The cost of health insurance in the United States is a major factor in access to health coverage. The rising cost of health insurance leads more consumers to go without coverage and increase in insurance cost and accompanying rise in the cost of health care expenses has led health insurers to provide more policies with higher deductibles and other limitations that require the consumer to pay a greater share of the cost themselves. This is obviously mainly caused by government involvement in the insurance market. Many people with pre-existing conditions such as cancer and depression are obviously turned down for coverage, denied coverage or are charged higher prices for coverage however if they are responsible enough to buy insurance when they are young and healthy it is much cheaper and continues to cover them if they have cancer or depression.
The US is the “only industrialized nation that relies heavily on a for-profit medical insurance industry to provide basic health care,” as Senator Dianne Feinstein has said, and the Pulitzer Prize–winning PolitiFact watchdog group has confirmed. The Kaiser Family Foundation claims that health insurance costs are driven not only by the added cost of health insurers making their profits, but also by rising health costs and administrative costs.
In 2004, employer-sponsored health insurance premiums grew 11.2% to $9,950 for family coverage, and $3,695 for a single person, according to a survey by the Kaiser Family Foundation and Health Research and Education Trust. The survey also found that 61% of workers were receiving employer sponsored health insurance.
Five years later, Kaiser’s 2009 survey found that employer health insurance premiums were $13,375 for a family and $4,824 for a single person. About 60% of workers were receiving employer sponsored health insurance. Less than half (46%) of employees at small firms with 3 to 9 workers received coverage. As of 2008, the percentage of Americans receiving employer sponsored health insurance had declined for the eighth consecutive year, says the Kaiser Family Foundation.
From 1999 to 2009, Kaiser found that the insurance premiums had climbed 131% or 13.1% per year, and workers’ contribution toward paying that premium jumped 128% or 12.8% per year. In 1999, workers’ average contribution to the premium was $1,543, and in 2009 it was $3,515. For employers, their contribution was $4,247 in 1999 and $9,860 in 2009.
The lower a family’s income is, the less likely that they can purchase health insurance, according to 2008 US Census figures. About 14.5% of households with $50,000 to $75,000 in income did not have health insurance. While 24.5% of households with $25,000 or less income went without health insurance.
A March 2010 study by the Center for Studying Health System Change, a Washington DC think tank, found that out-of-pocket costs for health insurance premiums and services were rising faster than family incomes. Published in the journal Health Affairs, the study found “…After accounting for general inflation, family incomes remained stagnant between 2004 and 2006, while out-of-pocket spending on premiums and health care services increased 8.5% over the two-year period. Overall, total out-of-pocket spending increased, on average, about 5 percent annually between 2001 and 2006, and was similar for the 2001–4 and 2004–6 periods.” The report found the largest increases in out-of-pocket expenses were for those with private health insurance, including middle- and higher-income families. The study was based on 2001 through to 2006 data.
People with pre-existing conditions typically cannot obtain any coverage, or at best can obtain limited coverage or more costly coverage for those conditions. This situation is expected to be corrected by the health reform bill being considered by the US Congress in early 2010. Currently, those with pre-existing conditions must pay the cost out-of-pocket, and some resort to medical tourism, obtaining treatment in other countries or US regions, to obtain more affordable health treatment. This is especially difficult for those impacted by cancer, heart condition and other serious illnesses where treatment costs can easily run into the tens of thousands of dollars or higher within a few days or weeks. According to the Kaiser Family Foundation, 21 percent of those who apply for health insurance on their own are turned down, charged a higher price or denied coverage for their pre-existing condition. Among the conditions that be considered “pre-existing” by insurance companies are domestic violence, cancer, asthma, depression and occupations such as police officer and construction worker.
The 9 million self-employed workers have a greater challenge than many people to find affordable health insurance. They represent 8 percent of the US labor force, and essentially pay a tax on their health insurance premiums, unlike any other workers. They pay a tax of 15.3 percent of their net earnings, double the rate of wage and salary earners.
For Americans earning less than $24000 per year, few have health insurance, or, they rely on government insurance (Medicaid). In this income bracket, more than half of people ages 27 to 37 do not have health insurance. This number drops when people reach their 40s, but even into their late 50s, more than one-third of these Americans are uninsured. When new health reform laws take effect, low-income families will receive subsidies to help them pay for health insurance. These subsidies will paid through higher taxes paid by people with higher incomes.
State cost-control efforts
California: On March 23, 2010, the California State Assembly’s Health Committee passed a bill that would require health insurers and health maintenance organizations to have same strict regulation that has covered automobile and other types of property insurance for the last two decades. The bill would require approval of some rate hikes by state agencies, and must next be considered by the state legislature.
Iowa: In March 2010, Iowa senior advocates and the AARP asked state legislators to act on a measure that would require state regulators to hold hearings when rate increases are proposed and issue an annual report about insurance rates.
Massachusetts: The State of Massachusetts held a three-day hearing in March 2010 to discuss ways to better control health insurance and other costs. Addressing these costs, Massachusetts Secretary of Health and Human Services Dr. JudyAnn Bigby said “As we examine all of the causes of increasing health care costs and implement reforms, we must strive to bring premiums down without sacrificing access to care or requiring consumers to pay more out of pocket.
Insurance coverage is the amount of risk or liability that is covered for an individual or entity by way of insurance services. Insurance coverage, such as auto insurance, life insurance – or more exotic forms, such as hole-in-one insurance – is issued by an insurer in the event of unforeseen occurrences.
BREAKING DOWN ‘Insurance Coverage’
Insurance coverage helps consumers recover financially from unexpected events, such as car accidents or the loss of an income-producing adult supporting a family.
Insurance coverage is often determined by multiple factors. For example, most insurers charge higher premiums for young male drivers, as insurers deem the probability of young men being involved in accident to be higher than say, a middle-aged married man with years of driving experience.
Auto Insurance Coverage
Auto insurance premiums depend on the insured party’s driving record. A record free of accidents or serious traffic violations typically results in a lower premium. Drivers with histories of accidents or serious traffic violations may pay higher premiums. Likewise, because mature drivers tend to have fewer accidents than less-experienced drivers, insurers typically charge more for drivers below age 25.
If a person drives his car for work or typically drives long distances, he generally pays more for auto insurance premiums, because his increased mileage likewise increases his chances for accidents. People who do not drive as much pay less.
Because of higher vandalism rates, thefts and accidents, urban drivers pay higher premiums than those living in small towns or rural areas. Other factors varying among states include the cost and frequency of litigation; medical care and repair costs; prevalence of auto insurance fraud; and weather trends.
Life Insurance Coverage
Life insurance premiums depend on the age of the insured party. Because younger people are less likely to die than older people, younger people typically pay lower life insurance costs. Gender plays a similar role. Because women tend to live longer than men, women tend to pay lower premiums.
Engaging in risky activities increases insurance costs. For example, a racecar driver faces increased risk of death and, as a result, may pay high life insurance premiums or be denied coverage.
A person’s medical records help determine insurance rates. A history of chronic disease or other potential health issues with an individual or family, such as heart disease or cancer, may result in paying higher premiums. Obesity, alcohol consumption or smoking can affect rates as well.
An applicant typically goes through a medical exam to determine whether he has high blood pressure or other signs of potential health issues that may result in premature death for the applicant and increased risk for the insurance company. People in good health typically pay lower life insurance premiums.
A person pays more for insurance coverage for a longer policy term and a larger death benefit. For example, the risk of dying for a person with a 30-year policy is greater than the risk of dying for a person with a 10-year policy.
Payment protection insurance (PPI), also known as credit insurance, credit protection insurance, or loan repayment insurance, is an insurance product that enables consumers to ensure repayment of credit if the borrower dies, becomes ill or disabled, loses a job, or faces other circumstances that may prevent them from earning income to service the debt. It is not to be confused with income protection insurance, which is not specific to a debt but covers any income. PPI was widely sold by banks and other credit providers as an add-on to the loan or overdraft product.
Credit insurance can be purchased to insure all kinds of consumer loans including car loans, loans from finance companies, and home mortgage borrowing. Credit card agreements may include a form of PPI cover as standard. Policies are also available to cover specific categories of risk, e.g. credit life insurance, credit disability insurance, and credit accident insurance.
PPI usually covers payments for a finite period (typically 12 months). For loans or mortgages this may be the entire monthly payment, for credit cards it is typically the minimum monthly payment. After this point the borrower must find other means to repay the debt, although some policies repay the debt in full if you are unable to return to work or are diagnosed with a critical illness. The period covered by insurance is typically long enough for most people to start working again and earn enough to service their debt. PPI is different from other types of insurance such as home insurance, in that it can be quite difficult to determine if it is right for a person or not. Careful assessment of what would happen if a person became unemployed would need to be considered, as payments in lieu of notice (for example) may render a claim ineligible despite the insured person being genuinely unemployed. In this case, the approach taken by PPI insurers is consistent with that taken by the Benefits Agency in respect of unemployment benefits.
