Introduction to Insurance
The beneficiary, the insured, and the owner can be, but are not necessarily, the same person.
Insurance Contract
An insurance policy must meet all of the common law requirements for a contract.
Insurable Interest
An insurance contract is not valid unless the owner has an insurable interest in the subject matter of the
policy—that is, if she would be harmed by the danger that she has insured against.
Rules governing insurable interests:
Definition: A person has an insurable interest if she would be harmed by the danger that she has
insured against.
Amount of Loss: The insurable interest can be no greater than the actual amount of loss suffered.
Life Insurance: A person always has an insurable interest in his own life and the life of his spouse
or fiancée. Parents and minor children also have an insurable interest in each other.
Work Relationships: Business partners, employers, and employees have an insurable interest in
each other if they would suffer some financial harm from the death of the insured.
Case: Banta Props. v. Arch Specialty Ins. Co.1
Facts: The Banta family controlled a complex network of companies. One family company (Banta
Family) owned three apartment complexes in Florida: Parkcrest Apartments, Colonial Park Apartments,
and Westwood Apartments. A different family business, Banta Properties, Inc. (Banta Properties),
managed these three complexes in return for 4 percent of the gross income. Banta Properties purchased
property insurance on the three complexes from Arch Specialty Insurance. Two months later, Hurricane
Wilma badly damaged all three.
As a result of the hurricane damage, the apartments lost approximately $39,000 in rents. Banta Properties’
share of those rents was about $1,600. Banta Properties filed an insurance claim for $6.1 million, which
was the cost to repair the damage that Wilma had caused to the apartments. Arch refused to pay, claiming
that Properties had no insurable interest in the complexes because it did not own them. At trial, the jury
disagreed, valuing Banta Properties’ insurable interest at $5 million.
Arch filed a motion asking that the jury’s verdict be overturned. The trial court denied the motion. Arch
appealed.
Issue: Did Banta Properties have an insurable interest in the three apartment complexes?
Excerpts from the Per Curiam Decision: 2
Arch argues that the amount of Banta Properties’s insurable interest is limited to its revenue stream from
the complexes, namely 4 percent of gross income. Banta Properties argues the Banta Family’s ownership
interest in the complexes covered by the insurance policy allows it to recover for physical damage to all
of the properties.
Under Florida law, property insurance contracts are enforceable only where the insured has an insurable
interest in the covered property at the time of the loss. An insured does not need to own property to have
an insurable interest. Instead, Florida law defines an insurable interest as an “actual, lawful, and
substantial economic interest”in keeping the property “free from loss, destruction, or pecuniary damage or
impairment.” In sum, the measure of an insurable interest is the loss the insured might suffer from
damage to the property.
Banta Properties actually had no property rights in the apartment complexes whatsoever. The only right
1 2014 U.S. App. LEXIS 1419;2014 WL 274478 United States Court of Appeals for the Eleventh Circuit, 2014
2Per curiam is a Latin phrase that literally means “by the court.” In other words, the decision was unanimous and no
individual judge signed the opinion.
Banta Properties had at the time of loss was the contractual right to receive 4 percent of gross income in
exchange for its service as property manager. The sole injury Banta Properties could have suffered from
the impairment or destruction of the apartment complexes was the loss of revenue from that contractual
right. We conclude that Florida law thus limits the extent of Banta Properties’s insurable interest to the
potential loss of that revenue.
The Banta Family created numerous business entities to manage its business ventures. Consequently, they
are bound to both the benefit and burden of the limited liability and interests of the entities. The only
plaintiff in this suit is Banta Properties, a company that obtained insurance for buildings it never owned,
only managed. The sole injury Banta Properties suffered to its insurable interest due to Hurricane Wilma
was $1,600, its 4 percent share of $39,000 in business interruption.
The judgment of the district court is reversed, and the case is remanded for entry of a judgment in favor of
Arch.
Question: Under Florida law, what does “insurable interest” mean?
Question: What is Banta Properties insurable interest in this case?
Question: The facts state that “Arch filed a motion asking that the jury’s verdict be overturned.” What
type of motion is this?
Additional Case: Tim’s Food, Inc. v. Fireman’s Fund Insurance3
Edith and Tim York operated a grocery business in Florence, Wisconsin, under the name “Tim’s Food.”
