform as intended 1450 - diminution in value 1451 - cost to repair defective product or structure 1452 - POLICY - CGL policies not intended to provide protection against one's inferior or defective products - rather, this is merely a commercial risk, generally within the insured's control 1453 - POLICY - must give "physical injury" its ordinary meaning, and give effect to both words, "physical" and "injury" - a court may not render some words meaningless 1454 - DEF - "loss of use" = "determined wrt the rental value of similar property which P can hire for use during the period when he is deprived of the use of his own property" 1455 - [H] - P's loss of use damages here not covered, since they are unrelated to rental value 1456 - RULE - F&H has a duty to mitigate damages, both to the seller and the insurer 1457 1458 1459 Trigger 1460 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1461 Trigger - options 1462 [1] Actual injury/injury in fact 1463 [2] Continuous 1464 [3] MAJ RULE - Exposure 1465 [4] NON RULE - Manifestation 1466 1467 Trigger - exposure versus injury 1468 (+) easier to prove exposure 1469 (+) the earlier in a series of years the trigger occurs, the easier it is for the insured to argue their case 1470 (+) more likely the insured expected injury by the time of manifestation 1471 (-) unclear how long after exposure injury will occur 1472 (-) if manifestation is the trigger, the insurer can cut and run 1473 (?) manifestation can only occur in one policy period, while injury can occur over several 1474 1475 [American Home Products] - AHP seeks indemnification for PL lawsuits 1476 - provision = "personal injury, sickness, or disease including death resulting therefrom which occurs during the policy period" 1477 - DEF - "bodily injury" not defined in the policy 1478 - DEF - "occurrence" includes insidious diseases 1479 - [H] - "injury, sickness, or disease" occurs when the effects of exposure to drug actually result in a diagnosable/compensable injury 1480 - [H] - the trigger is injury-in-fact - an identifiable and compensable injury, sickness, or disease that is shown to have existed during coverage 1481 1482 HYPO - slip and fall in Y1, continuing pain through Y20 1483 - bodily injury still occurred in Y1, and only Y1 policy provides coverage 1484 1485 HYPO - asbestos exposure in Y1, esposure "in residence" in Y2, manifestation in Y20 1486 - each asbestor fiber causes a small lung injury 1487 - thus multiple years of coverage are triggered 1488 1489 HYPO - waste deposit in Y1, leakage begins in Y1 and continues until manifestation in Y20 1490 - potentially injuries in multiple years of coverage 1491 1492 HYPO - waste deposits in Y1 and subsequent years, leakage begins in Y1 and continues until manifestation in Y20 1493 - ct: when did it start and how long did it keep moving? 1494 - potentially injuries in all twenty years of coverage 1495 1496 1497 Allocation 1498 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1499 - MAJ RULE = pro-rata allocation based on time on the risk 1500 - ALT RULE = joint and several liablity on all triggered policies (insurers work out contribution scheme themselves)

Page 28 INS_outline.txt 2014-04-22 1501 - can allow insured to avoid exclusions in triggered policies that would reduce the recovery under a time-on-the-risk approach 1502 - based on pre-1986 CGL language of "all sums" (now changed to "those sums") 1503 - ALT RULE = allocate proportionally by total coverage in each year ($50M year pays twice as much as $25M year) 1504 1505 [NSP] - RULE - presume that same amount of damage occurred in each year (pro rata) 1506 - many years of waste deposits, causing damage over many years 1507 - problems of proof make harm indivisible by year 1508 1509 [Silicone Implant] - cellular injuries occur before symptoms of autoimmune disease appear 1510 - [H] - excess insurers must pay, because trigger was discrete - allocation is the exception 1511 - RULE = actual-injury or injury-in-fact = the time of the occurrence is not the time the wrongful act was committed but the time the complaining party was actually damaged 1512 - TC: injuries occurred on or about the time of implant 1513 - TC: injuries continuous over time, so allocate damages among all triggered policies 1514 - RULE = for environmental damage arising from discrete and identifiable events, only those policies on the risk at the time of those events must pay 1515 - RULE = in continuous and indivisible/intermingled environmental contamination cases: 1516 [1] general liability policies are triggered when property damage occurred during the policy period 1517 [2] insurer liability is consecutive, limited to property damage occurring during the insurer's policy period 1518 [3] among consecutively liable insurers, pro rata by time on the risk 1519 - rubric: 1520 - is the injury continuous? 1521 - did the injury arise from a discrete and identifiable event? 1522 1523 POLICY - Generally, pro rata is better because more flexible v. being forced into one year 1524 - both insurers and insured will make self-serving, results-oriented arguments 1525 - insurers are more reluctant to go on record favoring a particular approach - mindful of future cases - insurer is always a repeat player 1526 - why does policyholder want to go vertical? 