978-1285770178 Lecture Note BL ComLaw 1e IM-Ch30 Part 2

subject Type Homework Help
subject Pages 17
subject Words 5288
subject Authors Roger LeRoy Miller

Unlock document.

This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
page-pf1
10 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
page-pf2
whole or in part.
of common knowledge that there is more danger of an unoccupied house being destroyed by fire than of one
occupied.” The court noted, however, that, “this is in general rather than in every case.” Sometimes, an
unoccupied house could lead to less risk or hazard. As the court pointed out in its opinion, a homeowner
might invest in more security when the house will be left vacant, to the point where the house is more secure
than when the homeowner was in residence. If the homeowner is an elderly person, his or her presence in the
home might cause greater risk of firethe person might inadvertently leave appliances on or fail to remove
combustibles or take care of defects in electrical wiring. Thus, concluded the court, “there is no rule that
moving out of a house per se increases the hazards against which the insurance company has insured you.”
2. Why did the court hold that Allstate’s cancellation of the policy, retroactive to November 2001
(when Luster moved to an extended-care facility), was ineffective? The court noted that the policy
expressly authorized the insurer to cancel the policy if any of its terms were violated. Certainly, leaving the
house unoccupied for years violated the occupancy clause. At the same time, the court emphasized the
importance of the insurer’s duty to notify the insured of any intent to cancel the policy. Because it was
impossible to give notice of this intent when retroactively canceling a policy, the cancellation was ineffective.
3. Was Luster’s intent to return to her home when her health permitted sufficient to constitute
occupancy? Why or why not? Yes. Luster’s intent to return to her home when her health permitted was
sufficient to constitute occupancy because she could not have known that her absence would be long or that
she might never return. No, Luster’s intent to return to her home when her health permitted was not sufficient
to constitute occupancyin the words of the U.S. Court of Appeals for the Seventh Circuit, the length of her
absence “constituted a change in occupancy.”
In the eyes of Allstate Insurance Co. and the trial and appellate courts, her absence displaced her intent.
The appellate court stated, “Regardless of the owner’s intentions, * * * four and a half years of continuous
absence of human occupation constitutes a change in occupancy.” But the court faulted the lower court and
the insurer for concluding, respectively, that leaving a house unoccupied for any period of time or for more
than thirty days increased the hazard to the insurer. The appellate court pointed out that “houses are rarely
occupied continuously,” and that when they are unoccupied, they may be secured by alarms or other
measures.
4. What fact, if it was different, might have persuaded the court in this case to rule in Allstate’s
favor? Discuss. Among the facts that might have convinced the court to rule in the insurer’s favor had the
circumstances been different are continued occupancy of the house, suppression of the fire that damaged the
house, notice to the insurer of the insured’s absence from the house, and notice of the insurer’s intent to
cancel its policy.
There is no rule that moving out of house increases the hazards against which an insurance company
has insured. There may be more danger of an unoccupied house being destroyed by fire but this is not
always true. Sometimes, an unoccupied house can lead to less risk. A homeowner might invest in more
security when a house will be left vacant. If the homeowner is an elderly person, as in the Luster case, his or
her presence might cause a greater risk of firethe person might inadvertently leave appliances on, fail to
remove flammable materials, or not fix defective wiring. Had Luster, or someone on her behalf, occupied the
house after her fall and injury, the subsequent events in this case might not have occurred. There might have
been no fire, no insurance claim, and no dispute. Or if Luster, or another party, had been in the house and a
fire had occurred, it might have been suppressed or the damage might have been averted, or at least
reduced, and there would have been no claim, or only a small claim, for Allstate to oppose.
page-pf3
whole or in part.
page-pf4
page-pf5
whole or in part.
page-pf6
whole or in part.
page-pf7
16 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
coverage mandated by New York law is that an entity have an “insurable interest” in the property it insures.” This term
includes “any lawful and substantial economic interest in the safety or preservation of property from loss, destruction
thus ABM meets New York’s requirement.”
Doesn’t extending ABM’s insurable interest under Zurich’s policy to include the common areas and
leased premises of the WTC give ABM direct damage coverage for these areas? No, although this is, in part,
what Zurich argued. The U.S. Court of Appeals for the Second Circuit reasoned, “To the contrary, ABM does not have
encompass an indirect economic interest in the property. Such an interest can be insured if, as is the case here, it
falls within the definitional boundaries set by the insurance policy.”
Suppose that before September 11, ABM had transferred its operations at the WTC to another firm.
Additionally, assume that it had sold its supplies and equipment to that firm but as of September 11, ABM
