Dynamic business law 4e kubasek 4e CH51

Chapter 51
Insurance Law

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Overview
• LO51-1: What is the nature of the insurance
relationship?
• LO51-2: What does the insurance contract include?
• LO51-3: How is an insurance policy canceled?
• LO51-4: What are the obligations of the insurer and
the insured?
• LO51-5: What is the insurer's defense for
nonpayment?
• LO51-6: What are the types of insurance available to
consumers?

51-2


Chapter 51 Hypothetical Case 1
• After years of heartache and despair, Wallace and Virginia
Gwinnett are finally getting a divorce. Five years ago, when the
bonds of their holy matrimony first started fraying, Virginia
took out a $251,000 life insurance contract on George without
his knowledge. The insurance contract was a 20-year term
policy listing her husband as the measuring life and Virginia
Gwinnett, herself, as the beneficiary.
• Virginia Gwinnett wonders: When the golden ring is off of her
finger, can she keep the life insurance policy by continuing to

pay the premiums on it? If she does, will she be entitled to the
$251,000 if Wallace Gwinnett dies within the 20-year term
period?

51-3


Chapter 51 Hypothetical Case 2
• After 13 years of marriage between Ivan and Donita Raspail, love had turned to hate.
The two divorced, and as part of the divorce settlement, Donita Raspail received
complete title to the home they had shared for so many years. Six months later, the
house was completely gutted by a fire. The police ruled out Ivan as the perpetrator,
since he had been gambling in Atlantic City, New Jersey, the night the fire occurred.
The total loss due to the fire was estimated at $615,000, based on the house's
appraised value of $425,000. In addition, all of Donita Raspail's personal property was
destroyed, a loss that amounted to $190,000. On the date of the loss, there was one
existing homeowners' policy on the property with a maximum insurance value of
$751,000, issued by Prentice-Towers Insurance Company. Ivan Raspail is listed as the
sole beneficiary of the homeowners' policy, and he has filed an insurance claim with
Prentice-Towers requesting compensation for the $615,000 loss.
• Is Prentice-Towers legally and/or ethically obligated to pay Ivan Raspail the $615,000,
since he was listed as the sole beneficiary of the homeowner's policy? If not, is
Prentice-Towers legally and/or ethically obligated to pay Donita Raspail the $615,000,
since she was the sole owner of the property at the time of the loss?

51-4


Nature of the Insurance
Relationship

• Insured party: Party who makes a payment (a premium) in
exchange for a payment in the event of damage/injury to
property/person
• Premium: Payment on policy
• Insurer (underwriter): Party who receives premiums from
insured party
• Beneficiary: Person who receives insurance proceeds
• Policy: Document that expresses agreement between the
insured party, beneficiary, and insurer
• Risk: Potential loss
• Insurable interest: Economic interest in life/property
• Life interest must exist at time policy obtained
• Property interest must exist at time of loss

51-5


The Insurance Contract
• Application for insurance: Party with insured
interest makes an offer to purchase insurance
(Based on information described in application,
insurance company evaluates the risk and
determines whether to accept/reject offer)
• Effective date: Date policy becomes effective
• Binder: Gives temporary insurance until decision
to accept/reject application made
51-6


Elements of the Insurance Contract

• Incontestability clause: Ensures insurance company
cannot contest statements made in insurance
application after certain period of time
• Antilapse clause: Grace period for insured to pay
premium
• Appraisal clause: Insured party and insurer select
disinterested appraiser for second opinion on
damages
• Arbitration clause: Disputes must be submitted to an
arbitrator

51-7


Canceling an Insurance Policy
• While insurer/insured may cancel policy at
specified times, insurer limited as to when
it may cancel the policy
• If either party breaches its duties as
established in the insurance policy, the
other party has legal remedy

51-8


Insurer and Insured Obligations
• Insurer duties
• Defend insured; insurer must defend insured
party from claims for which insured party
liable

• Pay sums owed by insured

• Insured duties
• Disclose material (significant, relevant)
information on application
• Cooperate with insurer (on defense of claims)

