Chapter 3: THE CONTRACTUAL RELATIONSHIP
Chapter 3 of the New Appleman on Insurance Law Library Edition examines the contractual relationship between the parties to an insurance contract. Insurance policies are subject to general contract law, but they are also are highly regulated by statutes and caselaw relating specifically to insurance policies. Therefore, in determining the rights of the parties to an insurance contract, one must consider not only the general principles of contract law but also state and federal regulation.
Section 3.01 evaluates the documents and procedures leading to the formation of an insurance contract. It addresses whether an insurance contract exists and the role that various documents, such as the application, play with regard to contract formation and in determining the insurance contract's terms. This section also addresses the consequences of an insured's delay in processing the application. Generally, the insurer has the right to reject the application. However, the insurer may have a duty to accept or reject the application within a reasonable time period. Additionally, the section addresses the insured's obligation to read the policy and notify the insurer if the terms are not correctly stated, and also whether the insurer has a duty to explain the contract. The majority of jurisdictions hold that neither insurers nor their agents have a duty to explain the policy terms or coverage unless they assume that duty or one is imposed on them by special circumstances or the special relationship of the parties. However, some jurisdictions require policies to be written in ''plain English'' to ensure that the policy is comprehensible to the insured. Finally, the section addresses the mechanics of formation in terms of traditional contract principles of offer and acceptance and the insured's obligation to make the first premium payment.
Section 3.01 addresses the timing issue of a loss in relation to the effective date of coverage. The determination of effective date is generally left to terms established by the parties to the insurance contract. Generally, the policy clearly specifies the effective date but complexities can arise in situations involving group insurance and certificates of insurance for group coverage, with additional insured endorsements and with temporary receipts or binders.
Section 3.01 addresses the problem that occurs when there is a question of whether the policy reflects the parties' intent or whether an effective change to the policy has been made. Reformation is a device used by the courts to conform policy language to the parties' intent. Modification, on the other hand, deals with adding or deleting terms by agreement of the parties after formation. Therefore, the contract elements of offer, acceptance and consideration, as well as mutual assent, are required for an effective modification.
Section 3.02 discusses the extent that oral contracts can be binding. The law does not exclude the ability to create an oral insurance contract, as long as it specifies the subject matter to be insured, the scope of risk, the duration of coverage, the amount of coverage and the amount of premium, whether by express terms or by implication.
Section 3.03 examines issues that arise in connection with insurance binders and certificates of insurance. Insurance binders are temporary contracts of insurance and are separate from the policy. They provide protection for the applicant until the issuance of the policy. Because of their temporary nature, binders are much more limited with respect to the terms they contain. The terms can be supplied by implication provided they are readily inferable from the prior course of dealings between the parties or established industry standards. They are deemed to include the usual terms of the policy.
Section 3.04 examines how courts deal with situations in which the insurance contract is not completely evidenced by the policy and other forms. In this situation, such as with oral contracts, courts will evaluate the statements of the parties and their actions to determine the existence of the contract and its terms.
Section 3.05 discusses the significance of delivery of the policy in creating a binding insurance contract. Many jurisdictions do not require delivery to be binding unless the parties expressly agree to that condition, but even then delivery is important in enforcing exclusions that were not otherwise made known to the insured.
Section 3.06 examines the factors affecting the legality of an insurance contract. In addition to the ordinary contractual requirements, an insurance contract must also comply with other aspects of the law. For instance, if an exclusion violates regulations it will be deemed void. This section also examines the insurable interest doctrine which requires those who obtain insurance to have an interest in preserving the subject of the insurance from occurrence of the risk. This doctrine is designed to prevent wagering and to foster the societal interest in discouraging conduct that poses a risk to property or a person's health and safety. The doctrine also protects the concept of insurance by eliminating the certainty of the risk from the insured's prospective that the incentive for causing such harm would create through a wagering arrangement.
Section 3.07 discusses the renewal and reinstatement of policies. In the reinstatement situation, the original policy is revived with all its terms. Because it is not a new contract, the parties continue to be bound by their original agreement. However, the insurer may be permitted to evaluate whether there has been a change in the risk during the period of the policies lapse, provided it takes reasonable effort to do so and otherwise conforms to the law. By contrast, renewal refers to a continuation of coverage and constitutes a new agreement. It can refer to either the issuance of a new policy in replacement of the old, or to the issuance and delivery of a certificate of notice extending the terms of the original policy.
Section 3.08 examines how the insurance contract, or relationship, is concluded. The initial focus is on the duration specified by the contract. Ordinarily, the time the insurance contract will end will be as agreed by the parties unless it is shortened by a material breach by one of them. Refusal to renew is also categorized with cancellation for regulatory purposes. There is a strong public policy behind giving the insured an opportunity to acquire new coverage. Rescission is another method by which the contractual relationship between the parties may end. Rescission results in a determination that the policy is void, and therefore that neither party owes duties to the other. This stands in contrast to a situation where the policy is cancelled and only future obligations are terminated. Grounds for rescission emanate from the formation of the agreement and include mutual mistake, impossibility of performance and fraud.
Section 3.09 discusses group insurance and related issues. Group insurance is generally seen in the employer/employee context involving health policies. In that situation, the employer contracts with the insurer and receives the policy, but the employees are the ones to receive benefits. The section also addresses the impact of the federal Employee Retirement Income Security Act (''ERISA''), which preempts state law if the benefits are provided in the form of a self-insured employee benefit plan.
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