Insurance law
From Wikipedia, the free encyclopedia
Insurance law is the name given to practices of law surrounding insurance,
including insurance policies and claims. It can be broadly broken into three categories -
regulation of the business of insurance; regulation of the content of insurance policies,
especially with regard to consumer policies; and regulation of claim handling.
Development of Insurance Law
The earliest form of insurance is probably marine insurance, although forms of mutuality
(group self-insurance) existed before that. Marine insurance originated with the
merchants of the Hanseatic league and the financiers of Lombardy in the 12th and 13th
centuries, recorded in the name of Lombard Street in the City of London, the oldest
trading insurance market. In those early days, insurance was intrinsically coupled with
the expansion of mercantilism, and exploration (and exploitation) of new sources of
gold, silver, spices, furs and other precious goods - including slaves - from the New
World. For these merchant adventurers, insurance was the
"means whereof it cometh to pass that upon the loss or perishing of any ship there
followeth not the undoing of any man, but the loss lighteth rather easily upon many than
upon a few... whereby all merchants, especially those of the younger sort, are allured to
venture more willingly and more freely." [1]
The expansion of English maritime trade made London the centre of an insurance
market that, by the 18th century, was the largest in the world. Underwriters sat in bars,
or newly fashionable coffee-shops such as that run by Edward Lloyd on Lombard
Street, considering the details of proposed mercantile "adventures" and indicating the
extent to which they would share upon the risks entailed by writing their "scratch" or
signature upon the documents shown to them.
At the same time, eighteenth-century judge William Murray, Lord Mansfield, was
developing the substantive law of insurance to an extent where it has largely remained
unchanged to the present day - at least insofar as concerns commercial, non-consumer
business - in the common-law jurisdictions. Mansfield drew from "foreign authorities"
and "intelligent merchants"
"Those leading principles which may be considered the common law of the sea, and the
common law of merchants, which he found prevailing across the commercial world, and
to which every question of insurance was easily referrable. Hence the great celebrity of
his judgments, and hence the respect they command in foreign countries". [2]
By the 19th century membership of Lloyd's was regulated and in 1871, the Lloyd's Act
was passed, establishing the corporation of Lloyd's to act as a market place for
members, or "Names". And in the early part of the twentieth century, the collective body
of general insurance law was codified in 1906 into the Marine Insurance Act 1906, with
the result that, since that date, marine and non-marine insurance law have diverged,
although fundamentally based on the same original principles.
[edit]Common law of insurance - basic principles
Common law jurisdictions in former members of the British empire, including the United
States, Canada, India, South Africa, and Australia ultimately originate with the law of
England and Wales. What distinguishes common law jurisdictions from their civil law
counterparts is the concept of judge-made law and the principle of stare decisis - the
idea, at its simplest, that courts are bound by the previous decisions of courts of the
same or higher status. In the insurance law context, this meant that the decisions of
early commercial judges such as Mansfield, Lord Eldon and Buller bound, or, outside
England and Wales, were at the least highly persuasive to, their successors considering
similar questions of law.
At common law, the defining concept of a contract of commercial insurance is of a
transfer of risk freely negotiated between counterparties of similar bargaining power,
equally deserving (or not) of the courts' protection. The underwriter has the advantage,
by dint of drafting the policy terms, of delineating the precise boundaries of cover. The
prospective insured has the equal and opposite advantage of knowing the precise risk
proposed to be insured in better detail than the underwriter can ever achieve. Central to
English commercial insurance decisions, therefore, are the linked principles that the
underwriter is bound to the terms of his policy; and that the risk is as it has been
described to him, and that nothing material to his decision to insure it has been
concealed or misrepresented to him.
In civil law countries insurance has typically been more closely linked to the protection
of the vulnerable, rather than as a device to encourage entrepreneurialism by the
spreading of risk. Civil law jurisdictions - in very general terms - tend to regulate the
content of the insurance agreement more closely, and more in the favour of the insured,
than in common law jurisdictions, where the insurer is rather better protected from the
possibility that the risk for which it has accepted a premium may be greater than that for
which it had bargained. As a result, most legal systems worldwide apply common-law
principles to the adjudication of commercial insurance disputes, whereby it is accepted
that the insurer and the insured are more-or-less equal partners in the division of the
economic burden of risk.
[edit]Insurable interest and indemnity
Most, and until 2005 all, common law jurisdictions require the insured to have an
insurable interest in the subject matter of the insurance. An insurable interest is that
legal or equitable relationship between the insured and the subject matter of the
insurance, separate from the existence of the insurance relationship, by which the
insured would be prejudiced by the occurrence of the event insured against, or
conversely would take a benefit from its non-occurrence. Insurable interest was long
held to be morally necessary in insurance contracts to distinguish them, as enforceable
contracts, from unenforceable gambling agreements (binding "in honour" only) and to
quell the practice, in the seventeenth and eighteenth centuries, of taking out life policies
upon the lives of strangers. The requirement for insurable interest was removed in non-
marine English law, possibly inadvertently, by the provisions of the Gambling Act 2005.
It remains a requirement in marine insurance law and other common law systems,
however; and few systems of law will allow an insured to recover in respect of an event
that has not caused the insured a genuine loss, whether the insurable interest doctrine
is relied upon, or whether, as in common law systems, the courts rely upon the principle
of indemnity to hold that an insured may not recover more his true loss.