Freemans were insured against losses to the building, its contents, continuing business expenses, and other cov-
erage, under a policy with Columbia National Insurance Co. When a fire damaged Circle F’s building and destroyed
its inventory, the Freemans filed a claim with Columbia, providing an appraisal of the lost merchandise at $107,905.13
and a list of their continuing business expenses. Columbia obtained a second appraisal of $71,231.69 and attempted
to find Circle F a building to serve as a temporary office. Columbia paid the Freemans $77,892.28 for inventory,
conduct in order to avoid a just obligation to its insured.” The insurer’s “failure to cover appellees’ ongoing business
expenses, to which they were entitled, was an act of bad faith.” The “appellant acted in bad faith when it failed to
provide appellees with a temporary location for their business,” when it agreed to pay “$32,725 for the cost of
repairing the building but * * * tendered only eighty percent,” and “when it requested that two appraisals be performed
on appellees’ inventory and chose to pay appellees based on the lower of the two appraisals.”
building was $32,725. Deducting the amount paid by or tendered by appellant, there was evidence that the total of
appellees’ compensatory damages exceeded $170,000.”
page-pf8
CHAPTER 30: INSURANCE 17
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
Suppose that after an investigation, Columbia had simply refused to pay the Freemans’ claim. Would
the result have been the same? The court noted that “bad faith does not arise from a mere denial of a claim; there
must be affirmative misconduct.” In other words, the same principles would have applied: evidence of the parties’
conduct could have been submitted to a jury, which would have made a determination as to whether the denial of the
claim was in bad faith.
REVIEWING
 INSURANCE 
Provident Insurance, Inc., issued an insurance policy to a company providing an employee, Steve Matlin,
with disability insurance. Soon thereafter, Matlin was diagnosed with “panic disorder and phobia of returning
to work.” He lost his job and sought disability coverage. Provident denied coverage, doubting the diagnosis of
disability. Matlin and his employer sued Provident. During pretrial discovery, the insurer learned that Matlin
had stated on the policy application that he had never been treated for any “emotional, mental, nervous,
urinary, or digestive disorder” or any kind of heart disease. In fact, before Matlin filled out the application he
had visited a physician for chest pains and general anxiety, and the physician had prescribed an
antidepressant and recommended that Matlin stop smoking. Ask your students to answer the following
questions, using the information presented in the chapter.
1. Did Matlin commit a misrepresentation on his policy application? Yes. If there were a clear record of
physician treatment for anxiety that resulted in drugs being prescribed, most people would understand that to
fall under emotional, mental, or nervous disorder. The application was broad in the questions asked, so the
misrepresentation was clear.
2. If there was any ambiguity on the application, should it be resolved in favor of the insured or the
insurer? Why? When the terms in a policy are unclear courts generally interpret them against the insurance
company. Since policies are often difficult to understand, courts do not want insurers hiding behind fancy
language that a policy holder would be unlikely to comprehend
3. Assuming that the policy is valid, does Matlin’s situation fall within the terms of the disability
policy? Why or why not? Disorders such as panic are recognized as real medical problems that can create
disability. So long as there is adequate medical evidence of a substantive problem, coverage would be due.
4. If Matlin is covered by the policy but is also disqualified by his misrepresentation on the
application for coverage, might the insurer still be liable for bad faith denial of coverage? Explain.
Insurance is a contract; the courts interpret the contract. However, if an insurer acts in bad faith in its
treatment of a policy holder, there can be a tort. That kind of suit is not common is would not seem likely to
apply here, but it is possible.
 DEBATE THIS 
Whenever an insurance company can prove fraud that the applicant committed fraud during the
application process, it should not have to pay on the policy. Whenever an applicant lies on an
application for any type of insurance, especially life insurance, that applicant is attempting to hide some fact
that would either cause the insurance company to deny coverage or to charge a higher premium. If,
page-pf9
18 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
subsequent to the acceptance of the fraudulent application, there is a claim on the policy, the insurance
company should only be liable for returning all payments paid. Otherwise, all premiums for all those who pay
for insurance will have to rise for all those covered by insurance.
Granted, it is unethical to lie on an insurance application, but after enough years have transpired since
the beginning of coverage, the insured will statistically become just like the average policyholder. Insurance
companies should not be able to avoid their duty to pay claims just because, many years before, applicants
lied on their applications. Taken to the extreme, insurance companies would spend too many resources
investigating each claim in an attempt to show minor “white” lies during the application process.

