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Course: Insurance Law Fall 2000
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Year: 2000
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1) aleatory K (condition precedent is a fortuitous event)

risk must be well defined; must have some possibility of fortuitous event


2) risk transference & distribution

3° must assume risk

risk must be ratable--distributed in common fund

must have a defined group subject to the risk

must be planned


3) insurable interest

quantifiable financial interest @ TK (and T FORTUITOUS EVENT for prop)

must have interest in matter insured which would result in econ detriment to you

if ¹ ^, illegal K, best defense avail to ins co b/c void ab initio, easy proof

must have reasonable personal interest, not a mere gamble; may be life or prop

life beyond 1° fairly difficult, but fact dep; ins co can be T sued if viol this

-- int must exist at TK

prop must also be identifiable--bailee, O, tenant; O int usually prevails

-- int must exist at TK AND T FORTUITOUS EVENT

capable of evaluation--quantifiable

Why--otherwise mere punting--P2 conflicts w/IT, gambling

4) indemnity & subrogation


5) 1°/3° party


"a plan or scheme to transfer and distribute risk of fortuitous events"

"insurable interest + subject to a well-defined risk + assumption by a 3° of the risk + distribution of the risk among a group subject to this risk + group must make a ratable contrib to common fund (premium)"


e.g.: "replace and repair any tire blown due to defects in material or workmanship" ¹ ins b/c no

fortuitous event

"replace/repair any tire blown for any reason for TX wort reason" = ins b/c fortuitous event

"burial societies" = ins

"AAA coverage" = ins

care whether or not "ins" b/c if classified as ins, must comply w/code provisions \ costs

--§ usually doesn't define--e.g. VA§ in GAF


ins ¹ biK----ins = reverse uniK: -ed must perform act (premiums, application, notice, truth) to trigger subsequent uniK; this subseq uniK obliges -er to pay/defend in given fortuitous event; -ed makes no P, only payment (etc.) satisfies (\ condition precedent)

-ed tenders premium and forms = offer (act); ins co accepts (acts, silence)

--fortuitous = out of control if -ed; if unsure, use GF, IIFP of GF/reasonable efforts

b/c must be fortuitous, no IT

what -ed does ¹ duty, = condition precedent; -er has no duty until conditions precedent are met; they are in essence a threshold

--rt to indemnity from ins co ¹ absolute--subject to conditions occurring, then enforceable

--beware illusory K: must have some element beyond your control (fortuitous event) in order for bargain exchange

when is ins K formed? §20--when reas people viewing surrounding cirs would say so;

evidence: assigning case #, deposit check, inordinate time, solicitation, data entry, issue policy


How to read policy:

1. dec sheet: parties, period, $amt, premium, prop/people insured

2. definition of person insured: is person claiming covered?

3. insurance clause: read to see if event is covered

4. exclusions: see if insured/client is excluded from coverage despite 3

5. conditions of compliance: what are conditions precedent and have they been met (strict/substantial)

6. facts/stipulations in declaration & application: are there K defense b/c of fraud, misrep

7. consider general principles of law, equity & applicable §: no-fault, finan resp law, un/derinsurance, PER, §oF


excess: covers amt > std/primary coverage; MAJ rule is that 1° owes duty to defend; if mult excess ins cos, general RoL is pro rata share of excess

reinsurance: ins co sells/buys ins liability/exposure w/ or w/o knowledge of -ed


Tests: Substantial Control Test

Does P invoke s.t substantially beyond control of Por? Y = ins; N ¹ ins

MAJ rule in US

will tolerate small amount of ins w/o calling it that

--but too broad b/c virtually all w are ins under this, plus many Ks

Ancillary Test--GAF

Was ins P the dominant feature of the K? Y = ins; N ¹ ins

Minority view "will become MAJ"

~ to covenant not to compete: illegal if overbroad, enforceable if focused

covenant not to compete must be reasonable and ancillary

\ argue by analogy--say K was about X, not ins/w

Purposive Interpretation Test

Purposive Interpretation: Is purpose of calling it ins needed/met here? (policy)

why do we want to reg this--b/c consumers need protection

--e.g., want to have solvency reqt, deter BF K, rates, forms, state requires ins

\ call it ins when we want to regulate it



Interests: ST agency (for policy holders), InsCo owners (shareholders, users, partners), ins agents, ATLA, D bar, policy holders


Ins = 2 duties: 1) duty to indemnify (pay sums...)

2) defend

Types: marine (prop, home)



casualty (liability)


Is there a K?--look at all surrounding circs \ MoL

Interp--> jury is FoF concerning I of parties \ no SJ

Construction--> Ct decides if there is a K, \ can get SJ


reverse uniK: once conditions precedent met, Por (-er) has duty ^ to Pee (-ed)


1°/3° party ins: to whom does payment run?



