Business Law Study Set 14

Business

Quiz 51 :

Insurance

Quiz 51 :

Insurance

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Interpreting Provisions Valley Furniture Interiors, Inc., bought an insurance policy from Transportation Insurance Co. (TIC). The policy provided coverage of $50,000 for each occurrence of property loss caused by employee dishonesty. An "occurrence" was defined as "a single act or series of related acts." Valley allowed its employees to take pay advances and to buy discounted merchandise, with the advances and the cost of the merchandise deducted from their paychecks. The payroll manager was to notify the payroll company to make the deductions. Over a period of six years, without notifying the payroll company, the payroll manager issued advances to other employees and herself and bought merchandise for herself, in amounts totaling more than $200,000. Valley filed claims with TIC for three "occurrences" of employee theft. TIC considered the acts a "series of related acts" and paid only $50,000. Valley filed a suit in a Washington state court against TIC, alleging, in part, breach of contract. What is the standard for interpreting an insurance clause How should this court define "series of related acts" Why [ Valley Furniture Interiors, Inc. v. Transportation Insurance Co., 107 Wash App. 104, 26 P.3d 952 (Div. 1 2001)]
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Interpreting Provisions:
In the case Valley Furniture Interiors, Inc. v. Transportation Insurance Co. (TIC) , 107 Wash.App. 104, 26 P.3d 952 (Div. 1 2001) the court entered a summary judgment in TIC's favor. The state intermediate appellate court affirmed.
The appellate court used the reasonable person standard in regard to the construction of the insurance policy as reviewed by an average person purchasing insurance.
The court considered the series of related acts as a chain of events that could reasonably have been anticipated to lead to the embezzlement and but for the participation of the payroll manager, the loss would not have occurred.
The three crimes of embezzlement used similar methodology for success, and began and ended at the same time. The payroll manager engaged in two occurrences of employee theft when she obtained money by unreimbursed payroll advances and unreimbursed merchandise purchases. The court addressed the matter by stating that the failure to report sums that should have been deducted from her paycheck was the manner through which she perpetrated her scheme.
These crimes taken together are related.

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Duty to Cooperate Dr. James Bubenik, a dentist practicing in Missouri, had two patients die while under sedation within six months. Bubenik had medical malpractice insurance with Medical Protective Co. (MPC). The families of both patients sued Bubenik for malpractice. MPC pointed out to Bubenik that a clause in his policy stated that the "Insured shall at all times fully cooperate with the Company in any claim hereunder and shall attend and assist in the preparation and trial of any such claim." During the litigation, however, Bubenik refused to submit to depositions, answer interrogatories, or testify at trial, invoking the Fifth Amendment privilege against self-incrimination. He also refused to communicate with MPC and entered into an agreement with the plaintiffs, stating that he would assist them in pursuing judgment against MPC. MPC requested a declaratory judgment from the court. The insurance company contended that it had no duty to defend Bubenik or counter the claims brought against him because of his refusal to cooperate. Did Bubenik's constitutional right to invoke the Fifth Amendment take precedence over the insurance policy's duty-to-cooperate clause Why or why not [ Medical Protective Co. v. Bubenik , 594 F.3d 1047 (8th Cir. 2010)]
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Duty to Cooperate:
In the case Medical Protective Co. (MPC) v. Bubenik, 594 F.3d 1047 (8 th Cir. 2010) the district concluded that Dr. Bubenik materially breached the cooperation clause in his insurance policy. The U.S. Court of Appeals affirmed.
The Court stated that, according to the terms of his policy, Dr. Bubenik was not required to waive his constitutional rights under the MPC insurance policy. Dr. Bubenik was able to choose whether to assert his Fifth Amendment rights or to cooperate with the defense attorneys provided him. Cooperation was the only option that would allow him to retain his coverage. Both options remained available to him throughout the Johnson trial.

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Why did the court conclude that an unoccupied house did not necessarily create a substantial increase in hazard
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Substantial Hazard Increase:
In the case of Estate of Luster v. Allstate Insurance Co., 598 F.3d 903 (2010) the district court granted summary judgment in favor of Allstate and dismissed Luster's suit. The United States Court of Appeals reversed and remanded.
The Court determined that an occupied house did not necessarily create a substantial increase in hazard because houses are rarely occupied continuously. Further, the vacancy circumstances, usually found in insurance policies, must be considered in conjunction with the character or class of property to which it relates.
In any case, a home that is unoccupied does not create a substantial increase in hazard for insurers or insureds.

