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Understanding Insurance Law

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Understanding Insurance Law

sixth edition

Robert H. Jerry, IIIsidor Loeb Professor of Law

Se nior Fellow, Center for the Study of Dispute ResolutionUniversity of Missouri School of Law

Douglas R. RichmondManaging Director

Aon Professional Ser vices

Carolina Academic Press

Durham, North Carolina


Copyright © 2018Carolina Academic Press, LLC

All Rights Reserved

Library of Congress Cataloging-in-Publication Data

Names: Jerry, Robert H., 1953- author. | Richmond, Douglas R., 1958- author.Title: Understanding insurance law / Robert H. Jerry II and Douglas Richmond.Description: Sixth edition. | Durham, North Carolina : Carolina Academic Press, LLC, [2018] | Series: The understanding series | Includes bibliographical references and index.Identifiers: LCCN 2018007693 | ISBN 9781531001285 (alk. paper)Subjects: LCSH: Insurance law--United States.Classification: LCC KF1164 .J47 2018 | DDC 346.73/086--dc23LC record available at https://lccn.loc.gov/2018007693

eISBN 978-1-53100-129-2

Carolina Academic Press, LLC700 Kent Street

Durham, North Carolina 27701Telephone (919) 489-7486

Fax (919) 493-5668www.cap-press.com

Printed in the United States of America


To Lisa.

— R.H.J.

For my father.

— D.R.R.


ix

Contents

Preface to the Sixth Edition xxiii

Introduction 3§ 1 Why Study Insurance Law? 3§ 2 The Outline of This Book 5

Part AWhat Is Insurance Law?

Chapter 1 · What Is Insurance? 9§ 10 Defining Insurance 9

[a] The Nature of Risk 9[b] Coping with Risk 10[c] The Economics of Transferring and Distributing Risk 12

[1] The Value of Transferring Risk 12[2] Economic Effects of the Transfer and Distribution of Risk 14

[d] A Definition 16§ 11 A Brief Historical Overview 17§ 12 The “Business of Insurance” 20

[a] State Definitions 21[b] The McCarran- Ferguson Act Definition 30[c] Self- Insurance as the “Business of Insurance” 30

§ 13 Classification of Insurance 33§ 13A Classification by Nature of the Risk 33

[a] Marine and Inland Marine 33[b] Life Insurance 34

[1] Term versus Whole- Life 34[2] Other Categories of Life Insurance 38[3] Annuities 40[4] Life Insurance and Taxes 42

[c] Fire and Casualty Insurance 43[d] Other Kinds of Insurance 45[e] First- Party versus Third- Party Insurance 46[f] A Trend Toward Reclassification? 47

§ 13B Classification by Nature of the Insurer 48[a] Stock versus Mutual Companies 48[b] Lloyd’s Associations 49[c] Fraternal Benefit Organ izations 50[d] Reciprocal Exchanges 51[e] Government Insurance 51


x CONTENTS

§ 13C Classification by Nature of Marketing 55[a] Group versus Individual Insurance 55[b] Classification by Distribution Channel 56

Chapter 2 · Sources of Insurance Law 59§ 2 The Rationale for Regulation: Generally 59§ 21 Legislative Regulation: State Versus Federal Control 62

[a] The Origins of the McCarran- Ferguson Act 62[b] The Substance of the McCarran- Ferguson Act 64[c] The Effects of the McCarran- Ferguson Act 66[d] Current Status of the State- Federal Accommodation 66

[1] The “Business of Insurance” 69[2] The “Specifically Relates” Exception 72[3] The Existence of a Conflict Between Federal and State Law 74[4] Federal Antitrust Law and State Regulation 75[5] The Boycott, Coercion, and Intimidation Exception 77

[e] The Future of McCarran- Ferguson 80[f] State- Federal Accommodation Issues Arising Under ERISA 81

§ 22 The State Regulatory Framework: Statutory Controls 86[a] Objectives of State Regulation 86[b] Rate Regulation 87[c] Insurer Solvency 90[d] Unfair Practices and Insurer Overreaching 91[e] Coverage 93

§ 23 State Regulation: Administrative Controls 95[a] State Departments and Commissions 95[b] National Association of Insurance Commissioners 96[c] National Conference of Insurance Legislators 96

§ 23A The Future of State Regulation 97[a] State Regulation: Pros and Cons 97[b] Implications of Federal Financial Ser vices Regulation for State

