P

rotecting against loss is give something of value to another be described as a predidion concern­
a foremost concern of all (either the insured or the beneficiary) to ing potential loss based on known and
property owners. No one can compensate the other for a particular, unknown fadors.
predid whether an accident or a fire stated loss. Insurance protection may Risk management normally involves
will occur, so individuals and busi­ provide for compensation for the injury the transfer of certain risks from the
nesses typically protect their personal or death of the insured or another, for individual to the insurance company by
and financial interests by obtaining damage to the insured's property, or a contractual agreement We examine
insurance. for other types of losses, such as those the insurance contrad and its provisions
Insurance is a contrad in which resulting from lawsuits. Basically, insur­ in this chapter. First, however, we look
the insurance company (the insurer) ance is an arrangement for transfetring at some basic insurance terminology
promises to pay a sum of money or and allocating risk. In general, risk can and concepts.

a n Db SECTION 1 C E r r company). In contrast, an insurance agent is an

agent of the insurance company, not an agent of
INSURANCE TERMINOLOGY the applicant. Thus, the agent owes fiduciary duties
AND CONCEPTS to the insurer (the insurance company), but not to
the person who is applying for insurance. As a gen­
Like other legal areas, insurance has its own special eral rule, the insurance company is bound by the
concepts and terminology, a knowledge of which is acts of its agents when they act within the scope of
essential to an understanding of insurance law. the agency relationship (see Chapters 32 and 33). In
most situations, state law determines the status of all
parties writing or obtaining insurance.
Insurance Terminology
An insurance contract is called a policy. The con­
sideration paid to the insurer is called a premium, Classifications of Insurance
and the insurance company is sometimes called an Insurance is classified according to the nature of the
underwriter. The parties to an insurance policy are risk involved. For example, fire insurance, casualty
the insurer (the insurance company) and the insured insurance, life insurance, and title insurance apply
(the person covered by its provisions). to different types of risk. Furthermore, policies of
Insurance contracts usually are obtained through these types protect different persons and interests.
an agent, who normally works for the insurance This is reasonable because the types of losses that
company, or through a broker, who is ordinarily an are expected and the types that are foreseeable or
independent contractor. When a broker deals with an unforeseeable vary with the nature of the activity.
applicant for insurance, the broker is, in effect, the Exhibit 51-1 on pages 1,002 and 1,003 provides a
applicant's agent (and not an agent of the insurance list of common insurance classifications.

1000
CHAPTER 51 l•sarooce 1001

Insurable Interest to have an insurable interest. Both a mortgagor and

a mortgagee, for example, have an insurable inter­
A person must have an insurable interest in
est in the mortgaged property, as do a landlord and
something in order to insure it. Without an insur­
a tenant in leased property, and a partner and the
able interest, there is no enforceable contract, and
partnership in partnership property. A secured party
a transaction to purchase insurance coverage would
has an insurable interest in the property in which
have to be treated as a wager. The existence of an
he or she has a security interest. The existence of an
insurable interest is a primary concern in determin­
insurable interest is a primary concern in determin­
ing liability under an insurance policy.
ing liability under an insurance policy.
LIFE INSURANCE In regard to life insurance, a per­ CASE IN POINT ABM Industries, Inc., operated
son must have a reasonable expectation of benefit the heating, ventilation, and air-conditioning sys­
from the continued life of another to have an insur­ tems at the World Trade Center (WTC) in New
able interest in that person's life. The insurable inter­ York City in 2001. Under its contracts to provide
est must exist at the time the policy is obtained. The these services, ABM had office and storage space
benefit may be pecuniary (monetary), or it may be at the WTC. Zurich American Insurance Company
founded on the relationship between the parties (by insured ABM against losses resulting from "busi­
blood or affinity). Close family relationships give a ness interruption" caused by direct physical loss
person an insurable interest in the life of another. or damage "to property owned, controlled, used,
Generally, blood or marital relationships fit this cat­ leased or intended for use" by ABM. After the ter­
egory. For example, a husband can take out an insur­ rorist attacks on September 11, ABM filed a claim
ance policy on his wife and vice versa, or parents to recover for the loss of all income derived from its
can take out life insurance policies on their children. WTC operations. Zurich argued that the recovery
A policy that a person takes out on his or her spouse should be limited to the income lost as a result of
remains valid even if they divorce, unless a specific the destruction of ABM's office and storage space
provision in the policy calls for its termination on and supplies. A federal appellate court, however,
divorce. ruled that ABM was entitled to compensation for
the loss of all of its WTC operations. The court rea­
KEY-PERSON LIFE INSURANCE Key-person insurance soned that the "policy's scope expressly includes
is insurance obtained by an organization on the life real or personal property that the insured 'used,'
of a person who is important to that organization. 'controlled,' or 'intended for use.' " Because ABM's
Because the organization expects to experience income depended on "the common areas and leased
some financial gain from the continuation of the premises in the WTC complex," it had an insurable
key person's life or some financial loss from the key interest in that property at the time of the loss. 1
person's death, the organization has an insurable
interest. Typically, a partnership will insure the life n nDb SECTION 2 dC « a
of each partner because the firm will sustain some
degree of loss if any partner dies. Similarly, a cor­
THE INSURANCE CONTRACT
poration has an insurable interest in the life of a
key executive whose death would result in financial An insurance contract is governed by the general
loss to the company. If a firm insures a key person's principles of contract law, although the insur­
life and then that person leaves the firm and sub­ ance industry is heavily regulated by each state. 2
sequently dies, the firm can collect on the insur­ Customarily, a party offers to purchase insurance
ance policy, provided it has continued to pay the by submitting an application to the insurance com­
premiums. pany. The company can either accept or reject the
offer. Sometimes, the insurance company's accep­
PROPERTY INSURANCE An insurable interest exists tance is conditional-on the results of a life insur­
in real or personal property when the insured derives ance applicant's medical examination, for example.
a pecuniary benefit from the preservation and con­
tinued existence of the property. Put another way, a
person has an insurable interest in property when I. Zurich American Insurance Co. v. ABM Industries, Inc., 397 F.3d 158
she or he would sustain a financial loss from its (2d Cir. 2005).
2. The states were given authority to regulate the insurance indus­
destruction. The owner of the property clearly has an try by the McCarran-Ferguson Act of 1945, 15 U.S.C. Sections
insurable interest, but a party need not be the owner 1011-1015.
]002 UNIT TEN PROPERTY AND ITS PROTECTION

EXHIBIT 51-1 • Insurance Classifications

TYPE OF INSURANCE COVERAGE
Accident Covers expenses, losses, and suffering incurred by the insured because of accidents causing
physical injury and any consequent disability; sometimes includes a specified payment to
heirs of the insured if death results from an accident.
All-Risk Covers all losses that the insured may incur except those that are specifically excluded. Typical
exclusions are losses due to war, pollution, earthquakes, and floods.
Automobile May cover damage to automobiles resulting from specified hazards or occurrences (such as
fire, vandalism, theft, or collision); normally provides protection against liability for personal
injuries and property damage resulting from the operation of the vehicle.
casualty Protects against losses incurred by the insured as a result of being held liable for personal
injuries or property damage sustained by others.
Credit Pays to a creditor the balance of a debt on the disability, death, insolvency, or bankruptcy of
the debtor; often offered by lending institutions.
Decreasing-Term life Provides life insurance; requires uniform payments over the life (term) of the policy, but with
a decreasing face value (amount of coverage).
Disability Replaces a portion of the insured's monthly income from employment in the event that illness
or injury causes a short- or long-term disability. Some states require employers to provide
short-term disability insurance. Benefits typically last a set period of time, such as six months
for short-term coverage or five years for long-term coverage.
Employer's liability Insures an employer against liability for injuries or losses sustained by employees during
the course of their employment. Covers claims not covered under workers' compensation
insurance.
Fidelity or Guaranty Provides indemnity against losses in trade or losses caused by the dishonesty of employees,
the insolvency of debtors, or breaches of contract.
Fire Covers losses to the insured caused by fire.

