To understand insurance law, it’s crucial to understand insurance first. Insurance is a contract, known asinsurancepolicy, in which one party (the policyholder or “insured”) pays a fee (called an insurance premium) and the other party (the insurer) promises to pay the insured party all or a portion of losses suffered by illness, death or accident. The losses covered by the policy may include permanent or long-term loss of physical capacity; lost earnings or medical costs dueto physical injury; property damage or loss from theft, fire, natural disaster, accident, or intentional harm; claims by third parties due to the policyholder’s negligence or another person’s death.

Insurance is basically the main option for businesses and individuals to reduce the financial impact of a risk happening. For instance, if you have you have automobile insurance and get into an accident, you will get money from the insurance company to repair or replace your vehicle. The insurance policy will typically cover what medical conditions, perils, and risks are subject of the agreement. For this reason, if the policyholder incurs such a medical condition, peril, or risk, they can file a claim with the insurer. As a preliminary matter, insurance providers are obligated to follow all the same laws and regulations that other types of businesses follow. This would include security regulations, tax laws, wage and hour laws, and zoning and land use. However, there are regulations that specifically govern insurance companies.

Insurance law is the collection of laws and regulations that govern how insurance contracts are formed and enforced. They manage the offering, selling, buying, and claims processes for different types of insurance. Insurance laws regulate a wide range of aspects relating to insurance:

  • When people are required to buy insurance policies in some states

  • Criteria for inclusion in an insurance plan

  • What premiums an insurance company can charge

  • Measures to make sure that insurers engage in fair competition without fixing the prices of their policies

  • Whether an insurance company has adequate resources and capital to have a secure and sound business

  • Penalties for bad faith practices

Terms to Know

  • Insurance Agent.

    An individual licensed to sell insurance
  • Benefit.

    This refers to the services or money an insurer provides in the event of a loss
  • Insured.

    An individual who receives the insurance benefit. But in the case of life insurance, this is an individual whose life is insured, and the one who obtains benefits is referred to as the beneficiary
  • Premium.

    The money or fee that the policyholder pays the insurance company
  • Policy.

    The agreement which details what the insurer will pay in compensation in the event of a loss
  • Claim.

    Policyholder’s request for benefits when a loss occurs
  • Premiums.

    The money the policyholder pays the insurance provider
  • Coverage.

    The type of losses which will be reimbursed by the insurer

With a policy comes numerous provisions. The types of risks the insurance policy covers are defined by the coverages. For instance, in auto insurance, liability coverage will pay for covered damages especially if you cause an accident, damage someone’s property or hurt someone. Also, it can pay to defend you if a lawsuit is filed against you. Conversely, if you’re involved in an accident, collision coverage helps pay for any damages on your motor vehicle.

Comprehensive coverage, on the other hand, helps pay for damages caused by storms, vandalism, theft, and certain natural disasters. Health coverage helps cater for covered medical costs for any person injured while in your automobile irrespective of who is liable for the accident. Each coverage contains provisions that indicate what loss is covered and what is excluded, as well as the duties and obligations of a policyholder and the rules he/she has to follow.

It is also important to understand where the duties of an insurance company come into play. For example, you can buy a homeowners insurance policy. If a fire breaks out in your home, and you and your neighbor are injured, and your home is damaged, then there are different harms in that case. Insurance plans are developed around coverage for such harms. Coverages outline the harms that the policy will cover. The insurance provider will then sell thepolicies in their thousands based on the covered harms. The accumulation of all the insureds’ premiums recompenses caters for the damages incurred by the small percentage of insureds who’ve experienced some sort of loss. And while most of the insureds will not file a claim at any period, they have a duty to continue paying the premiums.

Insurance laws and insurance policies separate harms into two forms of coverage, that is, harms incurred by another person and harms incurred by the insured. These are referred to as third-party coverage and first-party coverage, respectively. There are different types of duties for each of these coverages. To the home fire example above, if you get money to rebuild your home after it burns down, then that is a first party claim. Conversely, the claim you make to cover medical costs for your neighbor who was injured in the fire is an example of a third party claim. And suppose your neighbor decides to file a lawsuit against you for the damages incurred as a result of your house fire, your home insurance likely contains a provision for general liability coverage and therefore insures you against lawsuits.

