Chapter 1 GENERAL PRINCIPLES OF INSURANCE

1 1-1 2011 Edition Chapter 1 GENERAL PRINCIPLES OF INSURANCE PAUL BIERLY, , University of Washington (1982); , University of Puget Sound (1990); member of the Washington State Bar Association since 1990, the Alaska Bar Association since 1994, and the Oregon State Bar since 1995; shareholder, Markowitz, Herbold, Glade & Mehlhaf, PC, Portland. The author acknowledges the work of Joel J. Strong, candidate 2011, Lewis & Clark Law School, for his extensive assistance in preparing this Chapter . ELEMENTS OF AN INSURANCE CONTRACT.

2 1-4 Basic requirements .. 1-5 (a) Steps in Formation .. 1-8 (a)(1) Offer .. 1-8 (a)(2) Acceptance .. 1-10 (a)(3) Execution and Delivery of Policy .. 1-14 (b) Statutes Regulating Content or Form .. 1-16 (b)(1) Effect of Change in the Law .. 1-22 (b)(2) Effect of Conformity Clause .. 1-22 (b)(3) Effect of Statutory Violations .. 1-23 (b)(4) Effect of Issuance in Another State .. 1-24 (b)(5) Effect of Statute of Frauds .. 1-24 Oral Contracts .. 1-24 (a) requirements for Validity .. 1-25 (b) Effect of the Statute of Frauds and Other Statutory Provisions on Oral Agreements.

3 1-27 (b)(1) Statutory Form requirements .. 1-28 Binders .. 1-29 (a) Validity .. 1-29 (b) Effect .. 1-31 (c) Period of Protection .. 1-32 RULES FOR INTERPRETING INSURANCE POLICIES .. 1-34 Chapter 1 / GENERAL PRINCIPLES of INSURANCE 1-2 2011 Edition Reading INSURANCE Policies .. 1-35 (a) Policy Contents and Format .. 1-35 (a)(1) The Application .. 1-36 (a)(2) Declarations Page .. 1-37 (a)(3) The Grant of Coverage .. 1-37 (a)(4) Policy Conditions .. 1-39 (a)(5) Exclusions .. 1-41 (a)(6) Endorsements.

4 1-43 The Basic Contract Interpretation Rule .. 1-43 (a) Judicially Created PRINCIPLES .. 1-44 (b) Statutorily Created PRINCIPLES .. 1-46 Application of GENERAL PRINCIPLES and the Hoffman Analysis .. 1-47 (a) Determining the Intent of the 1-47 (b) Looking to the Terms and Conditions of the Policy to Determine Ambiguity .. 1-47 (b)(1) Who Determines that an Ambiguity Exists .. 1-49 (b)(3) If the Policy Contains a Definition of the Term or Phrase .. 1-55 (b)(4) If the Policy Does Not Contain a Definition of the Term or Phrase.

5 1-58 (c) Context and Close Scrutiny .. 1-63 (d) If Ambiguity Persists, Construe Against the Drafter (Insurer) .. 1-66 (d)(1) Exception for Ambiguities in Statutorily Required Language .. 1-70 (d)(2) Strangers to the Contract .. 1-71 (e) Interpreting Statutorily Required Provisions and Terms .. 1-71 (f) Rules Regarding Inconsistencies .. 1-74 (f)(1) Inconsistency with Binder .. 1-74 (f)(2) Inconsistency with Application .. 1-75 (f)(3) Inconsistency with Endorsement .. 1-75 GENERAL PRINCIPLES of INSURANCE / Chapter 1 1-3 2011 Edition (f)(4) Inconsistency Between Printed and Typed Language.

6 1-76 (f)(5) Inconsistency with Statutes .. 1-77 (g) Sufficiency and Admissibility of Extrinsic Evidence .. 1-78 (g)(1) Evidence of Purpose of Policy .. 1-78 (g)(2) Evidence of Construction by Parties .. 1-79 (g)(3) Evidence of Meaning of Technical Terms .. 1-80 (g)(4) Evidence of Custom and Trade .. 1-80 (g)(5) Evidence of Other Coverages and Additional Premium .. 1-81 Other Issues in Policy Interpretation .. 1-82 (a) Statutory Restrictions .. 1-82 (b) Public Policy Issues .. 1-84 (b)(1) Intentional Torts.

7 1-84 (c) Unconstitutionality .. 1-88 PROVING EXISTENCE OF POLICIES AND COVERAGE .. 1-89 Establishing Existence and Terms of Lost Policies .. 1-90 (a) Environmental Cleanup Assistance Act and Lost Policies .. 1-93 Burden of Proof .. 1-95 (a) Proving Applicable Exclusions .. 1-96 (a)(1) Misrepresentations .. 1-97 (a)(2) Noncooperation .. 1-98 (b) Proving Exceptions to Exclusions .. 1-100 (c) Standard of Proof .. 1-100 TERMINATION OF 1-104 Introduction .. 1-105 Cancellation of Policies .. 1-107 (a) Rights of Cancellation.

8 1-108 (b) Notice .. 1-111 (c) Effect of Cancellation .. 1-112 Chapter 1 / GENERAL PRINCIPLES of INSURANCE 1-4 2011 Edition (d) Modifications .. 1-114 (e) Duty of Good Faith and Fair Dealing .. 1-115 Rescission of Policies .. 1-115 (a) Copy of Written Application .. 1-118 (b) Materiality .. 1-119 (c) Reliance .. 1-121 (c)(1) Reliance in Fact .. 1-122 (c)(2) Justifiable Reliance .. 1-123 (c)(3) Right to Rely .. 1-125 (d) Either Fraudulent or Material to the Risk .. 1-126 (e) Burden of Proof .. 1-129 (f) Duty to Investigate Misrepresentations.

9 1-130 (g) Rescission by Insured .. 1-132 (h) Distinction Between Scope of Coverage and Conditions of Forfeiture .. 1-133 REFORMATION OF POLICIES .. 1-138 Mutual Mistake .. 1-139 Fraud .. 1-142 Burden of Proof .. 1-142 Defenses .. 1-142 Supplemental Relief .. 1-143 Alternative Legal Remedies .. 1-143 ELEMENTS OF AN INSURANCE CONTRACT A valid INSURANCE contract requires both an offer and an acceptance. A blank application provided to the potential insured is typically not considered an offer; but once the application is completed and returned to the insurer, it becomes an offer for an INSURANCE contract.

10 1A COUCH ON INSURANCE (3d ed 1995 & Supp 2011). GENERAL PRINCIPLES of INSURANCE / Chapter 1 1-5 2011 Edition Basic requirements INSURANCE is, essentially, a contract by which one party gives a consideration, typically paid in money, in exchange for a promise from another party to make a return payment if a certain loss has occurred. The word INSURANCE means a contract whereby one undertakes to indemnify another or pay or allow a specified or ascertainable amount or benefit upon determinable risk contingencies. ORS (1).