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a. Overviewour laws are so favorable to finding coverage so that people can hold each other financially
responsible for the injuries they cause
i. You must have insurance, and be able to prove you have it (i.e., carry a card), before you can
legally drive. But there are exceptions
1. Self-Insured: where you develop your own insurance policy. A person or company who
has at least 25 vehicles can qualify if the DMV formally concludes that the
person/company is financially responsible and endowed enough to handle claims. 56-960.
a. If you qualify, you can issue policies for your cars only.
b. Quasi-exception, since you are technically insured
2. Legally Uninsured: you pay the DMV a fee and then drive w/o no insurance; youre still
liable for damages, though
ii. Auto insurance policies cover both actual/compensatory and punitive/exemplary damages (rule in
SC and most states). See 38-77-30(4)
1. Compensatory Damages can be broken down (liquidated) and typically include (5
a. Medical Bills
b. Lost Wages
c. Pain and Suffering
d. Lost Earning Capacity
e. Hedonic damages: loss of enjoyment of life
2. Punitives
a. In SC, comparative negligence does not apply to punitive, b/c CN is about
apportioning actual fault, not setting an example
i. Note: Assumption of Risk & Last Clear Chance no longer work in SC
ii. Note: there is no intra-spousal or intra-family immunity in SC
b. Jedziniak: its not fair that UIM and UM should cover punitives; after all, its
your insurance company thats paying. How does that punish the other guy?
i. Partial response: first-party insurer might be able to seek contribution
from at-fault driver (but he may well be broke and thus judgment proof)
c. Liberal states say that insurance doesnt cover punitives
b. Types of Coverage
i. Fault/No FaultMost states (including SC) are tort-based states; that is, insurance is not
triggered without showing of fault (negligence at minimum)
1. No-fault: your own insurance pays for your damages, no matter how it happened
a. Only 13 states (mainly N.E.) use this, but none do pure no-fault
b. Jedziniak: this is a stupid, communist system
ii. Three Basic Types of Liability Insurance (limits as of 01/01/2007)
1. Individual Bodily Injury (BI): when only one occupant is hurt (fmrly $15K minimum;
now $25Ksee 38-77-140)
2. Group BI: when > 1 occupant is hurt (fmrly $30K; now $50K)
a. BI covers use, maintenance , and ownership of vehicle
3. Property Damage (PD): e.g., busted quarter panel (fmrly $5K; now $25)
a. Usually not litigated, as its so easy to figure out (e.g., whats the cost of a new
b. Interesting consumer problem: you have a car worth $1000. Your windshield gets
smashed, which costs $3000 to replace. The insurance company is going to
total your car for $1000 and take your car
iii. Combined Single Limits (CSL): states the above three types as a single figure (e.g., $100K, rather
than 25/50/25)
iv. First-Party Insurance: You buy this to protect yourself from harms caused by others, rather than to
pay for harms you cause to others
1. When you trigger this as a plaintiff/claimant, your own insurance company will then step
in and try to defend the defendant/other guy

a. Why? Because the insurance company has a financial interest in the claim; if it
can prove that the defendant wasnt at fault, it wont have to pay you (same
rationale with damage reduction)
b. In fact, in such a case your insurance company may have a duty to defend the
other guy
2. Uninsured Motorist Coverage (UM): covers you when the other guy doesnt have
a. 38-77-150(A): Any auto policy must automatically provide UM coverage up to
the legal minimum limits (15/30/5; now, 25/50/25)
b. HWY Dept: 2530% of motorists on SC roads are uninsured
c. Insurers can require deductibles up to $200. 38-77-150.
i. However, because of this deductible, its less likely that a claim will
trigger a raise in the premium
d. Additional UM (AUM): difference between minimum limits and the maximum
coverage of your policy.
i. AUM is not a mandatory coverage; however, the insurance company
must offer it to you. Garris; Gambrell; see 38-77-160
ii. Of course, most insurance companies dont want to sell you AUM
because the percentage of uninsured motorists out there (which means a
fairly high likelihood of the company paying out a lot)
e. Scenarios that trigger your UM
i. Other guy is flat-out uninsured
ii. Other guy is driving legally uninsured: he paid DMV a fee to drive
legally uninsured (in SC, $550 per car, per year)
1. A handful of people do this, almost surely because they cant
afford insurancetheyve been too reckless
2. Of course, theyre still totally responsible for the wreck they
cause, and b/c they have no insurance their assets will be
iii. Hit-and-run/phantom driver: the guy may have insurance, but you cant
know because hes not around (see below for more)
iv. Other guy is insured, but the company went bankrupt/became insolvent
1. S.C. Property and Casualty Guaranty Assn: pays claims in this
situation (state entity). It gets paid by assessing $ from the
solvent companies, meaning that ultimately everyone helps pay
2. The legislature hated this plan, and so instead it said UM will
take care of it
v. When the car that hit you is insured, but the insurance company
legitimately disclaims/escapes coverage
1. Ex: dude steals other guys car, takes it for a joyride, and crashes
it into your house
vi. When the limits of the at-fault guy are the state minimums of his state,
and his minimums are less than your states minimum
1. Ex: GA guy with 20/40/20 hits you (SC) as youre both on I-85
2. Important: here, your UM only kicks in to cover the deficiency
between his policy and your states minimums
3. Note also that most policies of companies who operate in
multiple states have provisions that say that if youre driving in
another state, and your limits are less than that states minimums,
they will raise them to that states limits
3. Underinsured Motorist Coverage (UIM): for when the other guy has some insurance, but
not enough to cover your damages
a. In such a case, the other guys insurance will probably just pay its limits without
a trial and let your insurance defend the other guy, as your insurer likely has more
to lose. (Ex: other guy has 25/50/25 liability; you have 100/300/100 UIM)





b. UIM starts at zero; the law does not require an automatic UIM minimum, but the
insurance company must offer it to you
c. Tests for Triggering UIM:
i. Limits-to-Damages test: (developed in SC, in early 1980s, most follow):
Your UIM kicks in if, and to the extent, your damages exceed the limits
of the other guys liability policy
1. protects you from the damages caused by an underinsured driver.
2. More of an equitable remedySCOSC says you should get the
benefit of the bargain
ii. Limits-to-Limits test (other states): your UIM only kicks in if, and to the
extent, it is higher than the other guys liability coverage limit
1. More of a legal remedyletter of the law
iii. Example: Other guy: 25/50;You: 250/500; Damages caused by other guy:
1. Limits to dams: 25 from other guy, 250 from you, 1 in personal
2. Limits to limits: 25 from the other guy, 225 from you, 26 in
personal judgment
4. Note: 38-77-161 says umbrella policies do not need to cover excess on UM or UIM
a. Accordingly, failure to offer it will not result in K reformation, like in other areas
(see The Offer Form below)
Physical Damage Coverage (PhD): no-fault coverage, so even if you cause the damage, youre
1. There are two types (neither of which is mandatory anymore)
a. Collision: (sometimes called Collision and Upset): only applies for damages you
cause, when the car makes physical contact with something (including, usually, if
the car just happens to flip)
b. Comprehensive: everything except collision.
2. You do not have to have a deductable here, but it is more likely that a claim will affect
your premium rate (as opposed to something with a deductible, like UM)
a. There can be no deductible for auto glass. 38-77-280
GAP: pays difference between what you paid for the new car and what it was worth when its
damaged (use in new car, leased car)
1. Ex: you buy $25K new car. As soon as you drive off the lot, its worth $20K (due to
depreciation). You total it on the way home. Your insurer is going to pay $20K. GAP
will pay the $5K
MedPay/PIP/EL: covers your hospital bills while youre making your claim, even if the other guy
was at fault (not mandatory since 1989)
1. PIP: Personal Injury Protection (APIP is addl PIP); EL: Economic Loss (a.k.a., Basic
Economic Loss) (SEL is suppl EL)
2. These coverages provided insureds between $1K and $5K to help pay bills while theyre
trying to make a liability claim
a. Jedziniak: Lawyers loved it because it let plaintiffs finance lawsuits
3. Mandate to Offer Law: Courts found a way to find coverage even if there was none. The
law said you had to offer PIP as per a particular method; if you did not, the trial court will
find there was no valid offer and reform the K to give the insured PIP ( see Offer Form
Stated Value Policyyou contract w/ insurer for what you agree the car is worth. If the car
wrecks, you get that value (mainly used on old collectible cars)
1. Basically a liquidated damages contract
Self-Insured: e.g., taxi companies. State allows certain entities to do this because the business in
question is vital, but no insurance company will sell to someone with such high risk
1. Self-insurers get no special treatment. They must still issue at least min. liability and UM
2. Fronting: when a trucking company, etc. buys a minimum liability/UM policy, but then
makes a side/ancillary agreement to have a deductable up to the minimum amount. They
do this to maintain more control over their business