Insurance Regulation 99§ 24 Issues in Insurance Regulation and Public Policy 102

[a] Gender- Based Rating 102[b] Ge ne tic Screening and Insurance Underwriting 105[c] Difficult Risks 109[d] Big Data, Credit Scores, Pricing, and Underwriting 112[e] A Concluding Thought on the Nature of Insurance 114

§ 25 Judicial Regulation 114[a] Courts as Regulators 115[b] The Interplay Between Legislative and Judicial Regulation 115

§ 25A Contract Interpretation 117[a] Kinds and Causes of Imprecision in Contracts 118[b] Princi ples of Interpretation 121

§ 25B Judicial Interpretation of Statutory Requirements 128§ 25C Reasonable Expectations 129§ 25D Waiver, Estoppel, and Election 134

[a] Ele ments & Terminology 134[b] Examples of Uses of the Doctrines 137[c] Estoppel and the Expansion of Coverage 138


CONTENTS xi

[d] Limitations on the Doctrines 142[e] Implications of the Parol Evidence Rule 143

§ 25E Implied Warranty 145§ 25F Insurers’ Liability for Bad Faith 147

[a] The Early History of Bad Faith 147[b] Bad Faith in Third- Party Insurance 149[c] Bad Faith in First- Party Cases 151[d] Insurer Misconduct Required to Constitute Bad Faith 153[e] Statutory Penalties and Related Remedies 157[f] Reverse Bad Faith 158[g] Bad Faith in the Absence of Coverage 159

§ 25G Reformation 160

Part BEstablishing the Contractual Relationship

Chapter 3 · Contract Formation 165§ 30 The Pro cess of Contract Formation: An Overview 165§ 31 The Legal Requirements for Forming a Contract 167

[a] Offer and Ac cep tance 167[b] Consideration 170[c] Capacity 171[d] The Writing Requirement 171[e] Public Policy 173

§ 32 Some Trou ble Spots in the Pro cess of Contract Formation 174[a] Insurer’s Delay in Responding to the Application 174[b] The Insured’s Duty to Read the Policy 178[c] The Insurer’s Duty to Explain the Policy 180[d] The Role of Standardization and the Use of Forms 182[e] Renewals: New Contracts or Extensions of the Old? 183

§ 33 The Binder 185[a] Nature and Purposes 185[b] Oral Binders 186[c] Types of Binders 187[d] Judicial Regulation of Binders 189[e] Defenses to the Binder 192

§ 34 Delivery of the Policy 193[a] The Event and Its Purpose 193[b] Constructive Delivery 194[c] Good Health Clauses and Other Conditions on the Effectiveness

of Delivery 195§ 35 The Intermediary’s Role in Contract Formation 197

[a] Overview 197[b] General Princi ples of Agency 198[c] General Agency Princi ples in the Context of Insurance 200[d] Types of Agents 201[e] Agents versus Brokers 203[f] Liability of Agents or Brokers 205

[1] Liability of Agents to Insurer 205[2] Liability of Agent or Broker to Insured or Applicant 207


xii CONTENTS

[i] The Professional’s Duty of Care 207[ii] Liability of Agents or Brokers to Insured for Failure to

Provide Advice or Explanation 208[iii] Liability of Agents or Brokers to Insured for

Failure to Procure Insurance 214[iv] Liability for Placing Insurance with Insolvent or

Unauthorized Insurer 218[3] Liability of Agent or Broker to Third Party 220[4] Liability of Insurer to Agent or Broker for Damages Caused by

Insurer’s Nonpayment of Proceeds 223[g] The Intermediary’s Ability to Bind the Insurer 224

[1] Power of Intermediary to Contract on Insurer’s Behalf 225[2] Ability of Intermediary to Modify or Alter Coverage 226[3] Effect of Misstatements on Application Prepared by Agent 226[4] Legal Effect of Limitations on Powers in Application or Policy 227[5] Effect of Giving Notice to Intermediary 228

§ 36 Conflict of Laws 229

Chapter 4 · The Insurable Interest Requirement 233§ 40 Origins and Purposes of the Insurable Interest Requirement 233§ 41 Relationship of the Insurable Interest Requirement to the Princi ple

of Indemnity 236§ 42 Property Insurance and the Insurable Interest Requirement 237

[a] Legal Interest versus Factual Expectancy: The Early En glish Cases 238[b] The Legal Interest Test 242

[1] Property Rights 242[2] Contract Rights 246[3] Legal Liability 247

[c] The Factual Expectancy Test 248[d] Statutory Requirements 251

§ 43 Life Insurance and the Insurable Interest Requirement 251[a] “Love and Affection” Test versus Pecuniary Interest Test 252[b] Statutory Requirements 258

