JurisdictionUnited States


A. Insurance and the Lawyer

The earnings of almost every civil lawyer in the United States are funded by the insurance industry. Insurance can best be described as the mother’s milk of the law profession. The civil defense lawyer is paid by an insurer for each hour he or she works. The civil plaintiffs’ 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 law the funds for that work come, 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. Without that knowledge, the lawyer will find he or she is litigating with duct tape firmly self-placed across his or her mouth.

Insurers are responsible for the earnings of the following:

Ÿ 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 the plaintiff after receiving payment from an insurer.

Ÿ The tort defense lawyer is paid directly by the client’s insurer(s).

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

Ÿ The insurance coverage lawyer is paid by an insurer to provide advice and counsel.

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

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

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

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

Ÿ The prosecutor whose practice is limited to the prosecution of insurance fraud is paid by funds paid to the state as a result of special taxes paid by insurers to prosecute crimes against insurers.

Ÿ 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 success of a civil law practice, it is imperative that every lawyer has a basic understanding of the law of insurance.

Similarly, 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. Indeed, the lawyer who is ignorant of the law of insurance cannot adequately serve his or her clients.

A thorough knowledge of insurance law is also important to risk managers, property owners, businessowners, 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; everyone who needs insurance to protect property or needs defense or indemnity from an insurer; and every person who practices law where insurance exists to pay for the defense or indemnity of a client.

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. The book includes the full text of insurance-related decisions of the United States Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the law that governs insurance transactions in the United States.

Those who are new to the subject of insurance will find this e-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 the 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 books available from or at

B. 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:

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

Ÿ Chinese traders as long ago as the 3rd millennium B.C. created a form of risk transfer. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel’s capsizing.

Ÿ The Babylonians developed a system that was recorded in the famous Code of Hammurabi as early as 1750 B.C. and practiced by early sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender’s guarantee to cancel the loan should the shipment be stolen or lost at sea.

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

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

Ÿ 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 to storm or sinkage.

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

Ÿ 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.”

Ÿ Separate insurance contracts, that is insurance policies not bundled with loans or other kinds of contracts, were supposedly invented in Genoa in the fourteenth century, as were insurance pools backed by pledges of landed estates.

Ÿ By 1654, Blaise Pascal, the Frenchman who gave us the first calculator, and his countryman, Pierre de Fermat, discovered a way to express probabilities and, thereby, understand levels of risk. Pascal’s triangle led to the first actuarial tables that are still used when calculating insurance rates.

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 enterprises among each other. With rudimentary insurance like those described above, the risk of shipping was equitably spread among those subscribing to the loan, and no single merchant suffered when a ship was lost at sea.

The early versions of marine insurance were more like a modern football pool than insurance as we know it now. A stakeholder would simply hold the bets of the merchants (the premium) until the ship returned to port. If it did not return, the stake would be paid out to the merchant whose cargo was lost. If it did return, the stake was paid out to the other merchants, who earned a healthy profit on their gamble.

Since the merchants were betting on each other’s success, all merchants worked together to avoid loss: the entire merchant community could absorb the loss of one ship. Trade by sea became economically viable, because each merchant was supporting the business of other merchants. Thus, the concept of risk management was born. It reduced the risks taken by those subscribing to the loans and, later, to those insuring risks. By managing and spreading the risk, the cost of insurance was reduced.

The earliest marine insurance policy known to have survived was issued in 1347. The policy concerned a shipment from Genoa to Majorca on a vessel called the Santa Clara. The policy was written in a form that characterized the premium as a “loan” to the “insurer” from the “insured.” The loan was repayable only if the cargo failed to arrive. If the cargo was lost, the loan was repaid to the insured for twice the amount of the loan. This premium—or interest rate—of 100 percent may seem excessive, but the rate probably reflected the excessive risks faced by merchants of that time.

C. Evolution 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.

The custom of insuring maritime ventures was well established in England by the end of the sixteenth century, as indicated by the act of Parliament of 1601 entitled “An Act Concerning Matters of Assurance Amongst Merchants.” This was the first known statutory recognition of insurance. It was an attempt to regulate a new business. Since that time many thousands of laws have been enacted around the world to regulate the business of insurance and courts have issued thousands of opinions dealing with the subject of insurance.

Originally, insurers were merely merchants who occasionally invested in insurance. As the volume of trade increased in the seventeenth century, some merchants specialized and became the first professional insurers.

1. Lloyd’s of London

In the latter part of the seventeenth century...

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