Insurance law governs the contractual relationship between an insured and an insurer. The contract is called a policy, and the insured is the policyholder. The policy contains an agreement between the insured (such as an individual or a business) and an insurance company that in exchange for the insured's payment of a premium, the insurance company will reimburse the insured for losses associated with covered risks. The insurance policy will state the extent to which a risk is covered and amount of reimbursement the insured may receive in the event of a loss.
Insurance policies cover a range of perils:
- Malpractice Insurance. Covers lawyers, doctors and others for malpractice claims arising from the delivery of professional services.
- Property Insurance. Covers structures on real property for certain hazards, such as fire. Coverage for hurricanes, flooding, earthquakes and other perils may need to be purchased separately. Also, property insurance usually does not cover a tenant's property. Tenants need to purchase their own renter's insurance to cover their property in the event of a loss.
- Health Insurance. Common insurance policy that employers provide to many employees. Such policies cover the payment of medical bills, including for doctor visits, laboratory tests and prescription drugs. Some policies limit coverage for certain medical treatments.
- Auto Insurance Covers bodily injury and property damages resulting from an auto accident. Many states require drivers to buy car insurance.
- Life Insurance. Covers the life of the insured.
Although insurance may cover many different risks, an insurance company may not indemnify an individual or business for committing an an intentional tort.
Parties to insurance contracts are required to deal in good faith, according the legal doctrine uberrima fides (as opposed to caveat emptor, where the buyer assumes the risk). The duty of good faith requires that the insured reveal all material information relevant to risk assessment. The insurance company has several good-faith obligations, including a duty to promptly pay or deny a claim, to try to find reasons to cover a claim, and to treat the financial interests of the insured as if they were its own.
In most contract cases, the failure of a party to fulfill its contractual obligations may give rise to a breach of contract suit. The aggrieved party may sue for damages to recoup what it was owed under the contract. The law treats insurance contracts stricter. If an insurance company acts in "bad faith" (by acting with malice, fraud or oppression), in some states, the aggrieved insured may recover not only what it is entitled to under the policy, but also interest, attorney fees, court costs, and damages for emotional distress caused by the bad-faith act. Additionally, some states allow the injured policyholder to recover punitive damages if the insurance company acted egregiously.
Insurance companies frequently determine rates of premiums by "redlining," where costs are determined based upon a factor, such as the location of the applicant's residence. Insurance companies may redline in ways that are discriminatory, so long as it is not based upon an unlawful category, such as race.
In the United States, federal and state laws apply to insurance institutions. However, state law plays a much larger role because the federal statute, the McCarran-Ferguson Act (15 U.S.C. § 1011), provides that the regulation of insurance is a matter for states. Most states regulate the insurance industry through a special department or commission. The National Association of Insurance Commissioners helps states promote competitive markets, fair and equitable treatment of consumers, and the reliability and financial solvency of insurance companies. In the absence of applicable state law, the federal antitrust statute, the Sherman Act, and the Federal Trade Commission Act apply.