Most PPI policies are not sought out by consumers. In some cases, consumers claim to be unaware that they even have the insurance. In sales connected to loans, products were often promoted by commission based telesales departments. Fear of losing the loan was exploited, as the product was effectively cited as an element of underwriting. Any attention to suitability was likely to be minimal, if it existed at all. In all types of insurance some claims are accepted and some are rejected. Notably, in the case of PPI, the number of rejected claims is high compared to other types of insurance. In the rare cases where the customer is not prompted or pushed towards a policy, but seek it out, may have little recourse if and when a policy does not benefit them.
As PPI is designed to cover repayments on loans and credit cards, most loan and credit card companies sell the product at the same time as they sell the credit product. By May 2008, 20 million PPI policies existed in the UK with a further increase of 7 million policies a year being purchased thereafter. Surveys show that 40% of policyholders claim to be unaware that they had a policy.
“PPI was mis-sold and complaints about it mishandled on an industrial scale for well over a decade.” with this mis-selling being carried out by not only the banks or providers, but also by third party brokers. The sale of such policies was typically encouraged by large commissions, as the insurance would commonly make the bank/provider more money than the interest on the original loan, such that many mainstream personal loan providers made little or no profit on the loans themselves; all or almost all profit was derived from PPI commission and profit share. Certain companies developed sales scripts which guided salespeople to say only that the loan was “protected” without mentioning the nature or cost of the insurance. When challenged by the customer, they sometimes incorrectly stated that this insurance improved the borrower’s chances of getting the loan or that it was mandatory. A consumer in financial difficulty is unlikely to further question the policy and risk the loan being refused.
Several high-profile companies have now been fined by the Financial Conduct Authority for the widespread mis-selling of Payment Protection Insurance. Alliance and Leicester were fined £7m for their part in the mis-selling controversy, several others including Capital One, HFC and Egg were fined up to £1.1m. Claims against mis-sold PPI have been slowly increasing, and may approach the levels seen during the 2006-07 period, when thousands of bank customers made claims relating to allegedly unfair bank charges. In their 2009/2010 annual report, the Financial Ombudsman Service stated that 30% of new cases referred to payment protection insurance. A customer who purchases a PPI policy may initiate a claim for mis-sold PPI by complaining to the bank, lender, or broker who sold the policy.
Slightly before that, on 6 April 2011, the Competition Commission released their investigation order designed to prevent mis-selling in the future. Key rules in the order, designed to enable the customer to shop around and make an informed decision, include: provision of adequate information when selling payment protection and providing a personal quote; obligation to provide an annual review; prohibition of selling payment protection at the same time the credit agreement is entered into. Most rules came into force in October 2011, with some following in April 2012.
The Central Bank of Ireland in April 2014 was described as having “arbitrarily excluded the majority of consumers” from getting compensation for mis-sold Payment Protection Insurance, by setting a cutoff date of 2007 when it introduced its Consumer Protection Code. UK banks provided over £22bn for PPI misselling costs – which, if scaled on a pro-rata basis, is many multiples of the compensation the Irish banks were asked to repay. The offending banks were also not fined which was in sharp contrast to the regime imposed on UK banks. Lawyers were appalled at the “reckless” advice the Irish Central Bank gave consumers who were missold PPI policies, which “will play into the hands of the financial institution.
The price paid for payment protection insurance can vary quite significantly depending on the lender. A survey of forty-eight major lenders by Which? Ltd found the price of PPI was 16-25% of the amount of the debt.
PPI premiums may be charged on a monthly basis or the full PPI premium may be added to the loan up-front to cover the cost of the policy. With this latter payment approach, known as a “Single Premium Policy”, the money borrowed from the provider to pay for the insurance policy incurs additional interest, typically at the same APR as is being charged for the original sum borrowed, further increasing the effective total cost of the policy to the customer.
Payment protection insurance on credit cards is calculated differently from lump sum loans, as initially there is no sum outstanding and it is unknown if the customer will ever use their card facility. However, in the event that the credit facility is used and the balance is not paid in full each month, a customer will be charged typically between 0.78% and 1% or £0.78 to £1.00 from every £100 which is a balance of their current card balance on a monthly basis, as the premium for the insurance. When interest on the credit card is added to the premium, it can become very expensive. For example, the cost of PPI for the average credit card in the UK charging 19.32% on an average of £5,000 each month adds an extra £3,219.88 in premiums and interest.
With lump sum loans PPI premiums are paid upfront with the cost from 13% to 56% of the loan amount as reported by the Citizens Advice Bureau (CAB) who launched a Super Complaint into what it called the Protection Racket.
PPI premiums as proportion of loan: cases reported Loan Type Loan Amount PPI premium Premium % of loan
Unsecured personal loan £8,993 £2,217 25%
Unsecured personal loan £11,000 £5,133 47%
Hire purchase for car £5,059 £2,157 43%
Hire purchase for car £6,895 £2,317 34%
Unsecured loan £5,600 £744 13%
Secured loan £25,000 £12,127 49%
Secured loan £35,000 £10,150 29%
Conditional sale for car £4,300 £2,394 56%
When interest is charged on the premiums, the cost of a single premium policy increases the cost geometrically. The above secured loan of £25,000 over a 25-year term at 4.5% interest costs the customer an additional £20,221.74 for PPI. Moneymadeclear calculates the repayment for that loan to be £138.96 a month whereas a stand-alone payment protection policy for say a 30-year-old borrowing the same amount covering the same term would cost the customer £1992 in total, almost one-tenth of the cost of the single premium policy.
Payment Protection Insurance can be extremely useful insurance; however, many PPI policies have been mis-sold alongside loans, credit cards and mortgages. There are many examples of PPI mis-selling, and as a result may leave the borrower with PPI that is no use to them if they came to make a claim. Reclaiming PPI payments and statutory interest charges on these payments is possible in this case either by the affected borrower or by the use of a solicitor or claims management company.
If the borrower at the time of the PPI claim owes money to the lender, the lender will usually have a contractual right to offset any PPI refund against the debt. If there is any PPI value left over, then the balance will be repaid to the PPI solicitor and or the client.
The first ever PPI case was in 1992-93 (Bristol Crown Court 93/10771). It was judged that the total payments of the insurance premium were almost as high as the total benefit that could be claimed. A 10-year non disclosure clause was put in place as part of the settlement. After 10 years, a copy of the judgement was sent to the Office of Fair Trading and Citizens Advice Bureau. Soon after, a super complaint was raised.
The judicial review that followed hit the headlines as it eventually ruled in the favour of the borrowers, enabling a large number of consumers to reclaim PPI payments. To date, £28.5 billion has been repaid to consumers (January 2018).
In 2014, a PPI claim from Susan Plevin against Paragon Personal Finance revealed that over 71% of the PPI sale was a commission. This was deemed as a form of mis-selling. The Plevin case has caused the banks and the Financial Ombudsman to review even more PPI claims.
PPI claim companies are currently one of the most common sources of internet click bait, often using misleading information to attract interest from casual browsing.
Mortgage Insurance (also known as mortgage guarantee and home-loan insurance) is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a mortgage indemnity guarantee (MIG), particularly in the UK.
In Australia, borrowers must pay Lenders Mortgage Insurance (LMI) for home loans over 80% of the purchase price.
In Singapore, it is mandatory for owners of HDB flats to have a mortgage insurance if they are using the balance in their Central Provident Fund (CPF) accounts to pay for the monthly instalment on their mortgage. However, they have the choice of selecting a mortgage insurance administered by the CPF Board or stipulated private insurers.
On the other hand, it is not mandatory for owners of private homes in Singapore to take a mortgage insurance.
Private Mortgage Insurance
Private mortgage insurance, or PMI, is typically required with most conventional (non government backed) mortgage programs when the down payment or equity position is less than 20% of the property value. In other words, when purchasing or refinancing a home with a conventional mortgage, if the loan-to-value (LTV) is greater than 80% (or equivalently, the equity position is less than 20%), the borrower will likely be required to carry private mortgage insurance.
PMI rates can range from 0.32% to 1.20% of the principal balance per year based on percent of the loan insured, LTV, a fixed or variable interest rate structure, and credit score. The rates may be paid in a single lump sum, annually, monthly, or in some combination of the two (split premiums). Most people pay PMI in 12 monthly installments as part of the mortgage payment.
In the United States, PMI payments by the borrower were tax-deductible until 2010.
Several private mortgage insurers failed during the financial crisis of 2007-2009.
