Deck 35: Principles of Insurance

Question 1

Luis and Rosaura Mora contracted with Tower Hill Prime Insurance Company for homeowners insurance on their home. Part of the application included the question "Do you have any knowledge of any prior repairs made to any structures on the insured location for cracking damage?" The Moras answered "No." However, on the home inspection report the Moras procured as part of the purchase, notations were made regarding "cracks in drywall at ceiling," "nook drywall cracks," and "fix cracks" under three windows. Was the Moras' failure to list these cracks on the application a misrepresentation sufficient to void the homeowners policy?

Answer 1

Material misrepresentation: Material misrepresentation of facts, figures and other details in an insurance policy can deem the policy to be void. For example, if a person takes a policy for car and forgets to state that the car is a 10 year old car then it is a material misrepresentation because the insured had hidden a material fact.
M's failure to represent the cracks in the house will not be treated as a material misrepresentation because M had supplied the insurance company with house inspection report. In case the cracks are very small and cannot be noticed by the naked eye it will be difficult to represent them and thus M's cannot be treated as a material misrepresentation.
Thus, the reasons are not sufficient to void the contract.

Question 2

Why must a person have an insurable interest in order to be a policyholder?

Answer 2

An insurable interest implies that the person who is taking the policy must have an interest that risk insured against does not take place.An insurance policy contract is created assuming a particular risk. If the insured does not have any interest to protect, there is no assumption of risk, and thus no insurance is required.Therefore, for one to become a policyholder, he must have an insurable interest.

Question 3

Superior Dispatch, Inc. (Superior) transported goods over short distances. Its application for insurance stated that it hauled produce, food goods and canned foods, beer/wine, textiles, and paper products. It gave the percentage of each item, which totaled 100 percent. Insurance Corporation of New York (Inscorp) issued an insurance policy covering damage to cargo in transit. A provision of the policy stated that it was void if the insured misrepresented any material fact. While Superior hauled a dump truck, the cab of the truck struck an overpass and was damaged. Superior filed a claim for the value of the truck with Inscorp, which denied the claim. Superior sued. Inscorp claimed that superior's failure to list motor vehicles as a commodity hauled was a material misrepresentation. Was it?

Answer 3

Material misrepresentation: Material misrepresentation of facts, figures and other details in an insurance policy can deem the policy to be void. For example, if a person takes a policy for car and forgets to state that the car is a 10 year old car then it is a material misrepresentation because the insured had hidden a material fact.
In this case, the insurance company's claim is a valid one because the insured failed to represent material facts properly. It represented automobiles as cargo and thus formed a material representation and based on the conditions of the insurance contract the company's claim is justified.

Question 4

Name three relationships giving rise to an insurable interest for life insurance.
b. Name three types of insurable interest for property insurance.

Question 5

Lawrence and Susan Pope applied for a homeowner's insurance policy with Mercury Indemnity Company of Georgia. The Popes indicated that they had a swimming pool and a diving board. Mrs. Pope wrote a check for the premium, and Mercury issued a policy. A month later, Mercury notified their independent insurance agent, Gerald Woodworth, that it was cancelling the policy because of the diving board. It mailed cancellation notices to Woodworth and the Popes and refunded the premium. Woodworth spoke with the Mercury underwriter, who agreed that Mercury would reinstate the policy upon receipt of a photograph of the Pope's swimming pool with the diving board removed. Lawrence Pope took down the diving board, took a picture of his swimming pool with the diving board removed, and provided the picture, together with the premium-refund check, to Woodworth, who forwarded them to Mercury. Mercury then reinstated a policy. Sometime after providing the picture of the swimming pool with the diving board removed, Lawrence Pope reinstalled the board. About a year later, the Popes' property sustained significant tornado damage. They made a claim under the policy for that damage, so Mercury sent a claims adjuster to their residence. The adjuster took pictures of the damage, one of which showed the swimming pool with the diving board reinstalled. Mercury sued to rescind the homeowners' policy, alleging that the Popes had made a material misrepresentation that they had permanently removed their diving board. Should the court rescind the policy?

