INSURANCE LAW

Professor Miller, Spring 2003

Note: This is one student's effort to "nutshell" many of the cases addressed in Insurance Law in the Spring 03 Semester. It does not include the Maryland cases and statutes covered in the supplement or any of the material in the lectures.

 

Class 1

 

GAF Corp v County School Bd

PROCEDURAL POSTURE: Defendant appealed from judgment of the United States District Court for the Western District of Virginia, at Abingdon, which found plaintiff properly invoked the provisions of Virginia's Unauthorized Insurers Process Act, Va. Code § 38.1-63 et seq., when serving process in its suit against defendant related to materials defendant guaranteed.

OVERVIEW: Defendant contracted with plaintiff, a school board, to supply roofing materials to contractors building two schools. Under the contract, defendant guaranteed to repair damage caused by various defects in the materials and workmanship, but excluded leaks in the roof caused by events unrelated to any defect in defendant's products. Subsequent to the formation of leaks in the roof, plaintiff sued defendant and served process under state's unauthorized insurer law, contending defendant's guarantee constituted an insurance contract. Noting that state law did not explicitly define "insurance contract," the court analyzed the provisions of the parties' agreement and held the guarantees at issue were considered provisions of a warranty rather than insurance. The court acknowledged that the guarantee contained traditional insurance elements of risk transfer and distribution. However, the court held that these elements did not give the contract its distinctive character, and the guarantee was not the type that the state's insurance laws were meant to regulate.

OUTCOME: Judgment, which found plaintiff properly invoked the provisions of Virginia 's Unauthorized Insurers Process Act when serving process in its suit against defendant related to materials defendant guaranteed, was reversed and remanded with instructions to quash service of process as defendant's guarantee did not fall within the ambit of insurance laws.

Holding: A small element of insurance should not be construed to bring a transaction within reach of insurance regulatory laws unless transaction involves "one or more of evils at which regulatory statutes were aimed" and elements of risk transfer and distribution give transaction its distinctive character

 

Insurance is "contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event."

 

Rawlings v Apodaca

PROCEDURAL POSTURE: Plaintiff insureds sought review of the order from the Superior Court of Maricopa County ( Arizona ), which overturned a finding that defendant neighbors had negligently caused the fire and that defendant insurance company had breached its duty of good faith and fair dealing.

OVERVIEW: The insureds filed a suit alleging that their neighbors had negligently caused a fire at the insureds' dairy farm and that the insurance company had breached its duty of good faith and fair dealing. The trial court found in favor of the insureds. The appellate court reversed the decision that the insurance company breached its duty of good faith and fair dealing. On appeal, the court held that the facts of the record supported the trial court's determination that the insurance company breached the implied covenant of good faith and fair dealing, and that the trial court did not err in finding that the insurance company had committed a tort. The court held that the trial court did not err in awarding a compensatory tort award. The court held that the existence of the insurance company's "evil mind" was needed in order to award punitive damages, and remanded that issue to the trial court. The court vacated the order from the appellate court, affirming the order from the trial court on all issues except punitive damages.

OUTCOME: The court vacated the order from the appellate court and remanded to the trial court the issue of punitive damages.

Holding: Good faith duty arises by virtue of contractual relationship. Essence of that duty is that neither party will act to impair right of the other to receive the benefits which flow from their agreement or contractual relationship. Conduct by insurer which does destroy the security or impair the protection purchased breaches the implied covenant of good faith and fair dealing implied in the contract.

 

The conditions of insurance are part of a bargain. They define risks that insurer agrees to bear for group of persons exposed to similar risks and paying similar contributions to fund from which losses are to be paid.

 

Fiduciary relationship implies more than honesty and lawfulness of purpose which comprises a standard definition of good faith. It implies a broad obligation of fair dealing and responsibility to give equal consideration to insured's interests.

 

Deschler v fireman's fund American life insurance co

PROCEDURAL POSTURE: Respondent insured sought recovery from appellant insurer for the death of her husband in an accident involving a water ski kite. The insurer denied recovery on the basis of a policy exclusion for death resulting from the use of a device for aerial navigation. The trial court ( Utah ) held as a matter of law that the insured was not using an excluded devise and granted summary judgment in favor of the insured. The insurer sought review.

OVERVIEW: The insurer claimed that the lower court erred in determining that the water ski kite was not a device for aerial navigation within the meaning of the policy's exclusionary clause. The court agreed with this claim and reversed the lower court's judgment. The court found that the water ski kite was a weight-carrying structure that operated on airfoil principles and that depended on the dynamic action of the air against its surfaces to stay aloft. Although the operator of a water ski kite could not maneuver the device to the same extent as a hang glider, the court found that the operator nevertheless had some control over speed, direction, and the determination of when and where to land. The court held that this element of control over direction, speed, and point of landing, together with the design of the kite, rendered it a device for aerial navigation. Thus, the court held that, as a matter of law, the water ski kite was a device for aerial navigation within the meaning of the policy exclusionary clause.

OUTCOME: The court reversed the lower court's grant of summary judgment in favor of the insured and granted judgment in favor of the insurer.

 

Holding: Generally, the burden is placed on the insured to establish in first instance that a loss has occurred within coverage. If this burden is carried, the burden shifts to insurer to establish the applicability of particular exclusion. It is commonly said that exclusions are to be construed narrowly against the insurer.

 

A stock company is organized as a profit-making venture, with stockholders assuming risks that are transferred by individual insureds.

 

A mutual company is owned by its policy holder-members and is organized not for pofit but for purpose of providing insurance for the members. They rely on accumulated surplus , NOT paid-in capital as guarantee of solvency. Any money left after paying all costs of operation, including additions to surplus, is returned to policyholder-members in form of dividends. Liability is assumed collectively

 

Reciprocal exchange aka interinsurance exchange is like a mutual company. It consist of unincorporated aggregation of individuals, called subscribers, who exchange insurance risks. It is a cooperative organization like mutual and not operated for profit. Liability of each subscribers is limited to premiums paid by that member.

 

Lloyds association does not issue policies or underwrite insurance. It markets services of a group of individuals, each of whom is an insurer who issues policies and underwrites risks separately or collectively with other members of the group.

 

By 1960, two types of private health insurance:

•  indemnity plans primarily sold by commercial insurers had patient/insured pay medical bills and then obtain reimbursement from plan to which premiums had been previously paid.

•  Service-benefit plans (Blue Cross/Blue Shield) would persuade providers to accept plan's payment for services. Patients not limited in choice of provider. Providers would be reimbursed directly from the plan

 

By 1970"s another plan, HMO.private health insurance-direct service plans. Insured would pay a monthly premium and would receive health care services from the same organization to which premium was paid.