Floater Covers movable property, as long as the property is within the territorial boundaries specified
in the contract.
Group Provides individual life, medical, or disability insurance coverage but is obtainable through
a group of persons, usually employees. The policy premium is paid either entirely by the
employer or partially by the employer and partially by the employee.

For the insurance contract to be binding, consid­ show that it would not have extended insurance if it
eration (in the form of a premium) must be given, had known the facts.
and the parties forming the contract must have the
required contractual capacity to do so.
Effective Date
The effective date of an insurance contract-that is,
Application for Insurance the date on which the insurance coverage begins-is
The filled-in application form for insurance is usu­ important. In some instances, the insurance appli­
ally attached to the policy and made a part of the cant is not protected until a formal written policy
insurance contract. Thus, an insurance applicant is is issued. For example, if the parties agree that the
bound by any false statements that appear in the policy will be issued and delivered at a later time,
application (subject to certain exceptions). Because the contract is not effective until the policy is issued
the insurance company evaluates the risk based on and delivered. Thus, any loss sustained between the
the information included in the insurance applica­ time of application and the delivery of the policy
tion, misstatements or misrepresentations can void is not covered. In other situations, coverage begins
a policy, especially if the insurance company can when a binder is written (to be discussed shortly) or,
CHAPTER 51 l•sarooce 1003

EXHIBIT 51-1 • Insurance Classifications, Continued

TYPE OF INSURANCE COVERAGE
Health Covers expenses incurred by the insured resulting from physical injury or illness and other
expenses relating to health and life maintenance.
Homeowners' Protects homeowners against some or all risks of loss to their residences and the residences'
contents or liability arising from the use of the property.
Key-Person Protects a business in the event of the death or disability of a key employee.

liability Protects against liability imposed on the insured as a result of injuries to the person or
property of another.
life Covers the death of the policyholder. On the death of the insured, the insurer pays the
amount specified in the policy to the insured's beneficiary.
Major Medical Protects the insured against major hospital, medical, or surgical expenses.

Malpractice A form of liability insurance that protects professionals (physicians, lawyers, and others)
against malpractice claims brought against them by their patients or clients.
Marine Covers movable property (including ships, freight, and cargo) against certain perils or
navigation risks during a specific voyage or time period.
Mortgage Covers a mortgage loan. The insurer pays the balance of the mortgage to the creditor on the
death or disability of the debtor.
No-Fault Auto Covers personal injuries (and sometimes property damage) resulting from automobile
accidents, regardless of who was at fault. The insured submits his or her claims to his or her
own insurance company, and is compensated for medical bills and lost wages (but usually
not pain and suffering). Governed by state "no-fault" statutes. These laws generally prohibit
a lawsuit against the at-fault driver except in specific circumstances, such as when a person's
medical bills exceed a specific dollar amount or the damages exceed the policy limits.
Term Life Provides life insurance for a specified period of time (term) with no cash surrender value. It
usually is renewable.
Title Protects against any defects in title to real property and any losses incurred as a result of
existing claims against or liens on the property at the time of purchase.

depending on the terms of the contract, after a cer­ of premium has been paid. Between the time the
tain period of time has elapsed or a specified condi­ company receives the application and the time it is
tion is met. either rejected or accepted, the applicant is covered
(possibly subject to certain conditions, such as pass­
BROKERS VERSUS AGENTS A broker is the agent of ing a physical examination). Usually, the agent will
an applicant. Therefore, if the broker fails to pro­ write a memorandum, or binder, indicating that a
cure a policy, the applicant normally is not insured. policy is pending and stating its essential terms.
According to general principles of agency law, if the Parties may agree that a life insurance policy will
broker fails to obtain policy coverage and the appli­ be binding at the time the insured pays the first pre­
cant is harmed as a result, then the broker is liable to mium, or the policy may be expressly contingent
the harmed applicant-principal for the loss. on the applicant's passing a physical examination.
If the applicant pays the premium and passes the
BINDERS AND CONDITIONS A person who seeks examination, then the policy coverage is continu­
insurance from an insurance company's agent is usu­ ously in effect. If the applicant pays the premium but
ally protected from the moment the application is dies before having the physical examination, then
made, provided-for life insurance-that some form in order to collect, the applicant's estate normally
]004 UNIT TEN PROPERTY AND ITS PROTECTION

must show that the applicant would have passed the of premiums, failure to file proof of death within a
examination had he or she not died. certain period, or lack of an insurable interest.

Provisions and Clauses COINSURANCE CLAUSES Often, when taking out

fire insurance policies, property owners insure their
Some of the important provisions and clauses con­ property for less than full value because most fires
tained in insurance contracts are discussed in the fol­ do not result in a total loss. To encourage owners to
lowing subsections and listed in Exhibit 51-2 below. insure their property for an amount as close to full
value as possible, fire insurance policies generally
PROVISIONS MANDATED BY STATUTE If a statute include a coinsurance clause. Typically, a coinsurance
mandates that a certain provision be included in insur­ clause provides that if the owner insures the property
ance contracts, a court will deem that an insurance up to a specified percentage-usually 80 percent-of
policy contains the provision regardless of whether its value, she or he will recover any loss up to the
the parties actually included it in the language of face amount of the policy. If the insurance is for less
their contract. If a statute requires that any limitations than the fixed percentage, the owner is responsible
regarding coverage be stated in the contract, a court for a proportionate share of the loss. In effect, the
will not allow an insurer to avoid liability for a claim owner becomes a coinsurer.
through reliance on an unexpressed restriction. Coinsurance applies only in instances of partial
loss. The amount of the recovery is calculated by
INCONTESTABILITY CLAUSES Statutes commonly using the following formula:
require that a policy for life or health insurance
provide that after the policy has been in force for a Amount of
specified length of time-often two or three years­ Insurance Coverage
Loss x (--------=---) = Amount
the insurer cannot contest statements made in the Coinsurance Property of Recovery
application. This is known as an incontestability Percentage x Value
clause. Once a policy becomes incontestable, the
insurer cannot later avoid a claim on the basis of, for Thus, if the owner of property valued at $200,000
example, fraud on the part of the insured, unless the takes out a policy in the amount of $100,000 and suf­
clause provides an exception for that circumstance. fers a loss of $80,000, the recovery will be $50,000.
The clause does not prevent an insurer from refusing The owner will be responsible for (coinsure) the bal­
or reducing payment for a claim due to nonpayment ance of the loss, or $30,000.

EXHIBIT 51-2 • Insurance Contract Provisions and Clauses

TYPE OF CLAUSE DESCRIPTION
Antilapse Clause An antilapse clause provides that a life insurance policy will not automatically lapse if no payment
is made on the date due. Ordinarily, under such a provision, the insured has a grace period of
thirty or thirty-one days within which to pay an overdue premium before the policy is canceled.

Appraisal Oause Insurance policies frequently provide that if the parties cannot agree on the amount of a loss
covered under the policy or the value of the property lost, an appraisal, or estimate, by an
impartial and qualified third party can be demanded.

Arbitration Clause Many insurance policies include clauses that call for arbitration of any disputes that arise
between the insurer and the insured concerning the settlement of claims.