EXAMPREP
 ISSUE SPOTTERS 
1. Neal applies to Farm Insurance Company for a life insurance policy. On the application, Neal
understates his age. Neal obtains the policy, but for a lower premium than he would have had to pay
had he disclosed his actual age. The policy includes an incontestability clause. Six years later, Neal
dies. Can the insurer refuse payment? Why or why not? No. An incorrect statement as to the age of an in-
sured is a misrepresentation. Under an incontestability clause, however, after a policy has been in force for a
certain time (usually two or three years), the insurer cannot cancel the policy or avoid a claim on the basis of
statements made in the application.
2. Al is divorced and owns a house. Al has no reasonable expectation of benefit from the life of Bea,
his former spouse, but applies for insurance on her life anyway. Al obtains a fire insurance policy on
the house and then sells the house. Al continues to pay the premiums on both the life insurance
policy and the fire insurance policy. Ten years later, Bea dies and the house is destroyed by fire. Can
Al obtain payment for these events? Explain your answers. No. To obtain insurance, one must have a
sufficiently substantial interest in whatever is to be insured. One has an insurable interest in property if one
would suffer a pecuniary loss from its destruction. This interest must exist when the loss occurs.
To obtain insurance on another’s life, one must have a reasonable expectation of benefit from the
continued life of the other. The benefit may be founded on a relationship, but “ex-spouse” alone is not such a
relationship. An interest in someone’s life must exist when the policy is obtained.