 

Now, other plans:

•  IPA independent practice association is plan that contracts with individual drs with independent practices

•  PPO preferred provider organizations which involves designated provider network which offers its services to insureds on discounted fee-for-service basis; insured can go out of network but higher costs

•  EPO exclusive provider organization which is a PPO but insured receives no coverage for care received outside the network

•  POS point of service which is an HMO that allows subscribers to use non-network providers if insured pays more

•  PHO physician-hospital organization which is a hospital-physician group joint venture that markets its services

 

Historically, insurance had three basic fields: (1) life (2) fire and marine (3) casualty

 

Private insurance is now commonly described in two groups (1) life and health (2) property and casualty

 

Life Insurance

•  whole life: provides coverage at level premium for entire lifetime. Described as permanent insurance, which is true as long as premiums are paid. Sometimes referred to as straight life or ordinary life. It may be written on a limited payment or on a single-premium basis. It usually has a savings feature and over time builds up cash surrender value. If savings is invested in stocks the policy is labeled a variable life or universal life policy

•  term life: temporary insurance in that it is written for specific period; at end of period, it expires. Only protection against death within contract period. It may be convertible or nonconvertible. No savings element and no cash surrender value

•  endowment life: agreement to pay face amount only in event tat insured lives for a specified term.endowment period. If insured dies within period, nothing is due. It more appropriate for funding an income source for use later in life such as retirement program than for protecting against premature death

•  life annuities: provide for regular periodic income for life of the annuitant.

•  Group insurance: involves marketing of a master contract or policy to a policyholders, such as an employer with opportunity for individuals within a pre-defined class to subscribe to benefits. A form of term insurance and has no cash value

•  Credit life: protects creditors against risk of nonpayment due to death of debtors. Sold to short-term borrowers by lending institutions and retailers often purchase it to protect charge accounts

•  Health and accident insurance: coverage include (1) loss of income, such as long term disability (2) loss of life, sight, or limb such as accidental death and dismemberment insurance (3) health care costs

 

Marine insurance is divided into ocean and inland marine. Four types of contracts: (1) hull and (2) cargo policies cover property ownership interest in vessel and goods shipped, (3) freight is tariff or fare for transporting the cargo (4) liability

 

Inland marine policy concerns perils arising from transportation activities. Four divisions: (1) property in transit (2) bailee liability (3) fixed transportation property (4) personal and commercial floaters, floater covers chattels that are subject to being moved but that have no particular location or destination

 

Class 2

 

Compagnie des bauxites v insurance co of north America

PROCEDURAL POSTURE: Plaintiff corporation appealed from a judgment of the United States District Court for the Western District of Pennsylvania that granted summary judgment to defendant insurance company and defendant excess insurers in plaintiff's diversity action to recover on its business interruption insurance policies.

OVERVIEW: Plaintiff corporation filed suit against defendant insurance company and defendant excess insurers to recover on business interruption insurance policies. The district judge held that design defects made the failure at issue inevitable, and thus that no fortuitous loss had occurred. The district court entered summary judgment in favor of defendants. On appeal, the court determined that the duty of the district judge under the Erie doctrine was to predict what definition of a fortuitous event the Pennsylvania Supreme Court would apply. The reviewing court decided that it should review the district judge's prediction as a determination of law, as to which review was plenary, rather than as a finding of fact reviewed by the clearly erroneous standard. The appellate court then held that the Supreme Court of Pennsylvania would hold that a loss arising from an unknown design defect was one caused by a fortuitous event.

OUTCOME: Summary judgment for defendant insurers was reversed because the court of appeals believed that the district court erred when it granted summary judgment to the insurers on the ground that a fortuitous event had not occurred.

Holding: A fortuitous event is an event which so far as the parties to the contract are aware, is dependent on chance. It may be beyond the power of any human being to bring the event to pass; it may be within control of third persons; it may even be a past event, such as the loss of a vessel, proved that the fact is unknown to the parties.

 

Business interruption or loss of use and occupancy coverages protect the insured against indirect or consequential losses resulting from direct losses to insured's property. A similar policy is called contingent business interruption insurance which protects against losses resulting from direct losses to another's property.

 

The loss may in fact be inevitable or even have already occurred, but as long as this information is unknown to the insured and insurer, it would seem that requirement of fortuity is satisfied.

 

All-risk coverage, the insured's prima facie burden is to show that a loss within coverage occurred; once insured carries this burden, the insurer has burden to establish that cause of the loss was an excluded risk.

 

Specified-risk policy, the insured's prima facie burden is to show not only that a loss occurred but also that the loss was caused by a covered (specified) peril. If insured carries this burden, the insurer has burden to establish that cause of the loss was actually an excluded peril.

 

Purposes of insurable interest requirement: (1) discourages practice of using insurance as device for gambling/wagering; (2) removing incentive for procurer of insurance to destroy subject matter of the insurance

 

Snethen v OK state union of farmers educational & cooperative union of America

PROCEDURAL POSTURE: Plaintiff insured sought a writ of certiorari to the Court of Appeals, Temporary Div. 129 ( Oklahoma ), after it affirmed an award of summary judgment to defendant insurer in a dispute over auto insurance coverage. The lower courts held that the insured, having purchased a stolen car, had no insurable interest in the car within the meaning of Okla. Stat. tit. 36, § 3605 (1981).

OVERVIEW: The insured bought a car for $ 6,500 without knowing that it was a stolen vehicle. He also gave his own car as a trade-in. The insurer, who also did not know that the car was a stolen vehicle, insured the car but refused to pay on an accident claim after the car's status was revealed. The insurer successfully argued that the insured had no insurable interest in the car. The court reversed and remanded for further proceedings, overruling its own precedent on the topic. The court held that the insured did, in fact, have an insurable interest under § 3605. This was so because he had a substantial pecuniary interest in the car, coupled with an undisputed lack of knowledge of the vehicle's stolen status. No public policy was violated because the insured would not be making a "profit" from collecting on his insurance coverage. The court further held that the insured established a lawful interest in the car, that is, although he was not the car's true owner, he held an innocently acquired title as a qualified possessor that was good against the whole world except for the true owner. Consequently, the requirements of the statute were met and the insured was entitled to coverage.

OUTCOME: The court reversed the summary judgment awarded to the insurer and remanded the case for further proceedings.

Legal interest theory: require that insurable interest be rested upon a legally cognizable interest in the property

Factual expectation theory: there is an insurable interest in property if insd would gain some economic advantage by its continued existence or would suffer some economic detriment in case of its loss or destruction

A good-faith purchaser under a defective title cannot hold against the true owner, he does have lawful possession against rest of world (qualified possessory right in property)

 

Indemnity: concept that only actual loss will be reimbursed.

 

General rule in property insurance is that insurable interest must exist at time of the loss. A small minority hold that insurable interest must exist at inception and time of loss.

 

Mutual savings life insurance v noah

PROCEDURAL POSTURE: Appellant insurer sought review of an order of the trial court (Alabama) that rendered judgment in favor of appellant beneficiary on two life insurance policies and one burial policy because the brother-brother relationship was not sufficient to support an insurable interest and the decedent was in default at the time of the accident.