§ 44 Timing: When Must the Insurable Interest Exist? 259[a] Property Insurance 259[b] Life Insurance 260[c] Liability Insurance 261

§ 45 Waiver and Estoppel: Preventing an Insurer from Denying the Existence of an Insurable Interest 262

§ 46 Property Insurance and the Insurable Interest Requirement: Some Recurring Issues 264[a] Stolen Property 264[b] Property with a “Negative” Value 266

§ 47 Life Insurance and the Insurable Interest Requirement: Some Recurring Issues 268[a] Assigning a Life Insurance Policy to One Lacking an

Insurable Interest 268[b] Standing to Question Insurable Interest 270[c] Incontestability Clauses 272


CONTENTS xiii

[d] Tort Liability for Issuing Policy to One Lacking an Interest in the Insured’s Life and the Role of Consent 273

Chapter 5 · Scope of Obligations: Persons and Interests Protected 277§ 50 The Meaning of “Insured” 277§ 51 Identifying the Insured (or Payee) 277

[a] Specific Designations 277[b] Omnibus Coverage 278

[1] General Princi ples 278[2] The “Permittee’s Permittee” Prob lem 283[3] Special Issues in Automobile Insurance 285

[c] The “Loss Payable” Clause 287§ 52 The Interests in a Life Insurance Policy 287§ 52A Beneficiaries Under Life Insurance Policies 288

[a] When the Beneficiary’s Rights Vest 288[b] Naming and Designating the Beneficiary 288[c] Changing the Beneficiary 290

[1] Typical Policy Provisions 290[2] The “Substantial Compliance” Rule 291[3] Waiver of Change of Beneficiary Provisions 295[4] Effect of Divorce on Beneficiary Designation 295

[d] Competing Claims to Proceeds: Creditors and Beneficiaries 297[e] Competing Claims to Proceeds: Assignees and Beneficiaries 299[f] Disqualification of the Beneficiary 301[g] Community Property Laws 305[h] The Common Disaster Prob lem 306[i] Payment to Wrong Beneficiary 308

§ 52B Assignees 309[a] Overview: The Nature of an Assignment 309[b] Assignment of Right to Receive Benefits or Proceeds 309[c] Assignment in Property and Liability Insurance 311[d] Assignment in Life Insurance 312

[1] General Princi ples 312[2] Viatical Settlement Arrangements 313

§ 53 Partial Interests and Property Insurance 316§ 53A Mortgages and Conditional Sales 316

[a] The Standard Mortgage Clause 316[1] Ele ments and Function 316[2] Mortgagee’s Right to Satisfaction of Debt 319[3] Effect of Mortgagee’s Foreclosure on Insured Property 323

[b] The “Open Mortgage” Clause 326§ 53B Vendor- Purchaser Transactions 327§ 53C Contrasting Mortgages and Real Estate Sales 332§ 53D Other Partial Interest Prob lems 334

[a] Life Tenant- Remainderman 334[b] Lessor- Lessee 334[c] Transactions in Goods 336[d] Bailments 339

Chapter 6 · Scope of Obligations: The Risks Covered 341


xiv CONTENTS

§ 60 An Overview of Common Coverages 341§ 61 All- Risk Versus Specified- Risk Coverage 344§ 62 Limitations on Coverage: Generally 347§ 62A Explicit Limitation: Duration of Coverage 348

[a] Commencement of Coverage 348[b] Termination of Coverage 349[c] Cancellation of Coverage 350

[1] General Princi ples 350[2] Unilateral Cancellation 351[3] Statutory Cancellation Procedures 353[4] Public Policy Restrictions on Cancellation by the Insurer 355

[d] Reinstatement 357§ 62B Conditions as Explicit Limitations on Coverage 358

[a] An Overview 358[b] Evidentiary Conditions 359[c] Some Common Conditions and Their Legal Effects 362

[1] Increase of Hazard Clauses 363[2] Vacancy and Occupancy Clauses 364

§ 63 Intentional Conduct and the Requirement of Fortuity 368[a] Overview 368[b] The Meaning of “Fortuitous Loss” 370[c] The Nonfortuity Defenses 373

§ 63A Intentional Conduct and Property Insurance 376§ 63B Intentional Conduct and Personal Insurance: Life and