1527 - wants to pay as few deductibles as possible (commercial deductibles are very large) 1528 - some policy years may be claims-made v. occurrence 1529 1530 RULE - uninsured years - either no recovery, or estimate based on what corp could have obtained that year, or hire an insurance archaeologist 1531 1532 [Metropolitan Life] - one or many occurrences? 1533 - [H] - each claimant's initial exposure to asbestos was a separate occurrence, rather than the single occurrence of Metropolitan's failure to warn - the exposure itself is the "last link in the causal chain" 1534 - NB: can combine exposures at the same time/place 1535 - ABRAHAM - these clauses could also unify similar harms at different locations - no explicit locational limitation 1536 - "occurrence" includes continuous injury, but not at multiple locations - cannot combine 100,000s of exposures around the country over sixty years into one occurrence 1537 - TESTS for identifying the occurrence: 1538 [1] TEST = underlying cause - look to the underlying cause of the damage - need one proximate, uninterrupted, and continuing cause - want to determine from the POV of the insured, not its victims 1539 - ABRAHAM - not an entirely accurate characterization - the underlying cause is the act giving rise to liability - not the "proximate cause" as tort law would see it 1540 [2] TEST = effect - effect of the accident >> typically expands coverage in multiple injury cases 1541 [3] TEST = triggering event - event or events triggering liability on the part of the insured 1542 1543 "Continuous Exposure" Clause / batch clause / aggregation clause 1544 - all similar/related causes of loss will be considered one occurrence 1545 - combine claims that occur when people or property are physically exposed to some

Page 29 INS_outline.txt 2014-04-22 injurious phenomenon such as heat, moisture, or radiation at one location 1546 - GOAL = determine whether there was essentially one cause, or multiple causes 1547 1548 "Occurrence" 1549 - occurrence = cause + effect/result 1550 - including the cause and effect may affect whether multiple occurrences occur 1551 - MAJ RULE - count the number of causes 1552 - MIN RULE - count the number of effects 1553 - 1986: effect removed from occurrence definition, as well as "expected or intended" 1554 - MOD RULE - cause-counting approach to occurrences - but not always obvious how to count causes - initial negligence, or each harm, e.g. cow poisoning - by cow? by shipment? by mislabelling? 1555 1556 1557 Exclusions & Conditions 1558 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1559 HX: CGL policy - "accident" expanded to include repeated/continuous/long-duration occurrences under market pressures - eventually becomes "occurrence" in 1966 CGL revision 1560 1561 "expected or intended from the standpoint of the insured" 1562 - equivalent MH with both expectation and intention 1563 - easier in legal context to infer expectation rather than intent 1564 - corporations generally do not ever "intend" harm 1565 - subjective or objective? - terms themselves imply subjectivity 1566 1567 DEF "expected" 1568 != "should have expected" 1569 == "knowing or having a state of mind about something happening" 1570 == "knowing anticipation" 1571 == "knowledge of a pretty high probability of harm" 1572 == "substantial certainly of harm" (MIN RULE) 1573 - ABRAHAM - something between "high probability" and "substantial certainty" 1574 1575 Whose expectation counts? 1576 - ABRAHAM - since this provision has been in the policy so long AND ambiguous, interpret as "any insured" 1577 - MIN RULE - means an expectation of harm by *management* of the corporation 1578 1579 What must be expected? 1580 - the policy doesn't say! 1581 - intentionally left undefined in the CGL policy 1582 - when litigated, insurers argue that anything expected precludes coverage, and are often successful 1583 1584 Who bears the BOP? 1585 - insured must prove loss falls within policy coverage - i.e. that they did not expect or intend harm 1586 - insurer must prove loss falls under policy exclusion 1587 - in many of these cases, ev will be unavailable due to elapsed time 1588 - should generally be allocated to the party with the best access to PV ev 1589 - generally the policyholder has better information 1590 - but it's hard to prove one does not expect harm - why place this high burden on the policyholder? 1591 - why is "expected or intended" in the definition of "occurrence"? 1592 - merchandising reasons - want to bury it from insureds, who would demand its deletion were it in the first exclusion 1593 - thus no substantive reason for the move from exclusion to definition - and it was moved back later because the merchandising problem disappeared 1594 1595 Issue - "accident" - what role does the term play in the current CGL policy? 1596 - does "accident" bear separate consideration from "neither expected nor intended"? 1597 - one possibility: "accident" refers to the cause - the cause must be fortuitous - but this would preclude most coverage, since most negligence results from deliberate acts 1598 - ABRAHAM - the term "accident" really doesn't add anything 1599 1600 Issue - known-loss defense

