Types of Insurance - Module 5 of 5

Types of Insurance - Module 5 of 5


Module Five: Types of Insurance

 

            In our final Module, we will look at the distinctive characteristics of several different types of insurance, including fire and casualty Insurance, marine and inland insurance, automobile insurance and liability insurance. 

 

Fire Insurance

 

            Fire insurance is commonly understood as property insurance and is used to cover a loss caused by “hostile” fire, but not friendly fire.  A “friendly fire” is contained in the intended place, such as a fireplace, furnace or a stove, whereas a hostile fire is one that occurs outside of those confines.  Courts have followed the practice of inferring a distinction between hostile and friendly fire in what is referred to as the Friendly Fire Rule. This distinction may be inferred regardless of whether the distinction is referenced in the policy. Its continued application by the courts has resulted in a common understanding and acceptance of this distinction. However, a fire that originated as friendly may become hostile by escaping beyond its confines, which allows the damage to be covered even if the escape is caused by the negligence of the insured.  The determination of a hostile or friendly fire is analyzed based upon the circumstances and intent of the parties.[1] 

 

For example, if a family heirloom is accidentally placed on a stove and the fire from the stove burns it, the loss would not generally be covered by fire insurance. The same would be true of something accidentally thrown into a fireplace. Similarly, courts generally do not provide coverage for damage caused by the soot or smoke of fire which comes from a friendly confine. However, if the fire from a fireplace spreads and burns the walls of a house, even if the spread was caused by the negligence of the homeowner, this would not be considered “friendly” fire and would be covered. In Austin v. Drew,[2] the insured’s premises were used to manufacture sugar.  A chimney went from the stove on the first floor to the top of the eight-story building, passing through each floor.  A register in the chimney could be opened or closed at each floor.  A fire was lit on the first floor, and an employee on the top floor forgot to open the register, forcing additional heat and smoke into a room where sugar was drying.  Two men suffocated trying to open the register but at no time did a flame get beyond the chimney. The heat and smoke did considerable damage to the building.  The court found the fire never to be excessive, as the fire itself was confined. The loss sustained was therefore NOT covered by the policy.  This illustrates that damage caused by fire within its normal place is not covered, even if its heat, smoke and soot escape its confinement. 

 

In Engel v. Redwood County Farmers Mutual Insurance Co.[3] an insured’s hog barn was heated by a furnace controlled by a thermostat set to 75 degrees. However, a short in the thermostat caused the furnace to continue to blow until it reached 120 degrees, causing all the hogs to die from the excessive heat.  At all times, the fire in the furnace burned in its usual place at its usual rate.  The court ruled that this case was different from Austin because it was an excessive, uncontrolled fire falling within the category of a hostile fire, allowing the insured to recover for the loss of his hogs. While the fire never left the place at which it normally burned, it did burn when it was not supposed to – after the temperature programmed into the thermostat had been reached. After reviewing Austin and Engel, it is evident that the hostile verses friendly fire distinction indicates different types of losses. A loss that can be expected by the ordinary burning of the fire as it is supposed to burn will probably be considered friendly and thus not covered.  The application of the rule has limitations.  Additional case law on the subject shows us that courts may abandon the friendly fire rule in favor of the reasonable expectations doctrine.[4]  In Sadlowski v. Liberty Mutual Insurance Co.,[5]  an insured’s programmed thermostat malfunctioned causing excessive fire and heat that damaged the insured’s home.  The insured urged the court to reject the friendly fire doctrine and apply the reasonable expectations doctrine, allowing for coverage.  The court found because the insurance policy is ambiguous, the policy should be interpreted with the reasonable expectations of the insured. The case was then set for trial to determine whether the fire was in the scope of what would reasonably be anticipated under the policy. 

Traditionally included within the coverage of a fire insurance policy are losses through lightning, explosion, earthquake, water, wind, rain and riot.[6]    

 

Casualty Insurance

 

Casualty insurance is used to protect against the insured’s legal liability for injuries to others or for damage to others’ property.  The “casualty insurance” umbrella may encompass workers compensation insurance, accident insurance, health insurance and insurance for damage to property.[7] Workers compensation insurance exists in all states by statute and arises when an employee is injured on the job.  It is funded by insurance and paid for by the employer. It pays for what the insured might otherwise be legally obligated to pay as damages because of an injury sustained in the course of employment.[8]  

 

Accident insurance reimburses the insured for pecuniary loss suffered as a result of injuries sustained in an accident.  It is frequently offered as a supplement to life insurance in the form of accidental death benefits, wherein many policies double the benefits.  It is also sometimes provided in conjunction with automobile insurance.[9] Health insurance indemnifies the insured for losses resulting from illness.  The payment of proceeds is governed by contractual principles as well as federal and state laws.  For example, certain federal or state laws dictate the manner of coverage and may be limited or extended.  Health insurance is offered in a variety of forms:

 

(1) Service Benefit Plans guarantee provided medical services in exchange for paying premiums.  There may be a variety of exclusions for medical services and the insured may be liable for deductibles or co-payments.  These plans are subject to special regulations regarding areas of coverage, renewal and termination, as well as appropriate premium levels.  