Accidental Death 380[a] Suicide 380[b] Death While Intentionally Involved in Unlawful Conduct 383[c] Execution of Insured 387[d] Accidental Death Benefit: Distinguishing Intentional Acts

and Accidents 388§ 63C Intentional Conduct and Liability Insurance 393

[a] “Intended” and “Expected” 393[b] “Intended” Construed 396[c] Self- Defense 402[d] Diminished Mental Capacity 404

§ 64 Par tic u lar Coverage Issues in Personal Insurance 406§ 64A Accidental Death Insurance 406

[a] Defining “Accident” 406[b] Limits on the Time Between the Accident and the Death 411

§ 64B Disability Insurance 413§ 64C Health Insurance 418§ 65 Par tic u lar Coverage Issues in Liability Insurance 422§ 65A “Occurrence” Versus “Claims- Made” Coverage 422§ 65B Liability Coverage Under the Homeowners Form 428§ 65C Liability Coverage Under the CGL 431

[a] Overview 431[b] The Insuring Agreement 432

[1] Coverage A: “Bodily Injury” or “Property Damage” 432[2] Coverage B: Personal and Advertising Injury 435

[c] The Meaning of Occurrence 435


CONTENTS xv

[d] Triggering Coverage 438[e] Environmental Liability Coverage 444

[1] The Regulatory Context 445[2] The Insuring Agreement 446[3] The Pollution Exclusions 448

§ 65D Number of Occurrences 454§ 65E Coverage of Punitive Damages 457§ 66 Par tic u lar Coverage Issues in Property Insurance: The Friendly

Fire Rule 462§ 67 Concurrent Causation 466

Part CPerforming the Contractual Obligations

Chapter 7 · The Insured’s Duty to Pay Premiums 475§ 70 Nature of the Obligation to Pay Premiums 475

[a] The Nature of a “Premium” 475[b] The “Duty” to Pay Premiums 475[c] Installment Premium Financing 476

§ 71 The Necessity of Paying the Premium 477[a] Generally 477[b] Conclusiveness of Repre sen ta tion in Policy that First Premium

Has Been Paid 478[c] Necessity of Paying Premium Before Loss 478[d] Mode of Paying Premiums 479[e] Time for Payment 480[f] Timeliness of Payment 484[g] Special Prob lems Involving Automatic Premium Payment

Procedures Through Financial Institutions 484§ 72 Grace Periods 486

Chapter 8 · The Mechanics of Claim Pre sen ta tion 489§ 80 Overview 489§ 81 Notice of Loss Provisions 489

[a] Purpose of the Notice of Loss Provision 489[b] Manner of Giving Notice 490[c] When Notice is Due 491[d] Excuses for Noncompliance 494[e] Effect of Noncompliance 495

§ 82 Proof of Loss 499[a] Substantive Requirements in Property Insurance 499[b] Proving Loss in Life Insurance 500[c] Effect of Noncompliance 502

§ 83 False Swearing and Examinations Under Oath 504§ 84 Disposition of Claims: Alternatives to Litigation 510

[a] Appraisal in Property Insurance 510[b] Arbitration 511

§ 85 Limitation of Actions: Timeliness of the Suit Against the Insurer 513[a] Statutory versus Contractual Limitations Periods 513[b] Regulation of Contractual Limitations Periods 515


xvi CONTENTS

[c] Mea sur ing the Limitations Period 516§ 86 No- Action Clauses and Direct Action Statutes 517§ 87 The Insured’s Duty to Cooperate with the Insurer 520

[a] Duties, Conditions, Express and Implied Terms 520[b] What Constitutes Non- Cooperation 522[c] When Non- Cooperation Gives the Insurer a Valid Defense 523

Chapter 9 · The Insurer’s Duty to Pay Proceeds 527§ 90 Source of the Duty 527§ 91 Failure of the Insured to Mitigate the Amount of Loss 527§ 92 Mea sur ing the Amount of Loss: Marine Insurance 531

[a] Total Loss, Partial Loss, and “Average” 531[b] General Average 532[c] A General Formula 533[d] Par tic u lar Average 535[e] The “Memorandum” 535

§ 93 Mea sur ing the Amount of Loss: Property Insurance 536[a] The Princi ple of Indemnity 536[b] Coinsurance Requirements 540

[1] Overview 540[2] Coinsurance Percentages 541[3] A Closer Look at the Text of the Coinsurance Clause 542

[c] Valued Policies 545[d] Replacement Cost Policies 547[e] “ Actual Cash Value” 549

[1] Replacement Cost Less Depreciation 549[2] Market Value 551[3] Broad Evidence Rule 552

