INTRODUCTION

• Jurisdiction: United States

For more than half a century California has led the insurance jurisprudence of the United States. It is responsible for starting and implementing the tort of bad faith and the efficient proximate cause doctrine to interpret insurance contracts.

Since the earnings of almost every civil lawyer in California are funded by the insurance industry, insurance can best be described as the mother's milk of the legal profession in California. The civil defense lawyer is paid by an insurer for each hour he or she works. The civil plaintiff's lawyer is usually paid by taking a percentage of any judgment entered in favor of the plaintiff, which judgment is usually paid by the defendant's insurer.

In almost every situation in which a civil lawyer practices, the funds for that work comes, either directly or indirectly, from insurance. Consequently, lawyers must use their wits and energies to avoid or to pursue litigation to the benefit of the client. Both sides understand that an insurer will eventually pay one or both sides in the dispute. Insurance is important to every civil dispute and even some that fall within the criminal courts.

Every lawyer retained to prosecute or defend a civil suit should begin the representation with a serious effort to find insurance coverage for the benefit of the client or the defendant the client is suing. If no insurance is available, it is essential that the plaintiff's counsel determine the assets of the defendant(s) to satisfy any judgment. It makes no sense to expend the time and money needed to successfully sue a judgment-proof defendant.

A lawyer that does not know the law of insurance will file a suit for actions excluded from every insurance policy the defendant may have. The lawyer who understands insurance will provide a suit whose judgment can be collected or will provide a defense to the client that will pay for the defense of the defendant and, if necessary, satisfy any judgment entered against the insured. Without that knowledge, the lawyer will find he or she is in trial litigating with duct tape firmly self-placed across his or her mouth and unable to intelligently evaluate the case.

Lawyers are paid by insurers if:

• The tort lawyer is retained by a plaintiff and subject to a contingency fee agreement whose fee, as part of any judgment, is paid by an insurer.

• The tort defense lawyer is paid directly by the client's insurer(s).

• The insurance defense lawyer is paid directly to defend an insurer.

• The insurer client pays the insurance coverage lawyer whose practice is limited to litigating against insurers.

• Insurers pay a fee to the regulatory lawyer who deals with regulatory agencies on behalf of or against the interest of insurers.

• An insurer pays the patent lawyer who determines that the suit for infringement is covered by insurance.

• An insurer pays the transactional lawyer who writes contracts to compel insurance to be available for the benefit of his or her client.

• The prosecutor whose practice is limited to the prosecution of insurance fraud is paid by funds paid to the state by insurers to prosecute crimes against insurers.

• The criminal defense lawyer who defends a client against the crime of insurance fraud is paid by his client as a result of an insurance claim.

Every civil lawyer should understand that a major part of the lawyer's income comes, directly or indirectly, from insurance. Since insurance is an important source of funds for the success of a civil law practice, it is imperative that every lawyer has a basic understanding of the law of insurance.

Similarly, California-based prosecutors or criminal defense lawyers dealing with the crime of insurance fraud must understand the law of insurance to properly represent the state or the defendant. Some other crimes still require the knowledge of insurance fraud to be proven, like bankruptcy fraud or mail or wire fraud. Indeed, the lawyer who is ignorant of the law of insurance cannot adequately serve his or her clients. Ignorance about insurance and insurance law is not incurable—a review of the material in this book will cure insurance ignorance as antibiotics cure pneumonia.

A thorough knowledge of insurance law is also important to risk managers, property owners, business owners, insurance underwriters, insurance brokers and agents, and insurance claims personnel. This book was written for everyone who earns a living from, or with the assistance of, insurance in California state or federal jurisdictions.

The purpose of this book is to provide the law student, the practicing lawyer, the insurance lawyer, professional claims personnel, persons who are insured, and all those who are involved with insurance with knowledge of California insurance jurisprudence. The book includes the full texts or digests of insurance related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts.

Those who are new to the subject of insurance will find this book a resource and a starting point for research. It can also be used as a basic training course for those who are just beginning the practice of insurance law or entering into the insurance claims business. For those representing insurers, those representing people who are insured, or for those litigating against insurers, the book can be used in conjunction with, or as a supplement to, the author's other books published by the National Underwriter Company, including: Insurance Claims: A Comprehensive Guide; Mold: A Comprehensive Claims Guide; and Construction Defects: Litigation and Claims. In addition, you can review information posted on Vertafore or FastCase, as well as the author's books published by the American Bar Association: The Insurance Fraud Deskbook and Diminution in Value Damages.

A. Ancient Forms of Insurance

Insurance was created to spread risk from individuals to multitudes. Spreading the risk from one person to many is the essence of insurance. The risk spreading model has taken many forms over the centuries:

• A form of insurance existed as early as 300 B.C. in ancient Babylon located south of present day Baghdad.

• Chinese traders as long ago as the 3rd millennium B.C. created a form of risk transfer.

• A form of credit insurance was included in the Code of Hammurabi, a collection of Babylonian laws.

• The Babylonians also used a system of loans for shipments by sea in which the loan was repayable only if the ship was lost.

• Persian monarchs were the first to insure their people, and made it official by registering the insuring process in governmental notary offices.

• In the 2nd millennium, a thousand years later, the inhabitants of Rhodes created the general average, which allowed groups of merchants to pay to insure their goods' being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether by storm or sinkage.

• Communities have pooled some of their resources to help individuals who suffer loss.

The state of California has enacted statutes relating to the business of insurance for more than a century and will be discussed in more detail below.

B. Guild Coverage

In the dark and middle ages, most craftsmen were trained through the guild system. Apprentices spent their childhoods working for masters for little or no pay. Once they became masters themselves, they paid dues to the guild and trained their own apprentices. The wealthier guilds had large coffers that acted as a type of insurance fund. If a master's practice burned down, a common occurrence in the wooden hovels of medieval Europe, the guild would rebuild it using money from its coffers. If a master were robbed, the guild would cover his obligations until money started to flow in again. If a master were suddenly disabled or killed, the guild would support him or his widow and family. This safety net encouraged more and more people to leave farming and take up trades. As a result, the amount of goods available for trade increased, as did the range of goods and services available. The style of insurance used by guilds is still around today in the form of "group coverage."

Moses instructed the nation of Israel to contribute a portion of their produce periodically for "the alien resident and the fatherless boy and the widow."

In the days of sailing ships and galleys powered by slaves pulling on oars, merchants found shipping to be inherently risky. The risks of shipping by sea were clearly too much for an individual merchant to bear. The loss of one ship could bankrupt a merchant, so the merchants spread the risk of their business...