Chapter 1 of the New Appleman on Insurance Law Library Edition – Content Abstract

Chapter 1 of the New Appleman on Insurance Law Library Edition – Content Abstract

Chapter 1: WHAT IS INSURANCE?

Chapter 1 of the New Appleman on Insurance Law Library Edition begins in Section 1.01 with a discussion of the reasons insurance exists. Risk exists throughout the world; life is uncertain, and we cannot foresee exactly what will happen in the future. These risks create insecurity, and sometimes insecurity is undesirable. Insecurity can prevent business activity, stifle economic development, and cause personal anguish. There are a variety of techniques of managing risk, but at some point it is desirable for risk-averse persons to transfer their risk to another entity. Markets exist where these risks can be transferred, and the mechanism for doing so is insurance. Insureds pay a premium to the insurer in exchange for the insurer's promise to assume the insured's risk. Taking advantage of the law of large numbers, the insurer can distribute the risks assumed in a variety of similar transactions across a large pool of insureds and thereby effectively manage the risk, earning a return in the process. The next section (Section 1.02) contains a brief history of the insurance business, which is a story of efforts to manage risk through increasingly more sophisticated insurance mechanisms.

Many contracts transfer risk but are not commonly understood as ''insurance contracts.'' In Section 1.03 a definition of insurance is provided in order to distinguish non-insurance transactions from insurance contracts. If the contract involves insurance, it is typically subject to regulation as the business of insurance; thus, the definition of insurance is important to understanding the scope of state regulatory authority.

As discussed in Section 1.04, the business of insurance is subject to state legislative and administrative regulation, but much insurance regulation is accomplished by courts through their normal adjudicatory functions. These complementary regulatory systems help define two principal domains of insurance law: one pertains to the regulation of insurance entities, and the other pertains to the regulation of the insurer-policyholder relationship. Together, these sources of authority create the body of law commonly understood as ''insurance law.''

Insurance law, as explained in Section 1.05, is comprised of a number of fundamental concepts and assumptions, including:

  1. fortuity, which refers to the principle that a loss must be accidental in some sense in order to be the valid subject of an insurance contract;
  2. insurable interest, which refers to the principle that the insured must have a cognizable interest in the thing insured, or in the case of life insurance, in the life of the person insured; and
  3. indemnity, which refers to the general proposition that the benefit paid under an insurance contract must not exceed the value of the loss, a principle which is very strong in property insurance but much weaker--although not entirely absent--in life insurance.

The discussion in Section 1.06 covers some key phrases and terms of art that often appear in discussions of the insurance business and insurance law. The discussion in Section 1.07 continues in this vein by describing the structure and contents of an insurance policy.

The discussion in Section 1.08 explores the different ways insurance is classified. These include:

  1. classification by nature of the risk insured, which refers to the fact that insurance has developed in particular ''lines'' (e.g., life, property/casualty, etc.), and the law of insurance is sometimes categorized along these same demarcations;
  2. classification by interests protected, which refers to the difference between ''first-party insurance'' (meaning protection of the insured's interest in the thing insured, such as property) and ''third-party insurance'' (which commonly refers to liability insurance, which provides protection for third parties through coverage of an insured's liability to those parties);
  3. classification by the nature of the insurer, which recognizes that insurance is sold through a variety of entities and organizations; and
  4. classification by how the product is marketed, which recognizes differences between group and individual policies, and which recognizes that different distribution channels are used in different parts of the insurance business.

The discussion in Section 1.09 examines modern efforts to ''stretch'' the definition or meaning of insurance through modern financial arrangements, including self-insurance, the use of captives, fronting arrangements, and new financial instruments which are used like insurance but are not the same as the traditional insurance contract.

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