Tim’s leased, with an option to purchase, the building in which it operated. The owners of the building,
Loretta and Daniel Baker, were required by the lease to maintain fire insurance on the building. Despite
this lease provision, the Yorks, acting on the advice of an insurance agent for Fireman’s Fund, purchased a
fire insurance policy on the building in the amount of $175,000. After a fire destroyed the building,
Fireman’s refused to pay the Yorks on the grounds that the Bakers owned the building and, thus, the Yorks
did not have an insurable interest.
Question: Did Tim’s have an insurable interest in the building?
Answer: Yes, Tim’s had a right to purchase the leased property and that was an insurable interest.
Misrepresentation
Insurers have the right to void a policy if, during the application process, the insured makes a material
misstatement or conceals a material fact.
Additional Case: Cummings v. American General Life Insurance Co.4
Facts: During a visit to a hospital emergency room for a gunshot wound, John Cummings tested positive
for cocaine use. Six months later, Cummings applied for life insurance, naming his mother as beneficiary.
On the application for the insurance Cummings was asked if he had, within the prior five years, used any
controlled drugs without a prescription by a physician. Mr. Cummings answered “No.” Four months
later, when completing the application, Mr. Cummings was asked “have you ever (b) used cocaine,
marijuana, heroin, controlled substances, or any other drug except as legally prescribed by a physician?”
3 152 Wis. 2d 404, 449 N.W.2d 336, 1989 Wisc. App. LEXIS 922 Court of Appeals of Wisconsin, 1989
4 2008 U.S. Dist. LEXIS 37157, District Court for the Eastern District of Pennsylvania, 2008.
Mr. Cummings answered “No.” During the required medical exam, Mr. Cummings did not test positive
for illegal drug use.
Mr. Cummings was issued a life insurance policy for $91, 351. Mr. Cummings died a year later from
a gunshot wound to the head. In investigating his death, the insurance company obtained medical records
from the emergency room that treated Mr. Cummings before he applied for life insurance. These records
indicated that he had tested positive for cocaine, opiates, and benzodiazepine. The doctor’s notes stated,
“COCAINE ABUSE-CONTINUOUS.”
American General rescinded Cummings life insurance policy claiming he had made a material
misrepresentation on the application. His mother filed suit seeking payment under the policy and
American General filed a motion to dismiss.
Issues: Is Mr. Cummings policy void because he made a material misrepresentation?
Holding: Yes, the insurance policy is void and American General is entitled to summary judgment.
Under Pennsylvania law, an insurance policy is void for misrepresentation when the insurer establishes
three elements: (1) that the representation was false; (2) that the insured knew that the representation was
false when made or made it in bad faith; and (3) that the representation was material to the risk being
insured. American General has established the first element of the test; the representation was false.
Considering the second prong of the test, there is evidence that the drug abuse by Mr. Cummings occurred
during the time periods covered in the life insurance applications, therefore his repeated denials of past
drug use were made in bad faith.
Regarding whether the representation was material to the risk being insured, Ms. Cummings
argues that Mr. Cummings’ drug use was not a material fact because “it would seem that having been shot
would present a greater underwriting risk (especially in light of the fact that that was how he died), than
an allegation of cocaine use, where the insured’s test results were negative for any drug use in [the]
paramedical exam.” However, according to the court, Mr. Cummings’ prior gunshot wounds and his
ultimate death from a gunshot are irrelevant to the analysis of his denial of drug use.
According to the court, a misrepresentation does not have to be related to the eventual claim for
which benefits are sought in order to be “material” for legal purposes. American General presented
evidence that had it known of Mr. Cummings’ past drug use, the company would not have issued any life
insurance policy to him within three years of the use of cocaine. Any misrepresented fact is material if,
had the insurer known it would have refused the risk or demanded a higher premium to insure the risk.
Thus, the court concluded that the undisputed facts lead to the conclusion that Mr. Cummings’ past drug
use would have led American General to deny Mr. Cummings’ insurance coverage and, thus, is a material
fact.
Question: Why do you think Mr. Cummings did not admit his drug use on the life insurance
application?