12th Century Lombards start w/maritime: a warranty from marine ins--owner had to state facts about the ship, load, etc, and people would subscribe, underwrite

Lloyd's coffee shop

1870 Langdell/Harvard--legal formalists, law as science; cases mere specimens of science; lab is library \ study cases to est what laws are \ writ system

1881 Holmes states immutable sys in The Common Law

1921 Williston on K--1st distillation of a body of law into a subject part




Regulation via Courts/JR

ins § called "code", but isn't really b/c still requires interp


GAF v. County

H: part of this was insurance, so insurance rules must/may apply

--the fortuitous part was ins

--if ins element is ancillary, small portion of underlying K, ¹ ins

sale and installation of roofing material was primary part of K, not w/ins P


Federal/State Regulation

1810--ins regulates by STs

1876--Paul v. VA Ct says that ins ¹ interST commerce \ Feds can't regulate

1944--US v. SE U/w Ass'n SCt o/r ^, \ Feds can regulate ins \ Fed antitrust apply to price fixing scheme; all regulation now at Federal level

McCarran Act results from ^ + lobbying of ST ins agents

--now both can potentially regulate ins

STs: "regulate business of insurance"; narrowly defined as all acts before TK \ all after TK Fed

Fed: all but ^

--b/c "bus of ins" narrowly construed, more falls into Fed hands


§1--regulation of ins by STs is in pub interest--P2 reasons

§2(powers) a. ins is regulated by individual states

b. three rules:

1. no implicit federal preemption--fed § must specifically apply themselves

2. Cong can reg if they want--by specifically applying to ins

3. Fed antitrust laws apply unless STs pass their own (all have)

1-3 restrictions only apply to "business of ins", not business of corps (SEC v. Nat'l Securities)

--must touch -er/-ed relationship to be "bus of ins" \ @ or before TK

but what is TK? ¹ sense b/c now just argue about what TK means

needed to prevent preemption of (1) corp law, (2) antitrust law, (3)

\ no implicit preemption before TK; if Feds want to reg before TK (i.e., the business of ins), must be deliberate; e.g ERISA

--serves as an antitrust exemption so can price fix, share information in public interest

Rating bureaus are exempted from fed § b/c of McC Act \ can make 1 STwide risk assessment (hence, potential price fix, abuse)


Royal Drug [p30] ins co went to pharmacists and got agrt that they would all sell Rx drugs at cost +$2; ins co then sends clients to participating stores

\ -eds tender $2 wort cost of drug--clear violation of fed antitrust

but TX ins official approves under TX §, so if fed law applied, would supersede TX law

\ depends on whether you say this is part of "bus of ins" or just bus

H: agrt not between -ed/-er \ not bus if ins \ fed law regulates \ this is illegal

RESULT: 3 criteria to not be subject to fed antitrust law:

1. if act is to xfer, spread risk among policyholders, OK

(all up to xfer of risk is ok, all after FED)

2. if act is practice integral part of -er/-ed relationship, OK

3. if act is integral part of ins industry, OK


Pireno health ins policy; chiropractor bills ins co for svcs, insco denies payment

---er has review board to see if 1) med necessary, 2) cost reasonable

--board says not necessary and too expensive

p sues for price fixing b/c takes decis away from Dr. to det price and necessity~~collusion

I: do FED antitrust laws apply? Is this bus, or bus of ins?

using Royal Drug, bus, not ins b/c after TK


If ins co consistently sends you to one of three Indep Med Examiners (b/c of their rec's), and they say no? If can show, then BF/unconscionable


Risk Distribution

Can an insurer discriminate based upon Gender/other factors


Norris women paid the same, but upon retirement women get less of a pension

H: illegal discrimination


Manhart women forced to pay 15% more to pension \ take-home pay less

H: illegal violation of Title VII



Kimball/Stevens debate

Kimball--if s.t. is actuarially significant, and easy to det, may as well account for it in rate

--if it is actuarially sound, it cannot be discriminatory



tensions: group v. indiv // vol v. mandatory // assigned risk v. social utility // med v. life v. self



Contract Insurance Analysis


Plain Meaning Rule

K says what is says and is limited to that

Hionis [p65]

Parol Evidence Rule (PER)

if totally integrated, K says what is says and is limited to that: p72

but n/a if only partially integrated

how to det if integrated?

4-corners test: looks integrated to judge (judicial interpretation)

--merger/integration clause is supporting ev of this

If want extrinsic evidence, but barred by PER, use

Wigmore's evidence test

Willistonian natural omission/inclusion test

prior court cases on point


once this adopted, Ct. interprets, no construction


Judical Opinions




Experts, Etc.




Extrinsic Evidence

barred under PER, but many ways to get it in

Best: Need to Explain an Ambiguity, equivocal


if allowed, necessarily a fact question, so must go to jury

--once brought in, use R2K 202,3,6,7

once ambiguity established, then judge can use contra proferentum

--why CP? ins K ¹ normal K reflecting bargained for exchange, but really a form K w/no real bargain or change available

\ whoever created for, chattel, good, svc, should not get bene of doubt


how to argue to get it in?

--say it is not contradictory, merely explanatory

--the mere fact that it is being litigated must mean it is ambiguous--$ wasted if not

--this Ct. had a dissenting opinion on this issue \ must have some ambiguity

--different Cts/jurisdictions say different things \ must have some ambiguity

--writing is only evidence of the K, parties' I

--different areas of law give different meanings (K/T--CiF&PC/admiralty, etc.)

--difference between legal, common sense, and dictionary definitions



1) get extrinsic evidence in to est or confirm ambiguity, using ^ reasons (MoF for jury)

2) once ambiguity established, intro ev favorable to your side

3) jury can tell Ct what K means (interpretation) OR

4) Ct can use contra proferentum (construction) (MoL for Ct)



R2K §202, 3, 6, 7


Determining Coverage

1. who is -ed? claimant, or 1°? only -ed can sue on K due to privity

2. what fortuitous events are covered? if not this event, no coverage

3. is -ed or event taken out of coverage? fraud, exclusion, definition

Which rule applies: Plain Meaning, DORE, or Equitable &ct?

