Law and the Insurance Contract

Law and the Insurance Contract

CAL-STATE EXAMS

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TABLE OF CONTENTS

LAW AND THE INSURANCE CONTRACT

LESSON ONE — INSURANCE AND THE LAW

Overview - Structure and Source of Law - Common Law - Constitutions Statutes - Administrative Rules and Regulations - Courts - Court Trials - Pleadings - Courts of Law and Courts of Equity - Insurance Regulation

LESSON TWO — CONTRACTS

Overview - Two Definitions of Contract - Offer - Acceptance - Competent Parties - Contract Form - Illegality - Duress and Undue Influence - Rules of Contract Construction - Breach and Materiality - Third-Person Beneficiaries - Liberty of Contract - Constitutional Protection of Existing Contracts - Insurance Contract Law

LESSON THREE — AGENCY

Power and Authority - Acts and Knowledge of the Agent - Capacity of Principal and Agent - Creation of the Principal-Agent Relationship - Limitations of the Agent's Authority • Principal and Agent - Principal, Agent, and Third Persons - Classification of Agents - Termination of the Agent's Powers - Master and Servant - Employer and Independent Contractor

LESSON FOUR— WAIVER AND ESTOPPEL

Overview - Waiver and Estoppel Defined - Express and Implied Waivers - Intent to Waive - Knowledge of the Insurer - Authority of the Agent - Forbidden Waivers and Estoppels - Cancellation of Waiver - Election - Estoppel and the Parol Evidence Rule - Common Waiver and Estoppel Situations

LESSON FIVE — PRIVACY AND INSURANCE

Overview - History of Privacy Law - Federal Privacy Legislation - State Privacy Laws - The NAIC Model Privacy Act - Privacy for Business

LESSON SIX — INSURERS AND AGENTS AS EMPLOYERS

Overview - Statutory Protection of Employees - Disparate Treatment and Disparate Impact Discrimination - Employment Practices and Decisions

LESSON ONE: INSURANCE AND THE LAW

OVERVIEW

The student of insurance needs a basic understanding of the law for four reasons. First, an insurance policy represents a contract, and a contract is an agreement enforceable in a court of law. For this reason, an understanding of contract law is a necessary part of insurance education. Second, a study of contracts leads inevitably to many other areas of law. An acquaintance with the law of agency, property, estates, trusts, community property, creditor-debtor relationships, equitable remedies, and torts is necessary to an understanding of contracts and of the insurance business. Third, insurance is heavily regulated by a body of law which is becoming more complex every day. Insurers must work continually to bring themselves into compliance with these laws. Fourth, insurers must conduct their businesses in accordance with many laws which have nothing to do with insurance. As employers they must deal with employment laws and as issuers of securities with securities laws. The purpose of this chapter is to explain the structure of law and the way the laws governing insurers fit into that structure.

STRUCTURE AND SOURCE OF LAW

When people speak of a law, they usually mean a specific rule or requirement, a statute, in legal terms, laid down by a legislative body. However, law is a great deal more than a collection of statutes. The structure of law is complex, and its sources manifold.

Structure of law. Included in the concept of law are the broad philosophies and principles of constitutional law, specific agreements embodied in treaties between nations, congressional enactments and state statutes, decisions of federal and state courts, rules and regulations of numerous administrative departments of federal and state governments, and many general principles of custom and public policy dating back so far that no one can say accurately when they originated. In its broadest sense, law can be defined as a system of rules and principles that comprise a definite and enforceable standard of human conduct.

The laws of a society are shaped by and tailored to the needs of that society. A law appropriate to and necessary for one society might be intolerable in another. Even within a country, different regions require different laws. In the United States, no two states have laws all of which are identical. Moreover, a federal law which applies to the entire country might be readily accepted in some states and not so readily accepted in others. Such was the case with the federal law requiring vehicles to limit their speed to 55 miles per hour. Many people in the western states where it is often necessary to travel great distances found this law difficult to accept, while people in small eastern states accepted it more readily. A lack of acceptance of a law will often cause it to be ignored, unenforced, modified, or repealed.

As society changes, some laws lose their acceptance. For example, at one time a state could lawfully deny women the right to practice law. Social changes caused this law to lose its acceptance, and the law was eliminated. Other changes in society make apparent the need for new laws. For example, when computers came into general use, it became necessary for the legislatures and courts to develop a body of computer law.

