In my last post on insurance law, I discussed the idea that it is not possible to create formerly non-existing clauses or coverages in an already existing policy, i.e., insurance contracts.  I wrote on only what is all, or virtually all, the problem, namely, when the insured criticized for having tried to (or having blundered into) perform such a creation.
 
Here in Part II, I turn to the insurer. The other day, in a deposition, I was asked whether I had ever heard of the axiom that “Insurers cannot create coverage in their policies.”  I said that I had never heard of that axiom applied to insurers and that, in any case, the axiom would depend on what the word “creation” meant and what the invoked idea was. 
 
She, the taker of the deposition, looked at me with a combination of astonishment and contempt.  In and of itself, that combination was not a matter of concern–of any consequence, really. 

One cannot have real new or unrecognized ideas without the rigid-minded or the uninformed to hold you in contempt, and it does not matter when I am right or when I am wrong. Those who do not believe in the value of innovation are pretty much all like that, and this is especially true in the law. Besides, very few cases consider insurers and their “power” to create new provisions in their own contracts of insurance.

—MSQ

Of course, an insurer may not create new coverage in an already existing policy if it is injurious to the insured.  The paradigm is simple.  Suppose an insurer provides coverage A, B, and C to its insured in a given contract.  Now suppose that absent any dispute over coverage, the insurer decided for some reason that it “really” only offered coverage A and B.  In other words, it deleted coverage C from the policy. This would actually be creating new coverage, namely: A & B & ~C.  Of course, these combinations are groups–sets, as it were–but that makes no difference.  There is such a thing as creation by elimination.  In a painting, the deletion of a figure creates a new painting, and–in any case–it is a creation. 
 
Just as the real objection to creation-by-insurer is based on the fact that the insurer gets hurt, the objection to this anti-creationism is that the insured gets hurt.  Now, consider the opposite.  What if the insurer created coverage that was to the benefit of the insured?  It is doubtful that the insured would object.   Of course, an Anti-Creationist could still say that these things cannot be done according to the fundamental principles.  Of course, this proposition is false.  Parties can agree to changes in contracts, and the benefited party may be considered cooperating–and almost certainly would be–or that party might have waived any objection s/he might have.
 
Now, why might an insurer do this?  There are lots of reasons, some questionable and some not.  I shall mention only one reason, and that one is not subtle and perfectly acceptable. 
 
Consider an insurer, that noticed another insurer using the same policy, was excluding something, and that insurer researched the case law on the subject and found that there were two cases supporting the actions of the other insurers.  Suppose the insurer in question looked at the language of the contract and said to itself, we are not sure what to do here. We did not intend not to insure this; we intended to insure it. We “the underwriting department,” together with senior executives, do not care that this is a standard policy used elsewhere in the industry.
 
Hence, straight forward we will consider it covered. We should go back and get the six (6) cases we “fouled up,” and make them conform to our view.  It seems to me that this is a paradigm of policy coverage creation.

Originally posted on 03/08/2013 @ 5:41 pm

Michael Sean Quinn, PhD, JD, CPCU, Etc

Michael Sean Quinn, PhD, JD, CPCU, Etc. (530)

One of Texas's leading insurance scholars, Michael Sean Quinn is a past chair of the Insurance Section of the State Bar of Texas and has a broad legal practice.

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