a. Note that this is technically not self-insurance

b. In this case, there still needs to be a valid offer of UIM and AUM.
c. Arising Out Of Coverage Issue
i. The payouts will only come if you show that the injury arose out of the ownership, maintenance,
or use of the vehicle
ii. 3-part test for Applicability of Liability Insurance (State Farm v. Dawson)
i. (1) Causal connection b/w use of auto and injury
1. This means that the car must be an active accessory to the injury2 factors
a. There is less than prox. cause, but car was more than mere situs of the
injury, and
b. The injury must be foreseeably identifiable within normal use of the car.
2. Active Accessory Examples
a. Wausau: Unidentified vehicles passenger shoots girl during highway
chase. Held: AA b/c car needed to pursue victims and make getaway
b. Towe: Guy throws bottle from moving car. Held: AA b/c high velocity
needed for bottle to be so harmful when thrown
c. Aytes: Girl pulls gun from glovebox in stationary car; guy, standing
outside of car, grabs gun and shoots girl. Held: No AA
ii. (2) No act of independent significance that breaks the causal chain; and
1. Plaxco: Car used to jump plane, which then lurched forward and caused
damages. Held: causal chain broken.
iii. (3) Car must be being used as transportation at time of injury
b. Use Cases
i. Wright v. North Area Taxi: taxi driver robbed and murdered; during
murder, taxi hits parked car.
1. No causal connection for the murder. It was the mere situs of the
injury, not the launchpad for it
a. Wright says that taxi robbery/murder is foreseeable, but
court disagrees about the taxi was incidental to the
2. Causal connection for the wreck.
ii. Doe & Roe v. S.C. Budg. & Ctrl. Bd.: Cop stopped Ps, on separate
occasions, on DUI suspicion. He offered them the choice of sex or jail.
In each case, they had sex either in or on the cop car
1. Ps claims fail Aytes test for fulfillment of the causal connection
prong. Car was not an active accessory.
2. Also, acceptance of the quid pro quo was an act of independent
3. Third, sex is not a use for transportation at the time of the injury
d. Service of Process
i. When you sue an insurance company, you have to serve the states director of insurance/insurance
commissioner. 38-77-70, -150, -160
e. Stacking
i. Benefit of the Bargain Rule: SCOSC decided to allow stacking because if you bought first-party
coverage for several cars, you bought it to protect yourself and thus should get to use as much of
it as you need.
1. Ex: guy w/ 25/50 hits me. I have 3 UIMs of 250K each. I should be able to get up to
750K in UIM
2. Measuring Vehicle Principle: You can stack up to the amount of UIM on the car involved
in the wreck; however, you can only get the limits of the car thats not in the action .
i. Ex: one car is 100/300 UIM, the other is 25/50 UIM. Car one is
wrecked. You get 125, not 200)
ii. Ex: same facts, except car 2 gets in the wreck. You get 50 (25 x 2)
b. Uninsured MVHypo: H and W are riding in car owned by H, which has no
insurance. (W has UM on other cars). Wreck. May W stack?

i. Erwood v. Nationwide: UM is personal and portable, and mandatory,

so if the at-fault driver (H) is uninsured, W can take from her at-home
1. Note: this case does NOT explicitly does not deal with stacking,
c. Underinsured MVF and D are riding in Fs truck, which has min. liability
and no UIM. (F has UIM on at-home cars). Wreck. May D stack?
i. Burgess v. Nationwide: she may not stack UIM where there is no UIM on
the car involved
1. Rationale: unlike UM, UIM is not a mandatory coverage.
2. Essentially, the insured is buying insurance coverage for
situations, as where he is a passenger in another's vehicle or is a
pedestrian, where he cannot otherwise insure himself. When,
however, the insured is driving his own vehicle, he has the
ability to decide whether to purchase voluntary UIM coverage.
Burgess chose not to do so when insuring his motorcycle.
3. In Garris and Gambrell, SCOSC said only excess UM and excess UIM can be stacked.
This is no longer true; you can stack the minimums on UM or UIM
ii. Omnibus Clause: usually has two sentences, and two classes
1. Class 1 Insured: states that the policy covers the named insured, his spouse, and members
of the household (aka, resident relatives)
a. Whether someone is a resident relative is a question of fact.
i. Use the common sense approach for whether someone actually lives in
the house (and thus is an RR)
ii. Ex: College student away at school: could prove it by legal residency,
drivers license, mail, etc.
b. Corporations cannot have Class 1 insureds.
2. Class 2 Insured: guests of class one and permissive users who arent Class 1.
a. Permission can be express or implied and is determined by the facts.
i. Party alleging permission has burden of proving it
b. Permissive Driver Tests:
i. Hell or High Water Rule (Initial Permission Test)liberal: so long as
Dad gives son permission to use car, anything son does with it is covered
as a permissive driver (even other people using car)
ii. Conversion Rule (SC follows)dad is liable for sons damages, unless
son can be found liable for converting the car
1. SC Bar misstates it as Conservative Rule
iii. Mild/Minor Deviation Rule: unless there is a gross/material deviation
from the scope of permission, its covered
1. Whether something is a gross deviation is a question of fact
a. Ex: Macloskie: Guy gets bosss permission to take
company truck home overnight, wrecks it late at night
far from home. Gross deviation
2. Auto Owners v. Rollison: The permission test only applies to the
driver, not passengers. Effective 06/30/08
a. So, as a passenger, you dont have to ask Is your dad
OK with me riding in this car? If the driver gives you
permission, it doesnt matter if the owner/ insured would
not have given you permission
b. Pleicones: this is foolish. What if someone stole your
car, told a friend to jump in, and then crashes? Car
owner shouldnt be liable then!
c. If the driver fails the applicable PD test, that just means that the driver was
uninsured and thus your UM applies instead of the other guys liability

d. Because omnibus clauses are mandated by statute, you cant flat-out deny
coverage of a permissive driver. However, you could put language in the policy
that they get minimum, mandatory coverage (e.g., 25 BI, no UIM)
iii. Class 1 members can stack, but Class 2 cant.
1. However, if a party has no car in the accident [i.e., he is class 2], then he can take from
the wrecked and also from one at home vehicles coverage (on which he is a Class 1
insured ) vehicle of his choice
2. Ex: Joe picks up his friend Rick, but they get in a wreck. Joe has UIM, and Rick has
UIMs of 100, 200, and 250. Rick will take from Joes UIM and his own $250 UIM
(because its the highest)
iv. UM and UIM are mutually exclusive. They do not stack. From the at-fault driver, you get his
liability and your UIM (if he was insured), or your UM (if he was not insured)
1. However, multiple UM policies can stack, as can multiple UIMs
v. Stacking CSL: Within the confines of the MV principle and the policy limits rule, you can take all
1. Ex: You have 100/300 UIM & 75 CSL UIM at home. You can get all 75
vi. Liability does not stack at all. 38-77-140
f. Phantom Drivers (John Doe Cases)
i. There is a lot of law on this, b/c so many would make fraudulent insurance claims after they hit a
tree, staged an accident, etc.
ii. To prove a John Doe Case (3 statutory reqs)
1. You Report to police in a reasonable amount of time;
a. Jed: should be ASAP (good strategy is immediately)
b. Morehead: 8 months is too long
2. There must be physical contact (evidence of another car hitting yours), or a witness who
swears out an affidavit acknowledging the accident; and
a. Wausau: no physical contact with unknown vehicle is necessary when witness
other than owner or driver of insured vehicle is available to attest to facts of
accident (but W must be able to testify to causation beyond car being mere situs)
b. Collins v. Doe: You must produce an actual affidavit; producing the witness in
court is not enough (no substituting)
i. Toal dissent: this is stupid. An in-court witness is more reliable than an
ii. Majority response: one of the functions of the affidavit requirement is to
provide the other side sufficient advance notice of the witness
c. Enos v. Doe: emphasizes need for someone other than the owner or operator to
produce the affidavit, even in a single-car accident.
i. Enos passed out in passengers seat of her own car, woke up with it
wrecked. She cant make the affidavit.
d. Gilliland v. Doe: the affiant need not have directly witnessed the cause;
circumstantial evidence of causation is enough (W saw headlights moving
i. However, you must still satisfy the Wausau test; that is, your
circumstantial evidence of causation must indicate causation stronger
than mere situs of the injury.
3. You must not have negligently failed to ID the driver/car at time of incident
g. Insurance Contract Construction and Interpretation
i. Although you have to have insurance to drive, you do not have a right to get an insurance policy.
But if they do decide to sell it to you, they have to sell you the minimum.
ii. In insurance adhesion Ks, the ambiguities are to be construed against the insurer (not against the
writer of the K, but against the actual insurer)
1. Gregory: We will not torture the terms of the insurance policy to find coverage but we
will still resolve ambiguities in favor of coverage
a. Moreover, we will construe insurance statutes liberally because we want to
enforce application of financial responsibility laws
2. This goes against normal K law (reading rule; doctrine of reasonable expectations)