OVERVIEW: The decedent purchased two life insurance policies and one burial policy from the insurer and named his brother as beneficiary. After the decedent passed away, the insurer refused to pay on the policy. The beneficiary commenced a declaratory judgment action in equity and sought recovery under the terms of the policy. The trial court found for the beneficiary and the insurer sought review. On appeal, the court affirmed. The court held that (1) the brother-brother relationship was, in and of itself, sufficient to support an insurable interest except in the exceptional case where the natural love and affection common to the brother-brother relationship was missing; and (2) the insurer was required to pay upon the life insurance and burial policies, even though the decedent suffered an accident during the defaulting period where the beneficiary claimed coverage, because it retained the past due premium when it was paid.

OUTCOME: The court affirmed the order of the trial court that rendered judgment in favor of appellant beneficiary on two life insurance policies and one burial policy.

Holding: Test for insurable interest is that natural love and affection prevailing between the two and expectation that one will render the other aid in time of need is sufficient to overcome any wagering contract argument as well as any impulse to hasten the death of the insd.

One test for insurable interest which is pecuniary interest or some reasonable expectation of monetary benefit from continuance of insd's life and within certain blood or affinity relationships this pecuniary interest or benefit is conclusively presumed.

 

Class 3

 

Under indemnity principle, insd is entitled to receive benefits up to or equal to a loss, but not to receive benefits in excess of a loss. It means that proceeds paid under insurance contracts should reimburse the insd for loss, not provide the insd with net gain as a result of the loss.

 

Elberon bathing co v ambassador insurance co

PROCEDURAL POSTURE: Defendant sought review of a decision by the Superior Court, Appellate Division (New Jersey), affirming an appraisal award to plaintiffs for a loss due to a fire, under N.J. Stat. Ann. §17:36-5.15 et seq.

OVERVIEW: Defendant issued plaintiffs a fire insurance policy for their property, providing additional coverage over a primary policy issued to plaintiffs by another insurer. While the policy was in effect the property was damaged by fire, and the parties were unable to agree on coverage under the excess policy. A court-appointed umpire and plaintiffs' appraiser awarded replacement cost for the damaged property, and defendant's appraiser refused to sign the award. Plaintiff sought entry of judgment, and the trial court found replacement cost was the appropriate measure of loss. Appellate Division agreed and the supreme court granted certification. The court found that: 1) pure replacement cost did not consider depreciation and did not measure "actual cash value"; 2) broad evidence rule should be used to find "actual cash value" of loss; 3) appraiser's failure to consider certain factors justified vacating award; and 4) trial judge should have determined liability before granting award.

OUTCOME: Judgment reversed and cause remanded for further proceedings because the court found the "actual cash value" of loss was improperly measured by plaintiffs' appraiser, who did not take into account depreciation when assigning pure replacement costs for the loss.

Case law reflects 3 general categories for measuring actual cash value: (1) market value.generally defined as price a willing buyer would pay a willing seller at a fair and bona fide sale by private contract, neither being under any compulsion (2) replacement costs less depreciation (3) broad evidence rule.every fact and circumstance which would logically tend to formation of correct estimate of the loss. It may consider original cost and cost of reproduction; opinions upon value given by qualified witnesses; declarations against interest; gainful uses to which the blds might have been put; any other fact reasonably tending to throw light upon the subject

 

Cunningham v metropolitan life insurance co

PROCEDURAL POSTURE: Plaintiff insured sought review of a decision of the court of appeals (Wisconsin), which affirmed the trial court's judgment and held that defendant insurer was equitably subrogated to the insured's interest in the settlement proceeds of the insured's wrongful death action against third-party tort-feasors.

OVERVIEW: The insured had received benefits for the care of his daughter who sustained injuries for which she was hospitalized and which ultimately resulted in her death. The court affirmed in part and reversed in part and held that the specific language of the insurer's group medical expense insurance-extended coverage rendered that portion of the policy indemnity insurance, and an insurer who paid benefits under that portion of the policy was equitably subrogated to the insured's claims, notwithstanding the absence of an express subrogation clause. The specific language of the group hospitalization and physicians' services insurance rendered that portion of the policy investment insurance, and in the absence of an express subrogation clause, the insurer who paid benefits under such an investment policy was not equitably subrogated to the insured's claims. Because the record failed to disclose what portion of the insurance proceeds were paid under each of the riders and what portion of the settlement proceeds in trust were paid under each of the insurance categories, the court could not determine to what extent the insurer was subrogated to the insured's claims against the tort-feasors.

OUTCOME: The court affirmed in part, finding a right of equitable subrogation regarding the medical expense insurance-extended coverage. The court reversed in part, finding no right of equitable subrogation regarding the group hospitalization and physicians' services insurance. The court remanded for further proceedings.

Primary function of subrogation is to prevent an insurer from paying and insd from receiving more than the parties bargained for in contract of insurance

Subrogation is an equitable remedy which operates when a victim of loss is entitled to recover from two sources, one of whom bears a primary legal responsibility. If secondary source pays the obligation, it succeeds to the rights of the party it has paid, against the 3 rd party, who was the primarily responsible party. Deals with rights of the insurer to be put in position of the insd in order to pursue recovery from 3 rd parties, legally responsible to the insd, for a loss paid by insurer to insd.

 

No implied rights of subrogation in area of personal insurance i.e. life, medical expense and hospitalization benefits, and accident benefits at least in absence of policy provision so providing.

 

An insurer of joint tortfeasor who settles with tort victim may pursue a right of contribution or indemnity possessed by the insd against another joint tortfeasor.

 

If court finds contract is indemnity then subrogation is allowed, even in absence of subrogation clause. If contract is one of investment, the court will not permit insurer to received subrogation in absence of express subrogation clause.

 

Class 4

 

Objectives of state insurance regulations:

•  ensuring that consumers are charged fair and reasonable prices for insurance products

•  protecting the solvency of insurers

•  preventing unfair practices and overreaching by insurers

•  guaranteeing availability of coverage to the public

 

the "prior approval" approach usually has mechanism under which a filed rate becomes effective unless the dept disapproves the rate within a specified period of time

 

the 'file and use' approach allows the insurer to use the filed rate, unless the insurance dept takes steps to disapprove the rate with specified period of time

 

'flex rating' combines these two methods. Insurers can file and use their rates provided they are within a specified range; but any rate changes outside the range must receive the dept's prior approval

 

'open competition' relies upon market forces to set rates

 

all states have some kind of 'residual market plan' through which auto insurance is sold to people unable to obtain insurance in voluntary market.

 

'redlining' refers to practice of drawing 'red lines' around certain geographic areas on a map and then declining to sell products or services in that location.

 

Vlastos v sumitomo marine and fire insurance co

PROCEDURAL POSTURE: Plaintiff challenged the judgment of the United States District Court for the Western District of Pennsylvania, which found that plaintiff had made an unambiguous warranty in an insurance policy issued by defendant.

