CIP Courses , CAIB Courses, CRM Courses: Essentials of Loss Adjusting C110

Chapter Two – Policy Contract Analysis

Describe the role of good faith and insurable interest on policy contract analysis.

What knowledge must a loss adjuster have of insurance policies in general to analyze coverage?

What must a loss adjuster ask to assess whether or not an insured has an insurable interest in damaged or lost property?

Interpreting Policy Wordings

· insurance policy is the underlying authority in the adjustment process

· clearer language for policies were adopted to eliminate legal jargon

· because policies are legal documents they must precisely describe their scope and application

· the adjuster must test whether there is utmost good faith in the contract and insurable interest in the property when the contract was formed

· Specifically the loss adjuster will examine the possibility of misrepresentation, concealment, non-disclosure, and change of material risk.

· The principles of contract law will apply

The loss adjuster must act in good faith. Bad faith dealing have serious repercussions. Courts may award punitive damages against a party that deals in bad faith.

The loss adjuster must determine whether the insured had an insurable interest in the property when the loss occurred. He will ask three questions.

1. What property was damaged by an insured peril

2. Is the property the subject matter of the insurance

3. What is the insured’s relationship to the property in law?

Policy Contract Analysis

each loss assignment adjusters must asses whether the policy covers it
knowledge of risks and property covered by the various types of policy is essential
requires an understanding of the construction and general content of insurance policies
clear language policy now allows consumers to understand their policies
loss adjuster must test whether utmost good faith has been the basis of the formation of the contract
loss adjuster must evaluate the insurable interest

Apply a proximate cause analysis to a loss.

What is proximate cause in relation to an insurance claim?

What is remote cause? Give an example.

Proximate Cause

· the doctrine of proximate cause is applied to determine if a peril is covered by the policy

proximate cause - immediate and effective cause of the loss

· difficulties may arise in the interpretation wording of a policy and may limit coverage when some degree of remoteness affects timing, location and cause of the loss

· loss must arise from an unbroken chain of events leading to the loss

· remote cause – ex pg 7

· proximate cause can be discarded when the language used in the policy wording is clear that the peril is excluded

Proximate Cause

peril that directly causes a loss is the proximate cause because it is the immediate and effective cause of the loss
insured must prove his or her loss under the policy and so must show that an insured peril was the proximate cause of the loss
Example: if the heat of the raging fire from next door causes the insured's building to weaken and collapse, the proximate cause of loss would be fire and not the collapse
loss adjuster must thoroughly investigate the cause of a loss to determine whether a stated cause is actually too remote to be considered the proximate cause

Remote Cause

Determine if the proximate cause is far too remote to have caused the loss. If a fire broke out next door and the adjacent building later collapsed when contractors were working on the adjacent building, the contractor is the proximate cause, the fire is remote.

Discuss the interpretation of concurrent causation.

How do the courts rule on concurred causation as it applies to insurance policies?

Concurrent Causation

· when losses occur concurrently, coverage will apply to that part of the loss caused by the covered loss, unless the policy wording clearly excludes the coverage

Fortuitous Loss

· the loss must happen by chance or by some accidental cause

· the insured must not benefit from the loss

Concurrent Causation

courts recently have held that when losses occur concurrently, coverage will apply to that part of the loss caused by the covered loss, unless the policy wording clearly states its intention to totally exclude coverage

Fortuitous Loss

loss must happen by chance or by some accidental cause

Discuss the evolution of language used in insurance contract wordings.

Why do most insurance policies use a clear language style?

What are the main parts of a standard insurance policy wording?

What does the declarations page of an insurance policy provide?

What does the insuring agreement describe?

What part of the policy would you consult to determine what is not covered?

Discuss how policies are organized?

