Commercial Law (Mgmt 348) Insurance (Chapter 49) Professor Charles H. Smith Spring 2011
Introduction • Insurance is an interesting topic which is governed by common law of contracts as well as extensive statutory law (e.g., California Insurance Code). • Insurance is “a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event” (C.I.C. § 22); in other words, it is a “safety net” against losses (expected and unexpected).
Issues We Will Cover • Whether there the insured has an “insurable interest” in property for the purposes of property insurance. • The interpretation of an insurance policy. • Scope of the insurer’s duty to settle claims. • Insurer’s ability to rescind/cancel the policy.
Property Insurance – “Insurable Interest” • One of the requirements of a property insurance policy is that the insured has an “insurable interest” in the property. • Obviously, property owners have this insurable interest, but others such as mortgagors, mortgagees, and tenants do, too. • Case study – Zurich American Insurance Co. v. ABM Industries, Inc. (pages 1011-12).
Interpretation of an Insurance Policy • Most rules of interpretation come from the law of contracts so the plain meaning rule is foremost. • What happens if the policy is ambiguous? Contract law states that any ambiguity is to be interpreted against the drafter of the contract which would be the insurer for the vast majority of insurance policies.
Interpretation of an Insurance Policy cont. • “An ambiguity arises when language is reasonably susceptible of more than one application to material facts. There cannot be an ambiguity per se, i.e. an ambiguity unrelated to an application. [¶] Accordingly, ‘[e]ven if a contract appears unambiguous on its face, a latent ambiguity may be exposed by extrinsic evidence which reveals more than one possible meaning to which the language of the contract is yet reasonably susceptible.’” (Dore v. Arnold Worldwide, 39 Cal.4th 384 (2006).) • Case studies – Cary v. United of Omaha Life Insurance Co. (pages 1015-16), Questions and Case Problems 49-6, 49-8 and 49-9 (pages 1024-25).
Scope of Insurer’s Duty to Settle Claims • Most insurance policies charge the insured with the duty of settling claims with no obligation to get or even seek the insured’s consent. • Scope of insurance coverage is quite broad; case study – Woo v. Fireman’s Fund Insurance Co. (pages 1017-18).
Duty of Insurer to Settle Claims cont. • However, what happens when the insurer’s settlement or its settlement practices cause damage to the insured? • Case studies • Security Officers Service v. SCIF, 17 Cal.App.4th 887 (1993) (insurer’s slow settlement practices and “over-reserving”). • Western Polymer Technology v. Reliance Ins. Co., 32 Cal.App.4th 14 (1995) (alleged damage to reputation and ability to recover on cross-complaint). • New Hampshire Ins. Co. v. Ridout Roofing, 68 Cal.App.4th 495 (1998) (insured forced to pay deductibles on allegedly questionable claims). • New Plumbing Contractors v. Edwards, Sooy & Byron, 99 Cal.App.4th 799 (2002) (attorney sued for settling instead of defending case on merits). • Hurvitz v. St. Paul Fire and Machine Ins. Co., 109 Cal.App.4th 918 (2003) (settlement precluded subsequent malicious prosecution case).
Insurer’s Ability to Rescind/Cancel Policy • The typical reason for rescission/-cancellation of an insurance policy is misrepresentation on the policy application. • Case studies – Questions and Case Problems 49-5 and 49-7 (pages 1024-25).