Coinsurance Clause Many property insurance policies include a coinsurance clause that applies in the event of a
partial loss and determines what percentage of the value of the property must be insured for
an owner to be fully reimbursed for a loss. If the owner insures the property up to a specified
percentage (typically 80 percent) of its value, she or he will recover any loss up to the face
amount of the policy.

Incontestability Clause An incontestability clause provides that after a policy has been in force for a specified length of
time-usually two or three years-the insurer cannot contest statements made in the application.

Multiple Insurance Clause Many insurance policies include a clause providing that if the insured has multiple insurance
policies that cover the same property and the amount of coverage exceeds the loss, the loss
will be shared proportionately by the insurance companies.
CHAPTER 51 l•sarooce 1005

or thirty-one days within which to pay an overdue

$ l OO,OOO = $50,000 premium. If the insured fails to pay a premium alto­
$80,000 X (
0.8 X $200,000 ) gether, there are alternatives to cancellation:
If the owner had taken out a policy in the amount of 1. The insurer may be required to extend the insur­
80 percent of the value of the property, or $160,000, ance for a period of time.
then according to the same formula, the owner 2. The insurer may issue a policy with less coverage
would have recovered the full amount of the loss to reflect the amount of the payments made.
(the face amount of the policy). 3. The insurer may pay to the insured the policy's
cash surrender value-the amount the insurer
APPRAISAL AND ARBITRATION CLAUSES Most fire has agreed to pay on the policy's cancellation
insurance policies provide that if the parties can­ before the insured's death. (This value depends
not agree on the amount of a loss covered under on the period that the policy has already run, the
the policy or on the value of the property lost, an amount of the premium, the insured's age and
appraisal can be demanded. An appraisal is an esti­ life expectancy, and amounts to be repaid on any
mate of the property's value determined by a suit­ outstanding loans taken out against the policy.)
ably qualified individual who has no interest in When the insurance contract states that the insurer
the property. Typically, two appraisers are used, cannot cancel the policy, these alternatives are
with one appointed by each party. A third party, important.
or umpire, may be called on to resolve differences.
Other types of insurance policies also contain provi­
sions for appraisal and arbitration when the insured Interpreting Provisions
and insurer disagree on the value of a loss. of an Insurance Contract
The courts recognize that most people do not have
MULTIPLE INSURANCE COVERAGE If an insured has the special training necessary to understand the
multiple insurance coverage-that is, policies with intricate terminology used in insurance policies.
several companies covering the same insurable Therefore, when disputes arise, the courts will inter­
interest-and the amount of coverage exceeds the pret the words used in an insurance contract accord­
loss, the insured can collect from each insurer only ing to their ordinary meanings in light of the nature
the company's proportionate share of the liability, of the coverage involved.
relative to the total amount of insurance. Many fire When there is an ambiguity in the policy, the
insurance policies include a pro rata clause, which provision generally is interpreted against the insur­
requires that any loss be shared proportionately by ance company. Also, when it is unclear whether an
all carriers. For example, if Green insured $50,000 insurance contract actually exists because the writ­
worth of property with two companies and each ten policy has not been delivered, the uncertainty
policy had a liability limit of $40,000, then on the normally is resolved against the insurance com­
property's total destruction, Green could collect pany. The court presumes that the policy is in effect
only $25,000 from each insurer. unless the company can show otherwise. Similarly,
an insurer must make sure that the insured is ade­
ANTILAPSE CLAUSES A life insurance policy may quately notified of any change in coverage under an
provide, or a statute may require a policy to provide, existing policy.
that it will not automatically lapse if no payment Disputes over insurance often focus on the inter­
is made on the date due. Ordinarily, under an anti­ pretation of an ambiguous provision in the policy,
lapse provision, the insured has a grace period of thirty as the following case illustrates.

BACKGROUND AND FACTS • Fourteen-year-old Dena Cary shot herself under the chin in
an unsuccessful suicide attempt because she suffered a major depressive episode of her diagnosed
CASE CONTINUES.
]006 UNIT TEN PROPERTY AND ITS PROTECTION

CASE s1.1 CONTINUED♦ bipolar disorder. Her injuries required extensive medical treatment. Dena's father, Thomas Cary, sought
payment for these costs under his medical insurance policy covering injury and illness, but the insurer
denied the claim. The insurer argued that coverage was excluded under a provision reading: "Injury.
Injury means accidental bodily injury which occurs independently of Illness. Injury does not include self­
inflicted bodily injury, either while sane or insane:' The Carys filed an action in a Colorado state court for
bad faith denial of coverage. The trial court found that the injury was covered by the policy, but the state
intermediate appellate court reversed. The Carys appealed to the state supreme court.

IN THE LANGUAGE OF THE COURT

RICE, Justice
* * * *
o,,.�- 5tf * * * One reasonable interpretation of these definitions is * * * [that] the
1 £ t'-' self-inflicted injury limitation in the second sentence of the "injury" definition
modifies only the phrase "accidental bodily injury which occurs independently of lllness."
As a result, injuries that occur as a result of illness, even if self-inflicted, are defined out of the
"injury" definition and are covered by the Plan's promise to provide coverage for "treatment
of an lllness."
* * * *
However, an equally reasonable interpretation is that both sentences in the "injury" defini­
tion are of like definitional value, that is to say that one does not modify the other. Thus, to be
covered, an injury must be [an] "accidental bodily injury which occurs independently of lllness"
and must not be [a] "self-inflicted bodily injury, either while sane or insane." Accordingly, if an
injury is accidental or is the result of an illness, it nonetheless would be excluded from coverage
if it is self-inflicted.
* * * Most importantly for our purposes, however, the plan is ambiguous because it is sus­
ceptible to each equally reasonable interpretation. * * * Because we resolve ambiguities in favor of
coverage, Dena's injuries are covered. [Emphasis added.]
DECISION AND REMEDY • The Colorado Supreme Court reversed the lower appellate
court's decision, with instructions to return the case to the trial court for proceedings consistent with
this opinion.
WHAT IF THE FACTS WERE DIFFERENT? • Suppose that there had not been an
ambiguity in this policy and that it had been subject to only one reasonable interpretation. Would the
result have been different? Explain.
THE LEGAL ENVIRONMENT DIMENSION • Should insurance policy provisions be
interpreted to avoid ambiguities if possible? Why or why not?

Cancellation canceled for nonpayment of premiums or suspen­

The insured can cancel a policy at any time, and sion of the insured's driver's license. Property insur­
the insurer can cancel under certain circumstances. ance can be canceled for nonpayment of premiums
When an insurance company can cancel its insur­ or for other reasons, including the insured's fraud
ance contract, the policy or a state statute usually or misrepresentation, gross negligence, or convic­
requires that the insurer give advance written notice tion for a crime that increases the risk assumed by
of the cancellation. The same requirement applies the insurer. Life and health policies can be canceled
when only part of a policy is canceled. Any pre­ because of false statements made by the insured
mium paid in advance and not yet earned may be in the application, but the cancellation must take
refundable on the policy's cancellation. The insured place only before the effective date of an incontest­
may also be entitled to a life insurance policy's cash ability clause. An insurer cannot cancel-or refuse to
surrender value. renew-a policy for discriminatory reasons or other
The insurer may cancel an insurance policy for reasons that violate public policy, or because the
various reasons, depending on the type of insur­ insured has appeared as a witness in a case brought
ance. For example, automobile insurance can be against the company.
CHAPTER 51 l•sarooce 1007