Page 30 INS_outline.txt 2014-04-22 1601 - there is a standalone known-loss defense in CGL policies 1602 - courts helping insurers out, likely in cases where something was not disclosed / misrepresented 1603 - counter-example - MGM grand buys insurance against lawsuits emerging after fire 1604 1605 [Stonewall Insurance] - "expected nor intended" 1606 - [H] BOP - insurer has burden to prove claim falls under exclusion, regardless of exclusion's location in the policy language 1607 - [H] subjective std for judging insured's expectation/intention - clear from lack of "should have" language 1608 - "known loss" defense - losses known to insured before policy takes effect are not covered 1609 - [H] though insured was aware of the risk of loss from its products at the time it obtained the policy, it did not know the specifics (number of injuries/claims, likelihood of claim success), and properly allocated this uncertainty to its insurer 1610 1611 NB: subjective intent/expectation can sometimes be inferred from the circumstances, perhaps even as a matter of law 1612 RULE - "known loss" doctrine - some courts construe narrowly (insured must know with certainty it has caused the harm and is liable), while others construe more broadly (excludes coverage where insured knows there is a high probability that loss will occur or has occurred) 1613 1614 [Unigard] - 11yo arsonist 1615 - provision - PD only covered if not "expected nor intended from the standpoint of the insured" 1616 - RULE - an accident is never present when a deliberate act is performed unless some additional unexpected, independent, and unforeseen happening occurs which produces or brings about the result of injury or death 1617 - SPLIT - whether the intended/expected injury clause requires specific intent on the part of the insured to cause the resultant damage 1618 - [H] - boy expected or intended the resulting fire damage from his intentional act of fire-setting 1619 - [I] - is parents' negligent supervision of the boy an excluded intentional act? 1620 - [H] - no - public policy supports coverage for parents of child arsonists 1621 - RULE - insurer's contracts with insureds are separable - the excluded act of one insured does not bar coverage for additional insureds who have not engaged in the excluded conduct 1622 1623 - SPLIT - whether harm expected/intended be precisely the same as the harm which actually occurs, or just of the same general sort 1624 - SPLIT - whether coverage is excluded merely when the act causing the harm is intentional 1625 - SPLIT - whether deliberate act, performed negligently, is an accident/occurrence 1626 - RULE - sexual abuse is an act intended to cause harm AMOL and is excluded 1627 - TREND - good chance of recovering from sex abuser's supervisor on respondeat superior theory - party may obtain liability insurance coverage for negligence related to sexual molestation committed by another 1628 1629 [Hakim] - the owned-property exclusion 1630 - [F] - oil leaks from home basement to water system - claim = cleanup costs to soil and water 1631 - RULE - insurer liable for cleanup to insured's own property if designed to remediate, prevent, or abate further migration of contaminants to offsite property 1632 - RULE - contra proferentem applies with special force to exclusions 1633 - [H] - both parties' plain language interpretations plausible; thus for insured 1634 - [H] - obj reas insured could have expected to be covered under the policy 1635 - [H] - coverage for cleanup to prevent harm to non-owned property; no coverage for cleanup solely for insured's property - cost will be apportioned 1636 - MIN RULE - all environmental cleanup is covered, because it is to remediate insured's maintenance of an environmental 1637 1638 MAJ RULE - owned property exclusion 1639 - owned-property exclusion applies - no damage to third-party property and none is imminent 1640 - owned-property exclusion applies - no damage to third-party property but such damage is imminent 1641 - owned-property exclusion does not apply - third-party property has been damaged

Page 31 INS_outline.txt 2014-04-22 and further damage is imminent 1642 1643 MAJ RULE - cleanup to groundwater generally covered because groundwater owned by state 1644 1645 [Weedo] - the business risk exclusions 1646 - [I] - is CGL insurer obligated to defend insured against contract breach and faulty workmanship claims? 