Liability is a legal concept at the core of every lawsuit and claim. Basically, liability is defined as the harms that an insurer must cover. So, assuming that your insurer simply said they were not liable for your neighbor’s injuries as result of the fire, and decline to pay for the medical expenses, you’ll be forced to determine responsibility and damages and would also have to defend the lawsuit filed against you. In addition, you’d have to file a lawsuit against your insurer for damages that you had to pay your neighbor, the cost of repairing or rebuilding your property, and for reimbursement of legal costs. This would be a messy situation. Liability issues can be quite complicated and that’s why it’s best to consult with an experienced insurance attorney who can help you understand your rights and risks.

Duties of the Insurance Company

The following are some of the basic responsibilities of an insurance company owed to the insured. If any of these duties is broken, the insurer is likely to be held legally responsible for any damages suffered as a result.

  • Duty of Good Faith and Fair Dealing

    In every insurance policy, there is an implied duty of good faith and fair dealing on the part of the insurer. In many insurance cases, the courts have found that a special relationship exists between the insured and the insurer and that’s what creates the duty of fair dealing and good faith. A policyholder does not buy an insurance policy hoping for the worst to happen, it is more of buying peace of mind. As such, an insurer must do what is right in order to ensure that the insured gets this peace of mind. The primary role of the insurer is to provide a certain level of solidarity and security to the policyholder. However, individuals should not purchase policies just to scam an insurance company into free money. For this reason, both parties are required to act in good faith towards each other.

    If a policyholder misinterpreted information related to their own personal history or the subject matter, then they’re responsible for the mistakes and the liability of the insurance company is revoked. On the other hand, if the insurance company fabricated or distorted information, they’re responsible in incidents where this kind of information has caused you damage. Insurance companies may be acting in “bad faith” if they don’t do what is right. This kind of behavior is severely penalized and there’s a possibility of punitive damages for bad faith.

    Also, when an insurance claim is filed, the insurer is required to fairly and quickly investigate the claim and provide coverage for valid claims.

  • Duty to Indemnify

    Indemnity is a concept that defines the duty of one party to pay for the damage incurred by another related party. Therefore, if you have an insurance policy and are found liable in a third party claim, your insurer must pay the damages. In insurance jargon, this kind of payment is referred to as indemnity. The insurer promises to reimburse the insured for the amount of the loss, at least up to the policy limits. Put simply, indemnity is a guarantee to restore the policyholder to the position they were before incident caused a loss. In essence, this is the section of the insurance policy that matters the most for the insured, because it’s this same section that also states that the policyholder has the right to be reimbursed (or indemnified) for the damages

    Typically, the payment made by the insurer is in direct proportion with the damages suffered. The insurer will pay the amount agreed on in the contract or up to the amount of the loss incurred, whichever is less. For example, if your home is insured for $30,000 but you incur a loss of $9,000, you’ll only get $9,000. Insurance policies are purchased to offer protection but not as a means to make profits. As such, one is not compensated if the incident that caused the loss if the incident that resulted in the damages does not happen within the time indicated in the contract.

  • Duty to Defend

    If a policyholder is sued for something related to his or her insurance contract in a third party claim, the insurer has a duty to defend the policyholder. The insurance company is required to hire an insurance defense attorney at its own expense to represent the insured and cater for all the litigation costs. A meaningful defense, in this case, is one that includes all claims and does not create room for the insurer to deconstruct claims. The duty to defend extends to all claims that are covered under the policy depending on the facts described in the claim.

  • Duty to Hire Cumis Counsel

    Conflictscan prevent the policyholder from obtaining an appropriate defense and when this happens, the insurer must hire and pay for a separate attorney (Cumis counsel) to defend the insured. Cumis counsel is a lawyer hired to represent a policyholder in insurance-related lawsuits when there is a conflict of interest between the policyholder and the insurer. A separate attorney can help improve the insured’s defense. However, it’s not common for insurance companies to appoint Cumis counsel. There are many cases where the separate attorney should have been appointed but was not. Failure to provide a separate attorney may result in the insurer having to pay for additional damages.