whole or in part.
of common knowledge that there is more danger of an unoccupied house being destroyed by fire than of one
occupied.” The court noted, however, that, “this is in general rather than in every case.” Sometimes, an
unoccupied house could lead to less risk or hazard. As the court pointed out in its opinion, a homeowner
might invest in more security when the house will be left vacant, to the point where the house is more secure
than when the homeowner was in residence. If the homeowner is an elderly person, his or her presence in the
home might cause greater risk of firethe person might inadvertently leave appliances on or fail to remove
combustibles or take care of defects in electrical wiring. Thus, concluded the court, “there is no rule that
moving out of a house per se increases the hazards against which the insurance company has insured you.”
2. Why did the court hold that Allstate’s cancellation of the policy, retroactive to November 2001
(when Luster moved to an extended-care facility), was ineffective? The court noted that the policy
expressly authorized the insurer to cancel the policy if any of its terms were violated. Certainly, leaving the
house unoccupied for years violated the occupancy clause. At the same time, the court emphasized the
importance of the insurer’s duty to notify the insured of any intent to cancel the policy. Because it was
impossible to give notice of this intent when retroactively canceling a policy, the cancellation was ineffective.
3. Was Luster’s intent to return to her home when her health permitted sufficient to constitute
occupancy? Why or why not? Yes. Luster’s intent to return to her home when her health permitted was
sufficient to constitute occupancy because she could not have known that her absence would be long or that
she might never return. No, Luster’s intent to return to her home when her health permitted was not sufficient
to constitute occupancyin the words of the U.S. Court of Appeals for the Seventh Circuit, the length of her
absence “constituted a change in occupancy.”
In the eyes of Allstate Insurance Co. and the trial and appellate courts, her absence displaced her intent.
The appellate court stated, “Regardless of the owner’s intentions, * * * four and a half years of continuous
absence of human occupation constitutes a change in occupancy.” But the court faulted the lower court and
the insurer for concluding, respectively, that leaving a house unoccupied for any period of time or for more
than thirty days increased the hazard to the insurer. The appellate court pointed out that “houses are rarely
occupied continuously,” and that when they are unoccupied, they may be secured by alarms or other
measures.
4. What fact, if it was different, might have persuaded the court in this case to rule in Allstate’s
favor? Discuss. Among the facts that might have convinced the court to rule in the insurer’s favor had the
circumstances been different are continued occupancy of the house, suppression of the fire that damaged the
house, notice to the insurer of the insured’s absence from the house, and notice of the insurer’s intent to
cancel its policy.
There is no rule that moving out of house increases the hazards against which an insurance company
has insured. There may be more danger of an unoccupied house being destroyed by fire but this is not
always true. Sometimes, an unoccupied house can lead to less risk. A homeowner might invest in more
security when a house will be left vacant. If the homeowner is an elderly person, as in the Luster case, his or
her presence might cause a greater risk of firethe person might inadvertently leave appliances on, fail to
remove flammable materials, or not fix defective wiring. Had Luster, or someone on her behalf, occupied the
house after her fall and injury, the subsequent events in this case might not have occurred. There might have
been no fire, no insurance claim, and no dispute. Or if Luster, or another party, had been in the house and a
fire had occurred, it might have been suppressed or the damage might have been averted, or at least
reduced, and there would have been no claim, or only a small claim, for Allstate to oppose.
whole or in part.
whole or in part.
whole or in part.
16 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
coverage mandated by New York law is that an entity have an “insurable interest” in the property it insures.” This term
includes “any lawful and substantial economic interest in the safety or preservation of property from loss, destruction
thus ABM meets New York’s requirement.”
Doesn’t extending ABM’s insurable interest under Zurich’s policy to include the common areas and
leased premises of the WTC give ABM direct damage coverage for these areas? No, although this is, in part,
what Zurich argued. The U.S. Court of Appeals for the Second Circuit reasoned, “To the contrary, ABM does not have
encompass an indirect economic interest in the property. Such an interest can be insured if, as is the case here, it
falls within the definitional boundaries set by the insurance policy.”
Suppose that before September 11, ABM had transferred its operations at the WTC to another firm.
Additionally, assume that it had sold its supplies and equipment to that firm but as of September 11, ABM
Freemans were insured against losses to the building, its contents, continuing business expenses, and other cov-
erage, under a policy with Columbia National Insurance Co. When a fire damaged Circle F’s building and destroyed
its inventory, the Freemans filed a claim with Columbia, providing an appraisal of the lost merchandise at $107,905.13
and a list of their continuing business expenses. Columbia obtained a second appraisal of $71,231.69 and attempted
to find Circle F a building to serve as a temporary office. Columbia paid the Freemans $77,892.28 for inventory,
conduct in order to avoid a just obligation to its insured.” The insurer’s “failure to cover appellees’ ongoing business
expenses, to which they were entitled, was an act of bad faith.” The “appellant acted in bad faith when it failed to
provide appellees with a temporary location for their business,” when it agreed to pay “$32,725 for the cost of
repairing the building but * * * tendered only eighty percent,” and “when it requested that two appraisals be performed
on appellees’ inventory and chose to pay appellees based on the lower of the two appraisals.”
building was $32,725. Deducting the amount paid by or tendered by appellant, there was evidence that the total of
appellees’ compensatory damages exceeded $170,000.”
CHAPTER 30: INSURANCE 17
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
Suppose that after an investigation, Columbia had simply refused to pay the Freemans’ claim. Would
the result have been the same? The court noted that “bad faith does not arise from a mere denial of a claim; there
must be affirmative misconduct.” In other words, the same principles would have applied: evidence of the parties’
conduct could have been submitted to a jury, which would have made a determination as to whether the denial of the
claim was in bad faith.
REVIEWING
 INSURANCE 
Provident Insurance, Inc., issued an insurance policy to a company providing an employee, Steve Matlin,
with disability insurance. Soon thereafter, Matlin was diagnosed with “panic disorder and phobia of returning
to work.” He lost his job and sought disability coverage. Provident denied coverage, doubting the diagnosis of
disability. Matlin and his employer sued Provident. During pretrial discovery, the insurer learned that Matlin
had stated on the policy application that he had never been treated for any “emotional, mental, nervous,
urinary, or digestive disorder” or any kind of heart disease. In fact, before Matlin filled out the application he
had visited a physician for chest pains and general anxiety, and the physician had prescribed an
antidepressant and recommended that Matlin stop smoking. Ask your students to answer the following
questions, using the information presented in the chapter.
1. Did Matlin commit a misrepresentation on his policy application? Yes. If there were a clear record of
physician treatment for anxiety that resulted in drugs being prescribed, most people would understand that to
fall under emotional, mental, or nervous disorder. The application was broad in the questions asked, so the
misrepresentation was clear.
2. If there was any ambiguity on the application, should it be resolved in favor of the insured or the
insurer? Why? When the terms in a policy are unclear courts generally interpret them against the insurance
company. Since policies are often difficult to understand, courts do not want insurers hiding behind fancy
language that a policy holder would be unlikely to comprehend
3. Assuming that the policy is valid, does Matlin’s situation fall within the terms of the disability
policy? Why or why not? Disorders such as panic are recognized as real medical problems that can create
disability. So long as there is adequate medical evidence of a substantive problem, coverage would be due.
4. If Matlin is covered by the policy but is also disqualified by his misrepresentation on the
application for coverage, might the insurer still be liable for bad faith denial of coverage? Explain.
Insurance is a contract; the courts interpret the contract. However, if an insurer acts in bad faith in its
treatment of a policy holder, there can be a tort. That kind of suit is not common is would not seem likely to
apply here, but it is possible.
 DEBATE THIS 
Whenever an insurance company can prove fraud that the applicant committed fraud during the
application process, it should not have to pay on the policy. Whenever an applicant lies on an
application for any type of insurance, especially life insurance, that applicant is attempting to hide some fact
that would either cause the insurance company to deny coverage or to charge a higher premium. If,
18 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
subsequent to the acceptance of the fraudulent application, there is a claim on the policy, the insurance
company should only be liable for returning all payments paid. Otherwise, all premiums for all those who pay
for insurance will have to rise for all those covered by insurance.
Granted, it is unethical to lie on an insurance application, but after enough years have transpired since
the beginning of coverage, the insured will statistically become just like the average policyholder. Insurance
companies should not be able to avoid their duty to pay claims just because, many years before, applicants
lied on their applications. Taken to the extreme, insurance companies would spend too many resources
investigating each claim in an attempt to show minor “white” lies during the application process.