iii. Statutory law controls over contrary terms of an insurance contract. We use the doctrine of liberal
construction: the K will be read in favor of finding coverage. 38-77-20
1. This is the opposite of normal K law, where people are generally allowed to make
private law among themselves
iv. In insurance law, the contract will be controlled by the law of the state(s) where the insured life,
property or interest is.
1. This goes against the K law default rule that the law of the state where the K was entered
into controls
2. In these cases, a poorly drafted policy (e.g., scriveners error, policy isnt up with current
case law or statutes, underwriter or lobbyist interference, etc.) can always be carefully
read to find more coverage. A policy can provide more than the statutorily required
coverage but never less
v. HOWEVER, if there is no mandate to offer or provide a certain coverage, it is largely unregulated
and is interpreted by contractual rules
h. The Offer Form
i. The form should have a spot for all types of coverages that the company offers (e.g., liability,
1. If the insurer doesnt put all that on there, the insured might not know about them, and
the presumption of an invalid offer arises.
2. In response, youll usually see some blanks on the forms in case the agent needs to list
something else
ii. When PIP was mandatory, not only did insurance companies have to offer it, they had to make a
valid offer
1. Penalty for not doing so was court contract reformation giving policyholder coverage.
2. In the late 1980s, PIP became optional; however, around that time, Garris and Gambrell
come down, where the court says that UM is mandatory, and UIM and AUM are optional
but must be offered
a. But, this does not apply to vehicles that are not owned (i.e., hired, like a cab)
iii. Insurer has the burden of proving a valid (meaningful) offer
iv. Wannamaker Test: To there to be a valid offer:
1. Must be made in a commercially reasonable manner, whether oral or written;
a. (In other words, offer it the same way you would normally offer mandatory
coverage policies)
2. Must specify limits of the optional coverages;
3. Must intelligently advise the insured of the nature of the optional coverages; and
a. Intelligently advise: person of common intelligence/the average person (not a
reasonable person) can understand it
b. Nature: explain how the optional coverages are different than other coverages
i. For example of form that satisfies this, look to page 1 of Jedziniaks offer
4. Tell the insured that optional coverages are available for additional premium and state the
amount of that premium.
v. Wannamaker test caused confusion, lead to a lot of reformations; this, in turn caused premiums to
rise and companies to leave the state. So, on a platform of insurance cost reduction, Campbell
and the legislature passed what has since evolved into 38-77-350.
1. 1990s: DOI creates offer form template; some companies use it, others like their own
2. SCOSC: if you use the DOI form, there is a presumption of a valid/meaningful offer;
a. But if you use your own form, even if the DOI has approved it, no presumption
(and thus more open for courts to scrutinize and find need to reform K)
3. Today, an offer form must use the language of 350.
vi. Current Offer Form Standards: 38-77-350
1. Provides the language that must be on the offer form
2. 350(a) provides list of things DOI must put on form
a. Brief & concise explanation of the coverages offered;
b. List of available limits and the premiums for each;





c. Space to mark whether insured accepted an optional coverage and if so, how
d. Space for insured to sign acknowledgment of offer; and
e. Contact info for SC DOI
350(b): if the form is completed by an insurer and signed by the insured, there is a
conclusive presumption of a meaningful offer on optional coverage.
a. Floyd v. Nationwide: the form is not properly completed, and the presumption of
a meaningful offer does not arise, unless the insured actually checks the boxes on
the form (and signs). Rule of strict compliance with the statute
i. Insured had signed form, but the insurance agent checked the boxes.
ii. Case was a certified question from G. Ross, who decided that, as a matter
of law, there is no valid offer when the insurer fills out the form (and
thus, reformation results in coverage)
iii. This basically took us back to Wannamaker era coverage crisis.
Premiums rising, reformations, companies angry at this constant push to
find coverage
b. After Floyd
i. Legislature amended (b) to say that the presumption of a meaningful
offer is conclusive, even if the agent fills in the boxes.
ii. Legislature raises minimum limit to current level.
1. This meant that previous offers of UIM and AUM (which would
have related to the old 15/30/5 standard) were no longer good.
Companies started sending out new forms so that they could
make new meaningful offers under the new minimums.
350(c): the offer form language need not be used for offers to renew insurance
356(d): compliance with this section means an insurer has fulfilled his duty to offer and
explain optional coverages.
350(e): the insured fails to return an executed offer form within 30 days, the insurer must
add on UM and UIM up to coverage limits.
a. Consumer Pro: get more coverage
b. Consumer Con: insured must now pay for this increased coverage, and if he
doesnt, the insurance company can cancel the policy

Evidence Issues
i. S.C. R. Evid. 411: you cant introduce insurance coverage info
1. Collateral source rule: you cant mention that the other partys recovery will also come
from other sources (like first-party coverage)
ii. Also, you cant introduce a ticket as evidence of liability; after all, a ticket is like a complaint, in
that it is merely an allegation
iii. However, judgments are different. You can almost always use a favorable judgment (i.e., not
liable) or a plea of guilty or nolo defensively, but offensive use varies among states.
1. In SC, you might be able to. But see 56-6-6160. You cant use evidence of a conviction
under that chapter offensively against that guy in a civil action
iv. In UIM and UM cases, evidence of Ps serving his own insurer (via the DOI) is not admissible.


a. OverviewInsurance Law Comes from these sources
1. State Insurance Law
a. 3 Sources
i. Constitution (not all states)
ii. Statutes and Regs
iii. Courts
2. Federal Antitrust Law
3. Non-Normal Situations (handled by Congress)
4. Dormant Commerce Clause
b. History

i. When Franklin, etc. started making insurance big, the government said it wanted in and started
ii. Also, the government was worried about the investment of surpluses and pots; what happens to
all the policyholders if the companies become insolvent?
iii. Hence, regulationprimarily state, until S.E. Underwriters
c. Commerce Clause Power
i. Recall ways in which ICC Power is triggered. Congress can only regulate when:
1. Does the regulation in question affect something actually enters into the stream of
2. Does the regulation affect the instrumentalities of interstate commerce?
3. Does the regulation have a substantial effect upon interstate commerce?
ii. Recall also the Dormant Commerce Clause Principles
1. Just because Congress does not exercise ICC power all the time does not mean that it has
ceded this unexercised power to the states;
2. Consequently, no state can make regulations that would infringe upon ICC power
3. An affirmative grant to Congress implies a negative exaction from the States
a. B/c of the Supremacy Clause, ICC/DCC power trumps 9A and 10A rights
iii. Gibbons v. Ogden: seminal ICC power case. Marshall says that much in the same way water
flows through our states, so does commerce (commerce = intercourse, movement; it does not just
mean business)
1. Despite Gibbons, in the early 1800s, there was no real regulation or attempt to regulate
insurance. Jedziniak says this is b/c the government had other stuff going on. Regulation
was left to the states, despite commerce clause power
iv. Paul v. Virginia (1868): SCOTUS says insurance business is not commerce, so its OK for VA to
make restrictions on foreign (out of state) insurance companies operating in the state
v. U.S. v. Southeastern Underwriters: Overrules Paul
1. Although an insurance contract itself could potentially be commerce, all the other
elements of the business of insurance payments, transactions, are definitely interstate
2. After this case, the Supremacy Clause means that all existing state regulation is void; and
because the only federal insurance law on the books at the time (1944) was the Sherman
Act, insurance became very unregulated.
d. Necessary and Proper ClauseCongress can do what it needs to exercise its other powers
e. Exemption from ICC, NPC, and Supremacy Clause
i. Test: The state law/regulation must
1. Be peripheral to the federal law
2. Promote (help), and not impede, federal authority
3. Award benefits or promote safety without altering the balance/distribution of power b/w
the state and fed govts
4. Touch interests that are deeply rooted in state issues/local feelings and state
a. Ex: DHEC regulates intracoastal waterway docs, which should be just Dept of
Interior b/c thats navigable water
f. The McCarran-Ferguson Act
i. Essence of the Act
1. Congress has the power to regulate the business of insurance
2. But in normal situations, were going to leave taxing and regulations up to the states
3. Finally, the federal government will get to regulate insurance antitrust under Sherman
Act, Clayton Act, and the Federal Trade Commission Act
ii. What is the business of insurance?
1. Test
a. It must transfer or spread the risk that policyholder will be liable;
b. This spread/transfer must be and integral part of the relationship between the
insurance company and the insured; and
If its one of the traditional core functions, its an integral part
c. The activity must be a practice limited to entities within the insurance industry