(2) Indemnity Insurance reimburses the insured directly for medical bills in accordance with the terms of an agreement.  The primary relationship is between the insurer and the insured, with the health care provider having no part in the agreement. 

(3) Independent or Self-Insured Plans, in which members make premium payments in exchange for medical services from a group of health care providers with few deductibles and co-payments.  The most common example of an independent plan is a health maintenance organization, commonly referred to as an HMO.  The Health Maintenance Act[10] provides parameters within which an HMO may operate.[11]    

 

Disability insurance protects the insured against income loss due to accident or illness. Disability insurance has two types of coverage: general and occupational disability. General disability benefits arise when the insured is unable to perform the duties of his occupation and is also unable to engage in work for which he is reasonably fitted.  Occupational disability benefits arise when the insured is unable to perform the duties of his particular job.  These policies are less commonly purchased than many other types of insurance due to publicly funded disability benefits offered by the state or federal government through workers’ compensation and social security that may partially or completely displace the need for this insurance.[12]

 

Marine and Inland Marine Insurance

 

            Marine insurance insures ships and their cargoes against natural ocean dangers in international waters.[13] Inland marine insurance developed as a result of shippers wishing to insure non-marine travel. For example, while a shipment from New York to London will cover mostly ocean waters, it may have to traverse inland rivers as it leaves and approaches ports.[14]  Inland marine insurance insures property transported on any inland waterways such as rivers, lakes and canals.  Modern marine insurance includes several lines including: transportation insurance for goods in transit, insurance for the instrumentalities of transportation such as bridges, tunnels and piers, insurance for the vessels on which people or goods are being transported, personal or commercial floaters for movable or personal property; insurance for loss due to the unavailability of a vessel, and insurance protecting a carrier against liability to those who ship their goods.[15]      

            A major category of inland marine insurance serves to fill a gap in coverage for property not permanently situated at a fixed location, and thus not the subject of fire or casualty insurance or the subject of a transportation carrier. These are referred to as personal property floater policies.  Floater polices cover personal property while it is being moved by boat and while it is in a fixed location, such as while moored.  A distinction is also made between personal and business property.  Floater polices on business property are referred to as block policies and are unique to specific businesses.  For instance, a jeweler’s block policy may cover jewels, metals, watches and glassware belonging or consigned to the business.  Scheduled property floater policies cover movable business property, such as heavy equipment or livestock.[16]    

 

Automobile Insurance

 

            Almost all states have compulsory liability insurance statutes making it illegal for an individual to drive a car without having automobile insurance.   A typical automobile policy has several different types of coverage.  Liability coverage is for the insured’s liability for bodily injury or property damage to another caused by the insured’s car (usually, whether or not the insured was driving). Liability coverage is generally mandatory, while other aspects of auto insurance policies are usually optional.

States typically require a minimum amount of coverage which is expressed in a combination of three numbers such as 25/50/10.  The first number imposes a coverage limitation of $25,000 per individual injured; the second number indicates a maximum of $50,000 for coverage of all people injured in an accident; and the third number means that $10,000 is the coverage limit for property damage caused by the accident.  These statutory amounts differ per state and policyholders may (and often do) choose to pay extra for coverage well in excess of statutory minimums. Medical payment coverage and personal injury protection are used for medical expenses incurred as a result of an automobile accident.  Uninsured motorist coverage applies if someone suffers bodily injury from an uninsured motorist driving the insured’s car who is unable to compensate the insured. 

Collision coverage indemnifies the car owner for loss suffered due to damage to the car in an accident. Comprehensive coverage covers damage to the insured’s vehicle not sustained while the car was being driven. For example, comprehensive may cover damage to the car from a fallen tree or vandals that damage the car while it is parked.[17]  While optional, these types of coverage may be required by leasing or financing companies as a condition of a purchase money car loan or lease. Usage-based insurance bases premiums on how much the car is used. It can be based on reported usage and/or on telematics, such as global positioning systems, which monitor a driver’s behavior. They can more precisely define risk by taking usage into account and can also help to identify high-risk and low-risk drivers.  These types of policies are expected to become more popular in the future.[18]    

            Stacking is the practice of pursuing claims under multiple insurance policies or coverages to obtain total indemnification for expenses resulting from an accident, when one policy cannot compensate for the loss.  The practice of stacking occurs often with uninsured and underinsured motorist coverage.  An insured may, for example, combine coverages from more than one vehicle in the same accident.  Some policies, however, contain anti-stacking provisions, and practices regarding the stacking of policies are specific to each state.[19] Starting in the 1970s, many states have passed no-fault laws which mandated benefits to be provided if the injured party had medical expenses above a certain amount, regardless of who was at fault. In no-fault states, coverage may be mandated in certain circumstances. Many states also provide that the insurance benefits are the sole remedy, which means that an injured party cannot bring a lawsuit outside of the no-fault rules. Some states have “choice systems” allowing motorists to decide between a no-fault or a traditional tort-based system.  No-fault laws have not proven to have a beneficial impact on lowering insurance premiums.[20] 

            Even in no-fault states, though, while benefits are paid regardless of who is at fault, if there are two cars in an accident, the insurance company of the at-fault party may be required to pay before the other driver’s policy. Moreover, insurance companies may use fault-based accidents as justifications for raising premiums or discontinuing policies. So, while they may be covered either way, drivers may still have interests in being declared the “innocent” party to a car accident.