A society which changes rapidly will have a rapidly changing body of law. The United States with its rapid social and technological change is an example of such a society.

Sources of law. It is often necessary to consult a number of sources before all the applicable law can be found on any given subject. Constitutions must be examined, as well as pertinent statutes, rules and regulations of administrative bodies, and reports of court decisions. Treaties between nations and executive orders and proclamations might also have an important bearing on the question under consideration.

The constitutions and legislative enactments of the federal government and of each state government are compiled and published. Legislative enactments are arranged, or codified, alphabetically by subject matter and indexed so that they can be found easily.

Each code has a title indicating its jurisdiction, as United States Code, Illinois Revised Statutes, or Massachusetts General Laws, Annotated.

The decisions of courts of appeal, appellate courts, are published in bound volumes called reports or reporters. They occupy many shelves in any law library, and detailed systems have been devised for indexing them.

A standard form of reference for these published court decisions has been developed. The title of the case is given thus: Smith v. Jones. Then follow the volume number, the abbreviation for the reporter system referred to, the page on which the case begins, and in parentheses, the year in which the case was decided. Thus, the landmark insurance case of United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944), will be found in volume 322 of the United States Supreme Court reports, beginning at page 533. This case was decided in 1944. Other examples may help in understanding this system. For instance, one famous insurance case is Metropolitan Life Insurance Co. v. Conway, 252 N.Y. 449, 169 N.E. 642 (1930). This means that this case is reported in volume 252 of the Court of Appeals of New York reports on page 449 and in volume 169 of in the North Eastern Reporter on page 642. This case was decided in 1930. Similarly, the case of Monahan v. Metropolitan Life Insurance Co., 283 Ill. 136, 119 N .E. 68 (1918) is reported in volume 283 of the Illinois Supreme Court reports on page 136 and in volume 119 of the North Eastern Reporter on page 68. This case was decided in 1918.

Lawyers also make frequent use of various treatises on the law, such as Restatements of the Law, prepared by the American Law Institute, Williston on Contracts, Couch on Insurance, and Corpus Juris Secundum, to mention only a few of the general references available. Such treatises help lawyers gain a general understanding of the law. The best treatises have influenced the development of legal principles.

Much of the law has been programmed into computers. LEXIS and WESTLAW are well-known software systems for computer assisted legal research. Their data bases are large and are being expanded. Many lawyers now use computers as tools to assist them to do fast, thorough, accurate legal research.

COMMON LAW

The United States is often said to be a common ,law country. The term common law has a number of different meanings. Some of the most important meanings are given below.

General principles of law. In its broadest meaning, the common law is a heritage of general principles and concepts involving customs, public policy, and ideas of justice that are followed as a matter of legal philosophy by courts of common, law countries, states, and provinces. The traditions of the common law were brought to the United States by the early settlers from England.

Common law v. civil law. Common law also means a system of law followed by England and by nations which derive their law from English law. Common law is often used in this sense to contrast legal systems based on English law with legal systems based on Roman law. England, Canada (except Quebec), and most of the states in the United States are common law jurisdictions. By contrast, France, Spain, Italy, Quebec, and some states in the United States derive their legal systems in whole or in part from the Roman law. These countries, states, and provinces are said to be civil law jurisdictions.

Perhaps the most important distinguishing characteristic of the civil law is that it attempts to bring together all the general principles of law and to organize them into a relatively complete code. Court decisions then are made only with reference to principles that have been made a part of that code. In common law jurisdictions, there is no attempt to write down all the principles that will be used, although such principles often are enacted into statutes or expressed as case law.

Case law. The term common law is sometimes used to distinguish case law (court decisions) from statutory, or legislative, law. In that sense, the common law of a jurisdiction is said to be made up of the decisions of the courts, as contrasted with the enactments of legislatures or written constitutions.

Law common to everyone. Common law originated in such an early period that its beginning cannot be established with certainty. Local courts were in existence, however, in the days of the early Saxons. After the Norman conquest of England in the year 1066, the Norman kings began to send their personal delegates through the country to represent them locally in various matters. In the 12th century, this practice developed into a regular system of itinerant courts. Eventually, these courts replaced the local courts, and the law of the King's Courts became law common to everyone, nobility or commoner, and hence the common law.

