There are almost as many variations of the definitions of insurance as there are texts on insurance. Black’s Law Dictionary states that Insurance is “A contract whereby, for a stipulated consideration one party undertakes to compensate the other for loss on a specified subject by specified perils.” Another legal definition is “a contract whereby one undertakes to indemnity another against loss, damage, or liability arising from an unknown or contingent event, and is applicable only to some contingency or act to occur in the future.”
A more practical definition offered by some insurance textbooks calls insurance, “…a device for the reduction of uncertainty of one party, called the insured, through the transfer of particular risk to another party, called the insurer, who offers a restoration, at least in part, of economic losses suffered by the insured.”
Insurance, by its very nature, is closely tied to the legal system. From the beginning of insurance, regulators realized that there were huge financial losses at risk, and the transfer of the risk was done by contract which was a “promise” to perform by the insurance company on behalf of their insured. In respect to liability insurance which is included in an automobile policy, the concept of negligence is introduced as a court must determine whether one’s action is (are) reasonable and prudent.
There are two types of legal wrongs, civil and criminal. Generally speaking, Insurance does not cover criminal acts except in certain specified situations which are not of interest in the discussion of automobile insurance. An insured who was greatly exceeding the speed limit could be involved in vehicular homicide (criminal) and sued for medical bills of the victim (civil).
There are two types of civil wrongs: torts and breach of contract. Courts will provide a remedy in the form of action for damages for Torts. Torts can be sub-divided into three sections:
CONSUMER APPLICATION
(1) A farmer who is burning off his field near a subdivision of homes creates strict liability. If the flames are carried by the wind into the subdivision and several homes burn down, the farmer can be held liable for the damage, even though he had been legally burning off his field.
(2) Some liabilities are created by legislation. A prime example is Workers Compensation. If the Jones Construction Company requires Green to climb on roofs with loose tiles, and because of a loose tile, Green falls and suffers injuries, the Jones Construction Company is legislated to liability with fault.
Reminder: If a Tort has occurred, Tort law provides protection against violations of certain rights. The main rights involving automobile insurance would be undue interference with an economic right or advantage, bodily injury, and property damage.
As remedies for these actions, there are three legal remedies:
Keep in mind that the insurance policy assumes certain liabilities of the policyholder, therefore the insurance company may have to (1) make the monetary award on behalf of its policyholder, or (2) provide restitution on behalf of its policyholder.
Money damages are usually compensatory, i.e. it compensates for a monetary loss which is reasonably related to the extent of the injury involved. Nominal damages may be awarded if there is little or no actual damages involved. Punitive damages may be awarded which are punitive in nature and frequently have no relationship to the compensatory damages. Most insurance policies do not cover Punitive damages as insurers have almost universally maintained that one cannot transfer an intentional or negligent act (the basis for most Punitive damage awards) to a third party.
CONSUMER APPLICATION
Smith drives his car into the back of a van waiting for a signal light to change. The occupant of the car, Mrs. Brandt, suffered cuts on her arm which required several stitches. The van was determined to be unsalvageable. Mrs. Brandt sued Smith and asked for damages in the amount of $50,000 for loss of earnings and pain and suffering, the replacement of her year-old van with another van identical but new, and she further asked for $1,000,000 punitive damages.
It was determined at trial that Mrs. Brandt was a school teacher and lost only one week of work because she complained of the pain. Otherwise she could have returned to work the next day.
It was discovered that the van had been owned by a company who used it for delivery, and it had 50,000 miles on it although it was just a little over a year old.
Smith’s policy would pay compensatory damages such as the actual medical costs for the
cuts to Mrs. Brandt, the replacement value of a similar van with 50,000 miles, and it would not pay for punitive damages. Since there was no evidence to show that Smith was excessively negligent, punitive damages were not awarded. Loss of income would be provided under the policy for the amount of money that she would have earned had she been at work that week. As a practical matter, it is doubtful that any insurance company would argue about the length of time she had taken from work.
