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P A R T
5
Property
Personal Property and Bailments
Real Property
Landlord and Tenant
Estates and Trusts
Insurance Law
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
C H A P T E R
27
Insurance Law
“If anything can go
wrong, it will.”
Anonymous (1950s), known
as Murphy’s Law
Learning Objectives
 Insurance
policies as contracts
 Property insurance
 Liability insurance
 Bad faith breach of insurance contract
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Overview
In an insurance agreement, the party who
risks a particular loss (insured) transfers that
risk – along with consideration (premium) –
to another party (insurer) which bears the
financial consequences if the particular risk
(perils) materializes as an actual event
 Person to whom insurance proceeds are
payable is the beneficiary

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Specifics of Insurance
Insurance policies must satisfy all of the
elements required for a binding contract
 Insured’s misrepresentation, if relied on by
the insurer, renders the contract voidable
 If a dispute arises over policy language,
courts interpret provisions as an average
person would understand them and construe
ambiguities against the insurer


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See Property Owners Insurance Co. v. Cope
The Insurance Binder
A binder is an agreement for temporary
insurance pending the insurer’s decision to
accept or reject the risk
 Example: World Trade Center Properties, LLC v.
Hartford Fire Insurance Co. is about interpretation
of property insurance binders issued shortly
before the September 11, 2001, plane attacks
on the World Trade Center Towers

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Proof of Loss & Time Limits
Within specified time, insured (beneficiary
for life insurance) seeking benefits of an
insurance policy must notify insurer a
covered event occurred
 Insured (or beneficiary) must furnish
reasonable proof of the loss-causing event

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Insurer’s Performance & Breach

Insurers perform obligations by paying out
sums and taking other actions under the
policy’s terms within a reasonable time after
the occurrence of a covered event



For property insurance, insured must have
insurable interest
Some perils (events) may be excluded
Insured may sue insurer for breach of
contract for wrongful refusal to pay for
covered loss
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Personal Property Insurance
Real property insurance may also cover
personal property inside a building
 Personal property insurance policies for
specific items are indemnity contracts with
policy limits
 Under right of subrogation, an insurer obtains
insured’s rights to pursue legal remedies
against anyone who negligently or
intentionally caused harm to the property

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Special Contract Clauses

Pro rata clause: apportions loss among insurers
if several insurance policies cover the property
Coinsurance clause: requires insured to buy
coverage in amount equal to a percentage of
fair market value to recover full cost of
partial losses
 Increase of hazard clause: insurer’s liability
will be terminated if insured takes action to
materially increase insurer’s risk

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Liability Insurance

Liability insurance (personal, business,
professional) allows insured the ability to
transfer liability risks to insurer


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Protects against insured’s liability for
negligence, but not deliberate wrongful acts
If insured is sued for a risk contemplated by
a liability insurance policy, the insurer has a
duty to defend insured and win, settle the
case, or pay any resulting award of damages
Test Your Knowledge

True=A, False = B



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Insurance policies are not like the typical
contract and do not require consideration.
A binder is an agreement for temporary
insurance pending the insurer’s decision to
accept or reject the risk.
“Proof of loss” refers to the evidence in a
lawsuit against an insured.
Test Your Knowledge

True=A, False = B



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Paul owns a small house, but rents it to his
cousin Deanna, so Paul does not have an
insurable interest in the property.
A pro rata clause apportions loss among
insurance companies if the insured
purchased multiple insurance policies.
Insurers must specifically exclude all perils
which will not be covered by the policy.
Test Your Knowledge

Multiple Choice

Dr. Philamena was sued for malpractice, but
is covered under a liability policy from Big
Insurance. Could Big Insurance settle the
case without Dr. Philamena’s consent?
(a) Absolutely
 (b) Yes, as long as the settlement was not in
bad faith
 (c) No, an insurer must have the insured’s
consent
 (d) None of the above

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Test Your Knowledge

Multiple Choice

For 2 years, ChemCo had a 50% increase in
the number of worker’s compensation claims
because the company failed to install required
safety equipment. Could the insurer
terminate the policy?
(a) No, because once a policy is written, it
must continue until terminated by the insured
 (b) Yes, under an increase of hazard clause
 (c) Yes, under the subrogation clause

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Thought Question

How should insurance claims be handled in
major disasters, such as the damage caused
by Hurricane Katrina along the Gulf Coast?
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