Duties and Obligations of the Parties cooperate with the insurer during any investigation
or litigation.
Both parties to an insurance contract are responsible
for the obligations they assume under the contract
(contract law was discussed in Chapters 10 through DUTIES OF THE INSURER Once the insurer has
18). In addition, both the insured and the insurer accepted the risk, and some event occurs that gives
have an implied duty to act in good faith. rise to a claim, the insurer has a duty to investigate
to determine the facts. When a policy provides
insurance against third party claims, the insurer is
DUTIES OF THE INSURED Good faith requires the obligated to make reasonable efforts to settle such
party who is applying for insurance to reveal every­ a claim. If a settlement cannot be reached, then
thing necessary for the insurer to evaluate the risk. regardless of the claim's merit, the insurer has a
In other words, the applicant must disclose all duty to defend any suit against the insured. Usually,
material facts, including all facts that an insurer a policy provides that in this situation the insured
would consider in determining whether to charge a must cooperate in the defense and attend hearings
higher premium or to refuse to issue a policy alto­ and trials if necessary. The insurer also owes a duty
gether. Many insurance companies today require to pay any legitimate claims up to the face amount
that an applicant give the company permission to of the policy.
access other information, such as private medical An insurer has a duty to provide or pay an attor­
records and credit ratings, for the purpose of evalu­ ney to defend its insured when a complaint alleges
ating the risk. facts that could, if proved, impose liability on the
Once the insurance policy is issued, the insured insured within the policy's coverage. In the follow­
has three basic duties under the contract: (1) to ing case, the question was whether a policy covered
pay the premiums as stated in the contract, (2) to a dentist's potential liability arising from a practical
notify the insurer within a reasonable time if an joke that he played on an employee while perform­
event occurs that gives rise to a claim, and (3) to ing a dental procedure.

BACKGROUND AND FACTS • Tina Alberts worked for Robert Woo as a dental surgical assis­
tant. Her family raised potbellied pigs, and she often talked about them at work. Sometimes, Woo
mentioned the pigs, intending to encourage a "friendly working environment'.' Alberts interpreted the
comments as offensive. Alberts asked Woo to replace two of her teeth with implants. The procedure
required the installation of temporary partial bridges called "flippers'.' While Alberts was anesthetized,
Woo installed a set of flippers shaped like boar tusks, as a joke, and took photos. Before Alberts
regained consciousness, he inserted the normal flippers. A month later, Woo's staff gave Alberts the
photos at a gathering to celebrate her birthday. Stunned, Alberts refused to return to work. Woo tried to
apologize. Alberts filed a suit in a Washington state court against him, alleging battery and other torts.
He asked Fireman's Fund Insurance Company to defend him, claiming coverage under his policy. The
insurer refused. Woo settled the suit with Alberts for $250,000 and filed a suit against Fireman's, claim­
ing that it had breached its duty to defend him. The court awarded him $750,000 in damages plus the
amount of the settlement and attorneys' fees and costs. A state intermediate appellate court reversed
the award. Woo appealed to the Washington Supreme Court.

I N T H E LAN G U A G E O F T H E CO U RT
FAIRHURST, J. [Justice]
* * * *
o,..;,,, ';� The professional liability provision states that Fireman's will defend any claim
ll.;; !: ._,
brought against the insured "even if the allegations of the claim are groundless,
false or fraudulent." It defines "dental services" as "all services which are performed in the
CASE CONTINUES.
]008 UNIT TEN PROPERTY AND ITS PROTECTION

CASE s1.2 CONTINUED♦ practice of the dentistry profession as defined in the business and professional codes of the
state where you are licensed." [Revised Code of Washington (RCW) Section] 18.32.020 * * *
states:
A person practices dentistry • • • who • • • undertakes by any means or methods to diagnose,
treat, remove stains or concretions from teeth, operate or prescribe for any disease, pain, injury, defi­
ciency, deformity, or physical condition of the same, or take impressions of the teeth or jaw, or • • •
owns, maintains or operates an office for the practice of dentistry • • • .
* * * [Woo] claims the joke was "intertwined with employee and patient relationships,
areas of Woo's ownership and operation of the dental office." Fireman's responds that the alle­
gations in Alberts' complaint unambiguously establish that Woo's practical joke was not con­
nected to treating Alberts' condition. It asserts the boar tusk flippers were not intended to
replace Alberts' teeth-they were intended only as a practical joke. Fireman's also asserts that
insertion of the boar tusk flippers was not covered under the professional liability provision
because Woo "interrupted his rendering of dental services."
* * * *
* * * In addition to covering the rendering of dental services, the professional liability provi­
sion covers ownership, maintenance, or operation of an office for the practice of dentistry and Alberts'
complaint alleged Woo's practical joke took place while Woo was conducting his dental prac­
tice. The insertion of the boar tusk flippers was also intertwined with Woo's dental practice
because it involved an interaction with an employee. [Emphasis added.]
Moreover, Woo's practical joke did not interrupt the dental surgery procedure, as Fireman's
argues. * * * The acts that comprised the practical joke were integrated into and inseparable
from the overall procedure.
In sum, Alberts' complaint alleges that Woo inserted a flipper, albeit oddly shaped, during a
dental surgery procedure while he was operating an office for the practice of dentistry. * * *
Because [Revised Code of Washington Section] 1 8.32.020 defines the practice of dentistry so
broadly, the fact that his acts occurred during the operation of a dental practice conceivably
brought his actions within the professional liability provision of his insurance policy.
DECISION AND REMEDY • The Washington Supreme Court held that Fireman's had a duty
to defend Woo under the professional liability provision of his policy because "the insertion of boar
tusk flippers in Alberts' mouth conceivably fell within the policy's broad definition of the practice of
dentistry." The state supreme court reversed the decision of the lower court.
THE ETHICAL DIMENSION • Are the acts of the principal parties-Woo, Alberts, and
Fireman 's-ethically justifiable in the circumstances of this case? Discuss.
THE LEGAL ENVIRONMENT DIMENSION • In determining if an insurer has a duty to
defend an insured, should a court ask whether the insured had a "reasonable expectation" of cover­
age? Explain.

BAD FAITH ACTIONS Although insurance law gener­ Defenses against Payment
ally follows contract law, most states now recognize An insurance company can raise any of the defenses
a "bad faith" tort action against insurers. Thus, if an that would be valid in an ordinary action on a con­
insurer in bad faith denies coverage of a claim, the tract, as well as the following defenses:
insured may recover in tort an amount exceeding the
policy's coverage limits and may also recover puni­ 1. If the insurance company can show that the pol­
tive damages. Some courts have held insurers liable icy was procured through fraud or misrepresenta­
for a bad faith refusal to settle claims for reasonable tion, it may have a valid defense for not paying
amounts within the policy limits, provided that on a claim. (The insurance company may also
there was affirmative misconduct by the insurer. 3 have the right to disaffirm or rescind the insur­
ance contract.)
3. See, for example, Columbia National Insurance Co. v. Freeman, 347
2. An absolute defense exists if the insurer can show
Ark. 423, 64 S.W.3d 720 (2002); and Selman v. Metropolitan Life that the insured lacked an insurable interest-thus
Insurance Co., 372 Ark. 420, 277 S.W.3d 196 (2008). rendering the policy void from the beginning.
CHAPTER 51 l•sarooce 1009