OVERVIEW: Plaintiff had sought to recover under an insurance policy issued by defendants. The policy was issued on a commercial building which was destroyed by fire. Plaintiff owned the building. Based on the trial court's declaration that plaintiff unambiguously warranted that the third floor of her building was occupied exclusively by a janitor, the jury found that plaintiff had breached her warranty. On appeal, plaintiff contended that the jury was incorrectly instructed that the warranty was unambiguous. The court held that plaintiff did warrant that the floor would be occupied as a janitor's residence. Yet, the warranty was found to be ambiguous since it was susceptible to more than one interpretation. While defendant's view, that the floor would be occupied exclusively by a janitor, was a possible construction, a reasonable person could have understood plaintiff has having warranted merely that the janitor lived there.

OUTCOME: Finding that the interpretation of plaintiff's warranty was susceptible to more than one meaning, the court reversed the judgment of the trial court insofar as it instructed the jury that plaintiff made an unambiguous warranty in the insurance policy.

 

Class 5

 

Berger v Minnesota mutual life insurance

PROCEDURAL POSTURE: Plaintiff appealed from a jury verdict that denied her recovery of the proceeds of her husband's credit life insurance policy issued by defendant insurer, because of the husband's misrepresentations in his policy application.

OVERVIEW: Plaintiff's husband had a credit life insurance policy issued by defendant insurance company. Following his death, plaintiff submitted a claim. Discovering a pre-existing diabetic condition of the husband, defendant refused payment under its policy, claiming that a misrepresentation on the application was material to the husband's insurability and that defendant would not have issued the policy had the truth been disclosed at the time the application for insurance was made. Plaintiff appealed from a judgment entered on a jury verdict that denied her recovery of the proceeds of the policy. The court held that the jury was properly instructed regarding the statutory elements required to determine whether the misrepresentation was sufficient to avoid the policy, and there was a reasonable basis in the evidence to support the jury's verdict. The evidence supported the conclusion that, although not fraudulent, the husband's concealment of his diabetic condition was knowing and intentional. The misrepresentation was material in that it prevented defendant from appraising its risk on the basis of the facts as they truly existed at the time the contract was made. The verdict was affirmed.

OUTCOME: The court affirmed the jury's verdict because the evidence supported the conclusion that the insured's concealment of his diabetic condition was knowing and intentional, and was material, therefore, coverage was denied.

Mutual benefit life insurance v JMR electrics corp

PROCEDURAL POSTURE: Defendant insured appealed the order of the United States District Court for the Southern District of New York, which granted plaintiff insurer's motion for summary judgment in its action seeking a declaration that defendant's life insurance policy was void and ordered recission of the policy.

OVERVIEW: Defendant insured was president of a corporation that submitted an application for a "key man" life insurance policy on his life. After defendant's death, plaintiff insurer discovered that representations made in the application concerning defendant's smoking history were untrue. Plaintiff then filed an action seeking a declaration that the policy was void due to the misrepresentations. Defendant appealed the trial court's order that granted summary judgment to plaintiff and rescinded the policy, and the court affirmed. The court held that, under N.Y. Ins. Law § 3105 , defendant's misrepresentations about being a non-smoker were material as a matter of law and thus plaintiff was allowed to avoid liability under the policy. As the risk insured was not the risk covered by the policy, the court ruled that the award of summary judgment to plaintiff and recission of the policy were proper.

OUTCOME: The court affirmed summary judgment in favor of plaintiff insurer. The court held that defendant insured's misrepresentation regarding his smoking history on his life insurance policy application was material as a matter of law and warranted recission of the policy.

Purpose of materiality inquiry is to make certain tat risk insured was risk covered by policy agreed upon.

 

Test for materiality is that the information sought is material if it would significantly affect the decision of the underwriter in issuing the policy at all, or in estimating the degree or character of the risk, or in fixing the amount of premium to be charged for the coverage.

 

Waxes v reserve life insurance

PROCEDURAL POSTURE: Appellant, administrator of decedent's estate, sought review of an order from the Johnson District Court (Kansas), which entered summary judgment in favor of appellee in a contract action brought by appellant, alleging that appellee breached when it refused to pay benefits under an insurance contract for medical expenses incurred by deceased.

OVERVIEW: Appellant, administrator of decedent's estate, brought an action on an insurance contract, to recover for medical expenses incurred by decedent. The trial court determined that decedent had made a fraudulent misrepresentation on his application, and granted appellee's motion for summary judgment. Appellant sought review, arguing that summary judgment was erroneous because appellee failed to establish that decedent made a false answer on his insurance application, with intent to deceive. The court reversed and granted summary judgment to appellant, because it believed decedent had omitted the information at issue from his application in good faith. The court explained that fraudulent misrepresentation in an action to rescind an insurance contract required an untrue statement of fact, known to be untrue by the party making it, made with intent to deceive or recklessly made with disregard for truth, where another party justifiably relied on the statement and acted to his detriment. Decedent had answered the questionnaire honestly. It was appellee's responsibility to ask questions to which it wanted more detailed answers, and appellee failed to do this.

OUTCOME: The court reversed the judgment of the trial court and granted summary judgment to appellant, because appellee failed to establish decedent made false answer on insurance application, with intent to deceive.

 

Omaha sky divers parachute club v ranger insurance co

PROCEDURAL POSTURE: Appellant owner challenged a decision of the District Court for Douglas County (Nebraska), which sustained appellee insurer's motion for summary judgment and dismissed the owner's petition seeking to recover insurance coverage to recover for damage to the insured aircraft.

OVERVIEW: The airplane was operated by a pilot whose medical certificate had expired. A brake on the plane failed upon landing and the aircraft was damaged in the resulting wreck. The owner sought recovery for the damage done to the airplane and filed suit against the insurer. The trial court granted the insurer's motion for summary judgment and dismissed the complaint. The owner appealed. The court affirmed the decision of the trial court. The insurance policy contained an exclusion clause that prevented application to any damage occurring while the aircraft was operated in flight by other than a certified pilot. Both the exclusion clause and the declaration were clear and unambiguous. The medical certificate, which had lapsed 5 months before the accident occurred, and before the issuance of the policy, was not a "valid and effective" medical certificate. A renewal shortly thereafter did not validate it retroactively. The district court was correct in granting summary judgment.

OUTCOME: The court affirmed the decision of the trial court granting summary judgment in favor of the insurer in the suit brought by the owner of the airplane seeking payment on an insurance policy.

 

In the matter of mostow v state farm insurance

PROCEDURAL POSTURE: Following an auto accident, an arbitration panel awarded appellee insured party an amount greater than the supposed per person limit under her underinsured motorist endorsement in her policy with appellant insurer. The trial court reduced the award to the per person limit. The Appellate Division of the Supreme Court in the Second Judicial Department (New York) reinstated the panel's award because the policy was ambiguous. The insurer appealed.