[f] Interest 553§ 94 Mea sur ing the Amount of Loss: Personal Insurance 555§ 95 Mea sur ing the Amount of Loss: Liability Insurance 556

[a] Generally 556[b] Interest, Expenses, and Costs 556[c] Insolvency Clauses and Statutes 557[d] Immunity of Insureds 558

§ 96 The Insurer’s Right of Subrogation 560[a] Overview 560[b] Equitable, Conventional, and Statutory Subrogation 562[c] Existence or Nonexistence of Subrogation by Line of Insurance 564[d] The Requirement that the Insurer Must Have Paid the Debt 566

[1] The “Made Whole” Rule 566[2] Apportionment in the Absence of the “Made Whole” Rule 568[3] Other Apportionment Prob lems 569[4] Special Prob lems Involving Personal Injury Claims 571

[e] The Requirement that the Insurer not be a Volunteer 573[f] Subrogation Against Insured Not Allowed 574[g] Defenses to Subrogation and the Effect of Releases on Coverage 575

[1] The General Rule Regarding Defenses 575[2] Release of Tortfeasor Prior to Loss 576[3] Release of Tortfeasor After Loss 579


CONTENTS xvii

[4] Summary 581[h] Parties in Interest 581[i] Loan Receipts 583

§ 97 Other Insurance Clauses 588[a] Overview 588[b] Other Insurance Clauses in Personal Insurance 588[c] Types of Other Insurance Clauses 589[d] Conflicts Among Other Insurance Clauses and Other Prob lems

of Enforcement 592[1] Pro Rata Clause versus Excess (or Escape) Clause 593[2] Excess versus Excess (and Escape versus Escape) 596[3] Excess versus Escape 597[4] The Prob lem of Secondary or “True Excess” Coverage 598[5] Impact of Insolvency of Primary Insurer 600[6] Toward a Solution 600

[e] Proration Formulas 602[f] Some Additional Trou ble Spots 604

[1] Sharing Defense Costs 604[2] The Effect of Indemnity Agreements on “Other Insurance” 605[3] Invalidity of Other wise Collectible “Other Insurance”

Due to Act or Neglect of Insured 607[4] Self- Insurance as “Other Insurance” 608[5] Deductibles and Coinsurance Requirements 608

§ 98 Resolving Disputes on Who Gets the Proceeds: The Interpleader Remedy 612§ 99 Remedies for the Insurer’s Breach of the Duty to Pay Proceeds 615

[a] General Contract Remedies 615[1] Loss of the Bargain 615[2] Other Loss 615

[b] Attorney’s Fees and Penalties 617[c] Punitive Damages 618[d] Tort and Extracontractual Remedies 618[e] Effect of Mistaken Payment by the Insurer 619

Chapter 10 · Excuses for the Insurer’s Nonper for mance 623§ 100 Basic Princi ples 623§ 101 Insured’s Breach of Warranty 624

[a] Definition 624[b] Creation of a Warranty 624[c] Effect of Noncompliance with a Warranty 625[d] Warranties versus Repre sen ta tions 627[e] Mitigating Doctrines 629

[1] Affirmative versus Promissory Warranties 629[2] Judicial Interpretation 630[3] Statutory Mitigation 632[4] Is Mitigation Appropriate? 637

[f] The Distinction Between Warranties and Coverage Provisions 638§ 102 Insured’s Misrepre sen ta tion 641

[a] A General Rule 641[b] Repre sen ta tion versus Warranty 643[c] The Requirement that the Repre sen ta tion be Untrue or Misleading 644


xviii CONTENTS

[d] Materiality 646[e] Reliance 650[f] Intent and Its Relation to Materiality and Reliance 651[g] Agent’s or Broker’s Role in Misrepre sen ta tion 652[h] Misrepre sen ta tion of Age in Life Insurance 653[i] Statutory Regulation 654[j] The Obligation to Correct Misrepre sen ta tions 656

§ 103 Insured’s Concealment 658[a] Overview: Distinguishing Misrepre sen ta tion from Concealment 658[b] The General Rule 659[c] Materiality 661[d] Intent 661[e] A Continuing Obligation 662[f] Justifications for not Disclosing Material Information 662

§ 104 Limitations on the Insurer’s Defenses 663§ 104A Waiver and Estoppel 663§ 104B Incontestability 664

[a] Overview 664[b] Scope of Incontestability Clauses 665

[1] Temporal Scope 665[2] Coverage versus Validity 667[3] Void Ab Initio versus Voidable 668[4] Exceptions versus Conditions 668