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Cancellation James Mitchell bought a building in Los Angeles, California, in February 2000 and applied to United National Insurance Co. for a fire insurance policy. The application stated, among other things, that the building measured 3,420 square feet, it was to be used as a video production studio, the business would generate $300,000 in revenue, and the building had no uncorrected fire code violations. In fact, the building measured less than 2,000 square feet; it was used to film only one music video over a two-day period; the business generated only $6,500 in revenue; and the city had cited the building for combustible debris, excessive weeds, broken windows, missing doors, damaged walls, and other problems. In November, Mitchell met Carl Robinson, who represented himself as a business consultant. Mitchell gave Robinson the keys to the property to show it to a prospective buyer. On November 22, Robinson set fire to the building and was killed in the blaze. Mitchell filed a claim for the loss. United denied the claim and rescinded the policy. Mitchell filed a suit in a California state court against United. Can an insurer cancel a policy If so, on what ground might United have justifiably canceled Mitchell's policy What might Mitchell argue to oppose a cancellation What should the court rule Explain. [ Mitchell v. United National Insurance Co., 127 Cal.App.4th 457, 25 Cal.Rptr.3d 627 (2 Dist. 2005)]
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A QUESTION OF ETHICS: Insurance Coverage. Paul and Julie Leonard's two-story home in Pascagoula, Mississippi, is only twelve feet above sea level and fewer than two hundred yards from the Gulf of Mexico. In 1989, the Leonards bought a homeowners' insurance policy from Jay Fletcher, an agent for Nationwide Mutual Insurance Co. The policy covered any damage caused by wind. It excluded all damage caused by water, including flooding. With each annual renewal, Nationwide reminded the Leonards that their policy did not cover flood damage, but that such coverage was available. The policy also contained an anti-concurrent-causation (ACC) clause that excluded coverage for damage caused by the synergistic action of a covered peril such as wind and an excluded peril such as water. In August 2005, Hurricane Katrina battered Pascagoula with torrential rain and sustained winds in excess of one hundred miles per hour. Wind damage to the Leonards' home was modest, but the storm drove ashore a seventeen-foot storm surge that flooded the ground floor. When Nationwide refused to pay for the damage to the ground floor, the Leonards filed a suit in a federal district court against the insurer. [ Leonard v. Nationwide Mutual Insurance Co., 499 F.3d 419 (5th Cir. 2007)] (a) Nationwide argued that the storm surge was a concurrently caused peril-a wall of water pushed ashore by hurricane winds-and thus its damage was excluded under the ACC clause. How would you rule on this point Should a court "enlarge" an insurer's policy obligations Why or why not (b) When the Leonards bought their policy in 1989, Fletcher told them that all hurricane damage was covered. Ten years later, Fletcher told Paul Leonard that they did not need additional flood coverage. Did these statements materially misrepresent or alter the policy Were they unethical Discuss.
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Fire Insurance Fritz has an open fire insurance policy on his home for a maximum liability of $60,000. The policy has a number of standard clauses, including the right of the insurer to restore or rebuild the property in lieu of a monetary payment, and it has a standard coinsurance clause. A fire in Fritz's house destroys a utility room and part of the kitchen. The fire was caused by the overheating of an electric water heater. The total damage to the property is $10,000. The property at the time of loss is valued at $100,000. Fritz files a proof-of-loss claim for $10,000. Discuss the insurer's liability in this situation.
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QUESTION WITH SAMPLE ANSWER: Insurer's Defenses. Patrick contracts with an Ajax Insurance Co. agent for a $50,000 ordinary life insurance policy. The application form is filled in to show Patrick's age as thirty-two. In addition, the application form asks whether Patrick has ever had any heart ailments or problems. Patrick answers no, forgetting that as a young child he was diagnosed as having a slight heart murmur. A policy is issued. Three years later, Patrick becomes seriously ill and dies. A review of the policy discloses that Patrick was actually thirty-three at the time of the application and the issuance of the policy and that he erred in answering the question about a history of heart ailments. Discuss whether Ajax can void the policy and escape liability on Patrick's death.