Question: What did Ms. Cummings mean when she said that her sons’ drug use was not a material
fact because “it would seem that having been shot would present a greater underwriting risk
(especially in light of the fact that that was how he died), than an allegation of cocaine use, where the
insured’s test results were negative for any drug use in [the] paramedical exam.”?
Answer: She meant that being shot is a greater risk for insurance companies because the likelihood of
Question: Why did the court say that such a conclusion is irrelevant to her argument?
Answer: The court said that the fact that Mr. Cummings actually died from a gunshot wound and not
cocaine use was irrelevant because the issue before the court is the statements made on the
Additional Case: New York Life Insurance Co. v. Johnson5
Kirk Johnson applied for life insurance with New York Life. On the application, he stated that he had not
smoked in the past 12 months and that he had never smoked cigarettes. In fact, he had smoked for 13
years and during the month he applied for the policy, he was smoking approximately 10 cigarettes per
day. Had New York Life known about his smoking it would still have issued the policy, but it would have
charged a substantially higher premium. Johnson died two years later of causes unrelated to smoking.
New York Life denied the claim and rescinded the policy.
Question: Was Johnson’s misrepresentation material?
Question: Did his lie affect the insurance company’s risk?
Answer: The lie affected the company’s risk, but not its liability. In other words, Johnson’s risk of
Question: What is the moral of this story?
Additional Fraud Cases
If students completed the insurance fraud research, this would be a good time for them to report their
findings to the class.
General Questions:
Do the students detect any particular patterns? Are some types of insurance more subject to fraud
than others?
How are the culprits typically caught? What gives them away?
Do the students know anyone personally who has committed insurance fraud?
Bad Faith by the Insurer
An insurance company can violate its covenant of good faith and fair dealing by (1) fraudulently inducing
someone to buy a policy, (2) refusing to pay a valid claim, or (3) refusing to accept a reasonable
settlement offer that has been made to one of its insureds by a third party. When an insurance company
violates the covenant of good faith and fair dealing, it becomes liable for both compensatory and punitive
damages.
Case: Goodson v. American Standard Insurance Co. of Wisconsin6
Facts: Dawn Goodson and her two children were in an automobile accident while driving a car owned by
Chet Weber. He was insured by American Standard Insurance Company of Wisconsin.
To treat injuries that she and her children suffered in the accident, Goodson sought care from a
chiropractor. She submitted these bills, totaling about $8,000, to American Standard. The insurance
company offered a number of erroneous reasons why it should not pay the claims: that the chiropractor
was not a member of American Standard’s preferred provider organization; that Weber’s policy was not in
effect at the time of the accident; and that Goodson and her children needed to undergo an independent
5 923 F.2d 279, 1991 U.S. App. LEXIS 42 Court of Appeals for the Third Circuit, 1991
6 89 P.3d 409; 2004 Colo. LEXIS 388 Supreme Court of Colorado, 2004
medical evaluation to determine whether their injuries were related to the accident and whether their
medical treatment was reasonable and necessary. In the end, American Standard did pay Goodson’s bills,
but it took 18 months to do so.
Goodson filed suit against American Standard, alleging that it had engaged in a bad faith breach of
the insurance contract. Although the company’s delay in payment had not caused Goodson any economic
damage, it had caused her substantial emotional distress. The jury awarded Goodson and her children
$75,000 in actual damages and an additional $75,000 in punitive damages. The appeals court overturned
the verdict. Goodson appealed to the state Supreme Court.
Issue: Can Goodson recover damages for emotional distress without showing any economic loss caused
by American Standard’s delay in paying her claim?
Holding: Judgment for American Standard reversed, trial court verdict reinstated. To establish that the
insurance company breached its duties of good faith and fair dealing, the plaintiff must show that a
reasonable insurer would have paid the claim. The insured may recover for non-economic losses such as
emotional distress; pain and suffering; inconvenience; fear and anxiety; and impairment of the quality of
life. Goodson proved to the jury that she suffered emotional distress worrying about whether she would
have to pay the bills herself. The whole point of buying insurance in the first place is to avoid such
anxiety. The fact that an insurer finally pays in full does not erase the distress caused by the bad faith
conduct.
Question: Would a reasonable insurer have behaved as American Standard did?
Question: But American Standard did in the end pay all the bills in full. What is Goodson’s claim
against the company?
Question: Are these reasonable claims?