[c] Incontestability and the Defense of Fraud 669[d] Trou ble Spots 671

[1] Reinstatement and Renewal 671[2] Eligibility for Group Insurance 672[3] Preexisting Conditions and Disability Insurance 675

§ 104C Divisibility or Severability 676

Chapter 11 · The Additional Duties in Third- Party Insurance 681§ 110 The Insured’s Duty to Cooperate and Assist in the Defense 681

[a] Overview 681[b] Materiality and Prejudice 686[c] Burden of Proof 687[d] Common Instances of Noncooperation 688

[1] Insured’s Absence from Trial or Other Proceeding 688[2] Making False Statements to the Insurer 689[3] Collusion 690

[e] Noncooperation and Compulsory Insurance 690§ 111 The Insurer’s Duty to Defend 691

[a] Source of the Duty 691[b] To Whom Is the Duty Owed? 695[c] The Tests for Whether the Insurer Must Defend a Par tic u lar Claim 696

[1] The General Rule 696[2] Evidence Extrinsic to the Complaint 699[3] Ambiguous Claims 701[4] Complaint Containing Claims within Coverage and Claims

outside Coverage 702


CONTENTS xix

[5] Reservations of Rights, Nonwaiver Agreements, and Declaratory Judgment Actions 704[i] Reservations of Rights 705[ii] Nonwaiver Agreements 707[iii] Declaratory Judgment Actions 708

[d] Triggering the Duty to Defend: When Does the Duty Exist? 710[e] Premature Termination of the Duty to Defend 712

[1] Discovery of Facts That Negate Coverage 712[2] Terminating the Duty to Defend by Paying the Policy Limits 713

[f] Disclaiming Coverage 715[g] Standard of Conduct: The Duty of Care 716[h] Remedies for Breach of the Duty to Defend 716

[1] Attorney’s Fees and Other Costs Incurred in Defending the Under lying Action 716

[2] Excess Judgment 717[3] Attorney’s Fees in the Insured’s Action Against the Insurer

or the Insurer’s Declaratory Judgment Action 719[4] Tort Damages 720[5] Liability for the Insured’s Settlement of the Under lying Action 721[6] Breach of the Duty to Defend as an Estoppel to the Insurer’s

Denial of Coverage 722[7] Other Consequences of Breaching the Duty to Defend 725

[i] The Insured’s Duty to Mitigate Damages When the Insurer Breaches the Duty to Defend 725

[j] An Insurer’s “Right” to Reimbursement of Defense Costs 726[k] “Defense within Limits” Policies 729

§ 112 Settlement Obligations 730[a] Insured’s Settlement Without the Insurer’s Consent 731[b] The Standard for Determining the Nature of the Insurer’s Duty

to Settle 732[1] The Reasonable- Offer Test 732[2] The Strict Liability Alternative 734

[c] Source of the Insurer’s Obligation: Tort or Contract? 736[d] Insurer Conduct Constituting Breach of the Duty to Settle 738[e] The Mechanics of Handling Settlement Offers 739[f] Remedies for Breach of the Duty to Settle 743[g] Effect of Breaching the Duty to Defend on the Duty to Settle 744[h] A Duty to Mitigate? 745[i] An Insurer’s “Right” to Reimbursement of Settlement Payments 746

§ 113 The Insurer’s Duty Regarding Appeals 748§ 114 Conflicts of Interest 750

[a] Overview 750[b] The Basic Alternatives: To Whom Is Loyalty Owed? 752

[1] The Dual Repre sen ta tion Model 754[2] What Happens When Dual Repre sen ta tion Is No Longer Pos si ble? 756[3] Assessing the Dual Repre sen ta tion and One- Client Models 757[4] Restatement (Third) of the Law Governing Lawyers § 134 760[5] Insurer Billing Rules, Litigation Guidelines, and Legal Auditing 762[6] Using Staff Counsel to Defend Insureds 764

[c] Managing Conflicting Interests 765


xx CONTENTS

[1] The “Do Nothing” Alternative 765[2] The “Abandon the Insured” Alternative 766[3] In de pen dent Counsel for the Insured 766

[i] The Separate Counsel Approach 766[ii] In de pen dent Counsel for the Insured 767

[d] Par tic u lar Conflicts and Their Resolution 772[1] Defense Under Reservation of Rights or Nonwaiver Agreement 772[2] Claims Exceeding the Policy Limits 776[3] Punitive Damages Are Claimed 778[4] The Insured Shares Confidential Information 780[5] Repre sen ta tion of Multiple Parties 781[6] Insureds’ Affirmative Claims 783[7] The Special Prob lems of Insured Professionals 785