3. Improper actions, such as those that are against term. At the end of the term, a fixed amount is
public policy or that are otherwise illegal, can also paid to the insured or, on the death of the insured
give the insurance company a defense against during the specified period, to a beneficiary.
the payment of a claim or allow it to rescind the Thus, this type of insurance represents both term
contract. insurance and a form of annuity (the right to
receive fixed, periodic payments for life or-as in
In some situations, the insurance company may this instance-for a term of years). Endowment
be prevented, or estopped, from asserting defenses insurance has a rapidly increasing cash surrender
that normally are available. For example, an insur­ value, but premiums are high because a payment
ance company ordinarily cannot escape payment on must be made at the end of the term even if the
the death of an insured on the ground that the per­ insured is still living.
son's age was stated incorrectly on the application. 5. Universal life combines aspects of both term
Also, incontestability clauses prevent the insurer insurance and whole life insurance. From every
from asserting certain defenses. payment, usually called a "contribution," the
issuing life insurance company makes two deduc­
a n Db SECTION 3 dE r r tions. The first is a charge for term insurance
protection; the second is for company expenses
TYPES OF INSURANCE and profit. The funds that remain after these
deductions earn interest for the policyholder at
There are four general types of insurance coverage: a rate determined by the company. The interest­
life insurance, fire and homeowners' insurance, earning amount is called the policy's cash value,
automobile insurance, and business liability insur­ but that term does not mean the same thing as it
ance. We now examine briefly the coverage available does for a traditional whole life insurance policy.
under each of these types of insurance. With a universal life policy, the cash value grows
at a variable interest rate rather than at a prede­
termined rate.
Life Insurance The rights and liabilities of the parties to life insur­
There are five basic types of life insurance: ance contracts are basically dependent on the specific
1. Whole life provides protection with an accu­ contract. A few features deserve special attention.
mulated cash surrender value that can be used as
collateral for a loan. The insured pays premiums LIABILITY The life insurance contract determines
during his or her entire lifetime, and the benefi­ not only the extent of the insurer's liability but also,
ciary receives a fixed payment on the death of the generally, whether the insurer is liable on the death
insured. (It is also sometimes referred to as straight of the insured. Most life insurance contracts exclude
life, ordinary life, or cash-value insurance.) liability for death caused by suicide, military action
2. Limited-payment life is a type of policy under during war, execution by a state or federal govern­
which premiums are paid for a stated number of ment, and even an event that occurs while the
years. After that time, the policy is paid up and insured is a passenger in a commercial vehicle. In
fully effective during the insured's life. For exam­ the absence of contractual exclusion, most courts
ple, a policy might call for twenty payments. today construe any cause of death to be one of the
Naturally, premiums are higher than for whole insurer's risks.
life. This insurance also has a cash surrender
value. ADJUSTMENT DUE TO MISSTATEMENT OF AGE The
3. Term insurance is a type of policy for which insurance policy constitutes the agreement between
premiums are paid for a specified term. Payment the parties. The application for insurance is part
on the policy is due only if death occurs within of the policy and is usually attached to the policy.
the term period. Premiums are lower than for When the insured misstates his or her age on the
whole life or limited-payment life, and there usu­ application, an error is introduced, particularly as to
ally is no cash surrender value. Frequently, this the amount of premiums paid. As mentioned, mis­
type of insurance can be converted to another statement of age is not a material error sufficient to
type of life insurance. allow the insurer to void the policy. Instead, on dis­
4. Endowment insurance involves fixed pre­ covery of the error, the insurer will adjust the pre­
mium payments that are made for a definite mium payments and/or benefits accordingly.
1010 U N IT TEN PROPERTY AND ITS PROTECTION

ASSIGNMENT Most life insurance policies allow the 2. Death and payment of benefits.
insured to change beneficiaries. When this is per­ 3. Expiration of the term of the policy.
mitted, in the absence of any prohibition or notice 4. Cancellation by the insured.
requirement, the insured can assign the rights to
the policy (for example, as security for a loan) with­
out the consent of the insurer or the beneficiary. If Fire and Homeowners' Insurance
the beneficiary's right is vested-that is, has become There are basically two types of insurance policies
absolute, entitling the beneficiary to payment of for a home-standard fire insurance policies and
the proceeds-the policy cannot be assigned with­ homeowners' policies.
out the beneficiary's consent. For the most part, life
insurance contracts permit assignment and require
STANDARD FIRE INSURANCE POLICIES The standard
notice only to the insurer to be effective.
fire insurance policy protects the homeowner against
fire and lightning, as well as damage from smoke and
CREDITORS' RIGHTS Unless insurance proceeds are
water caused by the fire or the fire department. Most
exempt under state law, the insured's interest in life
fire insurance policies are classified according to the
insurance is an asset that is subject to the rights of
type of property covered and the extent (amount)
judgment creditors. These creditors generally can
of the issuer's liability. Exhibit 51-3 below lists typi­
reach insurance proceeds payable to the insured's
cal fire insurance policies, and the following subsec­
estate, proceeds payable to anyone if the payment
tions discuss specific features and provisions.
of premiums constituted a fraud on creditors, and
proceeds payable to a named beneficiary unless the
beneficiary's rights have vested. Creditors, however, Liability. The insurer's liability is determined from
cannot compel the insured to make available the the terms of the policy. Most policies, however, limit
cash surrender value of the policy or to change the recovery to losses resulting from hostile fires-basi­
named beneficiary to that of the creditor. Almost all cally, those that break out or begin in places where
states exempt at least a part of the proceeds of life no fire was intended to burn. A friendly fire-one
insurance from creditors' claims. burning in a place where it was intended to burn-is
not covered. Therefore, smoke from a fireplace is not
covered, but smoke from a fire caused by a defective
TERMINATION Although the insured can cancel and
electrical outlet is covered. Sometimes, owners add
terminate the policy, the insurer generally cannot
"extended coverage" to the fire policy to cover losses
do so. Therefore, termination usually takes place
from "friendly" fires.
only if one of the following occurs:
If the policy is a valued policy (see Exhibit 51-3
1. Default in premium payments that causes the below) and the subject matter is completely
policy to lapse. destroyed, the insurer is liable for the amount

EXHIBIT 51-3 • Typical Fire Insurance Policies

TYPE OF POLICY COVERAGE
Blanket Covers a class of property rather than specific property, because the property is expected to
shift or vary in nature. A policy covering the inventory of a business is an example.
Floater Usually supplements a specific policy. It is intended to cover property that may change in
either location or quantity. To illustrate, if the painting mentioned below under "specific
policy" is to be exhibited during the year at numerous locations throughout the state, a floater
policy would be desirable.
Open A policy that does not state an agreed-on value for the property. The policy usually provides
for a maximum liability of the insurer, but payment for loss is restricted to the fair market
value of the property at the time of loss or to the insurer's limit, whichever is less.
Specific Covers a specific item of property at a specific location. An example is a particular painting
located in a residence or a piece of machinery located in a factory or business.
Valued A policy that, by agreement, places a specific value on the subject to be insured to cover the
eventuality of its total loss.
CHAPTER 51 l•sarooce

specified in the policy. If it is an open policy, then the liability. Courts vary somewhat on the enforcement
extent of the actual loss must be determined, and of such clauses.
the insurer is liable only for the amount of the loss
or for the maximum amount specified in the policy, Occupancy Clause. Most standard policies require
whichever is less. For partial losses, actual loss must that the premises be occupied at the time of the
always be determined, and the insurer's liability is loss. The relevant clause states that if the premises
limited to that amount. Most insurance policies per­ are vacant or unoccupied for a given period and the
mit the insurer to either restore or replace the prop­ insurer's consent to the vacancy is not obtained, the
erty destroyed or to pay for the loss. coverage is suspended until the premises are reoc­
cupied. Persons going on extended vacations should
Proof of Loss. As a condition for recovery, fire check their policies regarding this point.
insurance policies require the insured to file a proof In the following case, the court had to consider
of loss with the insurer within a specified period or how long a house must be left vacant before it can
immediately (within a reasonable time). Failure to be considered "unoccupied" and whether the risk of
comply could allow the insurance carrier to avoid hazard is always greater when a home is unoccupied.

