Insurance and the Law of Obligations.
When students enter law school, they are taught torts and insurance law as separate classes. The course on torts always comes first, and the class on insurance law most likely is not taught by the same professor. It got me wondering how this impacts American lawyers' understanding of the relationship between the two. This method of teaching certainly allows the student to see how insurance responds to the tort regime. Does it do an equally good job at getting students to understand how the tort regime responds to the system of insurance?
British legal scholars Rob Merkin and Jenny Steele address this very topic in their new book on the British system of insurance and the law of obligations, which for the uninitiated, focuses on the area of civil law concerned with the duties and rights between individuals or organizations. In British jurisprudence, the dominant perspective has been to create a high wall between thinking about contractual disputes and torts (i.e., wrongful acts under civil law leading to a resulting harm) on the one hand and the use of insurance to pay for the damages on the other.
At first glance, there is something attractive about this approach, since when a harm is committed, that person or organization causing the harm should be held liable for the resulting damages, whether or not they are able to pay for them. Guilt, the reasoning goes, is guilt, and the law should make it clear what has happened and where the fault lies. Thus, for example, British law prevents the litigating parties from knowing the amount of insurance coverage available to pay for the damages until the case has been resolved. The fear is that if the litigants are aware of what insurance is available, they will structure their case to follow the money, rather than trying to make clear what harm was caused, as happens in America (see Baker, 2005).
Merkin and Steele seek to dislodge the idea that insurance and harm should be kept distinct, arguing instead that British law and policymaking should see tort and obligations as two sides of the same coin. They offer three significant reasons why this should be the case. First, the lived reality is that thinking in this manner allows insurance companies to deny claims even when the court system finds no evidence of wrongdoing, and because of this, litigants are forced to shape their claims in ways that follow the money, which is of course the exact opposite of what they should be doing. Second, separating the law of obligations from insurance can lead to the unfortunate situation where injured parties do not get the restitution they need. Finally, despite claims of separating tort from insurance, there are already instances where policymakers and courts look to insurance in shaping legal decisions to ensure certain policy goals are met, and if this is already the case, why not do this systematically so that the law is shaped as effectively as possible? In short, they argue that by seeing the connections between insurance and the law of obligations, a polity can design laws that will serve the public interest better than is currently the case.
In his seminal article, "Why The 'Haves' Come Out Ahead," Galanter (1974) shows us that in the legal world, corporations only litigate the cases they expect to win, and over time case law will come to reflect the interests of powerful actors that repeatedly go the courts over the interests of individuals who tend to enter the legal system only once on a given issue. This is certainly the case when it comes to the issue of insuring damage caused by illegal acts. The doctrine of ex turpi causa states that an individual should not benefit from illegal acts he or she commits, and insurance companies use this doctrine to deny liability coverage to policyholders under these circumstances. Seen from the perspective of the person harmed, however, liability insurance is not "benefiting" the policyholder at all; rather, it exists to pay for their losses, and by denying coverage in these circumstances, insurance companies only hurt the victims.
Merkin and Steele do the reader a very nice service in discussing the three effects of liability insurance: (1) "it goes some way to ensuring that there is a compensation fund for victims against which claims may be made," (2) "it protects assured parties from bankruptcy or insolvency," and, (3) "if every person carrying on the relevant activity has to take out insurance, the sums paid by insurers are funded by premiums contributed to by all, so that there is no disproportionate premium burden resting on those who choose not to insure" (p. 260).
The first problem they have with the firewall between torts and insurance is that in pursing restitution from insurance (which, frankly, is usually the only source available), litigants are often forced to shape their legal strategies away from the pursuit of truth, when the truth will result in the insurer denying coverage. Parties will thus claim negligence instead of intentional actions, for example, or even worse, litigants target other actors who are not really the ones to blame at all, but who have coverage. Merkin and Steele argue that for these issues to be confronted, jurists must first acknowledge that they exist--which of course many are loath to do because it challenges the underlying assumptions that the firewall serves the public's interest.
Speaking of the public interest, the book is at its most powerful when it discusses the second concern, where people who have been harmed are unable to obtain restitution because the policyholder's company denied coverage. As mentioned above, from the perspective of someone suffering a financial loss, the concern is less whether the harm was negligently caused or not, and more about being made whole financially again. The authors dedicate several chapters to explaining liability jurisprudence as it relates to employees acting under the aegis of their company, and the complexities of subcontracting, for example, and they forcefully argue that separately thinking about torts and contracts on the one hand and about insurance on the other can lead to results that are undesirable from a policy perspective, in the sense that one of the very purposes of liability insurance is to form a compensation fund for victims.
