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1
CHAPTER 50
INSURANCE
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 50.1—CRITICAL THINKING
ECONOMIC
Why is an insurable interest required for the enforcement of an insurance contract? The
CASE 50.2—LEGAL REASONING QUESTIONS
1A. Why did the court conclude that an unoccupied house did not necessarily create a
substantial increase in hazard? The court stated that in a previous case, the court had
2 UNIT TEN: PROPERTY AND ITS PROTECTION
2A. 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.
3A. 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
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Misrepresentation
If there is a clear record of physician treatment for anxiety that resulted in drugs being
2A. Ambiguity
CHAPTER 50: INSURANCE 3
3A. Terms
4A. Bad faith
Insurance is a contract; the courts interpret the contract. However, if an insurer acts in bad faith
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
Whenever an insurance company can prove fraud during the application process,
it should never 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
ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
1A. Neal applies to Farm Insurance Company for a life insurance policy. On the
application, Neal understates his age. Neal obtains the policy, bur 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
4 UNIT TEN: PROPERTY AND ITS PROTECTION
2A. Al is divorced and owns a house. Al has no reasonable expectation of benefit from
the life of Bea, his ex-spouse, but applies for insurance on her life anyway. Al obtains a
fire insurance policy on the house, then sells the house. Ten years later, Bea dies and the
house is destroyed by fire. Can Al obtain payment for these events? Explain your
ANSWERS TO BUSINESS SCENARIOS
AT THE END OF THE CHAPTER
50-1A. Insurable interest
An insurance policy is not binding on the insurer unless the person claiming under the policy of
the insured has an insurable interest. A person has an insurable interest in property if damage
50-2A. Insurer’s defenses
Ajax will probably not be able to void the policy. Most life insurance policies contain what is
called an incontestability clause. Such a clause provides that a policy cannot be contested for
CHAPTER 50: INSURANCE 5
50-3A. Assignment
A fire insurance policy is considered to be a personal contract between the insured and insurer.
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
50-4A. Interpreting provisions
A court’s decision in the Katrina case would most likely turn on an assessment of the ambiguity
of the flood-exclusion clauses in the insurance policies at issue. This evaluation could depend in
50–5A. Duty to cooperate
No. The trial and appeals court agreed that Bubenik had breached the insurance policy and that
MPC had no duty to defend Bubenik. Under Missouri law, to deny liability coverage under an
50–6A. Bad faith actions
Liability insurance protects against liability imposed on the insured resulting from injuries to the
person or property of another. Once an insurer has accepted a risk and issued a policy, and an
event occurs that gives rise to a claim, the insurer has a duty to investigate to determine the
50–7A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Insurance provisions and
clauses
Farrington should not be included as an insured within the meaning of the property insurance
policy between Darling's and Philadelphia. The existence of an insurable interest is a primary
50–8A. Types of insurance
Under the circumstances described in the problem, John and Judy Sykes will suffer the loss.
This loss could have been avoided if the Sykeses had obtained the consent of American
National Property and Casualty Co. to assume Robert Houston’s insurance policy, or if the
Sykeses had obtained a new policy.
50–9A. A QUESTION OF ETHICS—Insurance coverage
(a) The court enforced the water-damages exclusion clause, but struck the ACC
clause as ambiguous and unenforceable: “[I]n a situation such as this, where the insured
8 UNIT TEN: PROPERTY AND ITS PROTECTION
(b) An insurance agent's oral statements can modify the terms of an insurance policy
if the policy is ambiguous or if the agent has the authority to change the terms. But a party's
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
50–10A. Insurance coverage
(a) Under the terms of the commercial general liability policy between PAJ, Inc., and
Hanover Insurance Co., Hanover had an obligation to provide PAJ with legal assistance. Of
(b) The court should hold that PAJ’s failure to notify Hanover of a claim in a timely
manner was an immaterial breach of the insurance contract. It did not relieve the insurer of the
defense.