Answer: The court thought so. Paying the bill reluctantly, after a year and a half of foot-dragging was
Types of Insurance
Insurance is available for virtually any risk. Most people, however, get by with six different types of
insurance: property, life, health, disability, liability, and automobile.
Research: Insurance
If students investigated the purchase of an insurance policy, now would be a good time to determine the
results of their research. Divide students into groups according to the type of policy they investigated.
Can they tell who got the best deal? How do the policies differ? They should notice, for instance, how
different the premiums are for whole life rather than term insurance. They will also probably find that the
prices for house insurance vary greatly.
Multiple Choice Questions
1. CPA QUESTION A decedent’s will provided that the estate was to be divided among the
decedent’s issue, per capita and not per stirpes. If there are two surviving children and three
grandchildren who are children of a predeceased child at the time the will is probated, how will the
estate be divided?
(a) 1⁄2 to each surviving child
(b) 1⁄3 to each surviving child and 1⁄9 to each grandchild
(c) 1⁄4 to each surviving child and 1⁄6 to each grandchild
(d) 1⁄5 to each surviving child and grandchild
2. Hallie is telling her cousin Anne about the will she has just executed. “Because of my broken
arm, I couldn’t sign my name, so I just told Bertrand, the lawyer, to sign it for me. Bertrand
was also the witness to the will.” Anne said, “You made a big mistake:
I. You should have made at least some sort of mark on the paper.”
II. The lawyer is not permitted to witness the will.”
III. You did not have enough witnesses.”
Which of Anne’s statements is true?
(a) I, II, and III
(b) Neither I, II, nor III
(c) Just I
(d) Just II
(e) Just III
2. Blake tells his client that there are five good reasons to set up a trust. Which of the following is not a
good reason?
(a) To pay his grandchildren’s college tuition if they go to the same college he attended
(b) To save money, since a trust is cheaper than a will
(c) To make sure the money is properly invested
(d) To avoid probate
(e) To safeguard his privacy
3. A(n) ____ power of attorney becomes effective when signed. A(n) ____ power of attorney becomes
effective at a later date. A(n) ____ power of attorney is valid even if the principal becomes
incapacitated.
(a) durable, springing, immediate
(b) springing, durable, durable
(c) immediate, springing, durable
(d) immediate, durable, durable
4. If Chip buys an insurance policy covering his daughter, Sarah’s apartment, then ________is the
insured, ____ is the beneficiary, and ____ is the owner.
(a) Sarah, Sarah, Sarah
(b) Chip, Chip, Chip
(c) Sarah, Chip, Chip
(d) Sarah, Sarah, Chip
Case Questions
1. If your grandparents were to die leaving a large estate and all of their children were also dead, would
you prefer a per stirpes or per capita distribution?
Answer: Answers will vary. It depends on the number of siblings you have in relation to the number
of children in each of the other branches of the family. For example, if the decedents had two
children, under per stirpes distribution, they would each inherit half the estate. If the children were
dead, their children (the grandchildren of the decedents) would split the parents’ portions. So, if you
2. You Be the Judge: WRITING PROBLEM Linda and Eddie had two children before
they were divorced. Under the terms of their divorce, Eddie became the owner of their house. When
he died suddenly, their children inherited the property. Linda moved into the house with the children
and began paying the mortgage that was in Eddie’s name. She also took out fire insurance. When the
house burned down, the insurance company refused to pay the policy because she did not have an
insurable interest. Do you agree? Argument for the Insurance Company: Linda did not own the
house; therefore, she had no insurable interest. Argument for Linda: She was harmed when the
house burned down because she and her children had no place to live. She was paying the mortgage,
so she also had a financial interest.
Answer: Linda had an insurable interest because she had made a substantial financial contribution by
3. Dannie Harvey sued her employer, O. R. Whitaker, for sexual harassment, discrimination, and
defamation. Whitaker counter-claimed for libel and slander, requesting $1 million in punitive
damages. Both Whitaker and Harvey were insured by Allstate, under identical homeowner’s policies.
