Insurance law
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.
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."
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".
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.
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.
. 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.
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.
, 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".
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), with the supreme court ruling that insurance policy contracts were not in themselves commercial contracts and that insurance was not subject to federal regulation. This "judicial accident", as it has been called, influenced the development of state-level insurance regulation. This stance did not change until 1944 (in the United States v. South-Eastern Underwriters Association
ruling ), 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 the United 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 ).
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 faith
claims 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
- along with several other insurers - inflated policy prices in an anti-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.
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
, 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.
History
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 leagueHanseatic League
The Hanseatic League was an economic alliance of trading cities and their merchant guilds that dominated trade along the coast of Northern Europe...
and the financiers of Lombardy
Lombardy
Lombardy is one of the 20 regions of Italy. The capital is Milan. One-sixth of Italy's population lives in Lombardy and about one fifth of Italy's GDP is produced in this region, making it the most populous and richest region in the country and one of the richest in the whole of Europe...
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."
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".
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.
Principles of insurance
Common lawCommon law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
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
Stare decisis
Stare decisis is a legal principle by which judges are obliged to respect the precedents established by prior decisions...
- 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
Civil law (legal system)
Civil law is a legal system inspired by Roman law and whose primary feature is that laws are codified into collections, as compared to common law systems that gives great precedential weight to common law on the principle that it is unfair to treat similar facts differently on different...
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.
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 2005Gambling Act 2005
The Gambling Act 2005 is an Act of the Parliament of the United Kingdom. It mainly applies to England and Wales, and to Scotland, and is designed to control all forms of gambling...
. 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.
Utmost good faith
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.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.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 AuthorityFinancial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
, 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".
United Kingdom
- Financial Services and Markets Act 2000Financial Services and Markets Act 2000The Financial Services and Markets Act 2000 is an Act of the Parliament of the United Kingdom that created the Financial Services Authority as a regulator for insurance, investment business and banking.-Outline:...
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
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
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
Paul v. Virginia
Paul v. Virginia, 75 U.S. 168 , was a historic case in corporate law in which the United States Supreme Court held that a corporation is not a citizen within the meaning of the Privileges and Immunities Clause...
ruling), with the supreme court ruling that insurance policy contracts were not in themselves commercial contracts and that insurance was not subject to federal regulation. This "judicial accident", as it has been called, influenced the development of state-level insurance regulation. This stance did not change until 1944 (in the United States v. South-Eastern Underwriters Association
United States v. South-Eastern Underwriters Association
United States v. South-Eastern Underwriters Association, 322 U.S. 533 is a United States Supreme Court decision that held that the Sherman Act, the federal antitrust statute, applied to insurance. To reach this decision, the Court held that insurance could be regulated by the United States...
ruling ), 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
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
each state typically has a statute
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
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 the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
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
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
, many countries operate independent services and regulation to ensure as little financial hardship is incurred as possible (National Association of Insurance Commissioners
National Association of Insurance Commissioners
The National Association of Insurance Commissioners is an Internal Revenue Code Section 501 non-profit organization which seeks to organize the regulatory and supervisory efforts of the various state insurance commissioners from around the United States. The NAIC was formed in 1871. Its current...
operates such a service in the United States ).
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 faith
Bad faith
Bad faith is double mindedness or double heartedness in duplicity, fraud, or deception. It may involve intentional deceit of others, or self deception....
claims 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
Price fixing
Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand...
occurs between insurers, creating an unfair competitive environment for consumers. A notable example of this is where Zurich Financial Services
Zurich Financial Services
Zurich Financial Services AG is a major financial services group based in Zurich, Switzerland.-History:The Company was founded in 1872 as subsidiary of the Schweiz Marine Insurance Company under the name Versicherung Verein...
- along with several other insurers - inflated policy prices in an anti-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.
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.See also
- International Association of Insurance SupervisorsInternational Association of Insurance SupervisorsThe International Association of Insurance Supervisors is an international organisation that brings together the world's insurance supervisors and regulators.-History:The IAIS was created in 1994...
- InsuranceInsuranceIn law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
- Agent of RecordAgent of RecordAn agent of record is an individual or a legal entity with a duly properly executed in line with the prevailing legal norms and regulations contractual agreement with an insurance policy owner...
- Australian insurance lawAustralian insurance lawAustralian insurance law is a term which refers to the body of law which regulates the insurance industry and insurance contracts within Australia. Commonwealth Parliament gains authority to make laws with respect to insurance and insurance companies under section 51 XIV and XX of the Australian...
- Financial Services AuthorityFinancial Services AuthorityThe Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
- United Kingdom regulator of financial services (including insurance) - National Association of Insurance CommissionersNational Association of Insurance CommissionersThe National Association of Insurance Commissioners is an Internal Revenue Code Section 501 non-profit organization which seeks to organize the regulatory and supervisory efforts of the various state insurance commissioners from around the United States. The NAIC was formed in 1871. Its current...
- United States organisation that coordinates insurance regulation