51-9


Insurer's Defenses for
Nonpayment of Claims
• Includes (but is not limited to):
• Breach of contract
• Lack of insurable interest
• Illegal activity

5110


Types of Insurance
• Individual insurance: Insured party is party purchasing
insurance
• Group insurance: Party who is neither insured party nor insurer
purchases insurance
• Personal insurance: Covers individual's life/health
• Commercial insurance: Covers business interests
• Property insurance: Protects property from loss/damage
• Casualty insurance: Protects person/property from accidental
injury

• Liability insurance: Protects business from tort liability to third
parties
• Commercial general liability policy: Protects business against
broad range of risks

5111


Types of Liability Insurance
• Contractors' liability insurance: Protects contractors against liability for
injuries that might occur while completing a job (excluding injuries to
employees)
• Garage liability insurance: Protects garage owner from liability to persons
injured by operation of the garage
• Product liability insurance: Protects producer or manufacturer of good
from loss due to damages paid to people injured using the good
• Professional liability insurance: Protects members of specific professions
from liability associated with their professional acts
• Fire insurance: Protects property from loss or damage from fire
• Livestock insurance: Protects owner from loss due to injury or death of
livestock
• Water, weather, and natural forces insurance: Flood insurance, water
damage insurance, weather insurance, hail insurance, lightning
insurance, etc.

5112


Life Insurance
• Whole-life: Protection for entire life of

insured
• Term-life: Provides coverage for specified
term (beneficiary paid only if insured party
dies during designated term)

5113


Chapter 51 Hypothetical Case 3
• Jerry Allenton has a small beach cottage on the Outer Banks of North Carolina. He has owned his
little piece of paradise for the past 21 years, and for that entire time, he has maintained hurricane
insurance on the property through Homeland Underwriters, Inc. Each and every year, Allenton has
dutifully paid the annual hurricane insurance premium well before the due date of September 1.
He has never made a claim on the policy.
On August 2, Allenton receives a letter from Homeland Underwriters. He believes the letter is a bill
for the annual premium payment, but he is surprised to discover that it is a letter terminating his
hurricane insurance coverage. The letter states, in part, "Mr. Allenton, we have valued our
association with you over the past 21 years, but we regret to inform you that the Homeland
Underwriters hurricane insurance policy on your property at 321 Clambake Drive is no longer
renewable. Effective September 1, your policy is terminated. Best of luck, and please continue to
consider Homeland Underwriters for any other insurance needs you might have." From a
probability standpoint, Homeland Underwriters has determined that Outer Banks properties are
no longer insurable risks.
• Does Allenton have any legal rights against Homeland Underwriters? In the interests of equity,
would a court likely compel Homeland Underwriters to renew the hurricane insurance policy,
especially if it would be difficult or impossible for Allenton to obtain such insurance elsewhere?
From an ethical standpoint, and given Allenton's 21 years of customer loyalty, should Homeland
Underwriters renew the policy?

5114

Chapter 51 Hypothetical Case 4
• Stay-at-home mother Dorinda Niedermayer purchased a $2 million, 20-year life
insurance policy for herself two years after the birth of their second child. Her
rationale for purchasing the policy was that her husband, Goran Vuckovic, would
not only need additional income in the event of her death—he would also need
to provide childcare for and pay for college for their children, Billy and
Stephanie.
A year after she purchased the policy, Niedermayer began experiencing
abdominal pain and nausea. She suspected that she was pregnant again and
visited her gynecologist. The doctor confirmed that she was indeed expecting,
but she also had terrible news: Niedermayer had stage four colon cancer and
had been suffering from the disease, undetected, for several years. Niedermayer
and Vuckovic decided to forgo treatment for her cancer, and she carried the
child, named Susan, to term. Niedermayer died 10 days after her daughter was
born.
• Because Niedermayer had colon cancer at the time she purchased the policy
(even though she did not know it), does the insurer have to pay the $2 million to
Vuckovic?

5115