  • Duty to Let the Insured Know if There Are Any Conflicts

    There are different forms of conflicts that can occur in an insurance case and it’s the insurer’s duty to reveal them to the policyholder. The defending lawyer must also evaluate the interest of both the policyholder and the insurer. If there’s a conflict of interest, the defense attorney should explain the situation to both parties. For instance, a conflict may occur if the defense attorney tries to minimize the settlement when he/she knows there’s a good chance of losing. The policyholder is responsible for amounts that go over the limit. But the attorney may try to use the limits as the upside risk to the insurer, which would likely hurt the insured.

    Another conflict is when the insurance company believes that a claim made by the insurer is not covered and then issues “reservation of rights” letter that states that the insurer can deny the claim if there will be facts that prevent coverage. In such a case, the strategy developed by the defense attorney may hurt the policyholder depending on how the claims are addressed.

  • Duty to Settle Within the Limits of the Insurance Plan

    The insurance is also obligated to make a good faith effort to settle a case at least within its limits irrespective of whether or not a policyholder or a third party demands such a settlement. If the insurance company fails to do so, it can lead to “bad faith.”

    If your insurer acts in bad faith or breaches your insurance contract, and you suffer damages as a result of a wrongful denial, you have the right to sue them and recover damages. The attorneys at Stop Insurance Denial Law Firm can help. Get in touch with us today to consult with one of our experienced attorneys.

Most Insurance Policies Are Regulated at the State Level

The vast majority of insurance regulations in the U.S. are not enforced by the federal government, instead, most of the regulations happen on the state level. The federal government runs a few public insurance programs such as Medicare, disability programs, and Social Security. Nevertheless, insurance law relates more to private insurers than government-provided plans.

Most states have an insurance administrator’s office that is responsible for generating rules and regulations that insurance providers have to adhere to while conducting their business. This office may also investigate violations of state insurance laws and initiate enforcement actions, where necessary. Administrative law and insurance law often interweave.

The McCarran-Ferguson Act provides that each state should control the insurance business, but even so, the Federal Trade Commission Act, the Clayton Act, and the Sherman Act are also applicable to the insurance industry. The McCarran-Ferguson Act gives states the power to regulate insurance businesses. And while most insurance laws apply at the state, some parts of federal law (such as tax laws) are always controlling. The factor that determines whether a particular law governs is whether the issue is related to peripherals of the insurance industry such as securities, tax, and labor, where federal law governs, or whether the issue is directly related to the business of insurance, where state laws govern.

Major U.S. Insurance Laws and Decisions

There are some pieces of U.S. insurance legislation and notable court decisions that regulate the insurance industry. From ruling that insurance policies were not subject to regulation, the U.S Supreme Court upheld that insurance contracts were commercials and thus regulatable in a 1944 case.

  • National Flood Insurance of 1968

    This National Flood Insurance of 1968 was amended by the Flood Disaster Protection Act of 1973. Its main purpose is to help individuals who own property in flood-prone areas to protect their investment. People who live in flood zones can purchase insurance for their properties under the national flood insurance program. This law calls for floodplain management as well as controlled rates.

  • Affordable Care Act

    The Affordable Care Act comprises two laws: The Health Care and Education Reconciliation Act and the Patient Protection and Affordable Care Act of 2010. The laws expand government health insurance programs such as Medicaid. They create requirements for certain private insurance policies that are mandated and also create subsidies for private health insurance policies that are based on a person’s income.

Schedule Your Free Consultation with Stop Insurance Denial Law Firm Near Me

While insurance companies are required to follow insurance law when dealing with policyholders and their claims, it’s common for them to deny valid claims. If your insurer unreasonably refuses to pay benefits for damages covered under your policy, the lawyers at Stop Insurance Denial Law Firm can help. Our attorneys understand all the laws that govern insurance in each state and will work hard to get what you’re entitled to under the law. Call us at 310-878-1771 or send us an email to schedule a free consultation with one of our attorneys.