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Part 5 iNSURANCE, SECURED TRANSACTIONS, AND BANKRUPTCY
ANSWER KEY
Chapter 19 Insurance
The Opening Case Questions
1. The text explains dwelling insurance in the following way: “Dwelling insurance will protect the
actual structure (a single family dwelling, an apartment building, and so on) from damage
caused by fire, wind, snow, ice, lightning and so on. However, it is also possible to add coverage
for damage to the contents of the rental property. This coverage will be needed if the rental
property is fully or partially furnished by the landlord or if the property contains appliances
2. The text explains umbrella policy in the following way: “An individual or a business can buy an
umbrella policy that will grant coverage beyond the limits of the standard policy provided by
the insurer in exchange for higher premium payments. Umbrella policies rarely stand alone.
Most insurance companies will not even think about issuing an umbrella except as a back-up for
3. The question of whether it is fair to permit AOMIC to explain its own terms is subjective in
4. The text explains the duty to investigate and the duty to defend in the following way: “Once a
claim has been placed on the table, the insurer has the duty to investigate the claim to determine
5. The question of whether AOMIC fulfilled either the duty to investigate or the duty to defend is
A Question of Ethics
Special Directions to the Instructor: Many, perhaps most, teachers have a difficult time forecasting
the wide answers learners develop for the ethical questions like the one asked in the Question of
Questions for Review and Discussion
1. Risk management is the process by which businesses try to identify, analyze, control, and
communicate risks of all kinds, from making a clerical error to having a company’s entire computerized
4. The principal types of life insurance are straight life, limited-payment life, term, and endowment
insurance. Straight life insurance (also known as ordinary life insurance, or whole life insurance, is a
kind of insurance that requires the payment of premiums throughout the life of the insured and which
pays the beneficiary the face value of the policy upon the insured’s death. Limited-payment life
insurance is a kind of insurance that provides that the payment of premiums will stop after a stated
length of time—usually ten, twenty, or thirty years. The amount of the policy will be paid to the
5. In property insurance, there must be a continuing insurable interest in the property that is to be
7. Under most fire insurance policies, claims may also be made for losses from water used to fight
the fire; scorching; smoke damage to goods; deliberate destruction of property as a means of
controlling a spreading fire; lightning, even if there is no resultant fire; riot or explosion, if a fire does
result; and losses through theft or exposure of goods removed from a burning building. A homeowner’s
policy gives protection for losses from fire, windstorm, burglary, vandalism, and injuries suffered by
other persons while on the property. An ocean marine insurance policy covers ships at sea. Inland
8. Seven types of automobile insurance are bodily injury liability, property damage liability,
collision, comprehensive coverage, medical payments, uninsured motorist, and no-fault. Bodily injury
liability insurance covers the liability of the insured for bodily injury to pedestrians and other motorists.
Property damage liability insurance covers damage to the property of others. Collision insurance
provides against loss arising from damage to the insured’s automobile caused by accidental collision
with another object, any part of the roadbed, or by an upset. Comprehensive insurance provides
9. Health insurance policies often include the following benefits: physician care, prescription drugs,
inpatient and outpatient hospital care, surgery, dental and vision care, and long-term care for the
10. The first step in obtaining an insurance policy is filling in an application. A binder provides
temporary insurance coverage between the time of the application and the time the policy goes into
effect. When the policy goes into effect in order to keep it active, the insured must continue to pay the
Cases for Analysis
1. The Ramos’s have no recourse against the insurance company. Most homeowner’s policies do not
2. Yes. A corporation has an insurable interest in the lives of its officers, key employees, and
principal stockholders. In addition, if the insurable interest requirement is satisfied at the time the
3. No. This was a warranty violation. The policy requirements concerning pilot experience were
intended to be conditions precedent to the existence of coverage. The insurer is entitled to rely on a
4. No. Victory does not own the Warrensburg property. Since Victory has no ownership, it has no
5. Yes. To establish the existence of an insurable interest, the insurer must demonstrate that he or she
has a monetary interest in the property. This monetary interest means that the insured may suffer a loss
6. In a majority of states, Allstate would prevail. The majority rule states that sanity clauses negate
any issue as to the mental facilities of the deceased. In a minority of states, Alice Searle would prevail.
The minority rule holds that the mental state remains an issue despite the sanity clause. Moreover, if the
deceased was so mentally incapacitated at the time of the suicide that he or she did not realize the
7. No. Whitaker’s insurance covered his vehicles only. Uninsured-motorist coverage is meant to
protect an insured motorist, his or her family, and permitted users of his or her vehicle against the peril
8. Yes. Binders are deemed to include all the usual terms of the policy that will eventually be issued.
The key word here is usual. The issue was whether the exclusion of liquor from an all-risk policy was a
usual term. The court found that it was not a usual term. While the insurance company and Riggins had
different interpretations of the phrase all-risk, the court found it reasonable to believe that the term
9. No. The fact that Mr. Henry died of cancer and not a disease he was questioned about is
irrelevant. A representation is material if it involves facts that influence the insurer’s decision to insure
10. Yes. A waiver occurs when the insurer agrees to rescind one of its customary rules for the benefit
of the insured. A waiver need not be expressed but can be implied from the conduct of the insurer. In
END CHAPTER NINETEEN