Part DSome Remaining Matters

Chapter 12 · Group Insurance 791§ 120 Overview: The Nature of Group Insurance 791§ 121 The Tripartite Contract and the Question of Agency 792§ 122 Other Group Insurance Issues 796

[a] The Implications of Multiple Contract Documents 796[b] The “Actively at Work” Requirement 798[c] Risk Management Considerations in Group Insurance 799[d] Termination and Modification of Group Plans 800[e] Assignments, Changing the Beneficiary, and Standing to Sue 802

§ 123 Legislation Affecting Group Insurance 802

Chapter 13 · Automobile Insurance 805§ 130 Overview 805§ 131 The History of Automobile Accident Compensation 807§ 132 The Current Landscape for Compensating Automobile

Accident Injuries 812[a] The Traditional System: Liability Insurance with

Supplemental Coverages 812[1] Ele ments of the System 812[2] Observations 814

[b] No- Fault Coverage 815[1] Add- On No- Fault 815[2] True No- Fault 815[3] Choice Systems 817

[c] Pos si ble Future Developments 817[1] Perceptions of the Current System 817[2] Second- Generation No- Fault Proposals 819[3] Driverless Cars and No- Fault 821[4] No- Fault Insurance Beyond Motor Vehicles 822

§ 133 The Nature of the Risk Covered 823[a] What Constitutes “Use” of a Vehicle 824[b] “Owner ship,” “Maintenance,” and Other Terminology 832[c] Territorial Restrictions 836


CONTENTS xxi

§ 134 Compulsory Liability Insurance and Financial Responsibility Insurance: Some Additional Issues 837[a] The Prob lem of Intentional Conduct 837[b] Insurer’s Defense against Insured 838[c] Nonowned Automobile Coverage 839[d] The Family (or House hold) Exclusion 840

§ 135 Uninsured and Underinsured Motorist Insurance 843[a] Purpose 843[b] Nature of Uninsured Motorist Coverage 844

[1] Four Ele ments of Coverage 844[2] The “Legally Entitled” Requirement and Immunity 844[3] Exclusions 845[4] Hit- and- Run Accidents 846

[c] Nature of Underinsured Coverage 850§ 136 Property Coverage in Automobile Insurance 851§ 137 Stacking of Automobile Insurance Benefits 853

Chapter 14 · Excess Insurance 857§ 140 Overview 857§ 141 Characterizing Insurance Policies 857

[a] Primary Insurance 857[b] Excess Insurance 858

[1] Stand Alone versus Following Form Excess Policies 859[c] Umbrella Coverage 860[d] Differentiating Excess and Umbrella Policies 861

§ 142 Primary and Excess Insurance: Some Fundamentals and Differences 861[a] Notice of Loss 862

[1] Notice: Whose Obligation? 863[2] The Notice- Prejudice Rule in Excess Insurance 863

[b] Excess Insurers’ Defense Obligations 864[1] Reservations of Rights in Excess Insurance 865[2] The Duty to Reimburse Defense Costs 866[3] Umbrella Insurers’ Duty to Defend Suits Not Covered By

Primary Insurance 866§ 143 Settlement Obligations and the Duty of Good Faith in Excess Insurance 867

[a] Overview 867[b] Excess Insurers’ Implied Duty to Settle Owed to Insureds 868[c] Excess Insurers’ Bad Faith Claims Against Primary Insurers 871

Chapter 15 · Reinsurance 875§ 150 Overview 875

[a] Definition 875[b] Types of Reinsurance Arrangements and Coverage 876

§ 151 Purposes 878§ 152 Legal Issues Involving Reinsurance 879

[a] Insurable Interest 879[b] Contract Interpretation 879[c] Insolvency of the Primary Insurer 880[d] Reinsurer’s Defenses and the Duty of Utmost Good Faith 881[e] Rights of Original Insured against Reinsurer 882


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[f] “Following the Fortunes” 883§ 153 Reinsurance Intermediaries 884

Table of Cases 887Index 959


xxiii

Preface to the Sixth Edition

This preface to the sixth edition of Understanding Insurance Law is being written on the thirtieth anniversary of the publication of first edition in 1987. Four of the six edi-tions have deep connections to Kansas. Bob Jerry wrote the first edition as a young pro-fessor at the University of Kansas School of Law. Doug Richmond, then a third- year law student at KU, read the first edition while taking an insurance law class taught by Pro-fessor Jerry. In 2003, a year after the third edition was published, Professor Jerry moved from the University of Missouri School of Law to the University of Florida to become the dean of the Levin College of Law (a position he held until 2014). With these new duties, he needed help if another edition were to see the light of day. Thus, in 2007 we joined as co- authors on the fourth edition, further cementing a friendship that began two de cades earlier, and we completed the fifth edition in 2012.

