Associate with men of good quality if you esteem your own reputation; for it is better to be alone than in bad company.
Principles of Insurance (part B)
by
Charles Lamson
Some Legal Aspects of the Insurance Contract
The laws applicable to contracts in general apply to insurance contracts. Five aspects of the law, however, have special significance for insurance contracts:
- Concealment
- Representation
- Warranty
- Subrogation
- Estoppel
Concealment
An insurer must rely upon the information supplied by the insured. This places the responsibility of supplying all information pertinent to the risk upon the insured. A willful failure to disclose this pertinent information is known as concealment. To affect the contract the concealed facts must be material; this means they must relate to matters that would affect the insurer's decision to insure the insured and the determination of the premium rate. Also, the concealment must be willful. The willful concealment of a material fact in most states renders the contract voidable.
The rule of concealment does not apply with equal stringency to all types of insurance contracts. In the case of property insurance, where the agent has an opportunity to inspect the property, the insurance company waves the right to void the contract. Concealment arises in ocean marine insurance whenever the insured withholds pertinent information, even if there is no intent to defraud.
Representation
An oral or written misstatement of a material fact by the insured prior to the finalization of the contract is called a false representation. If the insured makes a false representation, the insurer may void the contract of insurance. This results whether or not the insured made the misstatement purposely.
Some insurance applications require the applicant to state that the answers to questions in the application are made to the best of the applicant's knowledge and belief or in similar language. If the policy uses such language, and the applicant has answered truthfully, the fact that the applicant is unaware of the truth will not invalidate the contract.
Insurance policies now usually provide that if the age of the insured is misstated, the policy will not be voided; however, the face amount paid on the policy "shall be that sum which the premium paid would have provided for had the age been correctly stated."
Warranty
A warranty is a statement or promise of the insured that relates to the risk and appears in the contract or another document incorporated in the contract. Untrue statements or unfulfilled promises permit the insurer to declare the policy void.
Warranties differ from representations in several ways. The insurance company includes warranties in the actual contract of insurance or incorporates them in it by reference. Representations are merely collateral or independent, such as oral statements or written statements appearing in the application for insurance or other writing separate from the actual contract of insurance.
Also, in order to void the contract of insurance, the false representations must concern a material fact, whereas the warranties may concern any fact or be any promise. A representation need only be substantially correct, whereas a warranty must be absolutely true or strictly performed.
Several states have enacted legislation that eliminates any distinction between warranties and representations and does not require a showing of materiality for a warranty or that the insured intended to defraud. In these states, a breached warranty does not void the policy. Even in states without such statutes, courts are reluctant to find policies invalid and will construe warranties as representations whenever possible and interpret warranties strictly against the insurer so as to favor the insured.
Subrogation
In insurance, subrogation is the right of the insurer under certain circumstances to assume the legal rights of, or to "step into the shoes" of, the insured. Subrogation particularly applies to some types of automobile insurance. If the insurer pays a claim to the insured, under the law of subrogation the insurer has a right to any claims that the insured had because of the loss. For example, A has a collision insurance policy on a car. B negligently damages the car. The insurance company will pay A but then has the right to sue B to be repaid.
Estoppel
Neither party to an insurance contract may claim the benefit of a violation of the contract by the other party. Each party is estopped, or prevented, from claiming the benefit of such violation. An estoppel can arise whenever a party, by statements or actions, leads the second party to a conclusion, even if false, that the second party relies upon. If the second party would be harmed if the first party was later allowed to show that the conclusion was not true, there is an estoppel. For example, if an insurer gives the insured a premium receipt, the insurance company would lead the insured to the conclusion that the premium had been paid. The insurer would be estopped from later asserting that the insured had not paid the premium in accordance with the terms of the policy.
 INTERNET RESOURCES FOR BUSINESS LAW *SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, PGS. 450-453, 455*
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