Pinhole rule: Cts will construe coverage broadly and exclusions narrowly (virtually all juris)


How to read ins policy [626] example:

1) dec sheet--look for 1°/3°




what is the essential question? Who is the master of the words: the K (plain meaning), or the Ct (construe & interp)


Standard Venetian Blind v. American Empire Insurance [57] rain D to portico + B's property

commercial general liability (3°); dec j action \ judge must inter/construe

most general liability policies are designed to pay for D to others' prop, not D to own, or D to own in addition to others

\ this is liability ins, not property ins--should know they need to get sep policy for that

b/c commercial parties, both should know that this was not 1° insurance

reas expectations of parties is real issue--can always get around w/ambiguity


DIS says plain meaning rule should prevail--Hionis rule gives duty to read K and ask ?'s if need

if so, then correlative duty is for insco to explain, and if it doesn't, it's subject to CP

thus, the real question is: was K actually explained and understood, not could it be

note 2--riders are usually separately bargained for

note 3--custom/TU/CoD/CoP is admissible to show meaning wort PER; \ need expert witness to say what custom/TU/CoD/CoP is; not contradictory b/c shows better what I of parties


Bowling Alley Vandals [68]--cans cause roof to flood, thus water D; H2O D excluded

T/c: no direct coverage b/c D was by H2O, not vandalism

D ins co says I of policy was to prot against fire, paint, windows, etc., not indirect H2O D that proper maintenance would have prevented

--D caused by H2O, not vandalism \ no duty to pay b/c not covered

p: ins co has duty b/c there would have been no H2O but for the vandalism \ was dir. cause

b/c both p&D defn rational, must be ambiguous \ must determined what "direct loss caused by" means

\ p now says ct should apply CP; D says I of policy was not this b/c price does not reflect this coverage

p wants to use T PC/CiF defn, D wants K language (narrower)

but if two diff meanings thought, CP says ins co should specify, \ ins co loses



Polite Soldier [69] NG soldier trips on tent cord on drill, tries to claim against policy; policy excludes for loss "caused by or resulting from military service"

\ issue: was this caused by, or incidental

\ was this a status or result clause?

status clause = just being in service disqualifies you "while in svc"

P2 probs b/c may be buying illusory K

result clause = if characteristic act results in harm, excluded

H: K had result clause

T/c: SJ for ins co

A/c: aff'd

R: how was injury caused by military service? b/c was in line of duty, characteristic of service

pinhole rule applied favorable to p here, but found facts to contrary


typical e.g.: "losses except those OCONUS"--while \ not causal, but what @ NY-Miami flight?

"except while non-fare paying pax on aircraft"--status



Equitable Insurance Analysis

DORE: would this incident be covered under the reas expectations of the parties?

--necessarily a MoF for jury

p74 "": -er has duty to explain/disclose, otherwise bound by ORE of -ed (\ need to reform ins co agents' tng, custom)

exclusion lost if lost in details to the avg -ed \ ct construes against -er & extends coverage to -ed

a rule of interp that really just ignores what K says

Ct will ignore exclusion if not reasonable to find it w/a simple reading

don't need to show ambiguity before using this; separate tack

duty to read/explain:

if ct says there is a duty to read, then must show ambiguity (but none really needed if argue persuasively v)

if no duty to read, then don't have to prove ambiguity, esp b/c mass or form K

(surrounding cirs means ambiguity may or may not be relevant)

once ambiguity shown or n/a, then K lang unimportant, only ORE b/c PoP still have ORE based upon it

\ ct can impose mng or ignore exclusion easily (apply pinhole, CP)

DORE is about ORE, not K lang, so ambiguity not really necessary

\ does not matter if -ed actually read policy, only what a juror thinks -ed's ORE was

may be a supporting fact to show subjective reasonableness

can show subj reasonableness b/c this is equitable: goal is fairness \ don't have to be rigid about no ambiguity

logical extension of K law: K law to fulfill the reas expectations of parties, ins K should be =

Reason for it: P2--to allow consumer to actually get what he thinks he is paying for

most powerful if exclusion eviscerates the dominant feature of the K--then impose ORE

--< 50% in US recognize DORE, but get around by calling it a classic K approach

defenses to DORE: fraud, BF, other equitable one (any required for fairness)

a K theory, but roots in equity


[notes only] Dr. sued by parents for botched delivery

policy: "-er will defend & indemnify Dr...." + "will pay up to $1million per claim for injury caused"

?: what is "injury"--occurrence, or discrete harm, claim

potential claims: father, mother, infant; could be three suits or 1

So, plain meaning, or DORE?---is "injury" ambiguous?---should ct allow extrinsic ev to explain?

argt for: physical + emotional--different injuries?; kid + mom--different?