EXAMPREP
 ISSUE SPOTTERS 
1. Neal applies to Farm Insurance Company for a life insurance policy. On the application, Neal
understates his age. Neal obtains the policy, but for a lower premium than he would have had to pay
had he disclosed his actual age. The policy includes an incontestability clause. Six years later, Neal
dies. Can the insurer refuse payment? Why or why not? No. An incorrect statement as to the age of an in-
sured is a misrepresentation. Under an incontestability clause, however, after a policy has been in force for a
certain time (usually two or three years), the insurer cannot cancel the policy or avoid a claim on the basis of
statements made in the application.
2. Al is divorced and owns a house. Al has no reasonable expectation of benefit from the life of Bea,
his former spouse, but applies for insurance on her life anyway. Al obtains a fire insurance policy on
the house and then sells the house. Al continues to pay the premiums on both the life insurance
policy and the fire insurance policy. Ten years later, Bea dies and the house is destroyed by fire. Can
Al obtain payment for these events? Explain your answers. No. To obtain insurance, one must have a
sufficiently substantial interest in whatever is to be insured. One has an insurable interest in property if one
would suffer a pecuniary loss from its destruction. This interest must exist when the loss occurs.
To obtain insurance on another’s life, one must have a reasonable expectation of benefit from the
continued life of the other. The benefit may be founded on a relationship, but “ex-spouse” alone is not such a
relationship. An interest in someone’s life must exist when the policy is obtained.


Trusted by Thousands of
Students

Here are what students say about us.

Copyright ©2022 All rights reserved. | CoursePaper is not sponsored or endorsed by any college or university.