Insurance Contract Law

Summary

The legal principles governing insurance contracts, including formation, interpretation, and good faith obligations.

Overview

Insurance law governs contracts of insurance, where the insurer promises to indemnify the insured against specified risks in exchange for premiums. Insurance contracts are characterized by utmost good faith (uberrimae fidei), requiring full disclosure of material facts by the applicant. The insured bears a duty of disclosure going beyond ordinary contract principles. Insurance policies are contracts of adhesion, interpreted against the drafter (insurer) under the doctrine of contra proferentem.

Principles of Interpretation

Ambiguities in insurance policies are generally construed against the insurer. Courts interpret insurance contracts according to the reasonable expectations of the insured. Exclusions and limitations must be conspicuous, clear, and unambiguous to be enforceable. Many states require that policy language meet minimum readability standards. The doctrine of reasonable expectations provides that coverage will be provided as a reasonable insured would expect, even if the technical language would deny coverage.

Good Faith and Bad Faith

Insurance contracts include an implied covenant of good faith and fair dealing. Breach of this covenant may give rise to tort liability for bad faith. First-party bad faith occurs when an insurer unreasonably denies or delays payment to its insured. Third-party bad faith arises when an insurer fails to settle a claim against its insured within policy limits. Bad faith damages may include extra-contractual damages, emotional distress, and punitive damages in egregious cases.