What is Insurance?
Insurance Is
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Posted on October 29, 2021 by Barry Zalma
Insurance policies are contracts. To form a contract, an insurer must make an offer that is accepted by a potential insured who then pays consideration – premiums – for the promises made by the insurer. Insurance contracts, like all contracts, can only exist if there is an offer, acceptance of the offer and payment of consideration.
An insurance contract exists when an insurer and the insured agrees that the insurer will provide indemnity to the insured as a result of a contingent or unknown event that causes loss to the insured.
The language of insurance contracts come in multiple formats with an almost infinite variety of terms and conditions. I personally have collected, over the last 54 years about 17 linear feet of multiple insurance forms created by the Insurance Services Office (“ISO”), Standard, and individual insurance company specialty forms. In addition, since the advent of the Internet I have collected gigabytes of insurance policy forms as paper has given way to digital insurance policy wording.
It is recognized that an insurance contract can be written to contain nearly any term that the parties to it choose. In State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293, 313 (Ala. 1999), the court stated that “The language of insurance contracts comes in multiple formats with an almost infinite variety of terms and conditions.”
In almost identical language, the Wisconsin Supreme Court said that “parties are at liberty to enter into insurance contracts which specify the coverage afforded as long as the contract terms do not contravene state law or public policy.” [American Motorists Insurance Company v. R & S Meats, Inc., 526 N.W.2d 791, 793 (Wis. 1994).]
Since interpretation of an insurance contract’s wording is always a matter of law left to the court alone it is not a subject to be presented to a jury as fact finder. The court, asked to interpret the contract will look to the policy wording at issue first. If the wording is clear and it unambiguously expresses the parties’ intent, courts will enforce the insurance contract as written and may not alter its terms under the guise of contractual interpretation. However, as will be discussed in more detail later, if the court finds an ambiguity in the insurance contract wording it will interpret the contract to the favor of the policyholder.
PROPERTY INSURANCE
Property insurance does not insure property. It insures people who have an interest in real or personal property and who face the risk of losing that property to unknown or contingent perils. Most property insurance policies insure against all direct risks of physical loss not excluded or the risk of loss by perils named in the policy like fire, lightning, windstorms, or hail. The risk of loss is spread among the customers of the insurer so that the cost of insurance is affordable. It is called “first party” insurance against risks faced by property in which the insured (the first party to the contract of insurance) has an interest and by the loss of which the insured would be damaged. The insurer, considering ancient ways to describe parties to contracts, is considered the second party to the contract.
Only an insured of a policy who also has an insurable interest – an interest where the insured will be damaged in some way as a result of a loss due to a peril insured against – before he or she can collect. Failure to be an insured named on the policy or by definition – regardless of the extent of the insurable interest – deprives the person of a right to the benefits of the policy. Failure to maintain an insurable interest – even if named as an insured by the policy – deprives the person of the right to the benefits of the policy.
To obtain that indemnity the insured must also fulfill the promises he, she or it made to prove its loss and cooperate with the insurer’s investigation.
The Contract of Personal Indemnity
First party property insurance is a contract of personal indemnity. The insurer promises to indemnify the first party, the insured, in the event the insured incurs a loss as a result of one of the perils insured against by the wording of the policy. Insurance does not follow title to the land. The insurer makes a promise to the first party, the insured, that if there is a loss to property in which the insured has an interest, to pay indemnity for the loss. The “elementary principle of insurance law that fire insurance” is a contract of personal indemnity, “not one from which a profit is to be realized.” [Cigna Property & Cas. Ins. Co. v. Verzi, 684 A.2d 486, 112 Md.App. 137 (Md. App. 1995)]
The insurance claims adjuster (the adjuster) must always ascertain that the owner, or a person with some other insurable interest in the property, is the person insured and that the person insured has an interest in the property. Failure to do so could result in the insurer paying the wrong person or paying a person with no right to the benefits promised by the policy. Proceeds of a policy upon the interest of an insured are not subject to the claims of others who have an interest in the property but are not named as insured or who do not qualify as insureds by definition.
A first party property policy is considered by courts asked to interpret the conditions of the policy, a contract of personal indemnity. It is a contract made with the individual protected. The insurance does not go with the property as an incident thereto to any person who may buy that property. If it goes at all, it goes as a matter of contract for the transfer of the policy. [Estate of Cartwright v. Standard Fire Ins. Co., No. M2007-02691-COA-R3-CV, 2008 WL 4367573, *2 (Tenn. Ct.App. Sept. 23, 2008) (noting that “[t]he contract of insurance is also purely a personal contract between the insured and the insurance company, and does not attach to or run with the title to the insured’s property absent an agreement for the transfer of the policy.” Fulton Bellows, LLC v. Federal Ins. Co., 662 F.Supp.2d 976 (E.D. Tenn., 2009).
It is an elementary principle of insurance law that fire insurance is a contract of personal indemnity, not one from which a profit is to be realized. The right to recover must be commensurate with the loss actually sustained. [Glens Falls Ins. Co. v. Sterling, 219 Md. 217, 222, 148 A.2d 453, 456 (Ct.App.1959); Starkman v. Sigmond, 446 A.2d 1249, 184 N.J.Super. 600 (N.J. Super., 1982)]
ZALMA OPINION
It is essential that everyone in the business of insurance understand what insurance is and how it is created as a means to indemnity against the risks of loss faced by every citizen.
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.
He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.
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and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Go to training available at https://claimschool.com; articles at https://zalma.substack.com, the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/ podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4