Virtually every adult in the U.S. has some experience with insurance whether for health, life, car, home, or business. The purpose of insurance is to allow policyholders to mitigate specific risks that could have a substantial financial impact if they occur. They pay money upfront to cover them in the event of a covered loss. So insurance issues arise in many different contexts, and several areas of law may apply to a given dispute.
What Is Insurance Law?
“Insurance law” includes regulatory, contract, and other areas of law. Insurance and reinsurance are highly regulated industries with specific laws addressing business insurance, insurance policies, and claims handling. Common regulatory issues for insurers involve formation and licensing, filed rates and the filed rate doctrine, and premium rates and rate audits. In addition, there are varying rules for different types of insurers including life, property and casualty, public mutual and nonprofit insurers, and reinsurers.
Various laws also affect coverage and claim litigation, premium payment disputes, corporate regulatory and transactional issues, and loss recovery.
What Rules Apply to Insurance Policies?
Insurance policies are contracts between a policyholder (the insured) and an insurer. They are governed by the rules of contract law.
The typical insurance policy has four parts:
- This sets forth the parties (insured and insurer), policy number, the properties or risks covered by the insurance, the policy period, premiums, limits, and deductibles.
- Insuring agreement. The agreement describes what specifically is covered such as the activities, perils, and types of damage or costs for which the insurer will pay.
- Any activities or losses not covered by the policy are stated here.
- The conditions describe the obligations of each party to the contract.
Exclusions and Conditions for Coverage
The insurance policy will set forth exclusions and conditions for coverage. Policyholders must review these carefully to ensure they understand the scope of their coverage and what they must do to make a claim. Where certain activities or losses are excluded, an insured may be able to purchase additional specialized insurance or an umbrella policy to cover those risks.
Conditions may apply to the insured or insurer. For example, an insurer may be required to give notice before cancellation. An insured typically has obligations related to making a claim and cooperating in an investigation or litigation. Failure to meet these obligations can jeopardize coverage.
Making a Claim
Insurance policies set forth terms which govern when and how to make a claim. Compliance is essential in order to receive coverage. When policyholders suffer a covered loss, they are required to make a timely claim to the insurer (generally to their insurance agent). An untimely or late claim can give the insurer the right to deny coverage as provided in the language in the policy. The notice should provide documentation or any other evidence that supports the claim for coverage.
While policyholders must notify insurers of the loss, they should take care not to prematurely admit fault, make statements of fact as to which they lack information or are uncertain, or attempt to ascertain damages without sufficient information. Insurers can use this information against the insured to deny coverage.
Bad Faith Denial of Coverage
Insurers have an implied duty of good faith and fair dealing. If an insurer denies a claim with malice, fraud, or oppression, it may constitute bad faith and the insured can sue for what is owed under the policy as well as potentially obtain punitive damages, damages for emotional distress, attorney’s fees, court costs, and interest as permitted under state law.
The laws governing what constitutes bad faith vary from state to state. As a result, it is important to consult an attorney regarding a possible bad faith claim.
When Are Insurance Disputes Most Likely to Arise?
The most common insurance related disputes involve coverage or premiums. However, issues can arise in other contexts as well.
When an insurer denies a claim, the insured may bring a suit alleging breach of contract. The litigation will often focus on the language of the policy with both sides arguing their position on the scope of the policy, exclusions, and/or conditions. A claim of bad faith may also be made as discussed in the previous section.
Many businesses have policies with variable premiums. When the policy is issued, it is based on an estimate of an “exposure basis” multiplied by a rate determined by the classification of the exposure. Subsequently, a “premium audit” is performed which examines business records to establish the actual exposure basis and verify the correct classification codes and rates are used to calculate the final premium. An audit may result in a refund of previous premium overpayments, or a request for additional payment of premium.
Common examples of this type of exposure basis premium include auditing payroll records to calculate worker’s compensation insurance or alcohol sales for commercial liability polices for bars and restaurants. Disputes over the calculation of premiums can occur and may go to litigation if they cannot be otherwise resolved.
Duty to Defend; Settlement Rights
Insurance issues may also arise in other lawsuits due to insurance coverage for defending and settling those lawsuits. For example, if the insured is a party to litigation, a best practice is to investigate the existence of insurance coverage that could apply, especially coverage of any defendant or respondent party. The insurer may have a duty to defend and will hire and pay for an attorney. Insurance coverage may lead to faster settlement in the litigation and availability of funds to pay claims. However, as discussed previously, an insured is obligated to give prompt notice of claims so insurance companies may have the right to decline coverage where litigation has progressed without notice of a claim.
Insurance coverage may also play a role in bankruptcy as debtor policies may fund payments to creditors. This can be of critical importance in cases with future creditors, such as asbestos or tort victims whose injuries will only be known at a later date. In such cases insurance policies may be used to create trusts to pay out future claims.
Insurers may transfer some of the risk in their portfolios to a reinsurer to minimize the financial impact of large claims. In effect, reinsurance is insurance for insurers. As with any insurance policy, disputes may arise over the scope of coverage and other issues.
How Do Insurance Issues Arise in Transactional Law?
Insurance can be an integral part of business transactions. Some businesses are required by law to have insurance coverage to operate. Insurance may also be required by lenders. Common examples of corporate transactions that include a provision for insurance coverage are:
- Agency licensing
- Public and private offerings of securities or debt
- SEC Reporting
- Directors and Officer’s Liability
- Merger and Acquisition transactions
- Transfers of books of business through assumption or indemnity reinsurance
Verifying insurance coverage is part of the due diligence process in many business deals. Parties may be required to provide a certificate of insurance or other documentation.
Will Insurance Cover COVID-Related Claims?
COVID-19 has created new insurance issues. One of the first to arise involves business interruption coverage. Many businesses were forced to close in response to public health orders enacted at the city, state, and federal level. Some are seeking coverage under business interruption policies. Such policies are supposed to protect losses incurred by businesses from interruptions or disruptions to their operations caused by events listed in their policy.
The availability of coverage depends on the terms of the policy. Relevant issues raised by COVID-19 related claims include whether pandemics or epidemics are excluded under the policy, how long the interruption must last before the insurance coverage is available, and whether the policy require that the interruption be a result of damage to property.
State laws regarding coverage are changing in response to COVID-19. As a result, it is important to talk with an attorney regarding coverage or insurer obligations for COVID-19 related losses.
Insurance law can affect many aspects of our personal and business lives. Reviewing policies carefully before signing is crucial. If a claim arises, policy holders should document the details and give prompt notice to the insurance carrier. Both insurers and policy holders should consult attorneys for counsel regarding insurance claims, regulations, premium disputes, policy interpretations, and other insurance law issues.
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