The preface to the first edition observed that “[f]ew subjects as impor tant as insur-ance law are so neglected by American law schools and law students,” but noted that academic attention to insurance law was showing signs of growth. Thirty years later, insurance law casebooks and treatises are abundant, scholarly interest in insurance law has expanded, practitioner- oriented materials are robust, the first ALI restatement in the law of insurance is soon to be considered for final approval, insurance law courses are popu lar at many law schools, and law students increasingly appreciate the practical importance of the subject. Indeed, educators and students in larger numbers understand what practicing lawyers have long known — that having foundational knowledge of insur-ance law is critically impor tant, inasmuch as it is difficult to imagine a piece of litiga-tion or a transaction that does not involve insurance in some way.

Because the subject of insurance law is vast, the aim of this book must be modest. Our purpose is to pres ent in a single volume an analytic and substantive survey of the topics likely to be covered in an insurance law course. Because many of those topics are routinely subjects of litigation, we hope that insurance law prac ti tion ers and judges will also find parts of this book to be helpful. But our principal objective is to make the sub-stance of insurance law accessible and understandable to law students, lawyers, and courts who are unfamiliar with the subject.

Much of this book is necessarily descriptive, but we intend that the text provide perspective — sometimes economic, sometimes historical, sometimes po liti cal, and always, we hope, practical. After all, students who read this book will soon be practicing lawyers, and we believe that studying the law from dif fer ent perspectives produces lawyers better suited to solve clients’ prob lems. For judges and practicing lawyers, we hope that exposure to dif fer ent approaches will perhaps shed at least some light on murky areas. Also, we are not shy about offering our own critical assessments of insurance law doctrines and their directions or evolution, but we have strived to separate description and opinion.

No book is solely the product of its authors, and this one is no exception. We have built on the work of many fine insurance law scholars and lawyers who devote their prac-tices to insurance law. Professor Jerry gives special thanks to two people: first, his friend


xxiv PREFACE TO THE SIxTH EDITION

Peter Maxfield, who in 1985 suggested that he write a text on the fundamentals of insurance law; without this suggestion, the first edition would not have come into existence; and second, Doug Richmond, for without the collaboration with him, the fourth, fifth, and sixth editions would not exist. Professor Jerry is also grateful to a number of research assistants he has had through the years who helped him with the book: on the fifth edition, Chris Dietzel, L’12, University of Florida; on the third edition, Michele Mekel, Bruce Nguyen, Patrick Morgan, and Jeff Lasswell, all students at the University of Missouri- Columbia; on the second edition, Michael Elsner, Jason Massie, Bill Bruns, Teresa Newsom, and Bryan Rosenstiel, all students at the University of Memphis; and on the first edition, Scott Young, Charles Scanlon, Kevin Engels, Susan Hunt, Brian Doerr, and Jerry Capps, all students at the University of Kansas. Last but far from least, he is grateful to Lisa Jerry for all of her help and support, not only on this text but also with just about every thing good that has happened in his career.

Doug Richmond is grateful to the many fine lawyers with whom he worked at his law firm in Kansas City, Missouri, where he was fortunate to build a challenging and enjoy-able trial and appellate practice fueled by insurance and insurance law. Doug owes what-ever professional successes he can claim to the im mense support of the outstanding young lawyers who labored with and tolerated him on a daily basis, including Dave Bar-nard, Darren Black, Carlton Callenbach, Josh Ellwanger, Mike Matula, Orion Riggs, Bob Rooney, and Marty Rosemann. They remain special friends today. He never would have had any sort of meaningful legal career but for his great clients, whose patience and loyalty were invaluable. The clients to whom he is particularly indebted are too numer-ous to mention. And, of course, he owes thanks to friends at many law firms around the country who, over the years, have generously shared their ideas, opinions, and sugges-tions on a range of thorny issues. You know who you are.

We sincerely hope that readers find this book helpful to their understanding of insur-ance law. We welcome all comments, criticisms, and suggestions. Like insurance lawyers everywhere, we are still, and always, learning.

Robert H. Jerry, IIDouglas R. Richmond

December 2017