United States Court of Appeals, Seventh Circuit 598 F.3d 903 (2010).
www.ca7.ustourts.gov•

Allstate of his power of attorney and that month-purported to cancel

I N T H E LAN G UA G E O F T H E C O U RT had directed the company to bill the policy retroactively to November
POSNER, Circuit Judge. the insurance premiums to his law 2001, and returned the premiums
* * * * office. No one lived in the house for the subsequent period to the
This diversity after she left it. estate.
- suit for breach of an Three months after her death­ The appeal requires us to
insurance contract was her house still unoccupied-a fire consider [certain] provisions of
dismissed on summary judgment caused extensive damage. Gikas the insurance policy: [The policy
* * * , and the plaintiff's [Estate submitted a claim on behalf of the required the insured to notify
of Luster's] appeal presents issues estate. An investigation indicated Allstate of any change in occu­
of both contract interpretation and that the fire may well have been pancy of the premises and excluded
Indiana insurance law. started by burglars, but the plaintiff coverage for property loss caused by
[Wavie] Luster was a widow denies this and the district judge "any substantial change or increase
living alone in her house in made no finding. in hazard" or by "vandalism or
Merrillville, Indiana. She had a In the course of the investigation malicious mischief" if the insured's
homeowner's insurance policy from Allstate discovered that the house dwelling was unoccupied for more
Allstate [Insurance Company]. In had been unoccupied for four and a than thirty consecutive days imme­
October 2001, when she was eighty­ half years before Mrs. Luster's death diately prior to the vandalism or
three, she was injured in a fall, and denied the claim, precipitat- malicious mischief.]
and after being released from the ing [hastening] this suit. Allstate * * * *
hospital moved into an extended­ continued billing Gikas for premi­ Gikas argues that * * * the house
care facility. She executed a power of ums, however, and he continued was not unoccupied, because right up
attorney to her lawyer, Rick Gikas, paying them until October 2008, until her death Luster expressed the
who is the representative of her more than two years after the fire, intention of returning to live there
estate in this litigation. She never when Allstate-which claims not when her health permitted.
returned home and died in April to have known that the policy was Regardless of the owner's intentions,
2006, some four and a half years still in force until its lawyers read * * * four and a half years of con­
after her fall. Gikas had notified the estate's summary-judgment brief tinuous absence of human occupation
a. Select "Opinions" under the "Case Information" heading. When that page opens, enter case number "09-2483" and click on "List
Cases." In the result, click on the highlighted case number to access the opinion. The U.S. Court of Appeals fo r the Seventh Circuit
maintains this Web site.
EXTENDED CASE CONTINUES ♦
1012 U N IT TEN PROPERTY AND ITS PROTECTION

EXTENDED CASE 5 1 . 3 CONTINUED • short a time causes an "increase in might if in residence damage it
hazard" as a matter of law. Allstate inadvertently by leaving appliances
constitutes a change in occupancy. takes the more moderate position on or failing to remove combus­
[Emphasis added.] that any gap in occupation of more tibles [flammable items] like cans
The duty-to-notify provision than thirty days increases hazard as containing paint or oil-soaked rags
entitled Allstate to cancel the policy a matter of law. or to attend to defects in the electri­
in the event the house became Neither position is correct. cal wiring of the house. There is no
unoccupied. Houses are rarely occupied continu­ rule that moving out of a house per se
Although the policy expressly ously. A homeowner might take a [in itself] increases the hazards against
authorizes the insurer to cancel it thirty-one-day trip; Allstate implies which the insurance company has
for a violation of any of its terms, that if a fire occurred during that insured you. [Emphasis added.]
it also requires the insurer to give period the insured would be uncov­ * * * *
thirty days' notice of intention to ered. That is not the law. There may well have been
cancel, and Allstate failed to do that Allstate's argument thus implies vandalism, by burglars, and if so
after discovering in the wake of the that if you have a second home it occurred more than thirty days
fire that the house had been unoc­ the homeowner's policy on your after the house became unoccu­
cupied for years. The requirement of primary residence is illusory; you're pied, whenever precisely occu­
notice of intent to cancel is important; away a lot and so coverage lapses. pancy ceased-sometime during
it gives the insured an opportunity to That's nonsense. And even if the the four and a half years between
prevent a lapse of coverage, by taking house is unoccupied in the relevant Luster's fall and her death. But we
steps to reinstate the policy or obtain a sense-the sense that triggers the do not know whether the van­
substitute policy from another insurer. duty to notify the insurance com­ dalism caused the loss-there is
Retroactive termination is inconsistent pany of a change in occupancy-it no judicial finding that the fire
with the requirement of advance notice. doesn't follow that you have created that was the immediate cause of
[Emphasis added.] a "substantial * * * increase in the loss was the result of vandal­
* * * * hazard." Maybe you fitted the house ism. To decide whether it was will
The district judge ruled that with an array of locks and alarms require an evidentiary [relating to
leaving the house unoccupied and hired a security company to evidence] hearing, as will Allstate's
constituted a "substantial change check on the house daily and so alternative ground that nonoccu­
or increase in hazard" within the made the house more secure than pancy substantially increased the
meaning [the policy] . The judge when you were living there-an risk of loss.
seems to have thought that to leave especially plausible inference if you * * * *
a house unoccupied for however happen to be an elderly person who REVERSED AND REMANDED.

♦ (LU_E_S_T_L_O_N_
t S_____________________
1. Why did the court conclude that an unoccupied house did not necessarily create a substantial increase in hazard?
2. Why did the court hold that Allstate's cancellation of the policy, retroactive to November 2001 (when Luster
moved to an extended-care facility), was ineffective?

Assignment. Before a loss has occurred, a fire remaining at the date on which the sale is to close.
insurance policy is not assignable without the Ann agrees to assign the balance of her policy, but
consent of the insurer. The theory is that the fire Ajax has not given its consent. One day after passage
insurance policy is a personal contract between the of the deed, a fire totally destroys the house. Can Jeff
insured and the insurer. The nonassignability of a recover from Ajax?
policy is extremely important when a house is pur­ The answer is no, as the policy is actually voided
chased. The purchaser must procure his or her own on the closing of the transaction and the deeding of
insurance. If the purchaser wishes to assume the the property. The reason the policy is voided is that
seller's remaining period of insurance coverage, the Ann no longer has an insurable interest at the time of
insurer's consent is essential. loss, and Jeff has no rights in a nonassignable policy.
To illustrate: Ann is selling her home and lot
to Jeff. Ann has a one-year fire policy with Ajax HOMEOWNERS' POLICIES A homeowners' policy
Insurance Company, with six months of coverage provides protection against a number of risks under
CHAPTER 51 l•sarooce 1013