How Policy Wordings are Organized

· standard wording and a declarations or summary page are used by all insurance companies

· clear language simplifies the essentials

· words and phrases assigned a special meaning could be printed in bold face or italicized

· contents of a policy include:

1. Declarations or Coverage Summary Page – provides details of who is insured, how much insurance was purchased and against what peril, policy period, and a description of the insured property, and endorsements purchased

2. Insuring Agreement - described the property covered and the circumstances under which coverage will apply, under all risks coverage exclusions are important to determine perils not covered – manuscript policies are specifically designed and written for a particular risk

3. Exclusions – what is not covered may appear as an exclusion or limitations

4. Conditions – many policies include certain conditions in addition to the statutory conditions

5. Miscellaneous- policies include special additional coverage or limit coverage in certain ways,

How Policy Wordings are Organized

not all policies are organized the same way and this makes them more challenging to analyze
words and phrases assigned a special meaning could be printed in boldface or show in some other variation
very important to ensure that the actual policy involved in the claim is carefully examined

Declarations or Coverage Summary Page

provides details of who is insured, how much insurance was purchased, the policy period, a description of the insured property, and all other identifying information specific to the risk
declarations page is retained in some policy forms

Insuring Agreement

describes the property covered and the circumstances under which coverage will apply
all risks wording usually cover "all risks of direct physical loss or damage"
named peril wordings cover only losses arising from perils named in the form

Exclusions

what is not covered under a policy may appear in the form of a limitation or exclusion under an insuring agreement
both types of property and types of loss can be excluded

Conditions

insured must give immediate notice of a theft or vandalism to the police

Miscellaneous

limitations are stated in the residential policy wording
limitations could be included in the insuring agreement or be stated separately

The Rules of Contract Construction

policy must be looked at as a whole to determine intent of the parties

Common Rules

if a contract is unambiguous

court should give effect to the clear language

if ambiguity exists

effect is given to the reasonable expectations of the parties

The Rules of Contract Construction

· The same rules that apply to contracts in general also apply to insurance policies

Common Rules

· Where a contract is unambiguous a court should give effect to the clear language reading the contract as a whole

· Where there is ambiguity effect is given to the reasonable expectations of the parties

· Contract should be viewed in its entirely to determine the intent of the parties

· Interpretations seek fairness to both parties

Identify the rules of common law used to interpret contracts.

Discuss policy interpretation with respect to Contra proferentum, Coverage provisions construed broadly and narrowly, ambiguous language giving rise to reasonable expectations.

Explain the contra proferentum rule.

What is a contract of adhesion.

How are coverage provisions construed?

When a policy wording is ambiguous, which analysis is used to interpret the wording?

Reinstatement of Four Fundamental Principles

· Four principles applicable to the interpretation of insurance contracts:

1. the contra proferentem rule – when one policy drafts the policy wording or controls it is a contract of adhesion (insured has no say in drafting it), the principle of contra proferentem means against the offeror, policies must be clear to avoid all ambiguity

2. coverage provisions constructed broadly - law of precedent upheld that coverage provisions will be constructed broadly in the insured’s favour

3. exclusions constructed narrowly –and exclusions in insurance policies are to be interpreted narrowly and generally against the insured

4. policy ambiguity giving rise to reasonable expectations – where there are ambiguities the reasonable expectations of the parties be given effect, submissions made by the applicant during the negotiation of the policy, details of the insurance program, and the correspondence between the applicant and the insurer could be considered in the coverage analysis

Discuss the rules of contract interpretation in Quebec.

In a contract of adhesion in Quebec, what type of clause may be ruled as null or its obligation reduced?

The Rules of Contract Interpretation in Quebec

· pg 14-16

The Rules of Contract Interpretation in Quebec

if two possible meanings, those clauses that affect the subject matter of the policy and the subject matter of the contract will be accepted
found in articles 1425 to 1432 of the Civil Code of Quebec

Evaluate coverage for claims under the following policies: property policy and liability policy.

Explain how a decision tree model is useful to analyze policy coverage?

In Liability insurance claims situations, once it is determined that coverage is available under the policy where must the loss adjuster turn her attention?