Borrower Paid Private Mortgage Insurance
Borrower paid private mortgage insurance, or BPMI, is the most common type of PMI in today’s mortgage lending marketplace. BPMI allows borrowers to obtain a mortgage without having to provide 20% down payment, by covering the lender for the added risk of a high loan-to-value (LTV) mortgage. The US Homeowners Protection Act of 1998 allows for borrowers to request PMI cancellation when the amount owed is reduced to a certain level. The Act requires cancellation of borrower-paid mortgage insurance when a certain date is reached. This date is when the loan is scheduled to reach 78% of the original appraised value or sales price is reached, whichever is less, based on the original amortization schedule for fixed-rate loans and the current amortization schedule for adjustable-rate mortgages. BPMI can, under certain circumstances, be cancelled earlier by the servicer ordering a new appraisal showing that the loan balance is less than 80% of the home’s value due to appreciation. This generally requires at least two years of on-time payments. Each investor’s LTV requirements for PMI cancellation differ based on the age of the loan and current or original occupancy of the home. While the Act applies only to single family primary residences at closing, the investors Fannie Mae and Freddie Mac allow mortgage servicers to follow the same rules for secondary residences. Investment properties typically require lower LTVs.
There is a growing trend for BPMI to be used with the Fannie Mae 3% downpayment program. In some cases, the Lender is giving the borrower a credit to cover the cost of BPMI.
Lender Paid Private Mortgage Insurance
Lender paid private mortgage insurance, or LPMI, is similar to BPMI except that it is paid by the lender and built into the interest rate of the mortgage. LPMI is usually a feature of loans that claim not to require Mortgage Insurance for high LTV loans. The advantage of LPMI is that the total monthly mortgage payment is often lower than a comparable loan with BPMI, but because it’s built into the interest rate, a borrower can’t get rid of it when the equity position reaches 20% without refinancing.
As with other insurance, an insurance policy is part of the insurance transaction. In mortgage insurance, a master policy issued to a bank or other mortgage-holding entity (the policyholder) lays out the terms and conditions of the coverage under insurance certificates. The certificates document the particular characteristics and conditions of each individual loan. The master policy includes various conditions including exclusions (conditions for denying coverage), conditions for notification of loans in default, and claims settlement. The contractual provisions in the master policy have received increased scrutiny since the subprime mortgage crisis in the United States. Master policies generally require timely notice of default include provisions on monthly reports, time to file suit limitations, arbitration agreements, and exclusions for negligence, misrepresentation, and other conditions such as pre-existing environmental contaminants. The exclusions sometimes have “incontestability provisions” which limit the ability of the mortgage insurer to deny coverage for misrepresentations attributed to the policyholder if twelve consecutive payments are made, although these incontestability provisions generally don’t apply to outright fraud.
Coverage can be rescinded if misrepresentation or fraud exists. In 2009, the United States District Court for the Central District of California determined that mortgage insurance could not be rescinded “poolwide”.
Mortgage insurance began in the United States in the 1880s, and the first law on it was passed in New York in 1904. The industry grew in response to the 1920s real estate bubble and was “entirely bankrupted” after the Great Depression. By 1933, no private mortgage insurance companies existed.:15 The bankruptcy was related to the industry’s involvement in “mortgage pools”, an early practice similar to mortgage securitization. The federal government began insuring mortgages in 1934 through the Federal Housing Administration and Veteran’s Administration, but after the Great Depression no private mortgage insurance was authorized in the United States until 1956, when Wisconsin passed a law allowing the first post-Depression insurer, Mortgage Guaranty Insurance Corporation, to be chartered. This was followed by a California law in 1961 which would become the standard for other states’ mortgage insurance laws. Eventually the National Association of Insurance Commissioners created a model law.
Max H. Karl, a Milwaukee lawyer, invented the modern form of private mortgage insurance and helped put home ownership within reach for millions of families. In the 1950s, Mr. Karl became frustrated with the time and paperwork required to obtain a home backed by Federal Government insurance, the only kind available at the time. In 1957, using $250,000 raised from friends and other investors in his hometown of Milwaukee, Mr. Karl founded the Mortgage Guaranty Insurance Corporation (MGIC). Unlike many mortgage insurers who collapsed during the Depression, MGIC would only insure the first 20 percent of loss on a defaulted mortgage, thus limiting its exposure and creating more incentives for savings and loan associations and other lenders to issue loans only to home buyers who could afford them. The guarantee was enough to encourage lenders across the country to issue mortgage loans to buyers whose down payments were less than 20 percent of the home’s price. The availability of credit helped fuel the home building boom of the 1960s and 1970s. By the time of Mr. Karl’s death in 1995, more than 12 percent of the nation’s nearly $4 trillion in home mortgages had private mortgage insurance
In 1999 the Homeowners Protection Act of 1998 came into effect as a federal law of the United States, which requires automatic termination of mortgage insurance in certain cases for homeowners when the loan-to-value on the home reaches 78%; prior to the law, homeowners had limited recourse to cancel and by one estimate, 250,000 homeowners were paying for unnecessary mortgage insurance. Similar state laws existed in eight states at the time of its passage; in 2000, a lawsuit by Eliot Spitzer resulted in refunds due to mortgage insurers lack of compliance with a 1984 New York state law which required insurers to stop charging homeowners after a certain point. These laws may continue to apply; for example, the New York law provides “broader protection”.
For Federal Housing Administration-insured loans, the cancellation requirements may be more difficult.
Lenders mortgage insurance (LMI), also known as private mortgage insurance (PMI) in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property. Typical rates are $55/mo. per $100,000 financed, or as high as $125/mo. for a typical $200,000 loan.
Mortgage insurance in the US
The annual cost of PMI varies and is expressed in terms of the total loan value in most cases, depending on the loan term, loan type, proportion of the total home value that is financed, the coverage amount, and the frequency of premium payments (monthly, annual, or single). The PMI may be payable up front, or it may be capitalized onto the loan in the case of single premium product. This type of insurance is usually only required if the downpayment is 20% or less of the sales price or appraised value (in other words, if the loan-to-value ratio (LTV) is 80% or more). Once the principal is reduced to 80% of value, the PMI is often no longer required on conventional loans. This can occur via the principal being paid down, via home value appreciation, or both. FHA loans often require refinancing to remove PMI, even after the LTV drops below 80%. The effective interest savings from paying off PMI can be substantial. In the case of lender-paid MI, the term of the policy can vary based upon the type of coverage provided (either primary insurance, or some sort of pool insurance policy). Borrowers typically have no knowledge of any lender-paid MI, in fact most “No MI Required” loans actually have lender-paid MI, which is funded through a higher interest rate that the borrower pays.
Sometimes lenders will require that LMI be paid for a fixed period (for example, 2 or 3 years), even if the principal reaches 80% sooner than that. Legally, there is no obligation to allow the cancellation of MI until the loan has amortized to a 78% LTV ratio (based on the original purchase price). The cancellation request must come from the Servicer of the mortgage to the PMI company who issued the insurance. Often the Servicer will require a new appraisal to determine the LTV. The cost of mortgage insurance varies considerably based on several factors which include: loan amount, LTV, occupancy (primary, second home, investment property), documentation provided at loan origination, and most of all, credit score.
If borrowers have less than the 20% downpayment needed to avoid a mortgage insurance requirement, they might be able to make use of a second mortgage (sometimes referred to as a “piggy-back loan”) to make up the difference. Two popular versions of this lending technique are the so-called 80/10/10 and 80/15/5 arrangements. Both involve obtaining a primary mortgage for 80% LTV. An 80/10/10 program uses a 10% LTV second mortgage with a 10% downpayment, and an 80/15/5 program uses a 15% LTV second mortgage with a 5% downpayment. Other combinations of second mortgage and downpayment amounts might also be available. One advantage of using these arrangements is that under United States tax law, mortgage interest payments may be deductible on the borrower’s income taxes, whereas mortgage insurance premiums were not until 2007. In some situations, the all-in cost of borrowing may be cheaper using a piggy-back than by going with a single loan that includes borrower-paid or lender-paid MI.
LMI/PMI tax deduction
Mortgage insurance became tax-deductible in 2007 in the US. For some homeowners, the new law made it cheaper to get mortgage insurance than to get a ‘piggyback’ loan. The MI tax deductibility provision passed in 2006 provides for an itemized deduction for the cost of private mortgage insurance for homeowners earning up to $109,000 annually.
The original law was extended in 2007 to provide for a three-year deduction, effective for mortgage contracts issued after December 31, 2006, and before January 1, 2010. It does not apply to mortgage insurance contracts that were in existence prior to passage of the legislation.
Mortgage insurance in Australia
The two main mortgage insurers in Australia are Genworth Financial and QBE LMI. Mortgage insurance is payable if the loan-to-value ratio (LTV, or LVR in Australia) is above 80%, or above 60% for low document loans. Some non-bank lenders obtain mortgage insurance for every loan irrespective of the LVR however it is paid for by the lender if the loan is below 80% LVR.