This policy explicitly promised to defend Harvey against the exact claim Whitaker had made against
her. Harvey’s Allstate agent, however, told her that she was not covered. Because the agent kept all
copies of Harvey’s insurance policies in his office, she took him at his word. She had no choice but to
defend against the claim on her own. Whitaker mounted an exceedingly hostile litigation attack,
taking 80 depositions. After a year, Allstate agreed to defend Harvey. However, instead of hiring the
lawyer who had been representing her, it chose another lawyer who had no expertise in this type of
case and was a close friend of Whitaker’s attorney. Harvey’s new lawyer refused to meet her or to
attend any depositions. Harvey and Whitaker finally settled. Whitaker had spent $1 million in legal
fees, Harvey $169,000, and Allstate $2,513. Does Harvey have a claim against Allstate?
Answer: Harvey sued Allstate for a violation of the covenant of good faith and fair dealing. A jury
4. Clyde received a letter from his automobile insurance company notifying him that it would not renew
his policy that was set to expire on February 28. Clyde did not obtain another policy, and, in a burst of
astonishing bad luck, on March 1, at 2:30 a.m., he struck another vehicle, killing two men. Later that
day, Clyde applied for insurance coverage. As part of this application, he indicated that he had not
been involved in any accident in the last three years. The new policy was effective as of 12:01 a.m. on
March 1. Will the estates of the two dead men be able to recover under this policy?
Answer: No, the insurance company had the right to cancel the policy because Clyde had made
5. When Gregg died, his will left his money equally to his two children, Max and Alison, whom he
explicitly named. Max had died a few years earlier, leaving behind a widow and four children. Who
will get Gregg’s money?
6. When William Cook died, his will left all of his property to his brother Eugene. There were two other
pieces of paper in the safe with the will. One said that that his stamp collection should go to his
housekeeper, Bertha. This document was signed by two witnesses—the gardener and the cook. It was
dated after the will. There was also a piece of paper stating that he would like all of his assets to go to
his sister’s daughter, Evangeline. Who will get what?
Answer: The document leaving the stamp collection to Bertha is a codicil. It had two witnesses and is
Discussion Questions
1. Suzy Tomlinson, 74, met a tragic end – she drowned, fully-clothed, in her bathtub after a night out
partying with 36 year old J.B. Carlson. He had taken her home at 1 a.m. and was the last person to see
her alive. The two were not only party buddies, Suzy was on the board of directors of a company J.B.
had started. Her family was stunned to find out that she had a $15 million life insurance policy, with
the proceeds payable to a company J.B. controlled. He said it was a key man policy. He wanted to
protect the company if she died because she had frequently introduced him to potential investors. Is
the life insurance policy valid?
Answer: Did Carlson have an insurable interest? The court denied the insurance company’s motion
for summary judgment in its suit seeking a declaration that Carlson did not have an insurable interest.
That was in 2010 and there have been no further proceedings, which indicates the case may have
2. ETHICS Donna and Carl Nichols each bought term life insurance from Prudential Insurance
Company of America. These policies contained a provision stating that if the insured became
disabled, the premiums did not have to be paid and the policy would still stay in effect. This term is
called a waiver of premium. Carl became totally disabled, and his premiums were waived. Some years
later, two Prudential sales managers convinced the Nicholses to convert their term life insurance
policies into whole life policies. They promised that, once Carl made the conversion, he would only
have to pay premiums on the new policy for a six-month waiting period. They even wrote “WP to be
included in this policy” on the application form. “WP” stood for waiver of premium benefit. Only
after the new policy was issued did the Nicholses learn that Prudential would not waive the premium.
The Nicholses had exchanged a policy on which they owed nothing further for a policy on which they
now had to pay premiums that they could not afford. Do the Nicholses have a claim against
Prudential? Regardless of the legal outcome, did Prudential have an ethical obligation to the
Nicholses?
Should you have a will? Do you have one?
3. ETHICS Is an asset protection trust right? Should wealthy people be able to avoid paying legitimate
creditors? What about perpetual trusts that avoid estate taxes forever? Legislators pass such laws to
attract trust business from out of state. Trusts generate billions of dollars in fees each year. If you
were a state legislator, how would you vote when this legislation came up for approval? If you had
substantial assets, would you put them in such a trust? What Life Principles apply here?
4. Billionaire Warren Buffett said that children should inherit enough money so that they can do
anything but not so much that they can do nothing. Is it good for people to inherit money? How
much? At what age? How much would you like to leave your children?