CONSTITUTIONS

A constitution sets forth in general terms the principles that form the legal foundation of a government. Because of its great importance as an instrument of government, the most serious consideration is given to drafting and adopting a constitution. In addition, extensive safeguards are incorporated to prevent frequent or ill-considered amendments. A constitution ordinarily meets the needs of a changing society through interpretation by the courts, rather than by amendment. Its general language makes this flexibility possible. Constitutions tend to be significantly more permanent than statutes.

A twofold purpose. A constitution in the United States has a twofold purpose. First, it describes the structure of the government — defining the extent of its powers and outlining the principles on which it is to operate. Thus, it is customary to provide for three branches of government — legislative, executive, and judicial — and to establish a system of checks and balances to guard against any branch becoming too powerful. Second, a constitution establishes a system of safeguards and guarantees of basic human rights, such as freedom of speech, freedom of worship, and the other freedoms enumerated in the Bill of Rights of the federal Constitution.

The dual constitutional system of the United States. In the United States, there are two kinds of constitutions: the Constitution of the federal government and the constitutions of the various states. Because of this dual system, it is necessary to understand the relationships of the federal and state constitutions to each other.

The basic difference between the federal Constitution and the state constitutions is that power is delegated by the federal Constitution to the federal government, whereas the state constitutions define and limit the already existing power of the state governments. The federal government has no power which is not given to it by the federal Constitution. A state government has all powers which are not prohibited to it by the federal Constitution or by the constitution of that state.

The federal Constitution. Historically, the governing power in the United States was exercised separately by each of the original 13 colonies which had well-defined existences as political units before there was a federal government. When representatives of these colonies met to frame a constitution for a proposed central government, the authority of the new government so formed was delegated to it by the colonies. This idea is summarized in Amendment X of the federal Constitution as follows: The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the states respectively, or to the people. The federal government is more than a mere confederation of sovereign states. It has direct authority over the people themselves to the extent of the governing power delegated to it. The United States Supreme Court has the final power to decide whether he federal government has exceeded the limits of its constitutional authority. However, over the years, the Court has tended to broaden the authority of the federal government by holding that many powers not specifically granted to the federal government are implied in the Constitution. Once it has been established that a power is properly exercisable by the federal government, any acts by it in that particular area take precedence over the acts of any state or subdivision of a state with respect to the same subject matter. The federal Constitution, the laws of the United States that are enacted under its provisions, and all treaties made under the authority of the United States are declared by the federal Constitution to be the supreme law of the land. Accordingly, any law, whether federal or state, that violates a provision of the federal Constitution is unconstitutional. A court decision, whether federal or state, that violates a right guaranteed by the federal Constitution can be overruled by a higher court. The act of an administrative officer, either federal or state, can be overruled by a court if it conflicts with the Constitution of the United States. Nevertheless, there are many areas in which the state constitutions are supreme.

State constitutions. A state constitution performs some of the same functions for the state that the federal Constitution performs for the United States. That is to say, it outlines the general framework of the government and spells out the guarantees of fundamental human rights. However, a state constitution does not grant the state the power to govern. Instead, it functions as a limitation of the power that is inherent in the state itself. The governing power of a state exists whether there is a state constitution or not. Thus, the state constitution has been called the "mandate of a sovereign people to its servants and representatives.

While the federal Constitution enumerates delegated powers, a state constitution limits powers already acknowledged to exist — powers which in all other respects are unlimited. The practical effects of this concept are enormously significant. For instance, if an act of a state legislature is challenged, it will be considered to be constitutional unless the state constitution or the Constitution of the federal government prohibits it. By contrast, an act of Congress must be based upon some affirmative provision of the federal Constitution and will be constitutional only if it is the exercise of a power delegated to the federal government.

Under the federal Constitution, some of the powers that otherwise would be exercisable by the states were given up and delegated to the federal government. In still other areas, however, the state constitution represents the supreme law of the state. Thus, the Constitution of the United States and the constitutions of the various states — each operative in its respective sphere — together provide the fundamental principles upon which the government of the United States is based.

STATUTES

A statute is an act of the legislature declaring, commanding, or prohibiting something; a particular law enacted and established by the will of the legislative department of government; the written will of the legislature, solemnly expressed according to the forms necessary to constitute it the law of the state.

Collections of compiled statutes often are referred to as