a single policy, allowing the policyholder to avoid LIABILITY INSURANCE Automobile liability insurance
the cost of buying each protection separately. There covers liability for bodily injury and property dam­
are two basic types of homeowners' coverage: prop­ age. Liability limits are usually described by a series of
erty coverage and liability coverage. three numbers, such as 100/300/50. This means that,
for one accident, the policy will pay a maximum of
Property Coverage. Property coverage includes $100,000 for bodily injury to one person, a maximum
the garage, house, and other private buildings on of $300,000 for bodily injury to more than one per­
the policyholder's lot. It also includes the personal son, and a maximum of $50,000 for property damage.
possessions and property of the policyholder at Many insurance companies offer liability coverage in
home, while traveling, or at work. It pays additional amounts up to $500,000 and sometimes higher.
expenses for living away from home because of a fire Individuals who are dissatisfied with the maxi­
or some other covered peril. mum liability limits offered by regular automobile
Perils insured under property coverage often insurance coverage can purchase separate coverage
include fire, lightning, wind, hail, vandalism, and under an umbrella policy. Umbrella limits sometimes
theft (of personal property). Standard homeowners' go as high as $10 million. Umbrella policies also
insurance typically does not cover flood damage. cover personal liability in excess of the liability lim­
In the absence of a specific provision, such items its of a homeowners' policy.
of personal property as motor vehicles, farm equip­
ment, airplanes, and boats normally are not included COLLISION AND COMPREHENSIVE INSURANCE
under property coverage. Coverage for other prop­ Collision insurance covers damage to the insured's
erty, such as jewelry and securities, usually is limited car in any type of collision. Usually, it is not advis­
to a specified dollar amount. able to purchase full collision coverage (otherwise
known as zero deductible). The price per year is rela­
Liability Coverage. Liability coverage is for personal tively high because it is likely that some small repair
liability in the event that someone is injured on the jobs will be required each year. Most people prefer
insured's property, the insured damages someone to take out policies with a deductible of $100, $250,
else's property, or the insured injures someone else or $500, which costs substantially less than zero­
(unless the injury involves an automobile, which deductible coverage.
would be covered by automobile insurance). Liability Comprehensive insurance covers loss, damage,
coverage under a homeowners' policy applies when and destruction due to fire, hurricane, hail, vandal­
others are injured or property is damaged because of ism, and theft. It can be obtained separately from
the unsafe condition of the policyholder's premises. collision insurance.
It also applies when the policyholder is negligent.
Liability coverage normally does not apply, how­ OTHER AUTOMOBILE INSURANCE Other types of
ever, if the liability arises from business or professional automobile insurance coverage include the following:
activities or from the operation of a motor vehicle,
which are subjects for separate policies. Also excluded 1. Uninsured motorist coverage. Uninsured motorist
is liability arising from intentional misconduct. Similar coverage insures the driver and passengers against
to liability coverage is coverage for the medical pay­ injury caused by any driver without insurance or
ments of others who are injured on the policyholder's by a hit-and-run driver. Some states require that
property and for the property of others that is dam­ it be included in all auto insurance policies sold.
aged by a member of the policyholder's family. 2. Accidental death benefits. Sometimes referred to as
double indemnity, accidental death benefits provide
Renters' Policies. Renters also take out insurance for a payment of twice the policy's face amount if
policies to protect against losses to personal prop­ the policyholder dies in an accident. This cover­
erty. Renters' insurance covers personal possessions age generally costs very little, but it may not be
against various perils and includes coverage for addi­ necessary if the insured has a sufficient amount
tional living expenses and liability. of life insurance.
3. Medical payment coverage. Medical payment cov­
erage provided by an auto insurance policy pays
Automobile Insurance hospital and other medical bills and sometimes
There are two basic kinds of automobile insurance: funeral expenses. This type of insurance protects
liability insurance and collision and comprehensive all the passengers in the insured's car when the
insurance. insured is driving.
 1014 U N IT TEN PROPERTY AND ITS PROTECTION

4. Other-driver coverage. An omnibus clause, or other­ drafted to meet their needs. In many jurisdictions, for
driver clause, protects the vehicle owner who has example, statutes impose liability on a seller of liquor
taken out the insurance and anyone who drives when a buyer of the liquor becomes intoxicated as
the vehicle with the owner's permission. This a result of the sale and injures a third party. Legal
coverage may be held to extend to a third party protection may extend not only to the immediate
who drives the vehicle with the permission of the consequences of an injury, such as paralysis result­
person to whom the owner gave permission. ing from an automobile accident, but also to the loss
5. No-fault insurance. Under no-fault statutes, claims of financial support suffered by a family because of
arising from an accident are made against the the injuries. Insurance can provide coverage for these
claimant's own insurer, regardless of whose fault injuries and financial losses.
the accident was. In some situations-for exam­
ple, when injuries require expensive medical PRODUCT LIABILITY Manufacturers and retailers
treatment-state laws may allow an injured party may be subject to liability for injuries resulting from
to seek recovery from another party or insurer. the products they sell, and product liability insur­
ance can be written to match specific products' risks.
Coverage can be procured under a comprehensive
Business Liability Insurance general liability policy or under a separate policy.
A business may be vulnerable to all sorts of risks. A The coverage may include payment for expenses
key employee may die or become disabled; a cus­ incurred to recall and replace a product that has
tomer may be injured when using a manufacturer's proved to be defective. (For a comprehensive discus­
product; the patron of an establishment selling sion of product liability, see Chapter 22.)
liquor may leave the premises and injure a third
party in an automobile accident; or a professional PROFESSIONAL MALPRACTICE Attorneys, physi­
may overlook some important detail and be liable cians, architects, engineers, and other professionals
for malpractice. Should the first situation arise (for have increasingly become the targets of negligence
instance, if the company president dies), the firm suits. Professionals purchase malpractice insurance
may have some protection under a key-person insur­ to protect themselves against such claims. The large
ance policy, discussed earlier. In the other circum­ judgments in some malpractice suits have received
stances, other types of insurance may apply. considerable publicity and are sometimes cited in
discussions of what has been called "the insurance
GENERAL LIABILITY Comprehensive general liabil­ crisis," because they have contributed to a signifi­
ity insurance can encompass as many risks as the cant increase in malpractice insurance premiums.
insurer agrees to cover. For example, among the types
of coverage that a business might wish to acquire WORKERS' COMPENSATION Workers' compensa­
is protection from liability for injuries arising from tion insurance covers payments to employees who
on-premises events not otherwise covered, such as are injured in accidents arising out of and in the
company social functions. Some specialized estab­ course of employment (that is, on the job). State
lishments, such as taverns, may be subject to liabil­ statutes govern workers' compensation, as discussed
ity in particular circumstances, and policies can be in detail in Chapter 34.

I)
,r, · 1
'.I' ,,.,llf
11/,

s:!i ,;-' R EVrEWIN G

"' �
I .
�-¼•,
,J
<..!e'.;'d [ns.urance
, tvi1r"l1 �
- , Provident Insurance, Inc., issued an insurance policy to a company providing an employee, Steve
Matlin, with disability insurance. Soon thereafter, Matlin was diagnosed with "panic disorder and pho­
bia of returning to work." He lost his job and sought disability coverage. Provident denied coverage,
doubting the diagnosis of disability. Matlin and his employer sued Provident. During pretrial discovery,
the insurer learned that Matlin had stated on the policy application that he had never been treated for
any "emotional, mental, nervous, urinary, or digestive disorder" or any kind of heart disease. In fact,
before Matlin filled out the application, he had visited a physician for chest pains and general anxiety,
 CHAPTER 51 l•sarooce 1015

t.J ''J ,r.,

,'V l JJ/,flf
�- ,-
"' I \
� R EVrE W IN G
«•r ..:£.,,'-8,�
:ff',�
. = [nsu rance 1 Co ntinued
, /yi/Eil , · and the physician had prescribed an antidepressant and recommended that Matlin stop smok­
ing. Using the information presented in the chapter, answer the following questions.
1. Did Matlin commit a misrepresentation on his policy application? Explain.
2. If there was any ambiguity on the application, should it be resolved in favor of the insured or the
insurer? Why?
3. Assuming that the policy is valid, does Matlin's situation fall within the terms of the disability policy ?
Why or why not?
4.. If Matlin is covered by the policy but is also disqualified by his misrepresentation on the application
for coverage, might the insurer still be liable for bad faith denial of coverage? Explain.