Systematic Paradigm for Coverage Analysis

· adjuster must be methodical and through to achieve affair result

· legislation may effect coverage provided under a policy

· years ago a legislation was enacted to set the minimum standards for the peril of fire, legislation describes what can be excluded:

1. in the case of goods, their undergoing any process involving heat

2. riot, civil commotion, war, invasion, act of foreign enemy, civil war, rebellion, or military power

· whether or not the actual policy form includes the legislated parts, the insured would still be entitled to any protection arising from applicable legislation

Evaluating Coverage Under Property Policies

· analyzing the policy includes:

1. does the policy cover the loss? – declarations page cover the effective and expiry date, the date of loss must have occurred within the policy period

2. has the insuring agreement been satisfied? – must determine what is insured, and what it is inured against – all perils versus named perils

3. are there limitations or exclusions for the cause of the loss or for the property damaged? – what does the definition of property extend to? Outdoor equipment, swimming pools

4. have all the conditions of the policy been satisfied? – the statutory condition must have been satisfied and also any other conditions of coverage – insured peril may have specific conditions limiting coverage

5. does the policy offer any extensions of coverage separate from the main coverage? – often policies offer perks of coverage that that are identified as extensions

6. Is the amount claimed reasonable for the damages sustained? If it is, continue. If not, why not? What adjustments can be made to the claim amount.

7. IS there a deductible to be applied?

Evaluating Covering Under Liability Policies

· claims under a liability policy are subject to a two-pronged analysis:

1. policy is examined to determined whether coverage extends to the insured, any exclusions or conditions of coverage must be considered

2. once it is established that the policy covers the occurrence, attention is turned to defending the insured against action – the loss adjuster must determine a) did the insured owe a duty to the third party claimant?, b) was the duty breached by the insured?, c) did the damages suffered by the claimant result from that breach of duty?, d) does the insurer have a duty to defend the insured?

· Adjusters must also examine the actual wording in force

1. does the occurrence fall within the policy period?

2. does the loss fall within the insuring agreement? “we pay all sums which you become legally liable to pay as compensatory damages because of unintentional bodily injury or property damage arising out of: personal actions, or ownership, use or occupancy on the premises defined

3. are there exclusions under the policy that apply to the claim?

4. are there limitations or conditions that affect the claim? Special limitations section that limits the coverage available

5. does the insurer have a duty to defend? Policy describes whether the insurer will defend an action or whether they will indemnify the insured once the claim has been resolved, the contra proferentem rule extends to oblige the insurer to cover claims when allegations make it unclear as to whether the policy insurers the claim

Decision Tree Model

· one decision leads logically to the next action

· by moving through all the necessary pieces of the policy an adjuster can choose to further investigate to have questions answered and either settle or deny the claim

1. does the occurrence fall within the policy period?

2. does the loss fall within the insuring agreement?

3. are there exclusions under the policy that apply to the claim? How will coverage be effected?

4. are there endorsements? How will coverage be effected?

5. have all the policy conditions been met?

6. is there a deductible to be applied?

7. once coverage is determined the adjuster would have to determine how much should be paid

8. is the claim amount valid? If no what adjustments need to be made?

Systematic Paradigm for Coverage Analysis

interpreting coverage under a policy is a complex undertaking
policy must be thoroughly reviewed and knowledge of insurance contract law is essential
legislation may affect coverage provided under a policy
statutory conditions, general conditions, regulations and automobile coverage in some provinces are part of provincial legislation

Evaluating Coverage Under Property Policies

using a framework to systematically approach a coverage analysis encourages thoroughness in the process

How to analyze the policy

Does the policy period cover the loss?
Has the insuring agreement been satisfied?
Are there any exclusions for limitations for the cause of the loss or for the property damaged?
Have all the conditions of the policy been satisfied?
Does the policy offer any extensions of coverage separate from the main coverage?

Additional links to some interesting articles

Evaluating Coverage Under Liability Policies

Claims under a liability policy are subject to a two-pronged analysis

1. Policy examined to determine whether coverage extends to the insured

2. Once #1 established then the attention is turned to defending the insured against the action

Examine the actual wording in force

1. Does the occurrence fall within the policy period?

2. Does the loss fall within the insuring agreement?

3. Are there exclusions under the policy that apply to the claim?

4. Are there limitations or conditions that affect the claim?

5. Does the insurer have a duty to defend?

Decision Tree Model

Methodology reviews the basic concepts

Does the loss fall within the policy period?
Does the loss fall within the insuring agreement?
Do any exclusions apply?
Do any endorsements apply?
Have all policy conditions been met?
Is there a deductible to be applied?
Is the claim amount valid?

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CIP Courses , CAIB Courses, CRM Courses

Essentials of Loss Adjusting C110