1647 - provisions 1648 - exclusion for "property damage to the named insured's products arising out of such products or any part of such products" 1649 - exclusion for "property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of the materials, parts or equipment furnished in connection therewith" 1650 - [H] - exclusions are broad, unambiguous, and all-inclusive 1651 - insured's arg: business risk exclusions ambiguous when read in conjunction with exclusion (a) (contractual liability) - ct: no, the exception to exclusion (a) has no application to the business risk exclusions 1652 - ct: no, ambiguity arises where the phrasing is so confusing that the avg policyholder cannot make out the boundaries of coverage 1653 - ct: exclusions subtract from coverage, and exceptions to exclusions are limited by the other exclusions - each exclusion meant to be read independently 1654 - ABRAHAM disagrees - you need not necessarily read the exclusions in isolation - the way one exclusion uses or qualifies a term might tell you something about how another exclusion uses the term 1655 1656 - POLICY - distinction between faulty work itself and BI/PD flowing from faulty work 1657 - businesses can self-insure against repair costs of faulty work, but not against BI or PD to other property 1658 1659 RULE - exception to Your Work exclusion for work of a subcontractor 1660 RULE - exception to Your Product exclusion for component which damages other property when incorporated 1661 RULE - costs of recalling certain product/work excluded 1662 1663 1664 The Pollution Exclusion 1665 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1666 HX - timeline 1667 - 1940-66 - BI/PD "caused by accident" 1668 - 1966-72 - BI/PD "caused by an occurrence" - effect was to cover pollution - only common continuous/long-term harm 1669 - 1973-86 - qualified PEC - excluded BI/PD "arising out of the discharge, dispersal, release or escape" of pollutants unless "sudden and accidental" 1670 - most courts: "sudden and accidental" = "abrupt and fortuitous" 1671 - other courts: "sudden" can mean "gradual" - thus gradual unintentional pollution not excluded 1672 - letter of insurers to state ICs introduced as evidence - admitting that all accidental pollution already covered 1673 - "metaphysical moment" argument - there is a moment when any pollution is sudden/abrupt - rejected by most courts 1674 - 1986->> - absolute PEC (pollution exclusion clause) 1675 - does not cover one major category of pollution - pollution from non-waste products that occurs outside of insured's property 1676 1677 [Koloms] 1678 - [H] - pollution exclusion does not prevent coverage for carbon monoxide poisoning from a defective furnace 1679 - provision = exclusion for "BI/PD arising out of actual, alleged, or threatened discharge, dispersal, release, or escape of pollutants" 1680 - ambiguous? [1] intrinsically unclear, requiring extrinsic information? [2] unclear as applied to present context? 1681 - can't read the exclusion too broadly - Drano/chlorine examples 1682 - is exclusion so general as to make some applications absurd / meaningless / negating virtually all coverage? 1683 - [H] - the pollution exclusion should be limited to traditional environmental contamination 1684 - looks to drafting history of the exclusion - current "absolute pollution

Page 32 INS_outline.txt 2014-04-22 exclusion" still has the purpose of excluding coverage for governmental clean-up costs 1685 - exclusion was drafted in response to the explosion of environmental litigation and associated Federal laws 1686 - exclusion continues to employ environmental terms of art (discharge, dispersal, release, escape) and thus applies only to environmental pollution 1687 1688 ABRAHAM - hard to distinguish "environmental pollution" from other kinds - what isn't the environment? 1689 1690 TREND - courts divided on pollution exclusion: 1691 - some apply the exclusion to any discharge of a pollutant; others require the discharge to be into the environment 1692 - some require the substance to be waste/byproduct rather than a useful product; others apply the exclusion to any substance that is a contaminant/irritant 1693 - some apply the exclusion "as written"; others do not apply the exclusion where it would prevent coverage of the main risk posed by the insured's activities 1694 - "sudden and accidental" - some interpret as "abrupt and accidental"; others say "sudden" has no temporal component; some say "sudden" can mean either "abrupt" or "unexpected" 1695 1696 1697 Notice Conditions 1698 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1699 - when? - "as soon as practicable" 1700 - to whom? - the insurer; some policies provide a specific address 1701 - trigger - insured must have *knowledge* of the occurrence 1702 1703 [Mighty Midgets] 1704 - [H] - under obj/reas standard, insured's written notification 7.5 months after the occurrence complies with the "as soon as practicable" notice req 1705 - TEST - "as soon as practicable" - det what was a reas time under facts/circ 1706 - insured had a genuine belief that it had fulfilled the notice req by contacting its agent/broker 1707 - no indication of an adverse motive on the part of the insured 1708 - common practice for insureds to rely on the advice of intermediaries 1709 1710 MIN RULE - in other cases, one to two months' delay found unreasonable 1711 MIN RULE - the delay must be in good faith 1712 NB: some courts find that insurer must provide notice of coverage denial within a reas time (<48hr) 1713 NB: notice req unlikely to be interpreted strictly when it is the insurer's only defense 1714 1715 [West Bay] - insured notifies insurer