LMI premiums are calculated using a sliding scale based on the loan amount and LVR. State government stamp duty may be payable on the premium. The premium can often be capitalised on top of the loan amount free of charge. Unlike in other countries, the LMI premium is a once off fee in Australia.
Many of the larger Australian lenders have the ability to auto approve lenders mortgage insurance in house without the need to refer a loan application directly to their preferred insurer. This is known as a Delegated Underwriting Authority (DUA).
Mortgage insurance in Canada
The Bank Act which governs banks as well as provincial laws governing credit unions and caisse populaires prohibit most regulated lending institutions from providing mortgages without loan insurance if LTV is greater than 80%. The typical premium rates provided by Canada Mortgage and Housing Corporation are between 1% (for 80% LTV) and 2.75% (for 95% LTV) of the loan principal
In insurance, the insurance policy is a contract (generally a standard form contract) between the insurer and the insured, known as the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known as the premium, the insurer promises to pay for loss caused by perils covered under the policy language.
Insurance contracts are designed to meet specific needs and thus have many features not found in many other types of contracts. Since insurance policies are standard forms, they feature boilerplate language which is similar across a wide variety of different types of insurance policies.
The insurance policy is generally an integrated contract, meaning that it includes all forms associated with the agreement between the insured and insurer. :10 In some cases, however, supplementary writings such as letters sent after the final agreement can make the insurance policy a non-integrated contract.:11 One insurance textbook states that generally “courts consider all prior negotiations or agreements … every contractual term in the policy at the time of delivery, as well as those written afterward as policy riders and endorsements … with both parties’ consent, are part of the written policy”.The textbook also states that the policy must refer to all papers which are part of the policy. Oral agreements are subject to the parol evidence rule, and may not be considered part of the policy if the contract appears to be whole. Advertising materials and circulars are typically not part of a policy.Oral contracts pending the issuance of a written policy can occur.
The insurance contract or agreement is a contract whereby the insurer promises to pay benefits to the insured or on their behalf to a third party if certain defined events occur. Subject to the “fortuity principle”, the event must be uncertain. The uncertainty can be either as to when the event will happen (e.g. in a life insurance policy, the time of the insured’s death is uncertain) or as to if it will happen at all (e.g. in a fire insurance policy, whether or not a fire will occur at all).
Insurance contracts are generally considered contracts of adhesion because the insurer draws up the contract and the insured has little or no ability to make material changes to it. This is interpreted to mean that the insurer bears the burden if there is any ambiguity in any terms of the contract. Insurance policies are sold without the policyholder even seeing a copy of the contract.:27 In 1970 Robert Keeton suggested that many courts were actually applying ‘reasonable expectations’ rather than interpreting ambiguities, which he called the ‘reasonable expectations doctrine’. This doctrine has been controversial, with some courts adopting it and others explicitly rejecting it. In several jurisdictions, including California, Wyoming, and Pennsylvania, the insured is bound by clear and conspicuous terms in the contract even if the evidence suggests that the insured did not read or understand them.
Insurance contracts are aleatory in that the amounts exchanged by the insured and insurer are unequal and depend upon uncertain future events. In contrast, ordinary non-insurance contracts are commutative in that the amounts (or values) exchanged are usually intended by the parties to be roughly equal. This distinction is particularly important in the context of exotic products like finite risk insurance which contain “commutation” provisions.
Insurance contracts are unilateral, meaning that only the insurer makes legally enforceable promises in the contract. The insured is not required to pay the premiums, but the insurer is required to pay the benefits under the contract if the insured has paid the premiums and met certain other basic provisions.
Insurance contracts are governed by the principle of utmost good faith (uberrima fides) which requires both parties of the insurance contract to deal in good faith and in particular it imparts on the insured a duty to disclose all material facts which relate to the risk to be covered. This contrasts with the legal doctrine that covers most other types of contracts, caveat emptor (let the buyer beware). In the United States, the insured can sue an insurer in tort for acting in bad faith.
Insurance contracts were traditionally written on the basis of every single type of risk (where risks were defined extremely narrowly), and a separate premium was calculated and charged for each. Only those individual risks expressly described or “scheduled” in the policy were covered; hence, those policies are now described as “individual” or “schedule” policies. This system of “named perils” or “specific perils” coverage proved to be unsustainable in the context of the Second Industrial Revolution, in that a typical large conglomerate might have dozens of types of risks to insure against. For example, in 1926, an insurance industry spokesman noted that a bakery would have to buy a separate policy for each of the following risks: manufacturing operations, elevators, teamsters, product liability, contractual liability (for a spur track connecting the bakery to a nearby railroad), premises liability (for a retail store), and owners’ protective liability (for negligence of contractors hired to make any building modifications).
In 1941, the insurance industry began to shift to the current system where covered risks are initially defined broadly in an “all risk” or “all sums” insuring agreement on a general policy form (e.g., “We will pay all sums that the insured becomes legally obligated to pay as damages…”), then narrowed down by subsequent exclusion clauses (e.g., “This insurance does not apply to…”). If the insured desires coverage for a risk taken out by an exclusion on the standard form, the insured can sometimes pay an additional premium for an endorsement to the policy that overrides the exclusion.
Insurers have been criticized in some quarters for the development of complex policies with layers of interactions between coverage clauses, conditions, exclusions, and exceptions to exclusions. In a case interpreting one ancestor of the modern “products-completed operations hazard” clause, the Supreme Court of California complained:
“ The instant case presents yet another illustration of the dangers of the present complex structuring of insurance policies. Unfortunately the insurance industry has become addicted to the practice of building into policies one condition or exception upon another in the shape of a linguistic Tower of Babel. We join other courts in decrying a trend which both plunges the insured into a state of uncertainty and burdens the judiciary with the task of resolving it. We reiterate our plea for clarity and simplicity in policies that fulfill so important a public service. ”
Parts of an insurance contract
Declarations – identifies who is an insured, the insured’s address, the insuring company, what risks or property are covered, the policy limits (amount of insurance), any applicable deductibles, the policy period and premium amount. These are usually provided on a form that is filled out by the insurer based on the insured’s application and attached on top of or inserted within the first few pages of the policy.
Definitions – Defines important terms used in the rest of the policy.
Insuring agreement – Describes the covered perils, or risks assumed, or nature of coverage. This is where the insurance company makes one or more express promises to indemnify the insured.
Exclusions – Takes coverage away from the insuring agreement by describing property, perils, hazards or losses arising from specific causes which are not covered by the policy.
Conditions – These are specific provisions, rules of conduct, duties, and obligations which the insured must comply with in order for coverage to incept, or must remain in compliance with in order to keep coverage in effect. If policy conditions are not met, the insurer can deny the claim.
Policy form – The definitions, insuring agreement, exclusions, and conditions are typically combined into a single integrated document called a policy form, coverage form, or coverage part. When multiple coverage forms are packaged into a single policy, the declarations will state as much, and then there may be additional declarations specific to each coverage form. Traditionally, policy forms have been so rigidly standardized that they have no blank spaces to be filled in. Instead, they always expressly refer to terms or amounts stated in the declarations. If the policy needs to be customized beyond what is possible with the declarations, then the underwriter attaches endorsements or riders.
Endorsements – Additional forms attached to the policy that modify it in some way, either unconditionally or upon the existence of some condition. Endorsements can make policies difficult to read for nonlawyers; they may revise, expand, or delete clauses located many pages earlier in one or more coverage forms, or even modify each other. Because it is very risky to allow nonlawyer underwriters to directly rewrite policy forms with word processors, insurers usually direct underwriters to modify them by attaching endorsements preapproved by counsel for various common modifications.
Riders – A rider is used to convey the terms of a policy amendment and the amendment thereby becomes part of the policy. Riders are dated and numbered so that both insurer and policyholder can determine provisions and the benefit level. Common riders to group medical plans involve name changes, change to eligible classes of employees, change in level of benefits, or the addition of a managed care arrangement such as a Health Maintenance Organization or Preferred Provider Organization (PPO).
Jackets – The term has several distinct and confusing meanings. In general, it refers to some set of standard boilerplate provisions which accompanies all policies at the time of delivery. Some insurers refer to a package of standard documents shared across an entire family of policies as a “jacket.” Some insurers extend this to include policy forms, so that the only parts of the policy not part of the jacket are the declarations, endorsements, and riders. Other insurers use the term “jacket” in a manner closer to its ordinary meaning: a binder, envelope, or presentation folder with pockets in which the policy may be delivered, or a cover sheet to which the policy forms are stapled or which is stapled on top of the policy. The standard boilerplate provisions are then printed on the jacket itself.