 

Other Types of Insurance

 

Unlike first party insurance such as property and life insurance, liability insurance is third-party insurance. Third-party insurance is purchased by an insured to protect against tort liability to others.  Coverage is triggered when the insured is found to be liable for damage to another’s person or property if the event arose out of an occurrence covered by the policy.  One of the most common forms of third-party liability insurance is a commercial general liability policy, purchased to protect businesses from liability to third parties. Policies may include coverage for their customers’ personal injuries or for competitors’ libel or slander actions, depending upon the language of the policy.[21] 

Commercial General Liability policies have several typical exclusions, including the work product exclusion, which excludes coverage offered to construction companies for property damage to the insured’s products or for work performed on behalf of the insured.  Another common uniform exclusion is for pollution.  In the 1970’s, pollution was excluded from coverage for damages resulting from the discharge of pollutants unless “sudden and accidental.” The confusion surrounding the “sudden and accidental” phrase led insurers in the 1980’s to adopt the absolute pollution exclusion, denying coverage for any damage from environmental discharges.  However, in South Central Bell Telephone co. v. Ka-Jon Food Stores[22], the Louisiana Supreme Court held that an insured may recover under a Commercial General Liability policy despite the absolute pollution exclusion when the discharge occurred from a routine accident (as opposed to an environmental accident).  In addition, the court noted the insured might recover if it was not properly advised that the policy absolutely excluded environmental damage.[23]

Title Insurance protects against defects in legal title to real property. It protects against the risk of any incomplete information concerning someone else’s legal rights in connection to real property, such as a lien or mortgage held by a third party.  If a seller’s title is challenged, the insurer agrees to defend the buyer’s claim to the title to the property and to reimburse the insured for damages suffered as a result of another party making a claim to the title of the real property.[24]  Reinsurance is used for insurers to accept some of the risks from direct or primary insurance companies.  Similar to the composition of an insurance contract, the primary insurer pays a premium to the reinsurer for assuming some of their risks.[25] 

 

Conclusion

            Thank you for participating in LawShelf’s course in insurance law. We hope this survey course gave you a solid understanding of the landscape of insurance law and we hope you will take advantage of other LawShelf courses. Best of luck and please let us know if you have any questions or feedback.

 


[1] John F. Dobbyn, Insurance in a NutShell (Thomson West 1981) pg. 205-206.  

[2] 4 Camp. 360, 171 Eng. Rep. 115 (1815). See also, Barcalo Mfg. Co. v. Firemen's Mut. Ins. Co., 263 N.Y.S.2d 807 (App. Div. 1965) (discussing the subsequently parsed interpretation of Austin.).

[3] 281 N.W. 2d 331 (Minn. 1979). 

[4] Robert H. Jerry II and Douglas R. Richmond, Understanding Insurance Law (Carolina Academic Press 2018).  

[5] 487 A.2d 1146 (Del. Super. 1984).

[6] John F. Dobbyn, Insurance in a Nutshell (Thomson West 1981) pg. 205-206.  

[7] Robert H. Jerry II and Douglas R. Richmond, Understanding Insurance Law (Carolina Academic Press 2018).  

[8] Id at pg. 44. 

[9] Id at pg. 44.

[11] John F. Dobbyn, Insurance in a Nutshell (Thomson West 1981) pg. 36-38. 

[12] Id at 42.  

[13] Robert H. Jerry II and Douglas R. Richmond, Understanding Insurance Law (Carolina Academic Press 2018).  

[14] Id at 34. 

[15] Solomon S. Huebner et al., Property and Liability Insurance 3rd ed., (LexisNexis1982), 152.  

[16] John F. Dobbyn, Insurance in a Nutshell (Thomson West 1981) pg. 33-34. 

[17] Robert H. Jerry II and Douglas R. Richmond, Understanding Insurance Law (Carolina Academic Press 2018).  

[18] Id at 807.  

[19] John F. Dobbyn, Insurance in a Nutshell (Thomson West 1981) pg. 64-66.  

[20] Robert H. Jerry II and Douglas R. Richmond, Understanding Insurance Law (Carolina Academic Press 2018) at 817-818.  

[21]  John F. Dobbyn, Insurance in a Nutshell.  (Thomson West 1981) pg. 43-45.

[23] Id at 51.

[24] Robert H. Jerry II and Douglas R. Richmond, Understanding Insurance Law (Carolina Academic Press 2018) at 45.    

[25] Id at 875.