People are entitled to the enjoyment of their own property and any rights arising from the ownership of that property. Conversion is an intentional tort against the owner’s right to enjoy his/her personal property (such as an automobile). An intentional tort, because of the fact that it was “intentional”, makes the “perpetrator” have a high degree of blame.
There are also activities which by law create liability by the perpetrator, regardless of fault. These “no-fault” activities include actions such as a “reasonable” activity in an “unreasonable setting.” An example would be parking a truck loaded with explosives in a heavily populated area. Workers Compensation is an excellent example of “no-fault” activity created by law, as the employer is responsible for injuries to workers on-the-job, regardless of what the employer has done, or not done.
Negligence – an “Unintentional Tort” – is defined by the “prudent – man rule:” “the omission to do something which a reasonable man, guided by the considerations which ordinarily regulate the conduct of human affairs, would do; or doing something which a reasonable and prudent man would not do.” There must be a legal duty to use care in one’s activities; there must be a failure to exercise such care; and there must be some resulting damage or injury. Obviously, within our frame of reference regarding Personal Automobile Insurance, negligence can be assumed by an insurer.
CONSUMER APPLICATION
An interesting study in Negligence involves Bill Peterson, age 55, a Boy Scout leader. Last weekend, Bill took 4 boys on a camping trip to the Mountains, where they camped out, hiked, and in general, had a great time. They left Monday night, later than Bill really wanted as everyone was tired, but he gave in to the pleas of the Scouts who seemed to have endless energy.
As they were driving home, Bill felt sleepy, and since he had to be at work the next day, he allowed a 16-year old boy who had just received his license, to drive while he took a nap in the back seat.
They reached the outskirts of Atlanta and soon found themselves in heavy traffic which included many party-goers on their way home. The boy had never driven in traffic before, and when he woke Bill in concern, Bill just told him he had to learn at some time or other. Soon after, the boy found himself in so much traffic that he panicked, and when he tried to leave the freeway, he turned into an entrance lane to the freeway by error. Seat belts and air bags saved the two front seat passengers, but they were seriously injured. Bill and the other 2 boys suffered less serious injuries. To determine if Bill was negligent, the question as to the “prudent-man” rule arose, i.e. would a prudent man have allowed a 16 year-old inexperienced driver to drive under the conditions that arose?
Bill was the scoutmaster, the adult, so there was a legal duty to exercise the maximum care. There was obviously a failure to exercise such care. There was resulting damage and injury.
Negligence is divided into Contributory Negligence, Comparative Negligence and the “Last Clear Chance” concept.
In the determination of negligence, the last consideration is whether the person who was injured or damaged was negligent. The reasoning is that the guilty party must pay, and the injured party, if innocent of the actions, should not pay. Basically, the theory is that if each party is somewhat negligent, each party must bear its own share of the injury. This is determined by law in many jurisdictions. An example would be an automobile accident where one party made an illegal turn in front of a speeding vehicle. Under this concept, and by law in many places, each person would pay for their own damages as they both were responsible.
CONSUMER APPLICATION
Mary was driving home late at night, on a boulevard that was lighted by street lights so she was not aware that she had not turned on her headlights. Bronson ran a stoplight in his Ford pickup and hit the side of Mary’s car, causing Mary to be hospitalized and her car to be totally demolished.
Bronson was obviously at fault as he ran a stop light. At the trial, he insisted that he did not see the car because Mary’s headlights were not on and the street lights did not provide sufficient illumination.
The jury would find that Mary had contributed to the accident, and in a Contributory Negligence state, Mary would pay for her own damages, and Bronson would pay for his damages.
The major difficulty in Contributory Negligence is that in many cases the contributions of one party may be small, but the injuries to that party may be large. The Comparative Negligence concept attempts to assess the responsibilities of each party by determining the responsibilities of each. This concept has been adopted in several jurisdictions because of the fairness of the results. However, it creates certain responsibilities on the judge and jury to establish the percentages of negligence.