after first disposing of the offending drip barrels 1716 - [H] by destroying the perforated drip barrels, insured materially compromised insurer's ability to prove that the pollution was either intentional or gradual - thus policy breached 1717 - MAJ RULE - an unreasonable delay does not breach the policy so long as the insurer suffers no prejudice as a result of the delay 1718 - MAJ RULE - BOP on insurer to show prejudice 1719 - MIN RULE - BOP on insured 1720 - prejudice = material impairment to insurer's ability to contest its liability to insured/TP 1721 - a question of fact; but in clear cases a question of law 1722 - NB: insured also precluded potentially less-costly cleanup methods by delaying in notifying its insurer - delay itself prevents proof on this point, so prejudice is assumed 1723 - NB: rare for a court to hold AMOL that insurer suffered prejudice as a result of delay 1724 1725 Reasons policyholders don't give notice 1726 [1] disconnect between persons in company who must give notice and those who deal with liability 1727 [2] insured says "why bother?" because they think they won't have coverage 1728 [3] insured's insurance manager wants to avoid premium increases - penny-wise/pound-foolish

Page 33 INS_outline.txt 2014-04-22 1729 1730 TREND - division of authority as to what constitutes a claim or suit - e.g. the CERCLA "PRP Letter" 1731 1732 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 1733 [D&O] Insurance 1734 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 1735 1736 D&O Ins Scope 1737 - mismanagement - SH derivative suits 1738 - misrepresenting financial condition of company - securities suits 1739 - Side A - individual D&Os 1740 - Side B - corporation for indemnifying D&Os 1741 - Side C - corporation for securities liability in its own right 1742 - ODL - Outside Director Liability 1743 - EPL - Employment Practices Liability 1744 - NB: no duty to defend - but insurer covers defense costs 1745 1746 Issues 1747 - D&O policies are typically claims-made policies 1748 - misrepresentation in context of securities suits 1749 - severability - misrepresentation by one D&O 1750 - bankruptcy - split on whether D&O policy is an asset of the bankrupt estate 1751 1752 DEF - "wrongful act" = any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted, by an Insured Person, individually or otherwise, in his Insured Capacity, or any matter claimed against him solely by reason of his serving in such Insured Capacity 1753 - basically, anything you can be held liable for 1754 1755 Exclusions 1756 - claims covered under prior policies 1757 - suits by one insured against another - except for derivative suits 1758 - D&O will need continuing claims-made coverage after they leave corporate office - Exclusion 5(c) 1759 - ERISA suits - need fidelity bond coverage 1760 - pollution 1761 - fraud 1762 - intent 1763 1764 Insurer liable for defense costs - only up to its limit of liability 1765 1766 NB: securities suits almost always settle, because judgments on securities suits are not covered 1767 1768 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 1769 Duty to Defend 1770 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 1771 1772 Possible Situations: 1773 [1] covered claim 1774 [2] mixed claim 1775 [3] non-covered claim - no chance the claim will fall under coverage (e.g. auto claim against homeowners' policy) 1776 1777 NB: generally, the duty to defend is broader than the duty to indemnify - includes defense against groundless or false or fraudulent claims 1778 1779 [Beckwith] - there is a duty to defend where the insurer undertakes a defense without first reserving rights 1780 - [F] - insurer defended at first and subsequently withdrew; case settled @ $100K - internal memos at insurer reflect belief that at least some of the claims were covered 1781 - RULE - duty to defend arises wherever a claim is *potentially* within the scope of the policy's coverage - any claim that raises allegations which, if proved, would fall within coverage 1782 - RULE - insurer must defend until it can confine the possibility of recovery to

Page 34 INS_outline.txt 2014-04-22 claims outside the coverage of the policy (e.g. more facts required to determine whether covered) 1783 - RULE - insurer must send reservation of rights to insured if it believes the claim will is not covered 1784 - RULE - if insurer undertakes defense without notifying insured of a reservation of rights, it must carry the defense through to completion and is estopped from raising otherwise valid coverage defenses 1785 - POLICY - detrimental reliance; insured was deprived of opportunity to defend itself 1786 - POLICY - insurer subject to FD of good faith and due care 1787 1788 The Duty to Defend 1789 [1] TEST = defend claim that would be covered if allegations are proved to be true - the “potentiality,” “scope-of-the-pleadings,” “four-corners,” or “eight-corners” test 1790 [2] Available courses of action for insurer 1791 [1] Defend unconditionally 1792 - estopped to deny coverage (Beckwith) 1793 - exception for new circumstances? 