DEBATE THIS: Whenever an insurance company can prove that the applicant committed fraud during the
application process, it should not have to pay on the policy.

T E R �1 S A N D C O N C E P TS

endowment insurance 1009 policy 1000 underwriter 1000

incontestability clause 1004 premium 1000 universal life 1009
annuity 1009 insurable interest 1001 risk 1000 whole life 1009
binder 1003 insurance 1000 risk management 1000
cash surrender value 1005 limited-payment life 1009 term insurance 1009

Q U E S T10 1\1 S AN D C A S E P llO il L E hI S

f:-i � � z..,
'f·..J; � . -:;--
,._, 51 -1. Insurable Interest Adia owns a house the application form asks whether Patrick has ever had
,r,-
• !f'J� f..J :, " and has an elderly third cousin living any heart ailments or problems. Patrick answers no, for­
with her. Adia decides she needs fire insurance on the getting that as a young child he was diagnosed as having
house and a life insurance policy on her third cousin to a slight heart murmur. A policy is issued. Three years
cover funeral and other expenses that will result from later, Patrick becomes seriously ill and dies. A review of
her cousin's death. Adia takes out a fire insurance policy the policy discloses that Patrick was actually thirty-three
from Ajax Insurance Co. and a $ 1 0,000 life insurance at the time of the application and the issuance of the
policy from Beta Insurance Co. on her third cousin. Six policy and that he erred in answering the question about
months later, Adia sells the house to John and transfers a history of heart ailments. Discuss whether Ajax can
title to him. Adia and her cousin move into an apart­ void the policy and escape liability on Patrick's death.
ment. With two months remaining on the Ajax policy,
a fire totally destroys the house; at the same time, Adia's • For a sample answer to Question 51 -2, go to Appendix I at the
third cousin dies. Both insurance companies claim they end of this text.
have no liability under the insurance contracts, as Adia
did not have an insurable interest, and tender back 51 -3. Assignment Sapata has an ordinary life insurance
(return) the premiums. Discuss their claims. policy on her life and a fire insurance policy on her
house. Both policies have been in force for a number
51 -2. QUESTION WITH SAMPLE ANSWER: Insurer's Defenses. of years. Sapata's life insurance names her son, Rory, as
Patrick contracts with an Ajax Insurance Co. beneficiary. Sapata has specifically removed her right
agent for a $50,000 ordinary life insurance to change beneficiaries, and the life insurance policy is
policy. The application form is filled in to silent on the right of assignment. Sapata is going on a
show Patrick's age as thirty-two. In addition, one-year European vacation and borrows money from
&
CHAPTER 51 l•sarooce 1017

• To view a sample answer for Problem 51 -8, go to this book's Web refusal to cooperate. Did Bubenik's constitutional right
site at www.cengage.com/blaw/clarkson, select "Chapter 51," to invoke the Fifth Amendment take precedence over
and click on "Case Problem with Sample Answer." the insurance policy's duty-to-cooperate clause? Why or
why not? [Medical Protective Co. v. Bubenik, 594 F.3d 1047
51 -9. Insurance Coverage PAJ, Inc., a jewelry company,
(8th Cir. 2010)]
had a commercial general liability (CGL) policy from
Hanover Insurance Co. It covered, among other things,
liability for advertising injury. The policy required PAJ 51 -11. A QUESTION OF ETHICS: Insurance Coverage.
to notify Hanover of any claim or suit against PAJ "as Paul and Julie Leonard's two-story home in
soon as practicable." Yurman Designs sued PAJ for copy­ Pascagoula, Mississippi, is only twelve feet above
right infringement because of the design of a particu­ sea level and fewer than two hundred yards from
lar jewelry line. Unaware that the CGL policy applied the Gulf ofMexico. In 1 989, the Leonards bought
to this matter, PAJ did not notify Hanover of the suit a homeowners' insurance policy from Jay Fletcher, an agent
until four to six months after litigation began. Hanover for Nationwide Mutual Insurance Co. The policy covered any
contended that the policy did not apply to this incident damage caused by wind. It excluded all damage caused by
because the late notification had violated its terms. PAJ water, including flooding. With each annual renewal,
sued Hanover, seeking a declaration that it was obligated Nationwide reminded the Leonards that their policy did not
to defend and indemnify PAJ. The trial court held for cover flood damage, but that such coverage was available.
Hanover, as did an intermediate appellate court. PAJ The policy also contained an anti-concurrent-causation
appealed. Does Hanover have an obligation to provide (ACC) clause that excluded coverage for damage caused by
PAJ with assistance, or did PAJ violate the insurance con­ the synergistic action of a covered peril such as wind and an
tract? Explain. [PAJ, Inc. v. The Hanover Insurance Co., 243 excluded peril such as water. In August 2005, Hurricane
S.W.3d 630 (Sup.Ct.Tex. 2008)] Katrina battered Pascagoula with torrential rain and sus­
51 -10. Duty to Cooperate Dr. James Bubenik, a dentist prac­ tained winds in excess of one hundred miles per hour. Wind
ticing in Missouri, had two patients die while under damage to the Leonards' home was modest, but the storm
sedation within six months. Bubenik had medical mal­ drove ashore a seventeen-foot storm surge that flooded the
practice insurance with Medical Protective Co. (MPC). ground floor. When Nationwide refused to pay for the damage
The families of both patients sued Bubenik for malprac­ to the ground floor, the Leonards filed a suit in a federal dis­
tice. MPC pointed out to Bubenik that a clause in his trict court against the insurer. [Leonard v. Nationwide
policy stated that the "Insured shall at all times fully Mutual Insurance Co., 499 F.3d 419 (5th Cir. 2007)]
cooperate with the Company in any claim hereunder (a) Nationwide argued that the storm surge was a
and shall attend and assist in the preparation and trial of concurrently caused peril-a wall of water pushed
any such claim." During the litigation, however, Bubenik ashore by hurricane winds-and thus its damage
refused to submit to depositions, answer interrogatories, was excluded under the ACC clause. How would
or testify at trial, invoking the Fifth Amendment privi­ you rule on this point? Should a court "enlarge" an
lege against self-incrimination. He also refused to com­ insurer's policy obligations? Why or why not?
municate with MPC and entered into an agreement with (b) When the Leonards bought their policy in 1989,
the plaintiffs, stating that he would assist them in pur­ Fletcher told them that all hurricane damage was
suing judgment against MPC. MPC requested a declara­ covered. Ten years later, Fletcher told Paul Leonard
tory judgment from the court. The insurance company that they did not need additional flood coverage.
contended that it had no duty to defend Bubenik or Did these statements materially misrepresent or
counter the claims brought against him because of his alter the policy? Were they unethical? Discuss.

L E G AL R E S E A R CH E X E R C E S E § O N nr n W EB
Go to this text's Web site at www.cengage.com/blaw/clarkson, select "Chapter 5 1 , " and click
on "Practical Internet Exercises . " There you will find the following Internet research exercises
that you can perform to learn more about the topics covered in this chapter.
Practical Internet Exercise 51 - 1 : Legal Perspective
Disappearing Decisions
Practical Internet Exercise 51 -2: Management Perspective
Risk Management in Cyberspace