CONSUMER APPLICATION
Using the circumstances as stated above, if Bronson was found to be more negligent than Mary, but she had contributed to the accident by not having her headlights on, any award given to her would be lessened by the percentage that the jury found that she had contributed to the accident. If she was found to have contributed 25% of the negligence, the $100,000 award would be lowered to $75,000 that Bronson would have to pay.
“Last Clear Chance” concept is used primarily as a defense against contributory negligence by a plaintiff, if the defendant had an opportunity to avoid an accident but did not do so. By not avoiding the accident, then the defendant’s failure to take the proper action supersedes the allegation of contributory negligence.
CONSUMER APPLICATION
An automobile breaks down at night on a heavily traveled highway. The operator puts on the emergency flashing lights, and places an emergency reflector from an emergency kit in the trunk of the car, several feet at the rear of the auto. Another automobile driver ignores all of the warning lights and the reflectors and crashes into the stalled auto. The driver is said to have had the last clear chance to avoid the accident and since it was the primary cause of the accident, it overrides the contributory negligent actions of the driver of the stalled auto.
CONSUMER APPLICATION
A 4-lane highway is being repaired and the lanes are marked and traffic cones are so placed that all traffic merges to the right. A driver continues in the right lane and then goes around two of the cones and turns his car into a space between cars in the right lane. While there was adequate room to enter the lane, the driver obviously was negligent in avoiding the traffic signals and cones. The driver of the car that would have been in that space but now is behind the entering car, decides that since he is driving a big pickup with a steel pipe front bumper, he is going to “teach that driver a lesson.” He speeds up before the entering auto has completely entered the space, causing considerable damage to the auto, but very little to the pickup. The driver of the pickup had the “last clear chance” to avoid the accident, even though the driver of the automobile had negligently entered the space (which the pickup driver felt was his).
The law of contracts specifically applies in insurance as the insurance contract (policy) is the very basis of insurance. The laws of Contracts are extensive and voluminous, most of which are beyond the scope of this text. Certain elements of contract law should be learned and repeated on a regular basis as many questions regarding insurance can be answered and explained to the satisfaction of a policyholder or applicant, if the laws of contract are invoked.
Contracts are composed of four elements:
One party has to make an offer and the other party must accept it. The offer must specifically express the intent to make an agreement in terms that may be so construed, and they must be communicated to the other party. These terms are accepted if transmitted to the person to whom the offer is made, the terms are unconditional and definite, and the terms are transmitted to the person making the offer. An insurance agent is normally considered as a solicitor of the offer, and the offer is the insurance application. A policy is considered as an acceptance. In some types of insurance, the agent has binding authority, and in others they do not have the authority (usually in life and health insurance).
A party to a contract may be considered as incompetent if they are a minor, insane, under the influence of alcohol or drugs, or possibly a corporation (considered by law as an “artificial person”) which doesn’t have the authority to enter into such a contract. By law, many incompetents are given the opportunity to extract themselves from a contract if it was entered into while they were incompetent. In nearly all situations involving insurance, the policy may be cancelled by the insured by law. Even if the insured is found by a court to be incompetent without the knowledge of the insurer, the law usually allows a full return of premium to the insured.
Consideration is whatever one person asks another to do in return for the promise offered under the contract. Insurance consideration is the payment of premium or the promise to pay a premium at a specified later date. In some insurance policies, pre-payment of premiums is required. Life insurance coverage will not be effective until the full first premium is paid, however in Property & Liability insurance pre-payment is not usually required, but the insured has an obligation to pay the premium as soon as coverage commences.
Insurance contracts must involve a legal subject matter and this is usually not a serious problem. However, articles that may not be legally possessed may not be insured. For instance a vehicle used for illegal purposes cannot be insured under an automobile insurance policy.
Insurance contracts have certain unique features in addition to the qualifications listed above. These features are discussed below, but a more detailed discussion or explanations are beyond the scope of this text.