Industry standard forms
In the United States, property and casualty insurers typically use similar or even identical language in their standard insurance policies, which are drafted by advisory organizations such as the Insurance Services Office and the American Association of Insurance Services. This reduces the regulatory burden for insurers as policy forms must be approved by states; it also allows consumers to more readily compare policies, albeit at the expense of consumer choice. In addition, as policy forms are reviewed by courts, the interpretations become more predictable as courts elaborate upon the interpretation of the same clauses in the same policy forms, rather than different policies from different insurers.
In recent years, however, insurers have increasingly modified the standard forms in company-specific ways or declined to adopt changes to standard forms. For example, a review of home insurance policies found substantial differences in various provisions. In some areas such as directors and officers liability insurance and personal umbrella insurance there is little industry-wide standardization.
Manuscript policies and endorsements
For the vast majority of insurance policies, the only page that is heavily custom-written to the insured’s needs is the declarations page. All other pages are standard forms that refer back to terms defined in the declarations as needed. However, certain types of insurance, such as media insurance, are written as manuscript policies, which are either custom-drafted from scratch or written from a mix of standard and nonstandard forms. By analogy, policy endorsements which are not written on standard forms or whose language is custom-written to fit the insured’s particular circumstances are known as manuscript endorsements.
insurance Quotes is an online service connecting insurance shoppers with carriers by providing insurance quotes to shoppers and leads to insurance agents. The company is headquartered in Austin, Texas and was founded on March 31, 2010.
insuranceQuotes’ parent company, Bankrate, Inc., Inc., was founded in 1976 as a print publisher of the “Bank Rate Monitor”. In 1996, the company began moving its business online. After spending 10 years as a public company traded on the NASDAQ, Bankrate, Inc. was acquired in 2009 by Apax Partners in a transaction valued at approximately $571 million. In 2011, Bankrate, Inc. went public again and remains publicly traded.
In 2008 Bankrate,Inc. acquired InsureMe, an online service connecting insurance shoppers with providers. Over the following 4 years, Bankrate, Inc. continued to grow in the insurance industry, acquiring additional complementary companies including netQuote, Trouvé Media, Lead Karma, and InsWeb/AgentInsider. In March, 2015, Bankrate, Inc. combined their insurance brands into insuranceQuotes as a flagship insurance shopping company.
In November 2015, Bankrate reached a deal to sell insuranceQuotes to All Web Leads, Inc., a portfolio company of Genstar Capital. The transaction is expected to close by December 31, 2015, pending certain closing conditions.
insuranceQuotes.com provides auto insurance, life insurance, homeowners insurance, health insurance, renters insurance, commercial auto insurance and business insurance quotes to consumers and business owners by connecting them with insurance agents looking for leads throughout the United States. The company offers consumers informative, unbiased, and helpful research as well as access to a wide network of carriers and agents. insuranceQuotes.com also provides insurance agents with innovative tools and an account management team.
Besides insuranceQuotes.com, All Web Leads, Inc.’s flagship websites include AllWebLeads.com, netQuote.com, and MedicareGenius.com. All Web Leads,Inc. also owns and operates other personal, business and agent insurance websites.
According to the company, drivers receiving a driving under the influence citation see their respective rates rise by an average of 92%, with reckless driving and speeding at 31 or more mph over the posted limit increases premiums by an average 83% and 29%, respectively. Another survey, done by the Princeton Survey Research Associates, states that Millennials are less likely to have health insurance in comparison to other generations.
Guaranteed Auto Protection (GAP) insurance is also known as GAPS and was established in North American financial industry. GAP insurance is the difference between the actual cash value of a vehicle and the balance still owed on the financing (car loan, lease, etc.). GAP coverage is mainly used on new and used small vehicles (cars and trucks) and heavy trucks. Some financing companies and lease contracts require it.
GAP insurance covers the amount on a loan that is the difference between the asset value and the amount covered by another insurance policy. Some GAP policies also cover the deductible. This coverage is marketed for low down payment loans, high interest rate loans and loans with 60 month or longer terms. GAP insurance is typically offered by a finance company at time of purchase. Most auto insurance companies offer this coverage to consumers. GAP insurance is usually paid upfront and, for that reason, one is eligible for a refund if he/she sells or refinances their vehicle.
There are two ways of getting GAP coverage. The first type is an insurance policy sold by a broker. The second type is a waiver agreement sold by a Finance & Insurance Manager. The first is regulated by the insurance industry, the second is unregulated. In either case coverage is usually the same and sold as a soft product through the car dealership. Coverage is usually financed along with the lease/loan. Claims are subject to a total loss. The total loss is usually determined by the primary insurance company’s third-party appraiser.
Exclusions to GAP insurance vary by country or state. Some exclusions include a maximum loss limit of $50,000 while others require a loan term of less than 84 months. GAP is an optional purchase; however, many states in the US require that a car dealership offer GAP at the point of purchase. Other states require insurers to offer GAP if a client requests it. States such as Louisiana require that the purchaser sign a disclosure document as proof. Although GAP is optional, some finance companies require GAP as a condition to obtaining a loan. The Truth in Lending Act excludes GAP premiums from financial charges if GAP was not required by the creditor, the premiums were disclosed in writing, and the consumer provides a written request for the insurance.
UK Gap Insurance Update
In September 2015, the FCA changed the way that Gap Insurance premiums are sold by car dealers in the UK.
Claims ratios for GAP insurance (the amount paid out in comparison to premiums paid) were just 10% between 2008 and 2012, meaning that just £10.00 was paid out for every £100.00 paid in premiums. The poor value for money being given to consumers prompted the FCA to require the following:
Ensure dealers make consumers aware that other suppliers exist.
Delay the transaction by 4 business days.
Personal property is generally considered property that is movable, as opposed to real property or real estate. In common law systems, personal property may also be called chattels or personalty. In civil law systems, personal property is often called movable property or movables – any property that can be moved from one location to another.
Personal property is movable and can be understood in comparison to immovable property or real property, such as land and buildings. Movable property on land, for example, larger livestock, was not automatically sold with the land, it was “personal” to the owner and moved with the owner. The word cattle is the Old Norman variant of Old French chatel, chattel (derived from Latin capitalis, “of the head”), which was once synonymous with general movable personal property.
Personal property may be classified in a variety of ways.
Tangible personal property refers to any type of property that can generally be moved (i.e., it is not attached to real property or land), touched or felt. These generally include items such as furniture, clothing, jewelry, art, writings, or household goods. In some cases, there can be formal title documents that show the ownership and transfer rights of that property after a person’s death (for example, motor vehicles, boats, etc.) In many cases, however, tangible personal property will not be “titled” in an owner’s name and is presumed to be whatever property he or she was in possession of at the time of his or her death.
Intangible personal property or “intangibles” refers to personal property that cannot actually be moved, touched or felt, but instead represents something of value such as negotiable instruments, securities, service (economics), and intangible assets including chose in action.
Accountants also distinguish personal property from real property because personal property can be depreciated faster than improvements (while land is not depreciable at all). It is an owner’s right to get tax benefits for chattel, and there are businesses that specialize in appraising personal property, or chattel.
The distinction between these types of property is significant for a variety of reasons. Usually one’s rights on movables are more attenuated than one’s rights on immovables (or real property). The statutes of limitations or prescriptive periods are usually shorter when dealing with personal or movable property. Real property rights are usually enforceable for a much longer period of time and in most jurisdictions real estate and immovables are registered in government-sanctioned land registers. In some jurisdictions, rights (such as a lien or other security interest) can be registered against personal or movable property.
In the common law it is possible to place a mortgage upon real property. Such mortgage requires payment or the owner of the mortgage can seek foreclosure. Personal property can often be secured with similar kind of device, variously called a chattel mortgage, trust receipt, or security interest. In the United States, Article 9 of the Uniform Commercial Code governs the creation and enforcement of security interests in most (but not all) types of personal property.
There is no similar institution to the mortgage in the civil law, however a hypothec is a device to secure real rights against property. These real rights follow the property along with the ownership. In the common law a lien also remains on the property and it is not extinguished by alienation of the property; liens may be real or equitable.
Many jurisdictions levy a personal property tax, an annual tax on the privilege of owning or possessing personal property within the boundaries of the jurisdiction. Automobile and boat registration fees are a subset of this tax. Most household goods are exempt as long as they are kept or used within the household; the tax usually becomes a problem when the taxing authority discovers that expensive personal property like art is being regularly stored outside of the household.
The distinction between tangible and intangible personal property is also significant in some of the jurisdictions which impose sales taxes. In Canada, for example, provincial and federal sales taxes were imposed primarily on sales of tangible personal property whereas sales of intangibles tended to be exempt. The move to value added taxes, under which almost all transactions are taxable, has diminished the significance of the distinction.
Personal versus private property
In political/economic theory, notably socialist, Marxist, and most anarchist philosophies, the distinction between private and personal property is extremely important. Which items of property constitute which is open to debate. In some philosophies, such as capitalism, private and personal property are considered to be exactly equivalent.