2. Today, insurance companies have these core functions

a. Policy drafting, using standardized forms, tied to
b. Careful risk underwriting of rick
i. 1) physical risk;
ii. 2) legal risk;
iii. 3) moral risk; and
iv. 4) morale risk (and, as developing, systemic) risk, tied to
c. Insurance premium rating based upon replacement costs and actuarially-predicted
losses, tied to,
d. Careful risk management, based upon property location and exposure, through
mitigation and policyholder education, to keep future losses down, resulting in
i. Note: Despite traditional mitigation and education integral function,
some cases are starting to say nothing is an integral function unless the
activities are limited to entities within the insurance agencies
1. Ex: states also have some regulations saying how you have to
build your house; no longer is it just insurance studies on how to
reduce risk
2. Of course, if thats true, then M and E is not business of
insurance, and it goes to Congress to control. But if Congress
does nothing, then no one does anything and theres no
e. Investmentmanaging and growing these
i. Two large accounts of money (the pots)
1. Unearned premium reserves Not the companys money;
nevertheless, the company invests the money and makes money
off that
2. Reserves to protect policyholders claims (or surplus) excess
money use to pay claims
ii. This leads to state regulation of taxes and solvency protection, to protect
the ability to meet the promise to pay from mismanagement, fraud, and
unreasonable premiums
iii. Also, the excess money (especially the UPR), combined with the nature
of insurance Ks, leads to a consumer perception of insurance as an
entitlement, not as a privilege = a quick expansion of state regulation
(insurance was considered purely local in nature, not interstate
f. Premium-to-Surplus Test: Dollars in ratio to money how much you need to have
in the surplus (the pots)
i. Ex: 4:1 (auto), 1:1 (homeowners)
3. Example: ERISA
a. Regulates employee benefits
b. A common litigation issue is whether a part of ERISA is in the business of
insurance; if so, states can make the rule; if not, employer gets to make it unless
Congress speaks on the issue
i. Ex: Company says no life insurance to people who get AIDS, even if
theyve been paying in (probably is bus of insurance)
iii. Congress passes this in response to Southeastern.
iv. It basically says that Congress is expressly reserving the right to pass insurance regulations that
preempt state regulations, should it choose to do so in the future.
1. However, unless and until that happens, states may enact regulations that do not violate
2. Test for MFA-granted state domain: if the insurance action in question
a. Is not concerted activity placing unreasonable restraint on trade;
b. Is not the business of insurance;
c. Or is concerted and unreasonable but the state law promotes federal authority,

d. Then insurance action can be regulated, controlled or allowed/prohibited by the

several states
v. There has only been limited use of this law (e.g., ERISA), but Jedziniak says that federal
preemption will be much more common under Obama administration.
1. This could mean things like invalidating SCDOI rules, or vetoing decisions to kick
insurance companies out of a state (like FL just did to State Farm)
2. The one thing that MFA explicitly preserves is FTC power
g. Other Federal Regulation
i. Goals of Antitrust Regulation
1. promoting competition;
2. promoting a free market;
3. promoting marketplace efficiency; and
4. preventing anti-competitive conduct
ii. Sherman Act
1. 15 USC 1: Every contract, combination in the form of trust or otherwise, or conspiracy,
in restraint of trade or commerce among the several states, or with a foreign nation is
declared illegal. This means-a. No concerted activity restraining trade; and
b. No concerted activity creating a monopoly
i. Test for Illegal Monopoly
1. A monopoly
2. That is created/perpetuated by some unfair practice.
2. 15 USC 2: Every person who shall monopolize or attempt to monopolize or combine or
conspire with any other person or persona to monopolize any party of the . . .
a. Possession of monopoly power in a relevant market, AND
b. Predatory or anticompetitive acts to establish or restriction that market power
(distinguished from monopoly power gained through growth, superior ,products,
and best practices operations
3. There are 4 per se violations
a. Price fixing
b. Big Rigging
c. Agreement to Split Sales Territories or Customers
d. Agreement Not to Do Business
4. Reason Violations. Factors
a. General business information
b. Nature, history, and effect of activity allegedly restraining trade
c. The state of the marketplace before or after the event
d. Market power of the insured
i. Ex: State Farm writes 10% of homeowners policies in SC. It was
spending $60M to reinsurers to keep them solvent
1. SF starts saying, were not going to sell you homeowners unless
you buy auto and life with us, too results in restraint of trade
2. Court finds this isnt enough to be any sort of per se or reason
5. First Look/Quick Look: takes the rule of reason and transforms it into a presumption
that there is a restraint of trade if, upon a more cursory view of the circumstances, it looks
like violation; then, the company has the burden of proving the action is fair and there is
no restraint
a. This allows the court to not worry about studying insurance, etc. and taking years
to decide if theres a restraint (thinkif there is a restraint and it takes a judge
forever about this, you could have the problem going on for years before theres
an injunction)
b. This doctrine is in keeping with SC judges, who follow law that generally
disfavors the insurance companies
iii. FTCA15 USC 4158

1. Creates FTC and gives it power to

a. Bring cease and desist enforcement actions
b. Seek monetary redress and other relief from conduct injurious to consumers
c. Prescribe trade regulation rules defining with specificity acts or practice that are
unfair or deceptive and establishing requirements designed to prevent such acts
or practices
d. Conduct investigations relating to the organization, business, practices, and
management of entities engaged in commerce; and
e. Make reports and legislative recommendations to Congress on how to legislate
against unfair trade practices
2. Red-Lining: drawing on maps of areas and literally marking areas where youre not
going to write insurance policies
a. OK: Red-lining a flood plain
b. BAD: Red-lining a black neighborhood
c. If you red-line, its the FTC that investigates your actions
iv. The Clayton Act
1. Prohibits unfair price discrimination (per se violation)
2. Prohibits some tying agreements
a. Tying Agreement: seller conditions sale of one product on the purchase of
i. Test for Tying Agreement:
1. Items in question are separate products (i.e., homeowners and
auto; auto liability and auto UIM probably are not separate);
2. You condition the sale of one product (tying product) on the
purchase of another (tied product); and
3. Market Powerfactors
a. Market Share (e.g., 35%)
b. Overall Corporate Profits on items being tied
c. Size and strength of companys competitors
d. Affirmative acts that have restrained trade and/or
excluded competition (but stuff that they tried and did
not work doesnt count)
e. Ability to control prices
f. Profit Levels
b. Court has said that Rule of Reason applies here (used to be per se), but the quick
look practice has become the norm (as it has with other rule of reason violations)
3. Prohibits board members from serving on more than one board of competing companies
(ex: Allstate and State Farm) (per se violation)
4. Clayton Act provides for DOJ and FTC to review mergers and acquisitions, especially in
interstate commerce, to make sure no monopolies or restraint of trade in marketplace
5. Prohibits Exclusive Dealings K/ Requirements K
a. EDK: you cant do business with anyone else
b. RK: you can only do business with me (Marsh)
v. Indicators of a Companys Market Power
1. High market share
2. Sustained price leadership and control
3. Affirmative actions that have excluded competition
4. Size and strength of competitors
5. Profit levels


a. State Insurance Departments
i. Structure
1. Headed by Director/Commissioner
2. Tax Collection Departmenttaxes based on premiums

3. Solvency Departmentlooks at insurance company surpluses, makes sure theyre fair

and follow the rules
a. Possible DOI Tests for Making Sure a Companys Investments are Adequate (is
the company investing in the right places?)
i. Pigeonhole Test: State says exactly what you can invest in (e.g., bonds)
ii. Prudent Person Test: would an RPP do this?
1. Problem: the insurance dept guys dont know what the best
thing is (govt incompetence)
2. Other problem: too lenient standard, corps invest in things too
risky (e.g., junk bonds) and fail
iii. Modified Pigeonhole/Modified PP Test (SC follows): state says where to
put the money, and also says that company must explain to state why its
prudent to do so.
1. Strictest test
b. Solvency Regulation Considerations (does the company have enough money to
pay claims and, if a stock company, to pay stock investment returns?) to
determine how much surplus a company must hold to pay claims, consider:
i. Frequencyhow often the type of loss in question occurs
ii. Severityhow much the loss will likely cost
iii. Tail Length (how long it takes for full extent of loss to develop for
insurance company to know total severity)
1. long-tail (takes a long time for losses to develop automobile
wreck is a long-tail exposure)
2. short-tail exposure (losses are evidence almost immediately
home insurance is a short tail exposure))
iv. Note: Jed says a lot of this is done now using computer modeling
4. Licensingensures following of rules by controlling who can do business
a. (also good for collecting feesaddl source of state revenue)
5. Consumer Services (a.k.a. Ombudsmen)making sure claims are paid
a. Looks at policies and says whether you should be paid
b. Jed: invariably, these guys call the insurance companies, which deny coverage,
and then DOI says to policy holder sue em
6. Rate Approval
a. Types of Rate Regulation
i. Open Market/Market Regulationno official regulation. You can use
any form you want (assuming it complies with the law) and charge what
you want
1. Self-regulating because if you dont keep rates low enough or
provide enough coverage, no one patronizes you and goes to the
other guy. The end result is that rates stay reasonable so that
companies stay in business
ii. Use & File: start using the rates, but then you must file your rates and
forms with the DOIs RA department to make sure they comply with the
state standards to make sure they pass the Rate Correctness test)
1. If they dont comply, you lose the right to use those rates and
youll owe people their premiums money, with interest
2. Companies hate this b/c they have no way of knowing if theyll
be screwed
iii. File and Usethe opposite.
1. you have to file w/ the insurance department, and DOI gets as
much time as it wants to review docs and approve/reject them.
Whatever it says goes (or you litigate itinsurance company
likely to lose)
2. SC follows this
iv. Indexing: DOI picks a number (ex: 7%, SC). If your rate increase is
above number, you are subject one of the above sets of scrutiny (ex: SC