1794 [2] Defend subject to a “reservation of rights” 1795 - may take the form of a reservation of rights letter or a non-waiver agreement 1796 - entitled to contest coverage later (Gray) 1797 - defense costs paid even if it turns out the claim isn’t covered, only occasionally reimbursable (Buss) 1798 [3] Refuse to defend 1799 - if there was no duty, no liability 1800 - if duty breached, liable for defense and estopped to deny duty to indemnify (Gray, but see Burd) 1801 - not all courts are fully committed to this 1802 [4] Seek declaratory judgment as to duties, perhaps while defending subject to reservation (Lee, Montrose) 1803 (-) may harm policyholder in subsequent actions via collateral estoppel 1804 (-) complexity 1805 (-) potential COI between insurer and insured - insurer has to argue one side, then the other if the declaratory action fails 1806 - could resolve this with a rule that the jury's verdict in the underlying suit is not binding on the subsequent coverage suit 1807 [3] open questions: 1808 - What does it mean to be “potentially” covered? 1809 - Collateral estoppel: [Gray] says no, but... 1810 - Even absent collateral estoppel, practical conflicts 1811 - COI - insurer's financial interest is for either the insured to be held not liable, or liable for fraud/intent 1812 1813 MAJ RULE - insurer who breaches duty to defend is estopped to deny coverage 1814 1815 RULE - to terminate defense, insurer must show AMOL that there would be no coverage of the claim under the policy if the claim succeeded 1816 MAJ RULE - to terminate defense, insurer's tender of policy limit must be accepted by the party suing the insured 1817 MIN RULE - insurer may pay its policy limits into court, terminating its duty to defend 1818 NB: policy provisions that provide for termination of duty to defend likely to be enforced 1819 1820 RULE - duty to appeal if reasonable grounds exist for an appeal 1821 1822 - MAJ RULE - if a mixed claim, insurer has duty to defend the whole suit - regardless of cost allocation rule 1823 1824 [Gray] - insurer must always defend if there is a chance that there might be coverage, or it loses the right to deny coverage later 1825 - RULE - where policy language does not clearly define the intent exclusion to the duty to defend, the test is REotI 1826 - insurer cannot base defense decision on pleadings alone - pleadings are malleable and likely overstated 1827 - [H] - instant action presented potentiality of a judgment based upon nonintentional conduct, thus duty to defend applied at the outset 1828 - TEST - insurer must examine *facts* of complaint in determining duty to defend

Page 35 INS_outline.txt 2014-04-22 1829 - no COI for insurer, since instant action does not adjudicate coverage question, but only insured's liability 1830 - RULE - insurer liable for both costs and judgment where it has wrongfully refused to defend 1831 - RULE - coverage suit and liability suit are independent - insurer and insured will not be held to the judgment of one suit in the other 1832 1833 - MIN RULE - insurer not required to defend where COI exists that may prejudice insurer's later coverage claim 1834 - MIN RULE - insurer not required to defend if the liability trial will leave the question of coverage unresolved - insurer only required to pay if it loses the later coverage action 1835 - MIN RULE - some courts give insured right to select independent counsel where there is an insured/insurer COI 1836 - ABRAHAM - there has to be some limit on this, but it's not clear/developed 1837 - POLICY - courts want to give policyholders defense insurance 1838 1839 - NB: you can't buy separate coverage for the cost of defending frivolous claims 1840 1841 [Shoshone] 1842 - MIN RULE - no allocation of costs between covered and non-covered claims 1843 - [H] - no allocation of costs, unless specifically agreed to in the policy 1844 - policy does not define "duty to defend" or "claims" >> contra proferentem 1845 - thus policy does not distinguish between covered and non-covered claims 1846 - POLICY - insured can't selectively defend claims - modern claims are "plastic" / malleable, and selective defense would be complex, costly, possibly inconsistent, and pose uncertaintly on the insured 1847 - RULE - insurer may not modify policy through a reservation of rights letter 1848 - POLICY - reservation of rights letter creates no contract 1849 - POLICY - allocation rule forces insured to Hobson's choice between seeking defense with potential subsequent liability for repayment and not seeking to enforce duty to defend 1850 - RULE - where policy does not specify coverage for prosecuting counterclaims, insurer is not liable for these costs 1851 1852 - TREND - insurer may want a recoupment provision in their policies, but a state IC would never approve a recoupment provision in a consumer policy, and some CGL customers would change insurers 1853 - TREND - courts are denying insurers the right of recoupment 1854 1855 - MAJ RULE - no clear MAJ RULE on allocation 1856 - MIN RULE - insurer can recoup where one claim was never covered and insurer can prove specific costs in defending that claim only 1857 - MIN RULE - insurer can recoup costs where no part of