Personal property includes “items intended for personal use” (e.g., clothes, homes, and vehicles, and sometimes money). It must be gained in a socially fair manner, and the owner has a distributive right to exclude others.
Private property is a social relationship between the owner and persons deprived (not a relationship between person and thing), e.g., artifacts, factories, mines, dams, infrastructure, natural vegetation, mountains, deserts and seas. Marxism holds that a process of class conflict and revolutionary struggle could result in victory for the proletariat and the establishment of a communist society in which private property and ownership is abolished over time and the means of production and subsistence belong to the community. (Private property and ownership, in this context, means ownership of the means of production, not personal possessions).
To many socialists, the term private property refers to capital or the means of production, while personal property refers to consumer and non-capital goods and services.
Liability insurance is a part of the general insurance system of risk financing to protect the purchaser (the “insured”) from the risks of liabilities imposed by lawsuits and similar claims. It protects the insured in the event he or she is sued for claims that come within the coverage of the insurance policy. Originally, individual companies that faced a common peril formed a group and created a self-help fund out of which to pay compensation should any member incur loss (in other words, a mutual insurance arrangement). The modern system relies on dedicated carriers, usually for-profit, to offer protection against specified perils in consideration of a premium.
Liability insurance is designed to offer specific protection against third-party insurance claims, i.e., payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. In general, damage caused intentionally as well as contractual liability are not covered under liability insurance policies. When a claim is made, the insurance carrier has the duty (and right) to defend the insured. The legal costs of a defence normally do not affect policy limits unless the policy expressly states otherwise; this default rule is useful because defence costs tend to soar when cases go to trial. In many cases, the defense portion of the policy is actually more valuable than the insurance, as in complicated cases, the cost of defending the case might be more than the amount being claimed, especially in so-called “nuisance” cases where there is no liability but the case has to be defended anyway.
Commercial liability is an important segment for the insurance industry. With premium income of USD 160 billion in 2013, it accounted for 10% of global non-life premiums of USD 1 550 billion, or 23% of the global commercial lines premiums. Liability insurance is far more prevalent in the advanced than emerging markets. The advanced markets accounted for 93% of global liability premiums in 2013, while their share of global non-life premiums was 79%.
The US is by far the largest market, with 51% of the global liability premiums written in 2013. This is due to the size of the US economy and high penetration of liability insurance (0.5% of GDP). In 2013, US businesses spent USD 84 billion on commercial liability covers, of which USD 50 billion was on general liability, including USD 12 billion for Errors and Omissions (E&O) and USD 5.4 billion for Directors and Officers (D&O). US businesses spent another USD 13 billion on the liability portion of commercial multi-peril policies, USD 9.5 billion for medical malpractice and USD 3 billion for product liability covers.
The UK is the world’s second largest market for liability insurance, with USD 9.9 billion of liability premiums in 2013. The largest sub-line of business is public and product liability. This is followed by professional indemnity and employers’ liability (cover for employment-related accidents and illnesses). There has been a significant shift in the sub-segments of UK liability insurance. In the last decade, the share of professional indemnity has increased from about 14% to 32%, highlighting the shift towards a more services-driven economy. Manufacturing, meanwhile, comprises a lower share of liability claims as accidents related to injuries and property damages have declined.
In continental Europe, the largest liability insurance markets are Germany, France, Italy and Spain. Together they made up almost USD 22 billion of global liability premiums in 2013. Typically governed by civil law systems, these markets rely on local conditions and historical experience to determine which liability policies and covers are available. Penetration ranges from 0.16% to 0.25%, which is low compared to the common law countries such as the US, the UK and Australia.
Japan and Australia are the largest markets in the Asia Pacific region, with commercial liability premiums of USD 6.0 billion and USD 4.8 billion, respectively, in 2013. At 0.12% of GDP, the penetration of liability insurance in Japan is much lower than in other advanced economies. In Australia, penetration is much higher at 0.32% of GDP. This is due to the country’s English law derived legal framework, which has increased demand for employers’ liability insurance. Australia has mandatory covers for aviation, maritime oil pollution and residential construction and, in certain states, for medical practitioners, property brokers and stock brokers. Liability insurance premiums have grown at an average annual rate of 11% since 2000.
China is the ninth largest commercial liability market globally, with premiums of USD 3.5 billion in 2013 and strong annual average growth of 22% since 2000. However, penetration remains low at 0.04% of GDP. Growth has been driven by increasing risk awareness and regulatory changes.
Liability insurers have one, two or three major duties, depending upon the jurisdiction:
the duty to defend,
the duty to indemnify, and
the duty to settle a reasonably clear claim.
The duty to defend is prevalent in the United States and Canada, where most liability insurance policies provide that the insurer “has the right and duty” to defend the insured against all “suits” to which the policies apply. It is usually triggered when the insured is sued (or in some instances, given pre-suit notice that they are about to be sued) and subsequently “tenders” defense of the claim to its liability insurer. Usually this is done by sending a copy of the complaint along with a cover letter referencing the relevant insurance policy or policies and demanding an immediate defense.
In most U.S. states and Canada, the insurer generally has four main options at this point, to:
defend the insured unconditionally;
defend the insured under a reservation of rights;
seek a declaratory judgment that it has no duty to defend the claim; or
decline to defend or to seek a declaratory judgment.
The duty to defend is generally broader than the duty to indemnify, because most (but not all) policies that provide for such a duty also specifically promise to defend against claims that are groundless, false, or fraudulent. Therefore, the duty to defend is normally triggered by a potential for coverage. The test for a potential for coverage is whether the complaint adequately pleads at least one claim or cause of action which would be covered under the terms of the policy if the plaintiff were to prevail on that claim at trial, and also does not plead any allegations which would entirely vitiate an essential element of coverage or trigger a complete exclusion to coverage. It is irrelevant whether the plaintiff will prevail or actually prevails on the claim; rather, the test is whether the claim if proven would be covered. Vague or ambiguous allegations broad enough to encompass a range of possibilities both within and without coverage are usually construed in favor of a potential for coverage, but speculation about unpled allegations (that is, matters on which the complaint is totally silent) is insufficient to create a potential for coverage. Some jurisdictions allow extrinsic evidence to be considered, either because it is expressly described in the complaint or it is relevant to the facts expressly alleged in the complaint.
If there is a duty to defend, it means the insurer must defend the insured against the entire lawsuit even if most of the claims or causes of action in the complaint are clearly not covered. An insurer can choose to defend unconditionally without reserving any rights, but by doing so, it waives (or is later estopped from asserting) the absence of coverage as a defense to the duty to defend and impliedly commits to defending the insured to a final judgment or a settlement regardless of how long it takes (unless the policy expressly provides that defense costs reduce policy limits). In the alternative, the insurer may defend under a reservation of rights: it sends a letter to the insured reserving its rights to immediately withdraw from the insured’s defense if it becomes clear there is no coverage or no potential for coverage for the entire complaint, and to recover from the insured any funds expended to that point on defending against any particular claims or causes of action which were never covered or even potentially covered to begin with.
If the insurer chooses to defend, it may either defend the claim with its own in-house lawyers (where allowed), or give the claim to an outside law firm on a “panel” of preferred firms which have negotiated a standard fee schedule with the insurer in exchange for a regular flow of work. The decision to defend under a reservation of rights must be undertaken with extreme caution in jurisdictions where the insured has a right to independent counsel, also known as Cumis counsel.
The insurer can also seek a declaratory judgment against the insured that there is no coverage for the claim, or at least no potential for coverage. This option generally allows the insurer to insulate itself from a bad faith claim, in the sense that an insurer acts in good faith when it promptly brings coverage disputes to the attention of a court, even though it also places the insured in the awkward position of defending itself against two lawsuits: the plaintiff’s original complaint and the insurer’s complaint for declaratory judgment. Indeed, in some jurisdictions an insurer acting in good faith must seek declaratory relief from a court before declining to defend its insured (e.g., Illinois) or withdrawing from its defense pursuant to an earlier reservation of rights (e.g., Georgia).
Finally, the insurer can decline to defend and also refrain from seeking declaratory judgment. If the insurer is absolutely certain that there is no coverage or no potential for coverage, then in most jurisdictions the insurer adequately preserves its defenses to coverage by sending a letter to the insured explaining its position and declining to provide a defense. But this option can be very risky, because if a court later determines that there was a duty to defend all along, then it will hold that the insurer necessarily breached that duty, and may also hold that the insurer is subject to tort liability for bad faith. So insurers will often defend under a reservation of rights rather than decline coverage altogether.
Outside of the United States and Canada, liability insurers generally do not assume a duty to defend, in the sense of assuming a direct responsibility for hiring and paying a lawyer to defend the insured. Many write policies which promise to reimburse the insured for reasonable defense costs incurred with the insurer’s consent, but this is essentially a form of indemnification (covered in the next section below), under which the insured remains primarily responsible for hiring a lawyer to defend themselves. Such insurers often expressly reserve a right to defend the insured, presumably so they can intervene to protect their own interests if the insured’s counsel of choice is not providing an adequate defense against the underlying claim.
