While some federal law is involved in insurance, most laws governing insurance are at the state level. For this reason, insurance defense requires attorneys with local expertise. This document will help you to understand the basics of insurance law, in order to work more effectively with your attorney.
The insurance industry protects individuals and organizations against monetary loss by spreading risk among a wide pool of the insured. Insurance companies collect and manage money from the insured, and then allocate funds when needed.
Insurance policies vary widely, but they are all legal contracts which define loss and the responsibilities of all parties.
In the United States, state law governs the insurance industry. Most state governments regulate the insurance industry through an administrative agency. While state regulations differ, most of these agencies attempt to determine whether insurance companies have sufficient money to pay claims and that they treat their policy holders fairly. Many federal laws do apply to aspects of the insurance industry that do not deal directly with insurance, such as taxes, workplace conditions, and financial regulations.
When an insurance company defends its assets by going to court to recover damages, the case is called an insurance defense case. Most insurance defense cases involve one or more of the following legal concepts:
The Duty to Defend an Insured. Insurance companies, by agreeing to a policy, contract a legal obligation to defend its insured parties. The insurance company must cover the entirety of a claim, if any part of that claim falls under the contract. If the litigation ends, the policy limit is reached, or it becomes clear that the policy does not cover the claim, this duty is ended.
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The Duty to Settle. Most liability contracts give the insurance company the right to settle a lawsuit against their insured. Insurance companies are required by law to give the insured's interest as much consideration as their own when reaching a settlement. The rules governing this action vary widely from state to state, but most jurisdictions allow settlement when it is the most reasonable way to end a case.
Subrogation. When a third party causes damages to an insured, the insurance company can recover money from that third party. This is called subrogation. Insurance companies use this legal theory, which allows them to act legally as if they were the affected party, in many defense cases. They cannot recover damages under subrogation from their own insured. Defining the limits of subrogation rights can be difficult.
Any insurance agreement is a legal contract, and covered by contract law. Insurance companies must occasionally defend themselves against lawsuits by their insured. If found to be in breach of contract, the insurance company may be held liable for damages. Usually, the amount recovered is what the company would have paid under the policy. Insurance companies often rely on discovering fraud or misrepresentation by the insured.
Another important strategy is the review of the language of the policy itself. This means it is vital to write the agreement carefully. Both the insurance company and the insured will attempt to interpret the contract in their favor. Courts generally rely on the following methods when interpreting the language of contracts:
View the language itself. This method considers the language of the contract as literally written.
View the language in the context of the entirety. This method assumes that the language in a contract should be interpreted to be consistent with the whole of the contract.
View the language in the context of purpose. Courts using this method attempt to find the most reasonable interpretation of the language's meaning in light of the contract's purpose.
The local nature of the insurance industry makes it important that in any legal dispute involving an insurance company or policy, you consult with an attorney who has experience with insurance law in your state.