prior approval) and if below, then same, but with a different standard
(typically, open market)
v. Prior Approval (a.k.a. Deemer)-- Department has a certain number of
days to look at the rate for approval if it does not approve that rate
within a certain number of days, then the insurance company can use that
vi. Consent to Rate: done on policy-by-policy basis. Company negotiates
rate w/ policy holder. Typically done for big/unusual risks. (Ex: myrtle
beach hotel
b. Test for Rates Correctness (from S.C. Code 38-73-330(2), 38-73-430)
i. Insurance rate must be reasonable--enough for company to pay claims
(and if its a stock company, pay a reasonable rate of return). What
factors go into a reasonable rate?
1. Cant be unfairly discriminatory;
a. Basing rates on driving habits is fine; age, sex, race . . .
not so much
2. Cant be excessive; and
a. Cant grossly overcharge
3. Cant be inadequate
a. Must charge enough to cover your claims and pots
b. (see above for more on adequacy regulation)
ii. Its a subjective test, because its the DOI people making the decision
iii. B/c of judicial hesitancy to overturn admin decisions, courts will really
overturn do decision on propriety of rate
c. Filed Rate DoctrineEdge v. State Farm (2005)
i. The commissioner is the authority for approving rates. Once the
commissioner approves rates, they are final and not subject to collateral
attack by private parties asking the court to determine what a reasonable
rate should be. It is a conclusive presumption.
ii. Rationales for final rate doctrine:
1. it preserves the agency's authority to determine the
reasonableness of rates;
2. it recognizes the agency's expertise with regard to that industry,
whereas courts do not;
3. allowing an action would undermine the regulatory scheme
because the statute allows for enforcement by the appropriate
state officers; and
4. allowing an action may result in different prices being paid by
victorious plaintiffs than non-suing ratepayers, which violates
the statutory scheme of uniform rates
ii. History of SC Insurance Commn/Dept
1. S.C. was originally regulated as an extension of the legislature through commissioners.
The commissioners selected a chief commissioners.
a. The commissioners were selected from the insurance industry.
2. The lost trust scandal changed everything.
a. Legislature changed the form of regulating insurance.
b. Governor was given the ability to appoint the head of the Department of
Insurance (along with other agencies).
3. The head of the Department of Insurance is called the Director of Insurance.
The director is picked by the governor.
a. Directors are more political figures who work to please the governor.
i. The good thing about appointed directors is that they tend to be experts
ii. Bad thing is that theyre not necessarily responsive to consumer needs
their one boss is the gov
b. Some states have elected insurance directors.

i. Elected directors seem to be too responsive to voters and worry about

lowering rates to please voters.
b. Residual Markets
i. A.k.a., markets of last resort
ii. Created by a state to fill a market needinsurance for small, unsafe businesses who have trouble
getting insurance in most places (e.g., construction)
1. Note: This is just an example of the larger truth that insurance law is all driven by the
social policy of financial capability to pay for harms
2. Because the state wants (and thus requires) everyone to be able to pay, its only fair that
the state set up residual markets for those who ordinarily could not meet the systems
iii. The insurers in these markets have to insure everyone who comes to them
iv. Each state has at least 5
1. SCs Residual Markets
a. Workers Comp (e.g., tree-cutting co)
b. Commercial Auto (long-haul trucking and logging)
c. People who cant buy homeowners insurance in dangerous areas (e.g., along
d. Auto insurance
2. They are state-created, but insurance company-run
3. Types of Markets (4)
a. Market Assistance Program (not true Residual Market): if you cant find the
coverage you want, you call MAP hotline and they help you find it with
companies registered in that state
i. It is run either directly by the state insurance dept or by entity under
depts guidance
ii. Dram Shop Liability is huge in here
b. Joint Underwriting Association: state-created insurance company for certain
types of loss that companies dont want to insure, but still needs to be insured
against (public policy)
i. If the JUA gets hit on a loss, it passes that loss onto all the companies in
the state (at least all the ones doing that type of businesse.g., wind,
fire). The insurance companies have to agree to do this to in order to
operate in the state
1. There are exceptions, of course, and those who fall under the
exceptions dont have to chip in.
a. Ex: insurance companies who write insurance only to
property wholly owned by religious organizations. 3875-330
b. Ex: Southern Mutual Church Ins. Co. v. S.C. Wind &
Hail JUA:
i. WHJUA excludes companies whose writings are
wholly owned by parent, subsidiary, or allied
ii. Allied means some sort of ownership and
control, not alliance among the insureds
ii. Its not a state agency, but rather a company whose board consists of
people from insurance companies. Its run like a business. It pays
claims and customers pay premiums
iii. Interesting: if someone has to go to JUA, the Legislature gets wind of
that and then tells insurance companies, hey, you need to lower your
1. But we dont want JUA to be cheaper than the voluntary market
because then everyone will go there. And if everyone goes there
and there is a loss, that gets passed onto the companies, and then
thus onto the policyholders

iv. Ex: South Carolina Wind and Hail Association

v. Ex: N.Y. JUA for city fires (if one tenement goes up, they all do)
vi. Ex: Cal JUA for workers comp
c. Assigned Risk Plan: (SC uses this for workers comp; other applications are auto
and commercial auto)
i. Theres a rolling list of all the states insurance companies.
ii. You call ARP up and say you need WC insurance; ARP assigns each
caller to someone on the list (randomly, alphabetically, etc, but one by
iii. The slots on the list are assigned according to a companys market share
in that state
1. Ex: State Farm does 30% of SCs auto. Thus, for every 100
turns (slots on the list), State Farm has 30
iv. Like other residual markets, ARPs were subject to abuse absent
regulation. Instead of insurance companies turning people down for
legitimate risk problems, they turned people down for illegitimate
socioeconomic reasons and used residual markets as dumping grounds.
1. Ex: In the 50s, in SC, no one wanted to write blacks, sailors
d. Reinsurance Facility
i. State requires that for this type of policy, no insurance company can turn
you down. State bases statewide rate off of rates of companies in the
state, and then it spreads losses among those companies (who of course
then pass losses onto customers)
1. SC used to have this for auto; other states still do for auto
2. Started in SC during 60spoor, blacks, sailors couldnt get
3. Stopped in 1996. 1.2 M drivers had it (1.3 of drivers)
ii. Mandate to Write Law (a.k.a., Take All Comers Rule): you must take
everyone who walks in asking for the coverage in question
iii. But company does not take the premium and does not pay the losses;
these are passed along to the states reinsurance agency/facility, and
claims flow on the same path, in the opposite way
iv. Note: insured doesnt know about this. As far as he knows, hes still
working directly with insurance Co.
1. Purpose is to provide insurance without insureds stigma of
being in a residual market
v. RFs typically base rates/charges in one of two ways
1. Uniform Merit Rating Plan Creates a list of all possible
violations and people paid more for certain violations.
a. Ex: In Edge, person who got in wreck, etc. was assessed
two surcharge points, making her lose her safe driver
discount. After that, more points = further rate increase
b. Appears to be have been used in all auto insurance
companies until the plan was repealed in 2001. Edge.
2. Objective and Standard Rates Based on driving record.
Reinsurance Facilities, instead of passing the losses back to
insurance companies, passed the losses back to consumers, even
ones not in the RF. These were called recoupment charges.
a. These charges pissed customers, who didnt want to
have to subsidize the really crappy drivers using the RF
vi. Jedziniak: RFs are a JUA-ARP hybrid
vii. 3 Federal RFs
1. Floods
2. Terrorism
viii. Example of an RFHouck v. State Farm