\ argue that if ins co wanted to restrict the meaning of "injury" they would & should do so explicitly

\ also argue that "injury" is broad--definitions 1-10, not just 1 of 10, & ins co must restrict if they want to (pinhole rule)

DORE--argue that this is the coverage that Dr. wanted, that if he had wanted less, would have paid less, that is, the Dr. deliberately Ked for this coverage

argt against: b/c there are 10 meanings, "injury" must be ambiguous


Thompson v. Occidental of California [72] life ins premium paid up; -ed dies; survivor wants pro-rata share of premium based upon rest of year

H: K silent as to issue of refund \ can't be ambiguous \ can't construe otherwise \ j/ins co

Ct could gap fill by saying parties intend reasonable terms for items not mentioned, and this would be reasonable (a PoP would expect a reas refund), thus getting DORE in


Cortagelli v. Globe Life & Accident Ins [75] Idaho

--no ambiguity required to use DORE

--ID has reversed itself 2x since then, so this rule still applies


Estrin Construction v. Aetna [77] Missouri; only case that really explains DORE

Estrin (genK) build to plans of Morris (architect); Estrin had gen liability policy w/D

bldg D in storm; p files under builder's ins; builders ins sues M, M impleads p under indemnity agrt; p demands defense from D; D denies coverage b/c of two exclusions: if D in accident and -ed or indemnitee was architect [status]; and if D was to prop of -ed, or care, custody of -ed

I: was coverage properly denied, or does D have to defend p?

What type of policy was it? 3° liability, & most of those exclude D to own stuff

p says don't look @ K, I have ORE for coverage & defense for all things under this policy

asks Ct to use DORE

--but is p's interp really a reasonable one?

H: NO, no coverage b/c even using DORE, ORE of a 3° ins K is not p's

why not reas? b/c p controlled the event (b/c of K w/Morris)\ not fortuitous

besides, if D paid, what would it really be paying for: s.t. that 1° should cover

\ if allow p suit, all 3° insurers end up picking up the tab for 1° insurers, defeats purpose of 1° ins


Crop Duster [83b] part time crop duster/farmer buys policy to cover just this type of accident (overspray), but exclusion eviscerated only purpose of him getting ins

best example of a term being excluded that means wrt this farmer there was no purpose for K

\ strong argt for DORE


Implied Warranty of Fitness for a Particular Purpose

if view ins as a good, then IWFPP applies

would have to radically change K law, b/c then potentially all mass Ks are goods w/these W

argt: these mass Ks do not involve genuine bargained for exchange, but adhesion/take-it-or- leave-it [counterargt: there is mass bargaining on the mktplace]

\ it is so much not a bargain that it ¹ K, but chattel instead

once you call it a chattel, UCC applies

thus, if you buy theft ins, have W that it will protect from theft

C&J Fertilizer v. Allied Mutual Insurance [83] theft policy; "defines" theft, but really gives evidentiary conditions/limits

H: violates IWFPP b/c condition too restrictive


Farm Bureau Mutual v. Sandbulte [87] farm liability policy; want coverage for accident on farm business; ins co says no b/c this not "way immediately joining"

-ed says -er W that this would be covered when he sold policy

H: IWFPP applies, but under these facts, ins co prevails b/c general liability policy does not have a particular purpose



Other Equitable Theories honesty, good faith, conscience, and equity

divine right originally passed from king to vassal to Cts--led to causes of right

but few had rights, yet still need to solve disputes, so came up with system for ADR w/o rights

thus no actions at law (with rights) but did have action at equity (key goal: justice)

4 governing principles

honesty, good faith, conscience, and equity --all dealt with in Cts of chancellery (\ should be "chancellery theories", not "equitable theories"

but b/c of modern name, often forget honesty, GF, & conscience

now there is an equitable right--\have duty to act in GF, w/conscience, honesty & equity

P under equity can invite you to rely, \ Por has duty to act to prevent detrimental reliance

example of equitable theory: P estoppel, DORE (can get more than K D)

R2K §205--all K have implied covenant of GF & FD which is not K or T duty, but equitable

So, when ins co fails to pay legit claim, get more than K D, b/c is only got K D, then ins co always dispute to drive up costs to give -ed incentive to settle for less than K amt (yet still more than if fight it to get full K amt b/c of costs)

b/c ins K are mass K of adhesion, no real bargain or exchange \need to change to deal w/reality

\ CP, DORE, equity, GFFD, honesty, conscionability


Good Faith

GF STD: does ins co have good basis in fact or law to deny pmt? if ins co acts in GF, no DPUN

\ look at all surrounding facts to see if there was a reas basis in fact/law

-ed tries to show that -er had no basis; -er tries to show that it did have a basis

must act reasonably in doing whatever it did (deny coverage, limit coverage, etc)

\ BF = unreasonable, BF ¹ spiteful, WW, malicious

GF ¹ T, K std, but = equitable std: incorporates all areas of law to get what is fair

GF is additur concept: adds covenant of GF & FD to all dealings to achieve fair result

GF std analogous to N std in T: merely evaluate conduct under K wrt duty in K

D for BF = all D proximately caused \ conseq, incidental, collateral, ED, P&S \ flexible


3 types of K Ds: classical (DK/EXP/INC); BF (all D from br/duty of GF + all D following); punitive-- for I harms, etc




deals w/¹ and tries to rectify, adjust the parties to make them = so can bargain fairly

sources of ¹: bargaining status, pwr; access to info; knowledge (subj & obj) of parties; practical ability to bargain; value exchanged (actual $ for unlikely pay off) [may also buy peace of mind]