the suit was potentially covered 1858 - POLICY - is insured unjustly enriched where insurer defends a suit that is not potentially covered? - insurer gains many benefits from the defense: limited exposure, settlement negotiation control, access to privileged information 1859 1860 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 1861 Duty/Privilege to Settle 1862 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶ 1863 1864 [Crisci] - insurer rejects $10K settlement offer; jury awards $101K at trial 1865 - [H] - insured recovers in contract for $91K and in tort for $25K mental distress 1866 - RULE - implied cov of good faith and fair dealing in every policy, including duty to settle in appropriate cases 1867 - RULE - insurer has duty to consider interests of insured at least as highly as it considers its own interests 1868 - TEST = whether a prudent insurer without policy limits would have accepted the settlement offer 1869 - RULE - "disregard the limits" - insurer is not permitted to reject opportunities to settle within the policy limits unless it is also willing to absorb losses which may result from its failure to settle 1870 - POLICY - this prevents insurer from gambling with insured's money 1871 - POLICY - fairness - insurer must bear risks as well as rewards of choosing not to settle 1872

Page 36 INS_outline.txt 2014-04-22 1873 - MIN RULE - more than negligence or bad faith required to hold insurer liable past policy limits for rejection of settlement offer within policy limits 1874 - MIN RULE - strict liability for such action is also a MIN RULE 1875 - MIN RULE - allowing insured to recover non-economic damages 1876 - MIN RULE - subjective bad-faith - insurer may take its doubts about coverage into account in considering settlement offer 1877 - MIN RULE - insurer may recover settlement costs that fall outside coverage (few courts have considered this) 1878 - RULE - transfers of the right to recover in exchange for a covenant not to sue/execute are valid (typically between insured and plaintiff where insurer is not defending) 1879 - SPLIT - whether insurer can reduce/exhaust policy limits in settling for one insured where there is another insured also covered 1880 1881 POLICY - insureds pay for insurer to accept reasonable offers as well as offers that a jury may incorrectly find to be reasonable - most people/corps want this level of protection 1882 1883 ৺৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৽ 1884 ৷ [Auto] Automobile Insurance ৷ 1885 ╚৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶╝ 1886 1887 POLICY 1888 - consumer protection 1889 - victim protection 1890 - generally more-favorable to policyholders than other classes of insurance 1891 1892 Auto Policy 1893 - insureds = family members who are residents of the named insured's household 1894 [A] - Liability - e.g. 20/40/5 (individual/total/PD) 1895 - wording quite close to CGL policy - "damages for" instead of "damages because of" 1896 - NB: required in all states, but most are quite small - 10/20/5 1897 - "driving other car" clause - you or any family member for any auto 1898 - omnibus clause - insured means any person using your covered auto 1899 - exclusion - expected or intended BI/PD 1900 - exclusion - using a vehicle without reas belief that insured is entitled to do so 1901 - other insurance - owner's policy is primary; driver's policy is secondary 1902 [B] - Medical Payments 1903 - typically small 1904 - no-fault 1905 [C] - Uninsured Motorists 1906 - other driver must have liability 1907 - covers: 1908 - vehicle with no coverage 1909 - vehicle with !suff coverage under state law 1910 - hit-and-run vehicle - "vanishing headlight" problem 1911 - vehicle has coverage, but insurer denies or is insolvent 1912 - exclusion - workers' compensation and disability benefits policies must pay first 1913 - limit of liability - insurer wants one limit; motorist may want multiple limits if possible 1914 [D] - Property Damage 1915 - collision insurance is for operational losses 1916 - "other than collision" insurance is for non-operational losses (e.g. flood) 1917 - limit of liability = lesser of actual cost and replacement cost 1918 [E]/[F] - duties after loss & general provisions 1919 - notice required 1920 - cooperation required 1921 - subrogation upon payment 1922 1923 [Smith] - [H] - named driver exclusions are valid under statute 1924 - POLICY - purpose of auto ins is to protect public by securing payment of their damages 1925 - distinguished from automobile business exclusion / valet exclusion 1926 - POLICY - named driver exclusions 1927 (+) allow remainder of family to obtain affordable ins 1928 (+) deter insured drivers from entrusting their vehicles to unfit excluded drivers 1929 1930 MIN RULE - intentional collision with motorcycle still covered - [Tringali]