1. Insurance companies would not insure for floods. Congress

passed National Flood Insurance Policies to provide nationwide
insurance for floods.
a. Note: Congress could step in here under MFA b/c coastal
housing insurance problems are not normal
2. Federal Flood Insurance Program A reinsurance facility. It
used a Write-Your-Own Program. People paid premiums to
the insurance company under the WYO. Insurance company
ceded premiums to federal program, who paid any claims. These
claims are paid through taxes. Originally, there was only a
standard rate based on homes value. Eventually, a preferred
rate was created higher and lower rates depending on whether
home is in a flood zone.
c. Guaranty Funds

a. Definition: evaluating the risk of the loss (probability and cost) and then, if the company wants, issuing a
written policy stating what is and is not covered
b. History
i. Franklin started out with fire insurance: the premium on the cost of rebuilding your house
ii. Then, there were homes that Franklin wouldnt insurance b/c they were too risky
1. So, a 2nd company started, that would write policies for these sub-standard homes
a. Its a substandard company a.k.a. niche market companyfirst ones fire mark
was a tree (to mock Franklin, whose fire mark was hands held in a firemans
2. This is whats called adverse selection: you cant get full coverage from the one company,
so youve got to go to another place, one where the rates and the coverage will vary
iii. Another thing that Franklin did was use surpluses to research ways to reduce riskmake things
safer, what things are safer than others, etc.
1. Modern version of this is ULUnderwriters Laboratories.
2. Pretty much all big firms have lots of research and testing facilities for this purpose (ex:
hurricane facility in Hartsville)
c. Risk Classification Factors
i. Types
1. Physical risk (fire, hurricane, etc.)
2. Legal risk (laws of the localewhat will it cost in this case)
3. Morale risk (how responsible is this guy? Does he take care of his property?)
4. Moral risk (will this guy commit fraud, commit arson, etc.?)
5. Systemic Risk (risks created by the government itself)
a. Ex: Government acts to make loans to underqualified people on housing (comes
from community reinvestment actClinton policy of housing entitlement).
Giving the loans will likely result in a lot of defaults, morale and moral risks
b. This is an emerging category.
ii. Subjective v. Objective
1. Physical and legal risks are objective; the rest are subjective
2. Of course, this raises a profiling issueis subjective underwriting used to discriminate
against blacks, rather than truly looking at real risks?
a. There is a Congressional debate about making a law that provides a remedy for
d. Insurable Interests
i. Definition: an insurable interest is something that the insurance policys beneficiary stands to lose
if the policy is triggered (ex: house, husbands life, car)
1. Generally, you must have an insurable interest for your policy to be valid
ii. History
1. Tontine Policies: people would chip into a pot, buy some property, and the last one alive
got the money to pay off the mortgage (Italy)

2. Life Assurance Act (Gambling Act): Before a beneficiary can take out an insurance
policy, you have to have an insurable interest from which the beneficiary substantially
benefits from (England?)
iii. When Must Interest Exist?
1. For property and casualty policies, the insurable interest must be there at the time of the
2. With life insurance, the interest must be there at the time of the policys issuance
a. Ex: your wife takes a policy on you. You then divorce but she keeps the policy
up by paying the premiums. She can collect when you die.
iv. Loss Payee/Loss Payable Clause
1. When you pay a claim, you cut the check to the owner of the policy and to the loss payee
2. It is the loss payee is the one who must have the insurable interest
3. Two Types:
a. Open Mortgage Clause: well pay the LPayee unless the loss was caused by the
illegal act of the insured
b. Standard Clause: well pay the LP, no matter what
v. Force-Place Clause

a. Duties
i. Insurance Company3 duties
1. Indemnifypay directly to insured under 1st party ben, or to 3rd party if insured is at
2. Defenddefend the policyholder
a. Sometimes called litigation insurance b/c part of the reason you buy the policy
is so that someone will take care of your litigation costs (get you an atty, etc.)
b. Tendering the policy limits does not dispose of companys duty to defend
3. Act in Good Faith and Fair Dealing--duty to do indemnify and defend with GFFD (not an
explicit K right)
a. So if they dont do one of these first two things, you sueinsurance bad faith,
a tort action
b. Court-implied provision in every K
c. Standards of Conduct
i. Recall that an insurance K generally includes first-party coverage and
third-party coverage
1. Depending on the situation, an insurance company will have to
behave differently towards the policyholder.
a. First party coverageduty of fairness to the insured
b. Third party liability coverageduty of protection of
i. Insurance co owes no duty to the injured third
ii. This is because there is privity of K b/w
insurance co and P (only privity b/w insurance
co and D)
ii. Insured Party
1. Put the company on notice of a potential claim
2. Assist in the investigation and defense
3. Allow insurance company to control the defense
a. How do you at least attempt to get back some control? Use Tyger River
b. Common Coverage Limitations/Exceptionsinsurance company can deny your claim/refuse to uphold its
duties if
i. You make a material misrepresentation on your policy (including concealment of material fact
NC term)
1. Elements:






a. Misrepresentation;
b. Known to applicant;
c. Reliance/material to policy issuance (induce a reasonable insurer to enter into the
policy or to reduce the premium); and
d. Material to the risk (increase the risk of loss, contribute to the loss) and the
issuance of the insurance
i. Ex: you lie about your weight on the homeowners policy, and then
house burns downnot material
2. Typically, they can get ammo for this on the policy application
a. Ex: are you cohabitating?
b. Ex: have you ever been adjudged bankrupt?
3. If you lie about these things, youre screwedpolicy either wont cover you or will be
a. Could be void at that point or void ab initioas if the policy never existed
i. Of course, the company is hesitant to do this, as in that case it would
have to refund you your premiums
4. They want to know all this info to accurately underwrite you
5. NOTE: for life insurance, the two years w/in the life of the insured incontestability
clause ( 38-22-220) with no causal connection required for voiding/denial
a. Two years from signing/issuance of the K
b. This is basically a SOL for denial/voiding K on misrep grounds
Waiveryou fail to do one of your policy duties, so you waive your right to indemnification and
1. Prior ct. didnt squarely address this, but Jedziniak says two-year delay in notifying
insurance company definitely constitutes waiver
2. To take advantage of this, insurance company must assert waiver in answer, per SCRCP
12. See Collins v. Wausau
Breach of Insureds Warranty to Insurerin insurance setting, warranty is insureds
representation to do X, which the insurer takes and makes part of the K
a. Ex: The Doll House in Myrtle Beachincluded in policy that bartenders, girls,
etc. must go through liability/problem training
b. If you can get the warranty and show breach, this is HUGEdont have to
plead/show reliance, materiality, etc. of misrep., as they are presumed here (at
least materiality is)
2. Affirmative Warrantya fact at the time the K is entered into
3. Promissory Warrantyguarantee of future events
Collusion between D and P
1. P and D stage event with understanding that when P wins, he and D will split insurance
2. Doesnt cover Tyger River strategies
Insurance cos defense conflicts with the best interest of the insured (rare)
1. Ex: My insured couldnt have hit your car because he allowed an unlicensed teenager to
drive the car drunk
2. Ex: my insured couldnt have hit you b/c he was doing drugs at the strip club at the time
Every Allegation/Claim in the Complaint is Excluded from Policy Coverage
1. Stated another way, there has to be at least one claim that, if proven, the policy would
a. Four Corners Testif any one of the claims is covered under the insurance
policy, company must defend
i. Broader, more plaintiff-friendly
b. Extrinsic Evidence Test (SC uses)you can look at the complaint itself, but you
can also look beyond it and figure out what the actual facts and allegations are
i. Narrower, more defense-friendly (odd; most SC insurance law tends to
favor plaintiffs)
2. Collins v. Wausau Underwriters Ins. Co.

