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Personal Property and Bailments

Real Property
Landlord and Tenant
Estates and Trusts
Insurance Law
2010 The McGraw-Hill Companies, I nc. All rights reserved.
Insurance Law
If anything can go wrong, it will.

Anonymous (1950s)
known as Murphys Law
2010 The McGraw-Hill Companies, I nc. All rights reserved.
Learning Objectives
Insurance policies as contracts
Property insurance
Liability insurance
Bad faith breach of insurance contract
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Each day, every person and every business
faces the risk of physical and financial loss
In an insurance agreement, the party who
would normally risk a particular loss (the
insured) transfers along with consideration
(the premium) that risk to another party
(the insurer) which bears financial
consequences if the particular risks
materialize in the form of actual events
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An insured is the person who acquires
insurance on real or personal property or
insurance against liability, or, in the case of
life or health insurance, the person whose
life or health is the focus of the policy, but the
person to whom the insurance proceeds are
payable is the beneficiary
Except for life insurance, the insured and the
beneficiary generally are the same
Specifics of Insurance
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Insurance policies must satisfy all of the
elements required for a binding contract
Person makes application (offer) to insurance
company for insurance coverage
If the insurance company accepts the offer,
an insurance contract arises
Insureds initial premium payment and future
premium payments furnish consideration for
the insurers promises of coverage
Specifics of Insurance
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State law governs whether insurance
contracts are covered by the statute of
Once written, the policy generally is enforceable
as written
If a dispute arises over policy language,
courts interpret the provisions as an average
person would understand them and construe
ambiguities against the insurer
Specifics of Insurance
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A binder is an agreement for temporary
insurance pending the insurers 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

The Insurance Binder
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Applicants for insurance have a duty to
disclose all material facts about the risk so
an insurer may make an intelligent decision
about whether to accept the risk
An insureds misrepresentation, if relied on
by the insurer, is like any other contract: the
contract is voidable at the election of the

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Within a specified time, the insured (for life
insurance, a beneficiary) who seeks to
obtain the benefits of an insurance policy
must notify the insurer that an event
covered by the policy has occurred
Proof of Loss & Time Limits
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The insured (or beneficiary) must furnish
reasonable proof of the loss-causing event
A sworn statement by the insured (called a proof
of loss) about the loss and resulting damage is
often required by the policy
Proof of Loss & Time Limits
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Insurers perform obligations by paying out
sums and taking other actions under the
policys terms within a reasonable time after
the occurrence of a covered event
If the insurer refuses to pay despite the
occurrence of the covered event, the insured
may sue the insurer for breach of contract
Compensatory and consequential damages
Perhaps punitive damages if denial in bad faith
Insurers Performance & Breach
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An enforceable property insurance policy
requires the person who purchases the
policy (policy owner) to have an insurable
interest in the property being insured
Insurable interest is a legal or equitable
interest in the property that translates into an
economic stake at the time of the loss
Specifics of Property Insurance
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Insurers tend to (a) specify
covered events (perils) for
which the insured will be
paid for resulting losses, or
(b) broadly state coverage
and specify excluded
perils for which no
payment will be made
Covered & Excluded Perils
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Volcano damage is rarely covered
Real property insurance typically covers not
only harm to a residential or commercial
building, but also to personal property inside
the real property
Lessees of real property may obtain renters
insurance to cover their personal property
Personal property insurance for a specific
item, such as a vehicle, is available
Personal Property Insurance
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Shelter Mutual Ins. Co. v.
While residing overseas, Maples contracted to
have a home built in Arkansas and purchased
homeowners insurance from Shelter
Maples took reasonable precautions to winterize
the residence, but a water pipe froze and burst,
leaving several inches of standing water
By the time of discovery months later, mold
covered the interior surfaces of the residence and
the house had to be demolished
Maples reported the loss to Shelter
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Procedural History and Legal Reasoning:
Shelter brought suit to deny coverage
District court found in favor of Shelter, reasoning
that the policy language clearly provided that any
loss due to mold was not covered
Appellate court: Here, a covered peril, frozen
pipes, caused an excluded peril, mold, which
resulted in the loss.We disagree with the courts
reading of the policythe plain language of the
policy does not automatically preclude coverage.
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Shelter Mutual Ins. Co. v.
determinative question is a
factual one: whether the
frozen pipe or the mold was
the dominant and efficient
cause of the loss[thus] we
conclude a material issue of
fact remains, and summary
judgment was improper.
Reversed and remanded
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Shelter Mutual Ins. Co. v.
Property insurance policies are indemnity
contracts, thus the insurer must reimburse
the insured for actual losses to the insured
property caused by a covered event, but
reimbursement may not exceed the
insureds insurable interest or amount of
coverage purchased (policy limits)
Indemnity Contracts
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If real property insured under a valued
policy is destroyed, the insured recovers the
face amount of the policy regardless of
propertys fair market value
Except for the valued policy, property
insurance policies often contain a pro rata
clause, which apportions loss among
insurance companies if the insured
purchased multiple insurance policies
Special Issues
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A coinsurance clause states that for the
insured to recover full cost of partial losses,
the insured must buy property insurance in
an amount equal to a certain percentage
(e.g., 80%) of the fair market value
An increase of hazard clause states that the
insurers liability will be terminated if the
insured takes action materially increasing
insurers risk
Special Issues
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Under the right of subrogation, the insurer
obtains all of the insureds rights to pursue
legal remedies against anyone who
negligently or intentionally caused harm to
the property
Special Issues
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Liability insurance allows the insured the
ability to transfer liability risks to insurer:
Personal liability
Business or comprehensive general
Professional liability or malpractice
Workers compensation policies
Coverage for employers statutorily required
obligation to pay benefits to injured workers
Liability Insurance
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Liability policies generally protect against
insureds liability for negligence but do not
cover deliberate wrongful acts
In Auto-Owners Insurance Co. v. Harvey, a
teenager died and another pleaded guilty to
involuntary manslaughter. Court concluded
that insurance covered the related civil suit
because an intentional wrongful act had not
been proven
Liability Insurance
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Under a workers compensation
policy, injured employees need
not prove negligence on the part
of their employer in order to be
entitled to benefits, thus the
insurers obligation relates to
liability the insured employer
would face under state law rather
than employers negligence
Liability Insurance
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If another party states a legal claim against
the insured and the claim is such that the
insurer would be obligated to cover the
insureds liability if the claim were proven,
the insurer has a duty to defend insured
Insurer must furnish, at its expense, an attorney
to represent insured in litigation resulting from
the claim against insured
Insurers Obligations
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If a claim against the insured falls within
the liabilities covered by the policy and the
claimant is awarded compensatory
damages, the insurer must pay the amount
held to be due from the insured to the
claimant, including court costs
Payment obligations are subject to the policy
limits of the insurance contract involved

Insurers Obligations
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Insurance policies allow insurers to settle
claims of third parties who have made
liability claims against the insured
Generally, the insurers preference
Insurers that unjustifiably refuse to perform
obligations under a policy may be liable for
a bad faith breach of contract claim
See Vining v. Enterprise Financial Group, Inc.
Insurers Obligations
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Test Your Knowledge
True=A, False = B
Insurance policies are not like the typical
contract and do not require consideration.
A binder is an agreement for temporary
insurance pending the insurers decision
to accept or reject the risk.
Proof of loss refers to the evidence in a
lawsuit against an insured.
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Test Your Knowledge
True=A, False = B
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.
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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. Philamenas consent?
(a) Absolutely
(b) Yes, as long as the settlement was not in
bad faith
(c) No, an insurer must have the insureds
(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 workers 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
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