An indemnity case arises when an individual is obliged to pay for the loss or damage incurred by another person in an event of an accident, collision etc. The duty of indemnity generally originates from the agreement in between insurer and insured which protects the insured against any liability, damage or loss.
The duty to indemnify is the insurer’s duty to pay all covered sums for which the insured is held liable, up to the limits of coverage and subject to any deductibles, retained limits, self-insured retention, excess payments, or any other amounts of money which the insured is required to pay out-of-pocket as a precondition to the insurer’s duty.
It is generally triggered when a final judgement is entered against the insured, and it is satisfied when the insurer pays such covered amounts to the plaintiff who obtained the judgement. Most policies provide for payment of monetary damages as well as any costs, expenses, and attorney’s fees which the plaintiff may also be entitled to as the prevailing party.
Unlike the duty to defend, the duty to indemnify extends only to those claims or causes of action in the plaintiff’s complaint which are actually covered under the policy, since a final judgement against the insured would normally be supported by a factual record in the trial court showing exactly why the plaintiff prevailed (or failed to prevail) on each claim or cause of action. Thus, an insurer could have a duty to defend based on mere allegations that show a potential for coverage, but may not have a duty to indemnify if the evidence supporting a final judgement against the insured also takes those claims or causes of action completely outside of the policy’s scope of coverage.
While the duty to defend and the duty to settle are rare outside of English-speaking North America, the duty to indemnify is universally found in liability insurance policies.
To settle reasonable claims
In some jurisdictions, there is a third duty, the duty to settle a reasonably clear claim against the insured. This duty is generally triggered only if a reasonable opportunity to settle actually arises, either because the plaintiff makes a settlement offer, or the insurer is aware of information to the effect that the plaintiff would accept a settlement offer. The insurer is neither required to initiate an offer to a plaintiff likely to refuse it, nor required to accept an outrageous offer from a plaintiff who filed a frivolous lawsuit and cannot prevail against the insured under any theory.
The duty to settle is of greatest import in the scenario where the insured may have some liability exposure (i.e., there is some evidence apparently linking the insured to the plaintiff’s alleged injuries), the plaintiff has evidence of substantial damages which may exceed policy limits, and the plaintiff makes a settlement demand (either to the insured or directly to a defending insurer) which equals or exceeds policy limits. In that situation, the insurer’s interests conflict with the insured’s interests, because the insurer has an incentive to not immediately settle. That is, if the insurer refuses to settle and the case then goes to trial, there are only two possible outcomes: (1) the insured loses and the insurer must pay the ensuing judgment against the insured up to the policy limits, or (2) the insured wins, meaning both the insured and the insurer bear no liability. If the first outcome occurs, then it is essentially “nothing gained nothing lost” from the insurer’s point of view, because either way it will pay out its policy limits. (For simplicity, this analysis disregards sunk costs in the form of defense costs incurred to that point, as well as additional costs sustained by the insurer in defending the insured to a verdict at trial, and opportunity costs sustained by the insured while participating in trial.)
While the insurer may be indifferent in this scenario as to whether it pays out its policy limits before or after trial, the insured is most certainly not. If the first outcome above were to occur, the insured may be held liable to the plaintiff for a sum far in excess of both the pretrial settlement offer and the policy limits. Then after the insurer pays out its policy limits, the plaintiff may attempt to recover the remaining balance of the judgment by enforcing writs of attachment or execution against the insured’s valuable assets.
This is where the duty to settle comes in. To discourage the insurer from gambling with the insured’s assets in pursuit of the remote possibility of a defense verdict (under which it can avoid having to pay the plaintiff anything at all), the insurer is subject to a duty to settle reasonably clear claims. The standard judicial test is that an insurer must settle a claim if a reasonable insurer, notwithstanding any policy limits, would have settled the claim. This does not require an insurer to accept or pay settlement offers that actually exceed policy limits, but in that instance, the insurer must discharge its duty to settle by at least making an attempt to bring about a settlement in which it would have to pay only its policy limits (either because the plaintiff agrees to lower their demand or the insured or another primary or excess insurer agrees to contribute the difference).
Effects of breach
Generally, an insurer who breaches any of the foregoing duties will be held liable for breach of contract. In most jurisdictions, the result is a judgment requiring payment of the insured’s expectation damages—the sums that the insurer should have paid under its duty to indemnify. But this will be circumscribed by the policy limits, and will generally not compensate the insured for losses incurred as a consequence of the insurer’s breach, such as lost business opportunities when money intended to be invested in those opportunities was diverted (or seized) to pay judgments.
In the United States (and to a lesser extent, Canada), an insurer who breaches any of these three duties in a particularly egregious fashion may also be held liable for the tort of insurance bad faith, under which the insured may be able to recover compensatory damages in excess of the policy limits, as well as punitive damages.
Occurrence v. claims-made policies
Traditionally, liability insurance was written on an occurrence basis, meaning that the insurer agreed to defend and indemnify against any loss which allegedly “occurred” as a result of an act or omission of the insured during the policy period. This was originally not a problem because it was thought that insureds’ tort liability was predictably limited by doctrines like proximate cause and statutes of limitations. In other words, it was thought that no sane plaintiffs’ lawyer would sue in 1978 for a tortious act that allegedly occurred in 1953, because the risk of dismissal was so obvious.
In the 1970s and 1980s, a large number of major toxic tort (primarily involving asbestos and diethylstilbestrol) and environmental liabilities resulted in numerous judicial decisions and statutes that radically extended the so-called “long tail” of potential liability chasing occurrence policies. The result was that insurers who had long ago closed their books on policies written 20, 30, or 40 years earlier now found that their insureds were being hit with hundreds of thousands of lawsuits that potentially implicated those old policies. A body of law has developed concerning which policies must respond to these continuous injury or “long tail” claims, with many courts holding multiple policies may be implicated by the application of an exposure, continuous injury, or injury-in-fact trigger and others holding the policy in effect at the time the injuries or damages are discovered are implicated.
The insurance industry reacted in two ways to these developments. First, premiums on new occurrence policies skyrocketed, since the industry had learned the hard way to assume the worst as to those policies. Second, the industry began issuing claims-made policies, where the policy covers only those claims that are first “made” against the insured during the policy period. A related variation is the claims-made-and-reported policy, under which the policy covers only those claims that are first made against the insured and reported by the insured to the insurer during the policy period. (There is usually a grace period for reporting after the end of the policy period to protect insureds who are sued at the very end of the policy period.
Claims-made policies enable insurers to again sharply limit their own long-term liability on each policy and in turn, to close their books on policies and record a profit. Hence, they are much more affordable than occurrence policies and are very popular for that reason. Of course, claims-made policies shift the burden to insureds to immediately report new claims to insurers. They also force insureds to become more proactive about risk management and finding ways to control their own long-tail liability.
Claims-made policies often include strict clauses that require insureds to report even potential claims and that combine an entire series of related acts into a single claim. This puts insureds to a Sophie’s choice. They can timely report every “potential” claim (i.e., every slip-and-fall on their premises), even if those never ripen into actual lawsuits, and thereby protect their right to coverage, but at the expense of making themselves look more risky and driving up their own insurance premiums. Or they can wait until they actually get sued, but then they run the risk that the claim will be denied because it should have been reported back when the underlying accident first occurred.
Claims-made coverage also makes it harder for insureds to switch insurers, as well as to wind up and shut down their operations. It is possible to purchase “tail coverage” for such situations, but only at premiums much higher than for conventional claims-made policies, since the insurer is being asked to re-assume the kind of liabilities which claims-made policies were supposed to push to insureds to begin with.
Not surprisingly, insureds recognised what the insurance industry was up to in trying to use claims-made policies to push a substantial amount of risk back to insureds, and claims-made coverage was the subject of extensive litigation in several countries throughout the 1970s, 1980s, and 1990s. This led to important decisions of the U.S. Supreme Court in 1978 and 1993 and of the Supreme Court of Canada in 1993.
Retained limits and SIRs
One way for businesses to cut down their liability insurance premiums is to negotiate a policy with a retained limit or self-insured retention (SIR), which is somewhat like a deductible. With such policies, the insured is essentially agreeing to self-insure and self-defend for smaller claims, and to tender only for liability claims that exceed a certain value. However, writing such insurance is itself risky for insurers. The California Courts of Appeal have held that primary insurers on policies with a SIR must still provide an “immediate, ‘first dollar’ defence” (subject, of course, to their right to later recover the SIR amount from the insured) unless the policy expressly imposes exhaustion of the SIR as a precondition to the duty to defend.