a. Standard CGL language: well pay those sums that the insured becomes legally
obligated to pay ... because of bodily injury, only if such injury was caused by
an occurrence, and defined an occurrence as an accident, including continuous
or repeated exposure to substantially the same general harmful conditions.
b. Held: Collins gambling acts were not an accident because they involved a civil
conspiracy and RICO violations. Thus, no coverage.
c. Pleicones dissent: under the EET test, there is enough here for a trial judge to
have decided Collins acts were unintentionally unlawful, thus giving rise to
claim for negligent misrepresentation (which the policy would cover.
i. Pleicones distinguishes b/w this case and the inherently intentional
sexual abuse in Harvey (majority relied on it, said this case was just like
3. Prior v. S.C. Med. Malpractice JUA
a. Doctor sexually assaults girl, she presses criminal charges and sues. Almost two
years later, he notifies JUA.
b. Girl sued for negligent molestation
i. Trial strategy point: why/how would you allege something like this?
ii. Trial lawyers do it all the time, because if you allege something within
the policy coverage, the insurance company has to get involved.
1. The plaintiffs lawyer can then get the big money, either from
indemnification, or by setting up a Tyger River assignment for
the future
c. Using EET, court finds that the claim was really for sexual battery, an intentional
i. Because the JUA policy excluded intentional acts, there thus was no
vii. Complaint/suit only concerns intentional acts
1. SC doesnt follow this rule
2. Practice came about because most policies didnt cover intentional acts, but because that
is starting to change, this is becoming less of a reason not to cover
a. Auto and home policies typically dont cover intentional acts
b. But others may (ex: dram shop liability)
c. Insurance Companys Ways to Respond to Indemnification/Defense Request
i. Denybut that could result in bad faith action later
ii. Disclaim
iii. File a declaratory judgment actionsue client and ask court to say theres no coverage
1. But if you lose, theres coverage and youve got to pay
2. Why file a DJ action instead of just denying coverage?
a. If you just roll over and defend, youre pretty much on the hook to indemnify too
b. If you deny coverage outright, and turns out youre wrong, may be basis for
Nichols/Tyger River bad faith claim
iv. Enter into Non-Waiver Agreement with your own insuredsays that company will come in and
defend, but were not necessarily going to indemnify you (we reserve that right not to pay in case
of an intentional act)
1. Bi-Lateralboth parties sign
a. Most times, the insurance company makes insured sign before the investigation
even begins
b. But insured doesnt have to sign it to make investigation happen; cant condition
it, b/c that would be bad faith
2. Two Types
a. SC uses a general one
b. Other states use specific one
v. Issue Reservation of Rights letter (SC uses this for specific waiver issues)
1. Typically provides a reason for issuing the ROR lettersome issue that is causing
company to think maybe policy doesnt cover the loss in question.
2. Basically says, well still defend, but maybe we wont pay if you lose in the end

3. After all, an insurance policy is not a maintenance policy

4. Ex: Prior case: SCMMJUA agreed to defend under an express statement that it will
decide later if it feels it needs to pay
5. Should be very specificvagueness could be construed as unreasonable basis in a bad
faith claim later

a. Generally
i. SC, like most states, is a tort-based state.
ii. Others are no-fault: your own insurance pays for the accident no matter what
1. There are 13 no-fault states, and none are pure no-fault anymore (Jed: stupid socialist
crap theory)
iii. Contract cases
1. Failure to indemnify
2. Failure to defend
iv. Tort cases
1. Breach of implied duty of good faith and fair dealing
b. Damages
i. If youre suing for breach of K, youre only suing for what you should have had, if the K had
worked outexpectation dams
1. If bad faith, can get atty fees 38-59-10
ii. But in tort, you can get actual/compensatory/consequential dams (and possibly
1. The exemplary dams against an insurance co can be hugetakes a lot to teach a big
company a lesson (you show someone insurance cos assets with a balance sheet)
iii. If you hold D liable for an act/omission on multiple theories, you can only recover damages once
and must elect which damage award you want to take (See, e.g., Nichols)
c. Bad Faith Claims
i. If insurance company fails to act fairly or protect you from the third party, you sue for an
Insurance Bad Faith claim (violation of the duty of GFFD)
1. Bad faith can be imputed to insurance company through actions of the agent.
2. Note: comparative negligence is, of course, applicable to these claims
ii. Third-Party ClaimTyger River Claim (breach of duty of protection)
1. Tyger River Cases
a. Worker v. Tyger River
i. 1930sno workers comp, so you sued your company. At that point,
company couldnt assert contributory neg or other affirmative defenses
1. Guy gets his arm broken, company agrees to settle, but insurance
co says no, we dont cover idiocy
2. Jury awards $7200 (guy wouldve originally settled for $100),
but the policy is only for $5000
3. Insurer also says its still not on the hook for anything
b. Tyger River v. Maryland Casualty
i. Mill sues insurer for indemnification. Mill wins, gets up to the policy
c. Tyger v. Casualty, redux
i. Mill sues for remainder of verdict
ii. Mill says, we would have been out of this mess for $100 but for your bad
faith (no actual bad faith standard at time case started)
iii. Court says that the insurer has the duty to protect the insured, and
because this duty sounds in tort (and not K), Mill can recover
consequential damages even going beyond the policy limits
2. Elements:
a. Offer to settle w/in policy limits;
b. Insurance company refused to honor that offer based on an unreasonable basis;
i. SC uses unreasonable basis (negligence standard), but

ii. Most states use bad faith standard

c. Damages proximately caused thereby.
3. Unreasonable Basis
a. Jury/Fact-finder instructions: Trier of fact should consider
1. Absence or presence of communications b/w insurer and insured;
2. Absence/presence of an offer to settle; and
3. Absence /presence of investigation of loss/claim
4. Whether, in light of the totality of the circumstances, the
insurers actions were reasonable
a. Jury should decide whether a reasonable person would
have handled situation that way.
b. Case Examples of an Unreasonable Basis
i. Unreasonable delay in responding to initial claim
ii. Failure to return calls
iii. Failure to provide records or other documentation when requested
iv. False or misleading explanation for denial of benefits
v. Lack of a claims manual or guidelines for claims processing
vi. Inadequately trained medical personnel
vii. No claim review committee
viii. Disregard of diagnoses and recommendations of attending physicians
ix. Lack of an objective basis from independent experts to justify denial
x. Failure to follow its own procedures
xi. Failure to make a prompt, reasonable investigation of the underling claim
xii. Unreasonably delay in making payment
xiii. Employment of scare tactics
xiv. Taking advantage of the insureds vulnerability
xv. Failure to provide information to the insured
xvi. Failure to settle
c. You can also ground an unreasonable basis in the violations of the Unfair
Claims Practices Act or the Insurance Unfair Trade Practices Act (see below),
even though neither statute creates a private action
i. (basically, youre using negligence per se strategy where an actual
negligence per se suit wouldnt be allowed)
4. Tyger River Demand Letter
a. Plaintiffs lawyer ends up with defendants Tyger River claim rights by following
these steps
i. Figure out what the policy limits are (ex: $25,000)
ii. Liquidate your damages substantially above the limits (ex: $29,000)
iii. Offer to settle w/ D for right at/just under policy limits
iv. Concurrently, ask D to assign his possible Tyger River rights to you, in
exchange for your agreement not to execute the judgment against him in
case he loses
v. Have Ds lawyer send Ds insurer a Tyger River demand letter, stating
that D has a valid offer to settle at/below policy limits in hand
1. Time Demand Letter/Provisionsays pay me by X date or else
[Ill sue, etc.]
iii. First-Party ClaimNichols Claim (breach of duty of fairness)
1. Elements
a. Mutually binding Insurance Policy K;
b. Refusal to Pay/delay in paying benefits due;
c. There was an unreasonable basis Refusal/Delay; and
d. Damages proximately caused thereby
2. Nichols v. State Farm

a. Guy leaves Corvette in parking lot overnight, finds it next day w/ puke inside and
damaged engine. State Farm agrees to pay under comprehensive coverage, but
drags its feet in paying, refuses to pay entire claim.
b. N sues, arguing for extension of Tyger River to first-party insurance. SCOSC
c. Decision largely rooted in public policy.
i. The insurance business is affected with a public interest. (Hinds_
ii. An insured ordinarily possesses no bargaining power and no means of
protecting himself from the kind of treatment of which Respondent
complained. An insured does not contract to obtain any kind of
commercial advantage or leverage but only to protect himself against the
spectre of accidental [or unavoidable] loss. (Trimper)
d. Note: Nichols claims are partially pre-empted by ERISA (employment benefits
insurance claims) (Duncan).
d. Improper Claims Practices Action under 38-59-20
i. When an insurance company deals with a third party, the following constitutes an improper
claims practice if done (1) without just cause and (2) with such frequency as to make it a regular
business practice:
1. Knowingly misrepresenting to insureds or third-party claimants pertinent facts or policy
provisions relating to coverages at issue or providing deceptive or misleading information
with respect to coverages;
2. Failing to acknowledge with reasonable promptness pertinent communications with
respect to claims arising under its policies, including third-party claims arising under
liability insurance policies;
3. Failing to adopt and implement reasonable standards for the prompt investigation and
settlement of claims, including third-party liability claims, arising under its policies;
4. Not attempting in good faith to effect prompt, fair, and equitable settlement of claims,
including third-party liability claims, submitted to it in which liability has become
reasonably clear;
5. Compelling policyholders or claimants, including third-party claimants under liability
policies, to institute suits to recover amounts reasonably due or payable with respect to
claims arising under its policies by offering substantially less than the amounts ultimately
recovered through suits brought by the claimants or through settlements with their
attorneys employed as the result of the inability of the claimants to effect reasonable
settlements with the insurers;
6. Offering to settle claims, including third-party liability claims, for an amount less than
the amount otherwise reasonably due or payable based upon the possibility or probability
that the policyholder or claimant would be required to incur attorneys' fees to recover the
amount reasonably due or payable;
7. Invoking or threatening to invoke policy defenses or to rescind the policy as of its
inception, not in good faith and with a reasonable expectation of prevailing with respect
to the policy defense or attempted rescission, but for the primary purpose of discouraging
or reducing a claim, including a third-party liability claim;
8. Any other practice which constitutes an unreasonable delay in paying or an unreasonable
failure to pay or settle in full claims, including third-party liability claims, arising under
coverages provided by its policies.
ii. Despite these duties to third party, there is no private cause of action. Thus, the only remedy is
for the DOI to either fine you or pull your license (Swinton v. Chubb)
a. Swinton: All duties flow from the insurance contract/privity between the insured
and the insurer. All private causes of action must be between the insured and
2. Most likely a fine, especially with the big companies
3. In 30 years, theres only been one case brought; the rest were just threats by the DOI
e. Insurance Unfair Trade Practices Actions under 38-58-10 et seq.