This comes to a crescendo in the final chapters, where Merkin and Steele deal with auto insurance and asbestos litigation. In these two instances, both Parliament and the courts have shaped the law to ensure that liability insurance is available to meet the financial needs of those who have suffered harm due to the actions of policyholders. Case by case, along with the timeline of Parliament intervening to shape legislation on the issue, the authors show how auto liability insurance evolved over time to confront the "narrow rule" and the "wide rule" of ex turpi causa. "The narrow rule is that a claimant cannot recover an indemnity for a fine or other penalty imposed upon him for the commission of a criminal offense.... The wide rule is that there can be no claim where criminality can properly be said to be the cause of the loss and is of a nature which would cause a court to refuse to lend its assistance" (p. 339). One can readily see how a driver involved in a robbery who hits an innocent bystander while attempting to escape could be denied coverage under the wide rule. Would providing liability coverage under such a circumstance "benefit" the driver? We know from the work of Baker (2001) on so-called "blood money"--going after the assets of an individual beyond what insurance provides--that cases are rarely litigated beyond the limits of insurance, and not at all if there is no insurance. It rarely happens not merely because the wealthy are typically adequately insured and the poor have no assets, but also because attorneys are usually unwilling to go after the personal assets of all but the wealthiest.
But this, of course, ignores the painful reality that the innocent bystander needs indemnification, and the authors carefully trace how this led Parliament to shape the law to ensure that auto liability insurance will be there for this purpose in virtually all events other than when the driver intentionally seeks to harm the claimant.
In another relatively short and focused chapter, the authors do a magnificent job of walking the reader through the complexities of asbestos litigation to reveal that when it became apparent that liability policies as they were traditionally read might fail to cover the claims over mesothelioma, the courts responded by altering the traditional interpretations to ensure coverage. In short, Merkin and Steele argue that it is futile to pretend that insurance and the law of obligations are separate fields, and they use the examples of asbestos and motor insurance to show that regardless of what legal theorists believe, those concerned with actual litigation acknowledge the connections and, in doing so, are able to shape the law in ways that better serve victims in need of indemnification.
To be certain, Insurance and the Law of Obligations is not an easy read, and at 406 pages, not a quick one either. Those without a strong basis both in insurance and in law will find themselves struggling with this volume, and might be better served elsewhere. Frankly, even those with a strong basis in insurance and law will struggle with this volume! Yet those hale enough to wade through it will discover numerous little insights on topics that are not usually treated in a holistic fashion. In their discussion of subrogation, for example, Merkin and Steele pull together its multiple facets in a thought-provoking manner, moving beyond the basic platitudes of preventing unjust enrichment or allowing the insurer to litigate more effectively than the policyholder might. Likewise, they raise the important point that for many sophisticated purchasers, such as contractors in complex construction projects, ex ante agreements over who will be liable for what losses and how these agreements play out (or in their view should play out) can be useful to readers who typically are not involved in this area.
On a final note, the authors repeatedly bring to the fore the important point that insurance is not simply a financial instrument that comes into play only after losses occur, but rather, for many actors in the 21st century, insurance facilitates actions, whether they are something as simple as owning a car or as complex as obtaining insurance as a prerequisite for obtaining a loan. In ways that are often opaque, insurance not only responds to the existing law of obligations but also shapes it, and the more we come to an understanding of how it does that, the more powerfully we can formulate regulations and the law to achieve the policy goals we as a polity deem desirable.
Baker T., 2001, Blood Money, New Money and the Moral Economy of Tort Law in Action, Law & Society Review, 35(2): 275-319.
Baker T., 2005, Liability Insurance as Tort Regulation: Six Ways That Liability Insurance Shapes Tort Law in Action, Connecticut Insurance Law Journal, 12(1): 1-16. Galanter M., 1974, Why the "Haves" Come Out Ahead: Speculations on the Limits of Legal Change, Law & Society Review, 9(1): 95-160.
Reviewer: Brian J. Glenn, University of Connecticut School of Law; brian. email@example.com
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|Author:||Glenn, Brian J.|
|Publication:||Journal of Risk and Insurance|
|Article Type:||Book review|
|Date:||Sep 1, 2015|
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