Insurance policies are dependent upon an uncertain event. Under most other contracts, the contracts are based upon some acts being performed. In insurance, the acts may never occur and therefore are considered as “conditional.”
The normal contract can be added to or subtracted from, but an insurance contract is a “take-it-or-leave-it” type of offer. In other words, the insured must adhere to the agreements of the contract, hence it is a contract of “adhesion.”
A typical contact involves items of similar value, e.g. an automobile is purchased for a stated amount, which approximates the value of the automobile. An insurance contract consideration, conversely, is usually uneven. Rarely does the consideration of both parties become equal. The Aleatory concept is that the contract is dependent upon an uncertain event.
Only one party in an insurance contract, makes an enforceable promise. The policyholder pays a premium, the other party makes a Unilateral promise.
Insurance contracts by their very nature are considered as a contract of utmost good faith. The applicant must disclose all material facts, and the insurer must deal with its clients in complete honesty and good faith.
Insurance contracts are contracts of indemnity by which the injured party is compensated for the losses suffered by means of a financial settlement.
CONSUMER APPLICATION
The insurance policy on Roy and Betty was issued, covering the Ford and the Subaru. Six months after issue, Roy was involved in an accident on the freeway which resulted in a judgment against Roy in the amount of $250,000, the limits of his insurance policy.
His insurance policy is “Conditional”, the conditions being the liability that he incurred would be paid by the insurance company.
The policy is a contract of “Adhesion” as Roy accepted the policy as issued by AIC.
The policy is an “Aleatory” contract as the $100,000 it paid on Roy’s behalf is completely out of proportion to the premiums that he had paid.
The policy is “Unilateral”, as AIC had promised to pay under stipulated circumstances and basically all Roy had to do was to pay the premiums.
Roy had disclosed all material facts when he applied for insurance, so AIC exercised their responsibilities in good faith.
Roy was compensated for the losses suffered from the accident by means of a financial settlement, therefore the policy was also a contract of Indemnity.
STUDY QUESTIONS
1. According to all legal definitions, insurance is
A. a gentleman’s agreement.
B. a legal-defined artificial person.
C. a contract.
D. a Ponzi scheme.
2. There are two types of legal wrongs,
A. moral and morale.
B. civil and criminal.
C. intentional and unintentional.
D. Tort and Malfeasance.
3. A “Tort” is a
A. a legal procedure to limit liability.
B. a dessert served at a deli.
C. a criminal act.
D. a civil wrong
4. When a court may (1) grant an injunction, (2) award monetary damages, or (3) require restitution, these choices provide
A. alternatives for criminal acts only.
B. legal remedies for Torts.
C. reasons for appellate decisions.
D. for appeal in a civil suit.
5. Punitive damages
A. are compensatory damages.
B. are usually not covered under Personal Auto Insurance policies.
C. are awarded to compensate for a monetary loss related to the injury.
D. are damages awarded to a person who has wrongfully punished.
6. An intentional Tort against the owner of a car to enjoy the car, is called
A. negligence.
B. contributory negligence.
C. conversion.
D. malfeasance.
7. Under an auto policy, Negligence
A. can be assumed by an insurance company.
B. is never assumed by an insurance company.
C. is a No-Fault activity.
D. refers to the activities of a driver other than the insured.
8. The theory that if each party is somewhat negligent, each party must bear its own share of the injury is called
A. Contributory negligence.
B. Last Clear Chance.
C. Compensatory negligence.
D. Partial Negligence.
9. If a defendant had an opportunity to avoid an accident, even if he was “in the right”, but if he did not do so, and his inaction is used as a defense against negligence, this is called
A. Comparative negligence.
B. Contributory negligence.
C. Last Clear Chance.
D. Partial negligence.
10 An Aleatory Contract is
A. one that must be adhered to on a take-it-or-leave-it basis.
B. one that is based upon an uncertain event.
C. a contract of indemnity.
D. a unilateral agreement.
ANSWERS TO STUDY QUESTIONS
1C 2B 3D 4B 5B 6C 7A 8A 9C 10B