i. These are laws intended to regulated trade practices in the business of insurance in accordance
with the MFA. They are administrative, regulatory penalties and remedies such as fines, license
revocation, and cease/desist orders
1. Like the UPCA (and unlike regular UPTA) no private cause of action!
ii. Examples of Unfair Trade Practices
1. Use of state seal50
2. Trading stamps (food stamps) given as an inducement 150(1)(b)
3. Advertising gifts ($25.00), food and refreshments ($10.00)
4. Rebating commission (giving the insured back some of the commission)
a. Banned b/c back in the day rebates were getting handed out based on race
b. Exception: auto insurance
5. Make misrepresentation for the purpose of settling a claim 70
6. Misleading, fraudulent, or imcomplete comparisons to induce and insured to lapse a
a. Twistingdraining the cash value from a life insurance policy to fund a life
insurance policy issued by a competitor; and
b. Churningdraining the cash value from a life insurance policy to fund another
life insurance policy issued by the same insurer
7. Vanishing Premiums
8. Free insurance as an inducement to the sale of real or personal property or services is
prohibited with no identifiable charge or at less than cost)-- 170
9. Insurance premiums that are included within a purchase price or finances must be
separated stated and identified--180
a. History/Overview
i. 1752: Ben Franklin was a big insurance pioneer. He created what is essentially the modern
insurance company. His company:
1. Wrote policies
2. Underwroteevaluated your house on how many trees were around, what it was made
out of etc.
3. Sold policies
4. Set rates
5. Managed Risk
a. Mitigation
b. Education
6. Made investments
ii. Large amount of money in the pot to pay claims/the promise to paynext logical stepsinvest $
$ to pay taxes, claims, research, keep premiums reasonable, etc.leads to state regulation (and
then into Paul, ad nauseam)
b. Insurers
i. Under M-C Act, insurance companies can generally engage in several types of concerted activity;
that is, they are deemed not to be unreasonable restraints on trade
1. Aggregate claims info and loss info, among all companies, so that they can come up and
figure out average cost per risk for rate-making purposes
a. Insurance industry is only industry that gets to do this
b. Not allowed to put personal information in
c. Done for consumer protectiongotta keep rates realistically related to actual
costs of risks
i. Otherwise, the company is still going to keep charging enough to stay
solvent, and without realistic guidance, theyre going to err on the side of
overcharging you
2. Standardize policy forms and related forms
a. Consumer protections
3. Aggregate data for rating characteristics
a. What goes into a rate? Companies will consider the following factors to come up
with a rate that results in some profit/return

i. Premiumsused to pay
1. Expenses;
a. Acquisitioncommissions and other expenses to agents
for selling your policies;
b. Underwriting;
c. General (buildings, etc.); and
d. Licenses, Taxes, and Fees
ii. Loss Costsclaims and loss adjustment expenses (how much it costs to
adjust the claim before you pay it);
1. Made so that company can arrive at a figure for average cost per
iii. Investments/Profitscomes from underwriting and your investments on
the 2 pots (surplus and unearned premiums); and
iv. Contingenciescatch-all category for financially adverse laws/
conditions, or even favorable ones. Think about Garris and Gambrell, or
Floyd (court holds that forms are void)
b. Thus, the Reasonable Rate of Return Formula: RRR = PremiumsLoss Costs+/
4. Create Residual Market Programs
5. Refer substandard risks to other companies
a. Ex: You dont want to write guy who has several DUIs, and a competitor says, I
dont want to write teenagers.
i. Company 1 takes DUIs, and company 2 writes teenagers
ii. Guy with DUIs comes into Company 2s office. Company two can reject
him and then begin writing out the policy for Company 1 to write and
places guy with Company 1
b. Process is that you have to apply twiceonce for company 2, and then for
company 1
6. Run pools to prevent companies from becoming insolvent
a. 2 pools per state
i. Life, Accident and Health
ii. Property and Casualty
b. If company becomes insolvent, the pool takes company over and start paying
claims. It will start winding down the company and then distributing the claims
to the other companies in the state.
c. Those companies share that hit, and then, of course, pass that share onto policy
d. Some states give the contributing companies tax credits for these payments (SC
does not )
e. Insurance company execs/ board members serve on the boards of these guaranty
i. Why? Because (1) they know how to run insurance companies, and (2) if
the association gets triggered, these guys companies have to pay, so its
in their interest to make sure things are run efficiently
ii. Why can they do these things, while business in other fields would engage in antitrust if they
tried these things? Because efficiency in the insurance industry promotes safety and financial
iii. Types of Companiesthree categories
1. Business Form
a. Mutual Insurance Company
i. Company-owned and operated by policyholders for the benefit of them
ii. Policyholders are also shareholders
iii. Of course, if there is a shortage of money, they assess the policyholders
(unless theres a contract term otherwise)
b. Stock Company

c. Reciprocal Company: everyone technically is an insurer of everyone else (which

means that there is potential for assessment of policyholders, who are
stockholders, etc.)
i. The policyholders are unincorporated subscribers with an attorney-infact
d. Fraternal Benefit (a.k.a. Beneficial/Mutual Aid Society)
e. Self-Insured
2. Another CategoryRelation to Regulators
a. Licensedlicensed by state to do business there
b. Eligible Surplus Linesnot licensed. It comes in as a specialty company to
write a type of coverage no one else in that state will write.
i. Theyre pretty much unregulated
ii. Because of that, the company has to state on every policy that its not
subject to the guaranty association rulesits simply a negotiated
contract and if the company fails, TFB
c. UnlicensedYoure illegally transacting business (assuming youre not in one of
the other two categories)
3. Third CategoryCorporate Status
a. Domesticyour home state (can only have oneits state of incorporation)
i. This means that your company, if licensed, has to follow the rules of the
state where you are domestic
b. Foreignmeans youre from another state
c. Alienfrom another country
4. Final Category
a. Insurer
b. Reinsurer
iv. Investment
1. Insurance companies invest so that they can keep rates reasonable
c. Brokers v. Agents
i. An insurance agents actions bind the insurance company as a principal. (Basic agency principles)
ii. Producer: synonym for insurance agent
iii. Agents typically have no duty to advise customers. hey act on behalf of the insurer and by their
license to do so from the SC DOI.
1. But, if agents explicitly undertake to advise [on the cheapest policy, or what have you],
they have a duty.
2. Also, agents can impliedly assume a duty to advise when:
a. They receive consideration beyond a mere payment of the premium;
b. They make a clear request for advice; or
c. They have a course of dealing with the insured over an extended period of time
which would put an objectively reasonable insurance agent on notice that his
advice is being sought out and relied on.
i. Ex: the State Farm agent in Estillbeen there for decades, generations of
families go to him for everything.
3. Estoppel against Insurance Agenthow to get the agent/insurer, even if you were too
dumb/lazy to read through your policy
a. Insureds ignorance of the truth of the facts;
b. Agents representation which mislead (dont worry, you have coverage)
c. Insureds reliance upon the repsentation; and
d. Prejeudicial change in insureds position.
4. But Turner: unfulfilled promises or statements as to future events are not actionable
a. Case reminds us to distinguish puffing/sales talk from representations creating a
b. Also, even if this duty is undertaken (explicitly or implicitly) there is no recovery
for breach of this duty to advise absent showing of reliance/inducement. Turner
iv. A broker represents the insured (the customer).
1. A brokers actions do not bind the insurance company.

2. Brokers are paid by the customers to find insurance for them.

v. Houck: Plaintiff sues because the insurance agent did not personally and individually advise her
on the preferred risk policy.
1. Company sent out mailings indicating that Ps could obtain PRPs, which provided more
coverage at a better rate, but Ps just threw that stuff away without reading it
2. Ps allege that agents should have personally called them.
a. Did the insurance agent have a duty to do this?
3. Held: There is generally no duty for insurance agents to advise the customer about the
cheapest policies/best deals, and thats the case here. If customers wanted advice, they
should get a broker.