Insurance law is the body of rules and regulations that governs the insurance industry. Actuaries, for example, are professional experts that study and interpret these laws to help clients with their risk management needs.
In the United States regulation of insurance companies is mostly done at state level. Each state typically has a department of insurance with a head official called the insurance commissioner or something similar.
Definition
Insurance law is the body of legal rules that govern insurance policies and claims. It is important for individuals and businesses to understand how insurance laws work so that they can be aware of any potential problems and disputes that might arise. This includes understanding core principles such as the utmost good faith, insurable interest, and proximate cause.
In addition to ensuring that insurers operate honorably and fairly, the law also ensures that policyholders receive the benefits they are legally entitled to. This can be done through arbitration, litigation or other means of alternative dispute resolution. Disputes can arise in a number of different ways, such as when an insurer refuses to pay out on a claim or fails to adequately investigate a claim.
Each jurisdiction has its own set of regulations that oversee the insurance industry. In the United States, this is typically done through the state’s insurance department or another similar agency. These agencies are created through statute and their heads are known as the insurance commissioner or a similar title.
Generally, insurance regulation is geared toward assuring the solvency of insurance companies. This means that it covers such things as capitalization, reserve policies, rates and various other “back office” processes. It also focuses on regulating issues such as the ability of insurance companies to reject claims that are not within their contractual rights, and on ensuring that insurance contracts and policies meet a minimum standard.
Contracts
Insurance is a heavily regulated industry with many laws at both the state and federal level. However, much of insurance law deals with contracts and how they are entered into and enforced. A lawyer with an understanding of insurance law can assist you in both establishing and enforcing your policy as well as resolving disputes with your insurer.
Insurance contracts are legally enforceable in most jurisdictions. They must contain several elements to be considered valid – offer and acceptance, consideration, legal purpose, and competent parties. Consideration refers to the sum paid for the policy as well as the promise that future premiums will be paid. Legal purpose refers to the reason that the parties enter into the contract. If a party wishes to insure someone for the sole purpose of murder, then that contract will not be considered to have a legal purpose and would not be enforceable in court.
Competent parties are the people who enter into the contract. There are laws that prevent minors or the mentally ill from entering into insurance contracts. Insurers are required to meet the prevailing regulations in their state before they can issue a policy. They must also be licensed. If an insurer is found to be violating any of the governing laws they may face fines or other disciplinary action. Bad faith actions are a serious issue for insurance companies and can lead to the loss of business and even licenses in severe cases.
Liability
In law, liability is the legal responsibility for one’s actions, in particular the obligation to compensate a third party who was harmed by those actions. Businesses and individuals take many measures to mitigate their potential liability, including forming corporations and LLPs, and taking out insurance policies such as home insurance. Liability can also refer to the amount of tax a person or company is liable to pay to a government body, for example sales taxes.
There is considerable debate in the legal literature over the relationship between tort law and insurance. Some maintain that the tort system should operate independently of the insurance aspect and that decisions on issues of liability should be made regardless of whether the accused has an insurer or not. Others argue that, in the absence of insurance, the primary purpose of tort law is to redistribute the cost of damage caused by negligent or unlawful behavior. Insurance provides this redistribution through the payment of premiums to cover damages caused by certain actions.
For the risk-averse actor, insurance transforms a potentially ruinous liability into an actuarial certainty for a relatively small premium. However, there is a trade-off between the benefits of insurance and its costs in terms of a lower standard of care. Various mechanisms exist to contain the moral hazard created by insurance, such as bonus/malus schemes, deductibles, and experience rating.
Disputes
Insurance law covers issues involving policyholders’ claims, such as disagreements over the amount due on a bill or the amount an insurer paid on a claim. Disputes can also arise over the validity of a claim, whether a particular event or circumstance is covered by a policy, and the extent to which a policy meets certain standards, such as limitations, exclusions, and conditions.
Many disputes can be resolved through negotiation or alternative dispute resolution (ADR). Negotiation involves a neutral third party helping the parties to reach mutually acceptable solutions. It is usually less costly and faster than litigation. It also allows the parties to retain control of the process and solution. ADR can also help preserve business relationships between the parties and provide flexibility to find unique solutions.
Some types of ADR include mediation, which involves a neutral third party who facilitates communication and negotiations between the parties; and arbitration, which is a more formal process in which an arbitrator listens to arguments and evidence and makes a decision on the matter. Some insurance policies contain clauses that require parties to attempt ADR before proceeding to litigation.
When a dispute arises between an insured and their insurer, lawyers must examine the facts, analyze insurance laws, and determine how best to move forward with the case. Depending on the complexity of the issue, a lawyer may decide to negotiate, mediate, or arbitrate the dispute.