OVERVIEW: The appellate division determined that the policy provisions were ambiguous because they appeared to limit recovery for bodily injury to $ 100,000 per person, but also appeared to allow a greater per person recovery where two or more people were injured in the accident. In light of N.Y. Ins. Law § 3420 , the court found that the policy did not contain any language deeming the $ 300,000 per accident limit "subject to" the $ 100,000 per person limit. The court held that the absence of such language in the subject policy, coupled with the policy provision which stated that the $ 300,000 limit for each accident was the total amount of coverage for all damages due to bodily injury to two or more persons in the same accident, rendered the policy language susceptible of two reasonable interpretations. Because both constructions of the policy were reasonable and not contrary to law, its terms were ambiguous. Further, ambiguities in the insurance policy were construed in favor of the insured party and against the insurer, the drafter of the policy language. Thus, the appellate division properly declined to reduce the award from to $ 100,000, as the insurer requested.

OUTCOME: The court affirmed the judgment of the appellate division, which reinstated the arbitration panel's award to the insured party.

 

Class 6

Republic insurance co v silverton elevators, inc

PROCEDURAL POSTURE: Defendant appealed the judgment of the Court of Civil Appeals (Texas) affirming the judgment from the Seventh District Court from Briscoe County awarding plaintiffs damages under an insurance policy issued by defendant.

OVERVIEW: Plaintiff employer furnished plaintiff employee with a house as well as insurance covering employee's personal property as part of his compensation. The insurance issued by defendant was in the name of plaintiff employer. The home and all of plaintiff employee's belonging were destroyed by a tornado. Plaintiffs sued defendant to recover under the policy issued to plaintiff employer. Defendant argued that plaintiffs were not entitled to recover under the policy because the property destroyed was not owned by the named insured. Plaintiffs contended that defendant had waived the requirement that the named insured own the property because defendant's agent when issuing the policy knew that plaintiff employee was the owner of the property covered by the policy. In a non-jury trial plaintiffs were awarded damages under the policy and the appeals court affirmed. The court here affirmed both lower courts, holding that knowledge of ownership of the goods by defendant's agent was binding upon defendant, and the issuance of the policy operated as a waiver of the requirement that the named insured own the insured property.

OUTCOME: The court affirmed the judgment of the lower courts, holding that plaintiffs were entitled to recover on the insurance policy issued by defendant without a reformation.

 

Clark-peterson company v independent insurance associates

PROCEDURAL POSTURE: Appellant insurer challenged a decision of the Iowa Court of Appeals which affirmed the judgment of the trial court in an action for coverage for a judgment previously entered against appellees by a former employee who successfully sued for discrimination and wrongful discharge of said employee because of his alcoholism.

OVERVIEW: Appellees discharged an employee due to his alcoholism. The employee sued appellees successfully and obtained a substantial money judgment. Appellees sought coverage for the judgment under an insurance policy. The appellant insurer resisted on the basis that the discharge was an intentional act and not covered by the policy. Appellees sued the insurer and judgment was rendered by the trial court against appellant and on appeal, the court affirmed the judgment. On further appeal, the court held that while the discrimination was intentional, the doctrine of reasonable expectations applied to afford coverage based on the promises made by the insurer and the expectations of the insured at the time the policy was sold. Accordingly, the court held that appellant was required to extend coverage to appellees and the judgment of the trial and appellate courts was affirmed.

OUTCOME: The decision of the appellate court affirming the judgment of the trial court was affirmed because the court applied the reasonable expectations doctrine and determined that exclusions upon which the insurer relied would have eviscerated the discrimination coverage it explicitly agreed to provide.

Reasonable expectations can be invoked where an exclusion (1) is bizarre or oppressive (2) eviscerates terms explicitly agreed to or (3) eliminates the dominant purpose of the transaction. Before used, either the policy must be such that an ordinary layperson would misunderstand its coverage, or there must be circumstances attributable to the insurer which would foster coverage expectations.

 

Taylor v state farm insurance

PROCEDURAL POSTURE: Plaintiff insured sued defendant insurer on a bad faith claim. The court of appeals reversed a jury verdict in favor of the insured, and the insured appealed.

OVERVIEW: The insured sought damages against the insurer for bad faith damages, asserting that the insurer improperly failed to settle a claim within policy limits, resulting in a large excess verdict against the insured. The insurer moved for summary judgment, asserting that the insured had released the bad faith and all other claims through a document which provided for the release of "all contractual claims" against the insurer as part of a settlement involving uninsured motorist coverage. The insured also moved for partial summary judgment for a finding that the release did not preclude his bad faith claim. The trial judge denied both motions, finding that the release was ambiguous and that therefore parol evidence was admissible at trial to aid in interpreting the release. The jury awarded the insured compensatory damages, and the court granted attorney fees. The court of appeals found no ambiguity and reversed the judgment for the insured. On appeal, the court held that the bad faith claim was tortious in nature, that the release was reasonably susceptible to the insured's interpretation, and the trial judge did not err in admitting parol evidence to the jury.

OUTCOME: The decision of the court of appeals pertaining to the release was vacated and the matter was remanded to the court of appeals for resolution of remaining unresolved issues.

 

Class 7

Crobons v Wisconsin national life insurance

PROCEDURAL POSTURE: Defendant insurer appealed a decision from the United States District Court for the Eastern District of Michigan that granted partial summary judgment to plaintiff in an action to recover as the beneficiary of a life insurance policy.

OVERVIEW: Decedent's business partner took out a life insurance policy on decedent, which designated plaintiff, decedent's wife, as the primary beneficiary. Decedent suffered a massive brain hemorrhage and irreversible brain death. While decedent was on life support, the partner executed a change of beneficiary form substituting himself as the principal beneficiary. Defendant insurer determined that the change of beneficiary form had been properly executed and paid the business partner the proceeds of the policy. Plaintiff widow filed suit for constructive fraud and breach of contract. The court concluded that under the Michigan Death Act (Act), Mich. Comp. Laws Ann. § 333.1021 et seq., death occurred before the change of beneficiary form was executed and granted partial summary judgment to plaintiff. On appeal, the court held that the Act's method of determining time of death was the standard for all purposes, including the disbursement of insurance policy proceeds. The court stated that while the certified time of death was presumptively correct, evidence of death as defined by the Act had effectively rebutted the presumption, and therefore summary judgment had been properly granted.

OUTCOME: The court affirmed the grant of summary judgment because plaintiff had presented sufficient evidence that death had occurred before the change of beneficiary form was executed to rebut the presumption that death occurred at the time noted on the death certificate.

 

Uniform determination of death act

An individual who has sustained either (1) irreversible cessation of circulatory and respiratory functions, or (2) irreversible cessation of all functions of the entire brain, including the brain stem, is dead

 

Nielsen v provident life and accident insurance

PROCEDURAL POSTURE: Plaintiff appealed from decision of lower court (Idaho) awarding summary judgment to defendant insurance company in action brought by plaintiff seeking to recover death benefits under insurance policy of deceased husband, who died as result of self-inflicted gunshot wound.