[edit]Utmost good faith
The doctrine of uberrimae fides - utmost good faith - is present in the insurance law of
all common law systems. An insurance contract is a contract of utmost good faith. The
most important expression of that principle, under the doctrine as it has been interpreted
in England, is that the prospective insured must accurately disclose to the insurer
everything that he knows and that is or would be material to the reasonable insurer.
Something is material if it would influence a prudent insurer in determining whether to
write a risk, and if so upon what terms. If the insurer is not told everything material about
the risk, or if a material misrepresentation is made, the insurer may avoid (or "rescind")
the policy, i.e. the insurer may treat the policy as having been void from inception,
returning the premium paid.
[edit]Warranties
In commercial contracts generally, a warranty is a contractual term, breach of which
gives right to damages alone; whereas a condition is a subjectivity of the contract, such
that if the condition is not satisfied, the contract will not bind. By contrast, a warranty of
a fact or state of affairs in an insurance contract, once breached, discharges the insurer
from liability under the contract from the moment of breach; while breach of a mere
condition gives rise to a claim in damages alone.
[edit]Regulation of insurance companies
Insurance regulation that governs the business of insurance is typically aimed at
assuring the solvency of insurance companies. Thus, this type of regulation governs
capitalization, reserve policies, rates and various other "back office" processes.
[edit]In the United States
As a preliminary matter, insurance companies are generally required to follow all of the
same laws and regulations as any other type of business. This would include zoning
and land use, wage and hour laws, tax laws, and securities regulations. There are also
other regulations that insurers must also follow. Regulation of insurance companies is
generally applied at State level and the degree of regulation varies markedly between
States.
Regulation of the insurance industry began in the United States in the 1940s , through
several United States Supreme Court rulings. The first ruling on insurance had taken
place in 1868 (in the Paul v. Virginia ruling[3]), with the supreme court ruling that
insurance policy contracts were not in themselves commercial contracts. This stance
did not change until 1944 (in the United States v. South-Eastern Underwriters
Association ruling [4]), when the Supreme court upheld a ruling stating that policies were
commercial, and thus were regulatable as other similar contracts were.
In the United States each state typically has a statute creating an administrative agency.
These state agencies are typically called the Department of Insurance, or some similar
name, and the head official is the Insurance Commissioner, or a similar titled officer.
The agency then creates a group of administrative regulations to govern insurance
companies that are domiciled in, or do business in the state. In theUnited
States regulation of insurance companies is almost exclusively conducted by the
several states and their insurance departments. The federal government has explicitly
exempted insurance from federal regulation in most cases.
In the case that an insurer declares bankruptcy, many countries operate independent
services and regulation to ensure as little financial hardship is incurred as possible
(National Association of Insurance Commissioners operates such a service in the
United States [5]).
In the United States and other relatively highly-regulated jurisdictions, the scope of
regulation extends beyond the prudential oversight of insurance companies and their
capital adequacy, and include such matters as ensuring that the policy holder is
protected against bad faithclaims on the insurer's part, that premiums are not unduly
high (or fixed), and that contracts and policies issued meet a minimum standard. A bad
faith action may constitute several possibilities; the insurer denies a claim that seems
valid in the contract or policy, the insurer refuses to pay out for an unreasonable amount
of time, the insurer lays the burden of proof on the insured - often in the case where the
claim is unprovable. Other issues of insurance law may arise when price fixing occurs
between insurers, creating an unfair competitive environment for consumers. A notable
example of this is where Zurich Financial Services [6] - along with several other insurers
- inflated policy prices in ananti-competitive fashion. If an insurer is found to be guilty of
fraud or deception, they can be fined either by regulatory bodies, or in a lawsuit by the
insured or surrounding party. In more severe cases, or if the party has had a series of
complaints or rulings, the insurer's license may be revoked or suspended. It should be
noted that bad faith actions are exceedingly rare outside the United States. Even within
the US the full rigour of the doctrine is limited to certain States such as California.
[edit]In the European Union
Member States of the European Union each have their own insurance regulators.
However, the E.U. regulation sets an harmonsied prudential regime throughout the
whole Union. As they are submitted to harmonised prudential regulation, and in
consistency with the European Treaty (according to which any legal or natural person
who is a citizen of a Union member State is free to establish him-, her- or itself, or to
provide services, anywhere within the European Union), an insurer licensed in and
regulated by e.g. the United Kingdom's financial services regulator, the Financial
Services Authority, may establish a branch in, and/ or provide cross-border insurance
coverage (through a process known as "free provision of services") into, any other of
the member States without being regulated by those States' regulators. Provision of
cross-border services in this manner is known as "passporting".
[edit]Rest of World
Every developed sovereign state regulates the provision of insurance in different ways.
Some regulate all insurance activity taking place within the particular jurisdiction, but
allow their citizens to purchase insurance "offshore". Others restrict the extent to which
their citizens may contract with non-locally regulated insurers. Still others do both. In
consequence, a complicated muddle has developed in which many international
insurers provide insurance coverage on an unlicensed or "non-admitted" basis with little
or no knowledge of whether the particular jurisdiction in or into which cover is provided
is one that prohibits the provision of insurance cover or the doing of insurance business
without a licence.
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