Business Law Chapter 51 Homework Leonard Does Not Have Effective Assignment The

CHAPTER 51

INSURANCE

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 51.1—QUESTIONS (PAGE 1006)

WHAT IF THE FACTS WERE DIFFERENT?

Suppose that there had not been an ambiguity in this policy and that it had been subject to only one

reasonable interpretation. Would the result have been different? Explain. The ambiguity in this policy

different.

THE LEGAL ENVIRONMENT DIMENSION

Should insurance policy provisions be read to avoid ambiguities if possible Why or why not? Yes. In the

CASE 51.2—QUESTIONS (PAGE 1008)

THE ETHICAL DIMENSION

Are the acts of the principal parties—Woo, Alberts, and Fireman’s—ethically justifiable in the

circumstances of this case? Discuss. Woo’s boar-tusk joke was not ethically justifiable if he knew that

Alberts did not find his comments about her pigs to be “friendly.” This would conceivably be a

transgression of the Golden Rule. Alberts’s legal action in response to the joke is arguably excessive,

considering that Woo did not appear to act with malicious intent and tried to apologize. But Woo’s

THE LEGAL ENVIRONMENT DIMENSION

In determining whether an insurer has a duty to defend an insured, should a court ask whether the

insured had a “reasonable expectation” of coverage? Explain. Fireman’s made this argument, but the

CASE 51.3—QUESTIONS (PAGE 1012)

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 concluded that “it was a

matter 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

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. At the same time, the court emphasized

CHAPTER 51: INSURANCE 449

450 UNIT TEN: PROPERTY AND ITS PROTECTION

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 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.

2A. Ambiguity

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.

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 that would either cause the

insurance company to deny coverage or to charge a higher premium. If, subsequent to the acceptance

before, applicants lied on their applications. Taken to the extreme, insurance companies would spend

452 UNIT TEN: PROPERTY AND ITS PROTECTION

ANSWERS TO QUESTIONS AND CASE PROBLEMS

AT THE END OF THE CHAPTER

51-1A. Insurable interest

(Chapter 51—Page 1001)

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 to or

destruction of the property would cause that person direct pecuniary loss. It is immaterial whether the

person has a legal or equitable interest in the property insured. Moreover, the insurable interest in the

property must exist at the time the loss occurs, not at the time the contract for insurance is entered

into. Here is the point at which Adia loses in her claim against Ajax. Once Adia transferred title and

possession to John, Adia no longer had an equitable interest in the property. Adia did not have an

insurable interest at the time of loss, as the policy was voided at date of closing. Consequently, Ajax is

required only to refund the premium balance from the date of the house sale. A person has an insurable

interest in the life of another if, at the time the contract for life insurance is made, the person is in a

51-2A. QUESTION WITH SAMPLE ANSWER: 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 misstatements by

the insured after the policy has been in effect for a given period, usually two years. Even though the

application is part of the policy (attached to the policy), Patrick’s innocent error in answering the

question dealing with heart problems or ailments can no longer be contested by the insurer, as the

51-3A. Assignment

(Chapter 51—Page 1012)

A fire insurance policy is considered to be a personal contract between the insured and insurer.

Therefore, the policy is nonassignable without the consent of the insurer. This consent can be in the

policy itself, but if it is not (if the policy is silent on the subject of assignment), the insurer must expressly

consent to such assignment. Because there is no evidence of either kind of consent in this case, Leonard

does not have an effective assignment of the first insurance policy and cannot recover from any loss to

51-4A. Fire insurance

(Chapter 51—Pages 1004–1005)

The insurance company is liable for destruction and loss caused by a hostile fire. A hostile fire is one

that begins or burns in a place in which it is not intended to burn. Because the fire in this case was

51-5A. Insurer’s defenses

(Chapter 51—Pages 1008–1009)

The court issued a declaratory judgment, ruling that the insurer was justified in relying on the

misrepresentation by the Duffys in their application for insurance that the premises was protected by

51-6A. Interpreting provisions

(Chapter 51—Pages 1005–1006)

The court entered a summary judgment in TIC’s favor. Valley appealed to state intermediate appellate

court, which affirmed the lower court’s judgment. The appellate court stated that “[we] giv[e] the kind

51-7A. Cancellation

(Chapter 51— Page 1006)

United argued in part, in a motion for summary judgment, that Mitchell had made material

misrepresentations in his application for insurance, entitling United to rescind the policy. United

51-8A. CASE PROBLEM WITH SAMPLE ANSWER: 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 large part on

the definition of the term “flood.” It could be argued in the plaintiffs’ favor that the flood-exclusion

51–9A. Insurance coverage

(Chapter 51— Page 1007)

51–10A. Duty to cooperate

(Chapter 51— Page 1007)

(2) the existence of substantial prejudice as a result of the breach; and (3) the exercise of reasonable

diligence to secure the insured’s cooperation. Bubenik’s uncooperative behavior in the malpractice suit

filed against him, in violation of the malpractice policy’s cooperation clause, substantially prejudiced

51–11A. 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 property sustains

damage from both wind (a covered loss) and water (an excluded loss), the insured may recover that

456 UNIT TEN: PROPERTY AND ITS PROTECTION

portion of the loss which he can prove to have been caused by wind . . . even if [it] occurred

concurrently or in sequence with the excluded water damage.”

On Nationwide’s appeal, the U.S. Court of Appeals for the Fifth Circuit affirmed the lower court’s

judgment. Under the rules that govern the interpretation of contracts generally, a court cannot make

the terms of an insurance contract, or any contract, different from the contract made by the parties.

Unless a clause violates a statute or public policy, or is ambiguous and uncertain in its provisions, it is

enforced as it is written. In other words, a court cannot “enlarge” an insurer’s obligations under a policy

when the provisions are clear. In this case, the appellate court agreed with the insurer and the lower

court that neither the water-exclusion clause nor the ACC clause was ambiguous. The water damage

exclusion in the policy expressly excluded damage caused by flooding. Thus, Nationwide’s policy covered

the wind damage to the Leonards’ home, but not the damage caused by the wind-driven rain or the