Conscience is an excisor concept: removes part of K which is evil to achieve fair result

presumed mutual consent---> 1. procedural unconscionability {too hard to find mat term}

2. substantive unconscionability {too hard to understand}

3. no-choice unconscionability {no real choice on terms}

public policy ----> 4. unconscionability per se (illegality)

§2-302 UCC = unconscionablility


C&J Fertilizer [burglary ins case]

exclusion/definition was not real definition, but evidentiary condition (visible marks) for proof of substantive element (violence, force)

Strickland (Article) w/90-day amputee, same as ^: 90-days is evidence of causation, but should not be only allowable evidence

if use K theory for ^, easy to break, but silly restrictions; equity (e.g. DORE) ----> fairer result

to get CT to adopt, don't say "unfair", ask why clause is there; ans is to show linkage, reas lim to coverage

then can say that this clause was but one way to show evidence of meeting the substantive requirement


--if won't let do that, start by ripping up K to show that it is mere evidence of K

--b/c writing only ev of K, the assent (as condition) must be presumed

--then attack presumption w/ ability to read, understand

1-4^ tests the assent of the parties


1. PROCEDURAL: if mutual assent presumed, may be unconscionable if cannot locate material terms of agreement

how do you read a policy and interrelate the relevant passages, coverages, exclusions? --duty to read v. duty to explain

\ to overcome this, an ORE is that agent should lead -ed through, explain, or give -ed an analytical reading method

ins co can defeat ^ by 1. providing clear method to read 2. have agents explain

--most ins co don't do either ^

technique: give jury entire ins K in order to baffle them, show them how to read

also, usually have K to read only after you are bound \ can show that no one reads K

1. don't have at TKFORMED = physical unconscionability; esp for group policies

2. don't want to

\ if you are bound, shouldn't you have a copy to read?

if -ed has duty to read, they cannot meet it

if -er has duty to explain, they have br/it (esp if try to exclude coverage)

if you are going to use classical K theory, at least do it fairly

ins co may be able to beat ^ by saying party commercial, sophisticated


2. SUBSTANTIVE: even if PoP can find relevant terms, must be able to understand them

e.g.: polluter who eroded bridge--case keyed on "accidental", but D occurred over time

\ argue that "accident" was incomprehensible \ unconscionable b/c how can you assent to a K you don't understand?


coverage terms: pre 1966: "caused by accident"

1966-86: "occurrence"

1986: "claims made and reported"

must cite case law that is from same type of coverage term


3. NO CHOICE: -ed is unable to bargain for provisions, clauses (\ has no choices)--no endorsements available, only 1 possible K--ultimate adhesion

general/specific assent (Llewellyn): K presupposes a bargain, but only for items specifically dickered over; rest of form K has no genuine assent

so if only general assent given, cannot enforce specific provision adverse to -ed


thus, if mutual assent is presumed, atk w/1-3 above; if no assent, can't have K, or at least that part

4. PER SE: wort consent, illegal as against public policy--usually in a §


waiver: 1-way act that releases s.t. in/from K (often called P estoppel)

P estoppel: coverage occurs b/c of P

election: conduct of party indicates party has elected s.t., esp wrt remedies



Public Policy Insurance Analysis


what is P2? find it in CL, §, CONS, facts, legis record, purposive interp

Strickland (article): may viol P2 b/c of purposive interp (4), but how else?

by setting ev condition, against P2 b/c effectively private law making via K

ins co is telling -ed what ev rules will be w/o -ed's or public's representation

\ against P2 to impose private law w/o ct approval

Old strict compliance rules from Lloyds, but no longer applicable to mass Ks

\ should now have Substantial Compliance--comply w/I of K, not necessarily the letter


Major P2 issue/concerns:

1. compensating victims; logical conclusion of this is 100% no fault system; since we don't have one, there must be other concerns

2. financial responsibility clauses (wrt car): must show proof of 3° ins or post if get in wreck, but not before

3. compulsory ins: req 3° ins to register car; insures a car, not a person (\ meets #1 b/c broader)

4. un/underinsured motorist coverage: req all dvrs to have this to prot self (1°) from harms caused to them by others

¹ no fault b/c must sue TF before can collect from own ins co & ins co may defend TF

also supports #1 b/c is another way to compensate victims

5. owner liability doctrine: owner of car per se responsible for all harm caused by it = SL for car owners

6. omnibus insurance clauses: defines who beyond name -ed is covered by policy

those indirectly insured are "omnibus insured"

P2 says to require this to be broad, thus supporting #1

purpose: to make sure whoever is behind a wheel is insured so victims will get $

7. no bar: lack of K privity is no bar to suit by injured (\ injured 3° can sue -er directly)

very few STs have explicitly for ins, but may come in through claimants right §

WI, LA allow; perhaps PR, RI, KY

8. no joinder/action §/clause: opposite of ^, so cannot sue ins co directly, only TF [p111 e.g.]

sue TF, once have j/TF, then you are judgment creditor \ can sue ins co via K b/c now have derivative rights "stand in the shoes of the -ed" to sue on K w/privity b/c now you are assignee

--but ins co can raise 3° and 1° defenses against this suit

donee/creditor/intentional/assignee 3° beneficiary can sue on K; incidental (non- intentional) beneficiary cannot sue on K

