Enjoy this practice hypo for Insurance class. This question can be answered in 30 minutes. The answer key is provided below the question.
Sample Insurance Hypo:
Professor Foldberg has an accident insurance policy that covers, among other things, injuries that she suffered caused by her students.
Her policy, issued by State Grove Insurance, provides:
“Injury through negligence, recklessness, or purposeful malfeasance: This policy covers all losses committed against Insured through the negligence, recklessness, or intentional malfeasance of her students, including, but not limited to, assault, battery, robbery, theft, intentional infliction of emotional distress, and murder. Insurer will cover the actual loss suffered by the Insured.”
Professor Foldberg has been paying her premiums for a year. She sometimes pays her premiums late, but State Grove always accepts these payments. During the time of her insurance coverage, a student, Brody, agitated over how to calculate co-insurance rates, stabs her in the eye with a pencil.
After her injury, Professor Foldberg tells Brody that she won’t sue him, and they sign an agreement to that effect. State Grove refuses to pay for Professor Foldberg’s medical expenses, and she sues State Grove in Fohio state court. Professor Foldberg sues State Grove for $50,000, the cost of medical expenses, which would restore her eyesight to that of someone with perfect vision, even though she had some visual impairments before the injury.
What are the arguments State Grove is likely to make in its motion for summary judgment? How is the Fohio court likely to rule on these arguments, and why?
State Grove is first likely to claim that its insurance policy for coverage of intentional injury is void as a matter of public policy. Most states hold that insurance against intentional wrongdoing of the policyholder violates public policy (for moral hazard reasons and insuring that the insured doesn’t profit from wrongdoing- See Hartford Casualty v. Powell), but this insurance policy covers intentional wrongdoing by another party and is likely to be deemed permissible.
State Grove is next likely to claim that Professor Foldberg forfeited her coverage due to principles of equitable subrogation. There does not appear to be a subrogation forfeiture clause in the contract, but many courts hold that post-loss settlement that interferes with an insurer’s rights of subrogation voids coverage. State Grove is quite likely to succeed on its motion for summary judgment, unless the Fohio court holds that State Grove needed to explicitly include this language in its insurance contract to put Professor Foldberg on notice. (Great Northern v. St. Paul held this for pre-loss exclusions and so is distinguishable.)
State Grove will also claim that Professor Foldberg breached her contract by not paying her premiums on time, but insurers waive this defense through waiver principles if they continue to accept payments. State Grove will not be successful in advancing this defense.
Finally, State Grove will argue that indemnity principles mean that the measure of recovery cannot restore Professor Foldberg to better vision than before the injury, or she will be recovering more than her actual loss. A court may not accept this repair minus depreciation formula for actual loss outside of the property/casualty insurance context, because there is no real moral hazard issue here.