Question 6

Does the rule rendering an insurance contract voidable as a result of concealment apply with equal force to all types of property insurance?

Question 7

David Hilliard and Timothy Jacobs created Advance Marketing Technology, LLC (AMT). The business became successful. They executed an agreement in which they each agreed to purchase term life insurance policies on the other in the amount of $2,000,000 so that in the event of the death of either, the other would be able to buy out the deceased member's shares of AMT. Eventually, AMT's assets were sold to a third party, and AMT was dissolved. Hilliard asked Jacobs whether he wanted to trade the life insurance policies that they held on each other's life. Jacobs declined and continued to pay the premiums on the policies he held on Hilliard's life. Hilliard sued to require Jacobs to convey the life insurance policies to him or cancel the policies. The trial court ordered Jacobs to terminate the policies, and while Jacobs's appeal was pending, Hilliard died. Should Jacobs be required to terminate the policies?

Question 8

Under what circumstances will a misstatement of a material fact by an insured prior to the finalization of an insurance contract not invalidate the contract?

Question 9

While employed to handle the refinancing of two mortgages for Credit Union Central Falls (CUCF), attorney Lawrence Groff embezzled more than $200,000. CUCF provided funds to Goff. Goff would get title insurance for the refinanced loan from Mortgage Guarantee Title Insurance Company and pay the difference between the prior loan and the CUCF loan to the mortgagors. He was to pay off the prior loans, but he kept the money instead. CUCF filed claims on the title insurance policies and Mortgage Guarantee paid $223,410 to pay off the prior loans. Mortgage Guarantee then alleged it was subrogated to CUCF's claims in accordance with the terms of the title insurance policies. However, Doris Riendeau had obtained a judgment of $85,476.41 against Groff for misappropriation in another matter and also claimed any funds that Groff had left. Should Mortgage Guarantee now "stand in the shoes" of CUCF?

Question 10

How does a warranty differ from a representation?

Question 11

Kentucky Speedway, LLC (Speedway) purchased general liability insurance from Virginia Surety Company, Inc. (Surety). Cynthia Bivens and John Marsh, along with several others, attended an event at the Speedway at which food and alcoholic beverages were served. Bivens was killed when a vehicle driven by Marsh was involved in an accident leaving the Speedway. Bivens' estate sued Speedway for its negligence in serving alcohol to an already intoxicated Marsh. The Speedway reached a settlement with Bivens' estate, but sued Surety for its failure to defend and indemnify Speedway pursuant to the liability policy. Surety relied on the policy's liquor liability exclusion, which provided, in part, an exclusion for coverage for liability arising out of the sale of alcoholic beverages if the insured was "in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages." Was Surety on the hook to cover Speedway's claim?

Question 12

When does the principle of subrogation apply?

Question 13

What is the purpose of insurance?

Question 14

When can an estoppel arise?

Question 15

McAdam was the largest owner and managing member of McAdam's Fish, LLC (LLC). The LLC owned several fishing boats on which McAdam purchased insurance. In the course of fishing operations, two of the boats sustained losses, and McAdam made a claim. The insurance company refused to pay on the grounds that McAdam had no insurable interest in the boats. Was the insurance company correct in denying the claim?

Question 16

Identify the parties to an insurance contract.

Question 17

Rick Muse mortgaged a house and five months later deeded it to CHMC Inc. Three years later, the lender foreclosed on the house. Allstate Property and Casualty Insurance Co. (Allstate) had issued a homeowner's insurance policy on the house, naming Ali Muhammad and Rick Muse as the insureds. After the foreclosure, Allstate notified Muhammad that it was going to cancel the policy since he no longer had an insurable interest. Allstate cancelled the policy. Muhammad and the corporation he owned, Columbia Hills Management Company Inc., sued, alleging the cancellation was improper. Did Allstate have the right to cancel the policy?

Question 18

Is the insured responsible for all increased risk when a loss occurs? Explain.