OVERVIEW: Following death by suicide of decedent, defendant insurance company denied death policy benefits to plaintiff. On appeal, court adopted majority rule, and held that in order for insurer to avoid liability on basis of suicide clause in insurance policy with words "sane or insane," it was not necessary for insured to realize physical nature or consequence of act or to form conscious purpose to take his life. The court held that self-destructive act of decedent constituted either "sane or insane" suicide and was expressly excluded under terms of insurance contract. The fact that decedent may have suffered from mental aberration caused by auto accident did not remove act of self-destruction from plain language of policy excluding liability. Decedent's self-destructive act would clearly have constituted act of suicide in case of sane person and thus remained "suicide" under language of policy in case of insane person or one suffering mental aberration.

OUTCOME: Judgment affirmed on the grounds that self-destructive act of decedent constituted either "sane or insane" suicide and was expressly excluded under the terms of the insurance contract.

 

Crawford v equitable life assurance society of us

PROCEDURAL POSTURE: Defendant insurance company appealed an affirmance of summary judgment to plaintiff beneficiary rendered by the Appellate Court for the Third District (Illinois), which found that plaintiff's wife was covered under a group life insurance policy.

OVERVIEW: Defendant insurance company issued a group life insurance policy to employer's association for its employees. Plaintiff beneficiary, wife, and another enrolled under policy. Certificate of insurance was issued to wife. Master policy contained a provision that only a "full time employee" would be eligible for insurance. It was discovered that plaintiff and wife made representations that were false on the application. Wife was not a full-time employee. Wife died and plaintiff sought to recover under policy, suing defendant to recover as beneficiary. The appellate court affirmed a grant of summary judgment to plaintiff. Defendant appealed. The appeal presented the question whether an incontestability clause contained in a group life insurance policy barred defendant from defending against a claim on the ground that the insured was not an employee eligible for insurance under the terms of the policy. This was a question is one of first impression. The court reversed the decision of the appeals court. The incontestability clause of the policy provided only that the validity of the policy could not be contested, and its validity is not disputed.

OUTCOME: The court reversed the decision of the appellate court which found that plaintiff's wife was covered under a group life insurance policy because the validity of the policy was not contested as stated in the incontestability clause.

 

Class 8

Lemke v Schwarz

PROCEDURAL POSTURE: The District Court, St. Louis County (Minnesota) ruled that by reason of her status as named beneficiary, defendant widow was entitled to the entire proceeds of two insurance policies in the name of her deceased husband. Judgment was entered accordingly, and plaintiffs, the insured's daughters, appealed.

OVERVIEW: The insured had been married three times. At the time of his death, he had been married to the widow for a little more than a year. There was testimony that during the last six months of their marriage their relationship became progressively worse. On the evening prior to the insured's death, the widow informed him of her intent to leave him. It was sometime subsequent to this that the insured wrote a letter to his daughters, in which he expressed his intent that his daughters rather than his wife receive the entire proceeds of the policies. The court reversed the trial court's judgment. The court found that the insured's intent to change beneficiaries was unambiguously expressed in the letter to his daughters, as was his expectation that the letter have legal significance. In addition, the court found that the insured made affirmative efforts to effect a change of beneficiaries, even though he had not complied with the policy's requirements for changing beneficiaries. Noting that no prejudice to the insurance company would result from giving effect to the insured's demonstrated intent, the court ruled that the daughters were entitled to the proceeds of both policies.

OUTCOME: The court reversed the trial court's judgment, ruling that the daughters were entitled to the proceeds of the insurance policies.

Test: (1) whether the insd intended to change the beneficiary and (2) whether he took affirmative action or otherwise did substantially all that he could do to demonstrate that intention without regard to whether he complied with the change-of-beneficiary provisions in the policy

 

Prudential insurance company of America v athmer

PROCEDURAL POSTURE: Appellant insured's daughter sought review of a judgment from the United States District Court for the Southern District of Illinois, which found for appellee contingent beneficiaries, in an interpleader filed by plaintiff insurance companies in a case involving the Servicemen's Group Life Insurance Act of 1965, 38 U.S.C.S. § 1965 et seq., where the primary beneficiary under the policies murdered the insured.

OVERVIEW: The insured was murdered by his wife, who was the primary beneficiary of the two insurance polices on insured's life. Appellee contingent beneficiaries were the murderer's son and sister. The court held that under federal common law, as applied to a policy issued under the Servicemen's Group Life Insurance Act of 1965 (SGLA), 38 U.S.C.S. § 1965 et seq., and under Illinois state law, as applied to the other policy, provided that the contingent beneficiaries were not complicit, and there was no chance of benefit redounding to the slayer, those beneficiaries were entitled to receive the proceeds, and the court affirmed the judgment. The court held that to establish uniformity in construing policies issued under the SGLA, federal common law applied. The court held that the "murdering heir" rule was part of the federal common law, and that absent complicity it did not cut off the murderer's bloodline. As to the other policy, applying Illinois law as urged by appellant insured's daughter, the court affirmed the judgment because the district court's finding that the murderer would not benefit was not clearly erroneous, where the murderer had been estranged from appellees for years.

OUTCOME: The court affirmed the judgment for appellee contingent beneficiaries, because they had not been complicit in the murder, and the district court had found that the murderer would not benefit from appellees' receipt of the insurance proceeds, so that the "murdering heir" rule did not disinherit appellees by virtue of their relationship to the murderer.

The victim had a daughter never acknowledged the daughter. The murderer had a son who was listed as a beneficiary.

 

Ina life insurance v brundin

PROCEDURAL POSTURE: Appellant sought review of a jury verdict from the superior court rendered in favor of appellee in a suit to recover benefits under several identical accidental death and dismemberment policies.

OVERVIEW: Decedent, appellee's husband, died following hemorrhoid surgery. During surgery, decedent's heart stopped without warning. After lapsing into a coma, decedent died. Appellee filed claims as beneficiary under decedent's accidental death policies with appellant. Appellants rejected the claims on the grounds that the death was not covered by the terms of the policies. Appellee filed suit. The immediate cause of death was a cardiac arrest; however, expert witnesses could not arrive at a conclusion as to the exact cause of the cardiac arrest. A jury awarded a verdict for appellee. The supreme court held that the trial court properly instructed the jury on the definition of "accident" in the policies and adopted the reasonable expectations standard in defining "accident." However, the supreme court reversed because the trial court erred in excluding expert testimony crucial to appellant's case that clearly theorized that the cardiac arrest was not related to the surgery.

OUTCOME: Jury verdict reversed; although the trial court properly instructed jury on the definition of "accident," the trial court erred in excluding expert testimony offered by appellant on the issue of whether decedent's cardiac arrest was accidental.

Two lines of authority:

•  accident was strictly construed.required that the cause of the death was itself an accident.some actual mistake or misstep occurred during the surgery which caused the death. It would not be enough to prove that the result itself was accidental in the sense of being unexpected and unforeseen

•  reasonable understanding or expectations of the average person. Those effects which are not their natural and probable consequences

this case resulted in that accidental results are unintended injury or death occurred despite lack of any identifiable accidental causative agent

 

Class 9

Shapiro v Berkshire life insurance

PROCEDURAL POSTURE: Appellant challenged the grant of summary judgment by the United States District Court for the Southern District of New York in favor of appellee's claim for disability benefits, and appellee cross-appealed from the grant of summary judgment against his claim under N. Y. Gen. Bus. Law § 349 .