--classic donee: life ins

3° beneficiaries are always intended beneficiaries under liability ins, but if there is a #8 clause, you must first sue TF



Mutual of Enumclaw Ins v. Wiscomb [91] intra-familial tort; spouses sue each other

per se uncons/P2 concerns

HH/family exclusion common in liability ins b/c of conflict of interest, collusion, fortuity

but P2 is to compensate V, even if V is in same family

H: exclusion excised per P2


State Farm v. Tringali [125] car/bike in HI; IT \ no fortuitous event

P2 conundrum: interest in fortuity and in compensating V

H: V compensation is higher P2 interest \ excise clause


Union Camp Corp v. Continental Casualty [98] employment discrimination

P2 says we want V to be compensated

--but if req ins co to pay, diminish punitive nature of award

--also will result in Ee's paying for it themselves

\ ins co argues that its own policy is per se illegal as P2 issue (b/c V would end up paying for own award)

H: judgment was not predicated on intentional discrimination \ins co doesn't pay (would have had to pay for intentional b/c was liability policy--for intentional actions of -ed)

DORE says a reas -ed would not expect coverage \ no coverage




what triggers duty to defend?

1) face of complaint, if coverage pleaded, or

2) if any complaint, after required reasonable investigation indicates coverage

--of after investigation no facts indicate coverage, no duty to defend

--don't use facts if coverage in pleading

1 based upon old writ system of pleading though, so now unfair b/c of liberal pleading--nothing gets weeded out

2 allows ins co to investigate, and w/non-waiver allows ins co to preserve defenses and get out once actual facts shown


duty to appeal? in theory, all to SCt, but cts say look at probability of what would happen on appeal

duty to defend and pay generally independent, but always somewhat predicated on the potential requirement to pay

--\ duty to pay is a constructive condition precedent--MAJ juris w/PMR

--but duty to defend generally construed more broadly than duty to pay

when does duty extinguish?

when policy limits exhausted by settlement or judgment (b/c then no longer have reqt to pay wort any suits)

--must start our defending all suits filed

--3, 9, 11 circuits say can even abandon current suits

or, when reas person would end it given the reas expectations of the suits

DPUN claims alone are enough to trigger--count as covered under liability policies

when ins co refuses coverage, really 2 possibilities:

1) coverage dispute from w/in the policy--exclusions, etc

e.g.: conditions precedent not met--premiums not paid, unreasonable notice, no assistance

key here is not strict compliance, but substantial compliance

--look to why rule is there: usually to prevent prejudice to -er

2) K defenses--fraud, PER, §oF etc





Afcan v. Mutual Fire....[277] real estate broker case: coverage not originally plead; ins co tries to drop; p amends for coverage, but then ins co still denies b/c claim actual facts trump

I: does ins co have to defend -ed even if actual facts counter pleadings?

H: yes

nonwaiver agrt here prob invalid b/c too broad, not tailored


Potential Claims

Gondola Accident [293]--no claims filed, yet ins co informed

DORE says ins co has present duty to investigate, defend b/c a PoP would think they would be sued given actual facts

classical K (minority for this) says no, b/c K lang says not until suit filed


Envir example: EPA clean-up order

trigger duty to defend? yes because even though INJ. could be D as well, so b/c potential for D exists, coverage potentially exists, \ must defend

***source of duty of ins co to investigate? history and equity


Gray v. Zurich [286] IT assault; IT excluded

even if IT not explicitly excluded, probably not there b/c non-fort event

1) no coverage b/c IT

2) actual facts show IT, too \ no coverage

still, CT finds duty to defend based upon CP, DORE and K adhesion--through construct/interp

CP: concentric circles of ambiguities in K; says duty to defend very broad

--but exclusions later restrict (SOP for ins policy); but they may be procedurally uncons

ambiguities: were I acts or I results excluded? I to hit or I to harm?

^ ambiguous, \CP says must find for p

H: duty to defend is distinct and separable from duty to pay

defense does not extinguish, not a condition precedent

(but there must still be some possibility of payout)

very close to finding an absolute duty to defend


Great American v. Tate Construction [326] notice given 27 days after accident

NC starts w/ strict, but ends up using DORE

purpose for provision? reas notice so -er can protect interests

if not protected, Ct will enforce strict meaning of K and say no coverage

if protected despite this, ct will construe in favor of -ed "no harm no foul" DORE

3 step test:

1) jury must decide if notice was given ASAPracticable; if so = reasonable notice

2) if ^ N, jury must decide if -ed acted in GF; if so, = reasonable notice \ coverage

3) if ^ N, -er must show it was materially harmed--if so, then = no coverage

1+2 BoP on -ed; 3 BoP on -er

2 = GFFD adds second equitable notion (to DORE)

some STs stop at 2 (if -ed used GF, prejudice to -er n/a)


History: Mansfield--strict condition precedent

liberal pleading--add reas investigation for facts b/c changed from writ system

Tate --look at purpose: "no harm, no foul"


MFA Mutual v. Sailors [323] 2 years after accident notice given; ins co says unreas, no assistance \no coverage

H: ins co must still pay & defend even though D (-ed) doesn't coop, show up

R: b/c bad D, wouldn't want him to testify anyway \ not being there is no harm

"no harm no foul" \ no prejudice so must pay and defend





How can D cnsl best protect self?