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Insurance Coverage PAJ, Inc., a jewelry company, had a commercial general liability (CGL) policy from Hanover Insurance Co. It covered, among other things, liability for advertising injury. The policy required PAJ to notify Hanover of any claim or suit against PAJ "as soon as practicable." Yurman Designs sued PAJ for copyright infringement because of the design of a particular jewelry line. Unaware that the CGL policy applied to this matter, PAJ did not notify Hanover of the suit until four to six months after litigation began. Hanover contended that the policy did not apply to this incident because the late notification had violated its terms. PAJ sued Hanover, seeking a declaration that it was obligated to defend and indemnify PAJ. The trial court held for Hanover, as did an intermediate appellate court. PAJ appealed. Does Hanover have an obligation to provide PAJ with assistance, or did PAJ violate the insurance contract Explain. [ PAJ, Inc. v. The Hanover Insurance Co., 243 S.W.3d 630 (Sup.Ct.Tex. 2008)]
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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
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Insurer's Defenses In 1990, the city of Worcester, Massachusetts, adopted an ordinance that required rooming houses to be equipped with automatic sprinkler systems no later than September 25, 1995. James and Mark Duffy owned a forty-eight-room lodging house in Worcester, with two retail stores on the first floor. In 1994, the Duffys applied to General Star Indemnity Co. for an insurance policy to cover the premises. The application indicated that the premises had sprinkler systems. General issued a policy that required, among other safety features, a sprinkler system. Within a month, the premises were inspected on behalf of General. On the inspection form forwarded to the insurer, in the list of safety systems, next to the word sprinkler the inspector had inserted only a hyphen. In July 1995, when the premises sustained more than $100,000 in fire damage, Genera] learned that there was no sprinkler system. The insurer filed a suit in a federal district court against the Duffys to rescind the policy, alleging misrepresentation in their insurance application about the presence of sprinklers. How should the court rule, and why [ General Star Indemnity Co. v. Duffy , 191 F.3d 55 (1st Cir. 1999)]
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Insurable Interest Adia owns a house and has an elderly third cousin living with her. Adia decides she needs fire insurance on the house and a life insurance policy on her third cousin to cover funeral and other expenses that will result from her cousin's death. Adia takes out a fire insurance policy from Ajax Insurance Co. and a $10,000 life insurance policy from Beta Insurance Co. on her third cousin. Six months later, Adia sells the house to John and transfers title to him. Adia and her cousin move into an apartment. With two months remaining on the Ajax policy, a fire totally destroys the house; at the same time, Adia's third cousin dies. Both insurance companies claim they have no liability under the insurance contracts, as Adia did not have an insurable interest, and tender back (return) the premiums. Discuss their claims.
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CASE PROBLEM WITH SAMPLE ANSWER: Interpreting Provisions. Richard Vanderbrook's home in New Orleans, Louisiana, was insured through Unitrin Preferred Insurance Co. His policy excluded coverage for, among other things, "[f]lood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind." The policy did not define the term flood. In August 2005, Hurricane Katrina struck along the coast of the Gulf of Mexico , devastating portions of Louisiana. In New Orleans, some of the most significant damage occurred when the levees along three canals- the 17th Street Canal, the Industrial Canal, and the London Avenue Canal - ruptured, and water submerged about 80 percent of the city, including Vanderbrook's home. He filed a claim for the loss, but Unitrin refused to pay. Vanderbrook and others whose policies contained similar exclusions asked a federal district court to order their insurers to pay. They contended that their losses were due to the negligent design , construction, and maintenance of the levees and that the policies did not clearly exclude coverage for an inundation of water induced by negligence. On what does a decision in this case hinge What reasoning supports a ruling in the plaintiffs' favor In the defendants' favor [ In re Katrina Cana Breaches Litigation, 495 F.3d 191 (5th Cir. 2007)]
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Assignment Sapata has an ordinary life insurance policy on her life and a fire insurance policy on her house. Both policies have been in force for a number of years. Sapata's life insurance names her son, Rory, as beneficiary. Sapata has specifically removed her right to change beneficiaries, and the life insurance policy is silent on the right of assignment. Sapata is going on a one-year European vacation and borrows money from Leonard to finance the trip. Leonard takes an assignment of the life insurance policy as security for the loan, as the policy has accumulated a substantial cash surrender value. Sapata also rents out her house to Leonard and assigns her fire insurance policy to him. Discuss fully whether Sapata's assignment of these policies is valid.
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