Page 37 INS_outline.txt 2014-04-22 1931 MIN RULE - public policy voids exclusion for injury caused by use of vehicle in felony 1932 MAJ RULE - household exclusion (no intra-household insurance liability) is invalid 1933 1934 [Curtis] 1935 - [I] - did Wallace have implied permission as third permittee to use the car? NO 1936 - RULE - permittee's permittee can sometimes give permission 1937 - [H] - in this case, first permittees would have to have known about possible third permittee when giving permission to second permittee 1938 - [H] - court unwilling to rewrite the policy to treat the older daughters as named insurers 1939 - court straining to find that driver here had right to drive - using idea of express versus implied permission 1940 - insured must explicitly limit authority of permittee ("don't lend the car to anyone else") when giving permission 1941 - clearly goes beyond policy language: "express permission of the named insured" 1942 - second permittee (Deborah) was absolutely insured, but the mere fact of her being insured did not give her the right to give permission to another to drive 1943 1944 - SPLIT - interpretation of "permission" 1945 - liberal = all drivers in chain have full authority to grant further permission, independent of original scope 1946 - minor deviation = question of fact/degree 1947 - conservative = deviations from original scope are not covered 1948 - TREND - courts' interpretation of "reasonable belief" in permission to drive fairly liberal - [Harris] 1949 1950 NB: most states have state-enacted schemes providing auto ins to those who cannot obtain it 1951 = "residual market mechanisms" 1952 - assigned risk pool 1953 - show state IC you have applied to three auto insurers 1954 - state IC then assigns you to an insurer who must insure you 1955 - assignees allocated by market share 1956 - high rates, but often still a loss to insurers 1957 - joint underwriting association (JUA) 1958 - created by state 1959 - state's insurers pay for losses of JUA based on market share 1960 - state re-insurance fund/facility 1961 - each insurer entitled to reinsure a percentage of its policies 1962 - high-risk policies are those reinsured 1963 - state's re-insurance facility funded by assessments from state's insurers 1964 - economically equivalent to JUA 1965 - NB: sometimes established for other lines of insurance: inner city homeowners, medmal in 1980s 1966 1967 1968 Notice & Cooperation Conditions 1969 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1970 [Miller] - insured settles while insurer is litigating 1971 - [H] - cooperation clause not breached, because insureds had no duty to wait on settling until coverage was decided 1972 - [H] - insurer cannot compel insured to reject a settlement offer that is in their best interest 1973 - HX RULE - insurer must deny coverage before insured can settle - reservation of rights not enough 1974 - RULE - money judgment confessed to by insured is not binding on insurer if obtained through fraud or collusion 1975 - TEST - whether the settlement is reasonable and prudent = what a reas prudent person in the position of the insurer would have settled for on the merits - look to facts, risks of going to trial 1976 - BOP on plaintiff claimant 1977 - BOP would be on insurer if it had abandoned insured to trial 1978 - POLICY - better for insurer who makes the decision to contest coverage to bear the risk of an adverse settlement 1979 - POLICY - incentives - both insurer and insured should want to accept a reasonable settlement 1980 - insurer's own money is at stake

Page 38 INS_outline.txt 2014-04-22 1981 - but insurer might be indifferent as to judgment amount after policy limits exhausted 1982 - insured if risk-averse will be over-incentivized to settle 1983 - distinguish cases where policyholder will actually pay part of the settlement from those where settlement absolves policyholder of liability 1984 1985 - TREND/RULE - when insurer does not defend, or defends subject to a reservation, the insured is entitled not to cooperate in deciding whether to settle 1986 1987 1988 Other Insurance Clauses 1989 ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾ 1990 - sources of authority: 1991 [1] contract - if the policies are consistent 1992 [2] statutes/regulations - rarely solve the problem 1993 1994 POLICY - optimal rule would be one of certainty - prevent wasteful litigation 1995 1996 - types of "other insurance" clauses: 1997 [1] pro-rata 1998 [2] excess 1999 [3] escape - seeks to avoid all liability 2000 2001 [Carriers] 2002 - [F] - two insurers, both of whose "other insurance" clauses say they will be treated as excess insurance 2003 - [H] - both insurers share in the loss - best carries out their intent 2004 (+) certainty / notice 2005 (+) discourages litigation between insurers 2006 (+) enables underwriters to more accurately predict losses 2007 - pro-rating approaches 2008 [1] MAJ RULE - according to policies' limits 2009 [2] NON RULE - according to premiums paid to each insurer 2010 [3] MIN RULE - equally up to the policy limits - "fill from the bottom" 2011 - [H] pro-rating equally up to the policy limits is the best approach 2012 (+) easy to administer 2013 (+) avoids subsidy from high-coverage to low-coverage carrier (as well as potentially increasing the cost of additional insurance) 2014 2015 ৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶৶

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