In many countries, liability insurance is a compulsory form of insurance for those at risk of being sued by third parties for negligence. The most usual classes of mandatory policy cover the drivers of vehicles, those who offer professional services to the public, those who manufacture products that may be harmful, constructors and those who offer employment. The reason for such laws is that the classes of insured are deliberately engaging in activities that put others at risk of injury or loss. Public policy therefore requires that such individuals should carry insurance so that, if their activities do cause loss or damage to another, money will be available to pay compensation. In addition, there are a further range of perils that people insure against and, consequently, the number and range of liability policies has increased in line with the rise of contingency fee litigation offered by lawyers (sometimes on a class action basis). Such policies fall into three main classes:
Industry and commerce are based on a range of processes and activities that have the potential to affect third parties (members of the public, visitors, trespassers, sub-contractors, etc. who may be physically injured or whose property may be damaged or both). It varies from state to state as to whether either or both employer’s liability insurance and public liability insurance have been made compulsory by law. Regardless of compulsion, however, most organizations include public liability insurance in their insurance portfolio even though the conditions, exclusions, and warranties included within the standard policies can be a burden. A company owning an industrial facility, for instance, may buy pollution insurance to cover lawsuits resulting from environmental accidents.
Many small businesses do not secure general or professional liability insurance due to the high cost of premiums. However, in the event of a claim, out-of-pocket costs for a legal defence or settlement can far exceed premium costs. In some cases, the costs of a claim could be enough to shut down a small business.
Businesses must consider all potential risk exposures when deciding whether liability insurance is needed, and, if so, how much coverage is appropriate and cost-effective. Those with the greatest public liability risk exposure are occupiers of premises where large numbers of third parties frequent at leisure including shopping centres, pubs, clubs, theatres, cinemas, sporting venues, markets, hotels and resorts. The risk increases dramatically when consumption of alcohol and sporting events are included. Certain industries such as security and cleaning are considered high risk by underwriters. In some cases underwriters even refuse to insure the liability of these industries or choose to apply a large deductible in order to minimise the potential compensations. Private individuals also occupy land and engage in potentially dangerous activities. For example, a rotten branch may fall from an old tree and injure a pedestrian, and many people ride bicycles and skateboards in public places. The majority of states require motorists to carry insurance and criminalise those who drive without a valid policy. Many also require insurance companies to provide a default fund to offer compensation to those physically injured in accidents where the driver did not have a valid policy.
In many countries, claims are dealt with under common law principles established through a long history of case law and if litigated, are made by way of civil actions in the relevant jurisdiction.
Product liability insurance is not a compulsory class of insurance in all countries, but legislation such as the UK Consumer Protection Act 1987 and the EC Directive on Product Liability (25/7/85) require those manufacturing or supplying goods to carry some form of product liability insurance, usually as part of a combined liability policy. The scale of potential liability is illustrated by cases such as those involving Mercedes-Benz for unstable vehicles and Perrier for benzene contamination, but the full list covers pharmaceuticals and medical devices, asbestos, tobacco, recreational equipment, mechanical and electrical products, chemicals and pesticides, agricultural products and equipment, food contamination, and all other major product classes.
New policies have been developed to cover any liability that might be imposed on an employer if an employee is injured in the course of his or her employment. In those countries where such insurance is not compulsory, smaller organizations risk insolvency when faced by employee claims not covered by insurance.
In the United Kingdom, Employers Liability Insurance is compulsory, unless the only employee is the owner of the company (who holds at least 50% of the shares) or the business is a family business which is not incorporated as a limited company.
Similarly, workers’ compensation insurance is usually compulsory in the United States unless the employer can demonstrate the capability to self-insure by demonstrating sufficient financial capacity and risk management capabilities. Employers that self-insure may carry excess insurance for occurrences that generate unacceptably large losses for the employer.
Original jurisdiction over workers’ compensation claims has been diverted in much of the United States to administrative proceedings outside of the federal and state courts. They operate as no-fault schemes in which the employee need not prove the employer’s fault; it is sufficient for the employee to prove that the injury occurred in the course of employment. If a third party other than the employer actually caused the injury, then the workers’ compensation insurer (or self-insured employer) who is ordered to pay an employee’s claim is usually entitled to initiate a subrogation action in the regular court system against the third party. In turn, workers’ compensation insurance is regulated and underwritten separately from liability insurance. Just as the Insurance Services Office develops standard liability insurance forms and obtains approval for them from state insurance commissioners, the National Council on Compensation Insurance (NCCI) and various state rating bureaus provide similar services in the workers’ compensation context.
U.S. workers’ compensation insurance generally covers only bodily injury to and death of employees, but it does not always cover other persons who may suffer injury as a direct result of such bodily injury or death. U.S. employers often carry Employers’ Liability coverage (which is not necessarily compulsory) to protect themselves from lawsuits from such persons who would still have the right to sue them in the courts, such as an employee’s spouse who claims loss of consortium as a result of the employee’s bodily injury on the job which was allegedly caused by the employer’s negligence.
Workers’ compensation also does not cover intangible torts that merely cause emotional distress. During the 1980s, as U.S. employees began to obtain jury verdicts against their employers more frequently on the basis of such torts, ISO revised the Commercial General Liability insurance policy form to exclude coverage for torts related to the employer-employee relationship like racial or gender discrimination in the workplace, as well as liability for negligent supervision of midlevel managers who committed such torts. It soon became evident that U.S. employers were strongly interested in obtaining some kind of insurance coverage for such torts, which resulted in the development of Employment Practices Liability (EPL) insurance in the U.S. market.
Main article: Commercial general liability insurance
General Liability Insurance is the kind of coverage that provides an individual with protection against variety of claims which may include bodily injuries, physical damage to car, property damage etc arising from business operations. General Liability Insurance (GP) covers a number of businesses and the norms of insurance may vary from company to company as well as area to area. Many of the public and product liability risks are often covered together under a general liability policy. These risks may include bodily injury or property damage caused by direct or indirect actions of the insured.
In the United States, general liability insurance coverage most often appears in the Commercial General Liability policies obtained by businesses, and in homeowners’ insurance policies obtained by individual homeowners.
Generally, liability insurance covers only the risk of being sued for negligence or strict liability torts, but not any tort or crime with a higher level of mens rea. This is usually mandated by the policy language itself or case law or statutes in the jurisdiction where the insured resides or does business.
In other words, liability insurance does not protect against liability resulting from crimes or intentional torts committed by the insured. This is intended to prevent criminals, particularly organised crime, from obtaining liability insurance to cover the costs of defending themselves in criminal actions brought by the state or civil actions brought by their victims. A contrary rule would encourage the commission of crime, and allow insurance companies to indirectly profit from it, by allowing criminals to insure themselves from adverse consequences of their own actions.
It should be noted that crime is not uninsurable per se. In contrast to liability insurance, it is possible to obtain loss insurance to compensate one’s losses as the victim of a crime.
In the United States, most states make only the carrying of motor vehicle insurance mandatory. Where the carrying of a policy is not mandatory and a third party makes a claim for injuries suffered, evidence that a party has liability insurance is generally inadmissible in a lawsuit on public policy grounds, because the courts do not want to discourage parties from carrying such insurance. There are two exceptions to this rule:
If the owner of the insurance policy disputes ownership or control of the property, evidence of liability insurance can be introduced to show that it is likely that the owner of the policy probably does own or control the property.
If a witness has an interest in the policy that gives the witness a motive or bias with respect to specific testimony, the existence of the policy can be introduced to show this motive or bias. Federal rules of civil procedure rule 26 was amended in 1993 to require that any insurance policy that may pay or may reimburse be made available for photocopying by the opposing litigants, although the policies are not normally information given to the jury. Federal Rules of Appellate Procedure rule 46 says that an appeal can be dismissed or affirmed if counsel does not update their notice of appearance to acknowledge insurance. The Cornell University Legal Institute web site includes congressional notes.
In the technology industry
Because technology companies represent a relatively new industry that deals largely with intangible yet highly valuable data, some definitions of legal liability may still be evolving in this field. Technology firms must carefully read and fully understand their policy limits to ensure coverage of all potential risks inherent in their work.
Typically, professional liability insurance protects technology firms from litigation resulting from charges of professional negligence or failure to perform professional duties. Covered incidents may include errors and omissions that result in the loss of client data, software or system failure, claims of non-performance, negligent overselling of services, contents of a forum post or email of an employee that are incorrect or cause harm to a reputation, getting rid of office equipment such as fax machines without properly clearing their internal memory, or failing to notify customers that their private data has been breached. For example, some client companies have won large settlements after technology subcontractors’ actions resulted in the loss of irreplaceable data. Professional liability insurance would generally cover such settlements and legal defense, within policy limits.
Additionally, client contracts often require technology subcontractors working on-site to provide proof of general liability and professional liability insurance.