OVERVIEW: Appellee, a dentist, brought a diversity action against appellant insurance company, contesting appellant's denial of his claim for total disability benefits. Appellee asserted that progressive skeletal illnesses left him unable to perform any further "chair dentistry," and alleged breach of contract, and deceptive business conduct in violation of N. Y. Gen. Bus. Law § 349 . The trial court awarded summary judgment in appellee's favor on his claim for disability benefits, but denied the § 349 claim, awarding summary judgment in favor of appellant. On appeal and cross-appeal, the court affirmed, holding that in the relevant period, appellee's occupation was that of dentist; his administrative duties consumed no more than four of his 40 working hours per week, and were merely incidental to his material and substantial duties as a full-time dentist. On the § 349 claim, the denial of appellee's claim was not deceptive simply because it was mistaken.

OUTCOME: Summary judgment affirmed in favor of appellee on the breach of contract claim; appellee's main occupation in the relevant period was that of dentist. Summary judgment affirmed in favor of appellant on deceptive business conduct; the denial of appellee's claim was not deceptive simply because it was mistaken.

The policies define "total disability" as "the inability to perform the material and substantial duties of your occupation," and "your occupation" is limited to "the occupation you are engaged in immediately preceding the onset of disability." In another clause, the policies also provide benefits for residual disability, and define it: "Residual disability means that due to injury or sickness you are unable: (1) to do  [**3]   one or more of the substantial and material duties of your business or profession; or (2) to perform your duties for the length of time that they usually require." The insured is ineligible for residual disability benefits unless he has suffered a 20 percent drop in income as a result of the disability.

Under NY law, a claimant is totally disabled when she/he is no longer able to perform the material and substantial responsibilities of his/her job

 

Prudence life insurance v wooley

PROCEDURAL POSTURE: Appellant insurer sought review of the judgment of the Circuit Court of Smith County (Mississippi), which found in favor of appellee insured in his action to recover additional sums under a health and accident insurance policy providing for disability.

OVERVIEW: The insured suffered a heart attack and was paid benefits for total disability under the insurer's policy. When the insurer ceased making payments, the insured sought to recover additional sums. The court reversed the judgment that was for the insured. The insured's evidence justified a finding that he was totally disabled and unable to perform acts required of him in his farming and chicken-producing business. However, the evidence also showed that he was not disabled from engaging in any gainful occupation for which he was reasonably fitted by education, training, or experience, as required by the policy. The trial court improperly instructed that if the jury believed that the insured was prevented by his disease from performing the substantial acts required of him in his business, he was totally disabled within the meaning of the policy. The instruction should have required an additional finding that the insured was disabled and incapable of performing any gainful occupation for which he was fitted by education, training, or experience, or the substantial acts required thereby. Written statements by doctors who had died since the statements were given were properly admitted.

OUTCOME: The court reversed the judgment that was for the insured and remanded the case.

Two lines of thought:

•  recovery will not be prevented by fact that insd is able to perform all the substantial and material acts of some other business or occupation

•  an insd person may not be regarded as totally disabled within a general disability clause until he is unable to follow any occupation whatsoever.

•  Middle ground: in order to recover the insd has to be disabled from engaging in usual business or occupation, but that he must also be unable to engage in any comparable occupation for which he is fitted by education, experience, and physical condition

 

Connecticut general life insurance v Shelton

PROCEDURAL POSTURE: Appeal from the District Court of Denton County (Texas), in which the court entered judgment for appellee, for hospital and medical expenses incurred in connection with appellee's elective remedial surgery.

OVERVIEW: Years ago, doctors informed appellee that because of the incompatibility of her and her husband's blood, any children that were born could potentially have extreme health problems. Consequently, appellee had a tubal ligation. Thereafter, appellee married another man and became covered under an insurance policy. Appellee and her husband desired to have a child and learned their blood types were compatible. Accordingly, appellee had restorative surgery and sought to collect benefits under the policy because of the surgery. After a trial, judgment was entered for appellee for hospital and medical expenses incurred in connection with the elective remedial surgery. On appeal, appellant contended there was no evidence that appellee's claim for expenses were incurred for the necessary care and treatment of an injury or sickness, as defined in the group insurance policy. The court agreed with appellant's position because it held the surgical procedure was neither accidental nor fortuitous in character, nor was it necessitated to cure appellee's sickness. Accordingly, judgment was reversed because appellee's surgery was not covered under the terms of the policy.

OUTCOME: The court reversed the lower court's decision because it held that appellee's surgery was not covered under the terms of the group insurance policy.

In addition to the requirement that risks, to be insurable, must lend themselves to measurement in quantitative terms, certain other conditions must be met before the institution of insurance may function. (1) The risk must be genuine, must exist for large groups of people, and its existence must be recognized by a sufficient number of people to warrant the establishment of organization(s) to insure it. (2) Persons exposed to the risk must feel a responsibility for the possible loss and its consequences. (3) Those concerned must possess the resources with which to pay their prorata share of the costs or premiums. (4) The magnitude of the potential loss must be sufficient to cause a real hardship for the individuals upon whom actual losses may fall. (5) The events concerned must be accidental or fortuitous in character; they must occur according to the laws of chance and not be subject to control by those seeking to insure. (6) And, finally, a catastrophe hazard must not exist. 

 

Fuller v CBT corp

PROCEDURAL POSTURE: Plaintiff insured appealed from an order from the United States District Court for the Northern District of Illinois, Eastern Division, which granted defendant insurance plan's motion for summary judgment and dismissed plaintiff's suit against defendant wherein plaintiff challenged the denial of two claims.

OVERVIEW: Plaintiff insured sought reimbursement from defendant insurance plan for the cost of removing a tumor at the site of his vasectomy. Plaintiff had his vasectomy reversed at the same time, but that procedure was not covered. Plaintiff alleged that defendant allocated too little of the total cost to the covered procedure. Plaintiff also claimed that defendant should have covered expenses incurred when plaintiff's sons were injured in a car accident. The accident occurred after plaintiff quit his job and elected not to convert his medical coverage to an individual policy. The district court granted defendant's motion for summary judgment and dismissed both claims. On appeal, the court held that plaintiff failed to defeat defendant's motion for summary judgement on the tumor claim because he did not submit evidence as to the cost of removing the tumor. The court affirmed the summary judgment entered in favor of defendant on this claim. As to the accident claim, the court reversed the judgment as premature and remanded it. The court held that the plan required uniform treatment of all employees and the trustees had extended benefits for other employees in similar circumstances.

