B-221
ALTERNATE CASE PROBLEM ANSWERS
CHAPTER 51
INSURANCE
51-1A. Brokers versus agents
(Chapter 51—Page 1003)
51-2A. Interpretation of insurance contract terms
(Chapter 51—Pages 1005–1006)
The trial court construed Frances’s death as an “injury” (rather than a “loss from an injury”) under the
Nationwide insurance policy. The court noted that for payment, the policy required that an injury (1)
51-3A. Insurance cancellation
(Chapter 51— Page 1006)
B-222 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 51
APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 51 B-223
51-4A. Insurable interest
(Chapter 51—Page 1001)
Claude and Mildred have an insurable interest in their home, despite the fact that they had conveyed its
ownership to Benjamin, because they had a contractual liability to “trade in” the house as part of con-
sideration for construction of the new house. The court stated that “in general a person has an insura-
51-5A. Interpretation of insurance contract terms
(Chapter 51—Pages 1005–1006)
51-6A. Effective date of coverage
(Chapter 51—Pages 1002–1003)
No. The court held that the interim policy never became operative because Gladney had failed to satisfy
the conditions precedent for coverage. In short, no insurance contract had come into existence, only a
conditional agreement. That agreement did not operate to provide coverage “unless and until” Paul Re-
51-7A. Insurer’s defenses
(Chapter 51—Pages 1008–1009)
The court ordered the entry of a judgment declaring that the policy in question was void from the be-
ginning. Generally, an insurance policy is void for misrepresentation if the insurer establishes that (1)
the representation was false; (2) the insured knew that it was false when made or made it in bad faith;
and (3) the representation was material to the risk being insured. The smoking habits of the decedent
were clearly material to the risk assumed by the insurer. A misrepresented fact is material if its disclo-
51-8A. Insurer’s defenses
(Chapter 51—Pages 1008–1009)
The court found that there was no misrepresentation. “Even if there was misrepresentation,” stated the
court, “it was not material. Plaintiff [New England Mutual] mistakenly likens the description of a benefi-
ciary to a warranty and argues that a mischaracterization of a beneficiary is grounds for rescission, simi–
lar to the misrepresentation of a pre-existing health condition.” The court viewed the matter otherwise,
reasoning that the relationship between the insured person and his or her beneficiary “is considered to
be a description and not a warranty. The instant case involves a description of a non-traditional, non-
familiar relationship, not a warranty, which, even if misrepresented, would not invalidate the policy.”
The court did not stop there. It went on to say that the insurance company should have to pay attor-
51-9A. A QUESTION OF ETHICS
1. The majority opinion of the appellate court was based on the following reasoning: First, the
phrase “on authorized business” was ambiguous because it was reasonably susceptible to more than
one interpretation; therefore, it should be construed against the insurer and in favor of the insured.
Second, in the absence of any case law addressing this issue, the court reasoned by analogy that “on au-
thorized business” could be likened to the phrase “in the course of employment.” For purposes of the
2. The court, at least, had no difficulty in concluding that the meaning of this phrase was suffi-
ciently ambiguous to construe it against the insurer. First, the term business is capable of numerous in-
terpretations. Indeed, as the court stated, “it is hard to imagine a word with more varied uses in our so-
ciety.” Second, the term authorized also presents problems. Should authorized business include that
five minutes of time in which an employee tends to a personal task at his or her desk? Should it encom-
pass employees who run an errand for their supervisor after working hours? The court concluded that