2. undivided loyalty--stay out of coverage issues


3. Fully & fairly inform both when prob ID; stop when prob seen, state problem openly, no secrets; get consent of both -er and -ed before continuing


conflict of interest: when Dcnsl has clients whose interests on one matter may conflict


actual--ID and continue

reconcilable--reconcile and then continue

irreconcilable--don't continue

= s.t. must be litigated (MoF) that will det both coverage and liability \ clients ¹ interest

(e.g., when pivotal fact must be litigated & will necessarily prejudice one client)


6 solutions [handout]


1. -ed exclusive client: prevent conflict by saying client is -ed exclusively, and Dcnsl is chosen by -ed; no protection of -er's interests; -er pays

--but how can Dcnsl be truly indep if paid by -er?

--naught in ins K to say this

--ins co may try to get coverage lim to include defense costs

--**ins co must have some control b/c they are source for authority to settle

--MI only ST w/CL


2. Cumis/-ed elective 2nd counsel: avoid conflict, but say that -ed is client, & if CoI arises -er may prot interests by paying for another atty

have 1 Dcnsl until CoI arises, then Dcnsl goes to -er, -ed gets new Dcnsl (leads)

once ins co reserves rights, -ed can get own atty

16-20 STs

--but then -er is paying 2x (but should be factored into their costs)

--ed may not be competent to pick own cnsl; own cnsl may cost too much

--takes longer b/c new cnsl must learn case, duplicate effort

--ins co still pays, so ¹ independent


3. -er elective 2nd counsel: address CoI by having -er pick new cnsl for -ed when CoI arises; new cnsl is not lead

gives more prot to ins co

--few if any STs


4. 1 counsel: 1 Dcnsl, for -ed for all purposes; rep both until CoI, then tie goes to -ed

--must be careful to stay out of coverage issues (actively avoid CoI)

--Plurality position in US 14-16 STs

--probably most workable soln; conforms to model rules of PR & CL


5. joint client rule: -ed consents to -er's defense, wort CoI, by virtue of the K---ed has no priv available as long as policy actively or constructively accepted by -ed

treats -er/-ed as 1 client except for priv commo


6. one relationship rule: -ed and -er are deemed to be one client w/same interests \ cannot have CoI \ 1 atty is all that is needed

this arrangement part of basis of bargain of the ins K

even though up to 3 parties, only one relationship \ 2 parties waive priv wrt each other

--unfair to -ed b/c -ed will always get short end of stick

--legal fiction



I. Investigation/discovery

Biggest problem area

frugal neglect: -er tells Dcnsl to do minimum necessary to defend and not default

Dcnsl who does this can claim only following client's wishes, but doing so ignores

must be careful about reporting anything discovered which may affect coverage


Employers Casualty v. Tilley [315] Dcnsl sandbagged client, acted as investigator for -er

? here was notice--2yrs late here; -ed claims acting in GF, but Dcnsl discovers really BF (that - ed knew about potential ins liability), \ potential defense to ins K \ CoI

should Dcnsl do naught, or tell both?

here Dcnsl only told ins co \ obvious prejudice \ MP

b/c priv commo, can tell neither

2 probs: Dcnsl acted as investigator, and didn't F&F inform both clients

ct adopts 12 principles of PR

iv--when/if CoI, F&F inform both in writing @ nature and extent of CoI

v--Dcnsl can only continue for both w/acquiescence of -ed (better to get explicit, else not F&F)

vi--Dcnsl has duty not to disclose facts/info when -ed tells Dcnsl under impression of a/c priv

iv + v + vi = 4 on 1-6 scale


Parsons v. Continental National American Group [322] Dcnsl again acting as investigator

pivotal fact is was T I or N; -er defends w/rights reservation; Dcnsl then finds records clearly indicating IT \ no coverage

should have told -er naught

H: -er fully liable for j/ b/c CoI prejudiced -ed








II. Evaluation


Stay out of coverage issues--tell ins co to use their own investigators as condition for accepting case

--if you make a coverage evaluation, seek to take yourself off Dcnsl case

--how det exposure? jury verdict data, equation based upon what sought

verdict data best, but 1st case bias, hard to find, unique cases hard, hard to chg

hint: get jv data bound for negotiations, make it look more credible

also get them to draft RRN/NWA

1. reasons for reservation

2. a clear denial of liability for the claim asserted against the -ed

3. specific grounds and provisions of the policy on which the denial is based

4. insurer's intentions

5. disclosure of the CoI existing between the -er and -ed

6. disclosure of the rt of -ed to seek indep cnsl at own expense and rec'd to do so

7. explanation of -ed's req't to coop, etc.

8. notification of -er's options in light of -er's denial of liability

9. explanation of -ed's liability

in general: (1)must F&F, (2)be specific (spell it out), and (3)tell -ed that he has rt to indep cnsl for this decis and all subsequent (4)add "included but not limited to"

--if RWN, make into biK by saying we will interp silence as acceptance/consent

--if gen + specific, general will be deemed to control \ waiving all but specifics

--if specific but unexplained (¹F&F), will be stricken

--won't help you, and will prob be stricken in ct \ -er only has K defenses

an actual irreconcilable CoI can occur here (e.g., was flight pleasure or travel?)

when one arises, what should Dcnsl do?