OUTCOME: The court affirmed the summary judgment in favor of defendant insurance plan with respect to the tumor claim because plaintiff insured failed to submit any evidence as to the cost of removing the tumor. The court reversed and remanded as to the accident claim because a material issue of fact existed as to whether defendant had extended benefits for other employees in plaintiff's position, thus obligating them to reimburse plaintiff.

 

Bullwinkel v new England mutual life insurance

PROCEDURAL POSTURE: Plaintiffs appealed from the order of the United States District Court for the Northern District of Illinois, Eastern Division granting summary judgment in favor of defendant, in plaintiffs' action for recovery of insurance benefits that were denied by defendant under pre-existing conditions clause.

OVERVIEW: Plaintiff wife found a lump in her breast before defendant's insurance coverage began, which was removed shortly after coverage began, engendering costly subsequent cancer treatments. Defendant denied coverage under the pre-existing condition limitation in the insurance policy that provided no benefits were payable for conditions, sickness or injury treated or diagnosed in the six month period preceding coverage, concluding that the lump predated the effective date of the policy. Plaintiffs husband and wife appealed the district court's grant of summary judgment for defendant. The court determined that the lump was a condition, sickness, or injury for which plaintiff wife received treatment within the pre-existing conditions clause. The court held that plaintiffs had not shown a genuine issue of material fact disputing the reasonable inference that the breast lump was cancerous prior to the insurance coverage, and thus, the grant of summary judgment in favor of defendant was proper.

OUTCOME: The court affirmed the district court's grant of summary judgment in favor of defendant insurer's denial of insurance coverage because plaintiff's cancerous breast lump was an excluded pre-existing condition under defendant's policy.

 

Sarchett v blue shield of California

PROCEDURAL POSTURE: Defendant insurer sought review of a decision of the Superior Court of Los Angeles County (California), which directed a verdict in plaintiff insured's favor and awarded plaintiff compensatory and punitive damages in an action alleging that defendant breached the implied covenant of good faith and fair dealing.

OVERVIEW: Plaintiff insured elected to be insured under a group policy provided by defendant insurer. Plaintiff was subsequently hospitalized by his treating physician. Defendant paid the medical and diagnostic testing bills but denied plaintiff's claim for the hospital stay, because it determined upon a retrospective review that the stay was not medically necessary. Plaintiff sued defendant, the trial court entered a directed verdict in plaintiff's favor, and the jury awarded punitive and compensatory damages. On appeal, the court reversed and remanded. The court reasoned that, by the language of the policy, defendant was not precluded from challenging the medical necessity of hospitalization recommended by the treating physician. The court further determined that while defendant breached its duty of good faith and fair dealing by failing timely to advise plaintiff of his right to peer review and arbitration, it was unlikely that the jury would have awarded the same damages for that breach.

OUTCOME: Judgment in plaintiff's favor was reversed and remanded, because trial court erred in directing a verdict that defendant violated its duty of good faith and fair dealing by disagreeing with treating physician on retrospective review. However, trial court did not err in directing a verdict that defendant's failure to advise plaintiff of his right to peer review and arbitration breached the duty.

Dissent: An exclusionary clause in a policy must be "conspicuous, plain and clear." ( State Farm Mut. Auto. Ins. Co. v. Jacober (1973) 10 Cal.3d 193, 202 [110 Cal. Rptr. 1, 514 P.2d 953].) The burden is on the insurer to "phrase exceptions and exclusions in clear and unmistakable language"   [*19]   ( Harris v. Glens Falls Ins. Co . (1972) 6 Cal.3d 699, 701 [100 Cal. Rptr. 133, 493 P.2d 861]), and to "draft its policy to avoid any misinterpretation by the average layman"

Majority: In summary, we appreciate the plight of the subscriber, forced to decide whether to follow his doctor's recommendation without assurance that his policy will cover the expense. We do not, however, believe it would be alleviated by requiring the insurer to insert redundant language into the policy to make doubly clear to the subscriber that he really is in a dilemma and cannot count on coverage. And although a judicial ruling that retrospective review violates public policy would protect against retrospective denial of coverage, subscribers would pay the price in reduced insurance alternatives and increased premiums.

The problem of retrospective denial of coverage can be reduced through the growing practice of preadmission screening of nonemergency hospital admissions. When such screening is not feasible, as in the present case, we think the best the courts can do is give the policy every reasonable interpretation   [*13]   in favor of coverage.

 

Engel v redwood county farmers mutual insurance

PROCEDURAL POSTURE: Plaintiff insured filed an action against defendant insurer, alleging that the insurer was liable under a fire insurance policy for a loss occasioned by the death of a number of the insured's sows, which was caused by heat emanating from a furnace. The District Court, Redwood County (Minnesota) rendered judgment for the insured. The insurer appealed.

OVERVIEW: The insured, a farmer, constructed a hog barn on his farm for use in farrowing hogs. The barn was heated by a certain furnace, which was located just outside the building and which blew hot air into the barn by means of a fan. The furnace was controlled by a thermostat that could be adjusted to shut off the fan and furnace at a pre-set temperature. The thermostat malfunctioned, the barn became overheated, and several of the insured's sows died. At all times the fire inside the furnace burned and produced heat at its usual rate and was confined within the furnace, causing no damage to the hog barn or to the furnace. The insured denied coverage under the parties' fire insurance policy, claiming that the loss was not recoverable because it was the result of a so-called "friendly" rather than "hostile" fire. On appeal, the court ruled that under Minnesota law, fire could be found to be hostile, although it was intentionally kindled and never escaped its confines, if it was excessive or uncontrolled. A fire which caused damage by burning for a greater length of time than intended was no less uncontrolled merely because it continued to burn at its usual rate, the court reasoned.

OUTCOME: The court affirmed the district court's judgment.

 

Youse v employers' fire insurance

PROCEDURAL POSTURE: Appellant insurer sought review of a judgment from the Wyondotte District Court (Kansas), which found that appellee insured was entitled to recover for the loss and damage of a star sapphire ring caused by fire under the terms of the parties' insurance policy.

OVERVIEW: The ring was inadvertently burned in a trash burner. The trash burner was intended for that purpose, the fire was lit intentionally, and it was confined to the trash burner. The insurer maintained that it was not liable for loss or damage that resulted from a "friendly fire" under the terms of the policy. The insured maintained that the policy covered the damage to the ring by any kind of fire. Upon review, the court found that the term "fire" as used in standard insurance clauses meant "hostile fire" even if the policy did not state that in its provisions. A hostile fire was an unexpected fire in a place not where it was intended to be or a fire that escaped from a place where it was intended to be. A friendly fire was lit and contained in a usual place for a fire. The court observed that when a person bought standard fire insurance, it was done with the idea of protecting himself from hostile fire. Thus, the court concluded that the fire that damaged the ring was a friendly fire because it was intentionally lit for the ordinary and usual purpose of burning trash, and it was confined to the trash burner. The damage to the ring was not covered under the parties' policy.

OUTCOME: The court reversed the judgment for the insured in his action to recover for the loss and damage of a ring caused by fire under the terms of the parties' insurance policy.