MI (1)--ignore -er's interests and proceed w/-ed's

all others is a ?, but safe w/4 or 5x, but safe w/4 or 5

--F&F inform both, in writing

--don't continue until have express permission of -ed

What are ways out for ins co? 3 options

1. defend, and possibly accept liability + defense costs

2. don't defend, and possibly take all^ plus BF

3. straddle w/ good RRN or non-waiver agrt


--but if -ed has good personal counsel, will advise no to consent \ forcing ins co to assign second atty to defend, choose not to defend (thus force to defend or not)

if -ed won't waive, then seek DJ or intervene, other action, but may be forced into 2 or 4 but ins co must still take steps to prevent default, take proper steps to reserve rts


III. Communication/disclosure

Tilley & Parsons --much overlap between commo and investigation probs

if discover facts concerning coverage, what MUST Dcnsl do?

if source is 3°p, disclose F&F to both, even if in -er's interest; tell @ rt to indep cnsl

continue if both consent

if source is client, must not disclose if a/c priv (strong rule, even if fraud)

--can use vi as was around: say that ins co shouldn't subsidize fraud, esp from outset

--old rule: Dcnsl would tell -ed to tell, and if not, Dcnsl would tell

--even if withdraw, cannot disclose key coverage fact, but by withdrawing, you tip hand \ potential MP

best: 4--take interest of -ed if there is a tie; ins co prob can't sue Dcnsl, but Dcnsl should stipulate this bef taking case


IV. Negotiation/settlement

Dcnsl is agent, not m/s \ need authority to settle

Gray facts: 500kD + 500k DPUN 100k policy limits

^ alone sets up potential CoI from DPUN and b/c 400k not covered

\ tell both about this CoI, get consent to continue, tell him to get another opinion

now in settlement: p asks for 110k, EV to ins co = 50k

tell -ed all of this, + rt to cnsl, + CoI, etc: -ed will have to pay 60k to settle

-ed does have right to settle, but only for $60k

tell -er @ CoI

must advise -ed not to take if it will require him to pay and it is this close

now p offers $99,999: BF, sets up right of action against ins co if they unfairly deny

Dcnsl must still tell -ed it will cost 49,999 to settle + indep cnsl + CoI + consent to continue

--must tell not to take unless & until he gets indep cnsl to say so (b/c otherwise lets p pit D against cnsl)

never let -ed pay for a settlement w/in policy limits

Dcnsl should tell -er that paying full amt will save potential BF +

now what if p only demands 25k, but -ed won't settle? (e.g., IT, MP)

must have GFFD when Dr signed consent to settle form

ultimately must prot actual interests of -ed

if -er doesn't agree, get a new cnsl for one of them, b/c cannot settle wort-ed's wishes

--id ins co settles under -ed, -ed can sue ins co for BF + excess

--middle ground: ins co defends, -ed pays all >25k



V. Litigation }not

VI. Special }covered



Excess or Extracontractual Liability


CM--claims made (like term life ins)

\ no coverage for any events after term \ no tail coverage

(CM defined differently in each policy; may be suit, notification, knowledge of accident)

P2 issue: is there GF duty to disclose accident before claim made, or will that be seen as an attempt to ensure coverage for that event wort when suit filed \ making it harder for -ed to get coverage?

--NO--now must wait for suit and continue w/CM coverage--plain meaning rule applied to definition of "claim made" in this ins K

--Keeton says there is a duty to disclose & reasonably investigate wort definition; hiding potential liability may make it harder for p or D to collect, \ may be unfair to either or both

Occurrence--like paid up whole life--all liability stemming from that period, wort when suit filed

\ liability tail is covered (occurrence = when manifested)

Accident--old version of ^, 1 point in time, changed b/c of multiple, gradual harms (e.g., bridge)

\ liability tail is covered


so, if have CM following Occ/Acc, can have overlapping coverage

so, if have Occ/Acc following CM, can have gap


"The 165 lines"--common mutual fire policies have this, now prescribed by legis

--reverse of the reverse uniK of adhesion b/c now terms are imposed on -er

important b/c was adopted as a std, leading to mass uniform K in ins

fire ins is only one w/ US-wide boilerplate language

liability policies not controlled by legis, though, \ have many different forms, but most in line w/ISO std forms

1940, 43,55,66,73,86; must litigate using precedent from right form

--first technique when trying to atk ins co is to see if form approved by ST; if not, then can say all adverse conditions are void as against P2



divide into 1°/3°

what is source of duty that leads to right to > DK?

--arise from 1 of 7 lawyering fns ^

usually language in ins K is permissive for -er, mandatory for -ed

\ duty arises by reading in--imposing-- a duty of GFFD on the language

\ find duty to act reasonably w/in the K

source: special relationship between -er/-ed:

--ed buys ins for peace of mind

--ins co essentially has $ in trust for -ed in event of accident \ shouldn't have to go ape to get it and must protect your interests in litigation

Garden variety: arises out of duty to settle fairly e.g. p demand for 90k w/in policy, no settle, j/500k

in this case, ins co liable for all of j/ unless it had reasonable basis in fact or law to refuse settlement

--applies equally to negotiate, extend coverage, etc


Crisci v. Security Ins [376] LL sued by T, lim 10k, could have settled for 3k, -er refuses, j/101k

H: ins liable for whole j/ b/c had no reas basis to refuse offer


1° BF comes from unreas refusal to pay claim, \ can get > DK








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