9.4 Review and Practice

1. Walter Brown owns a warehouse in Chicago. The building would cost $400,000 to replace at today’s prices, and Walter wants to be sure he’s properly insured. He feels that he would be better off if he had two $250,000 replacement cost property insurance policies on the warehouse because “then I’ll know if one of the insurers is giving me the runaround. Anyhow, you have to get a few extra dollars to cover expenses if there’s a fire—and I can’t get that from one company.”

   1. If the building is totally destroyed by fire, how much may Walter collect without violating the concept of indemnity?
   2. What is Walter’s insurable interest? Does it exceed the value of the building?

2. During the application process for life insurance, Bill Boggs indicated that he had never had pneumonia, when the truth is that he did have the disease as a baby. He fully recovered, however, with no permanent ill effects. Bill was unaware of having had pneumonia as a baby until, a few weeks after he completed the application, his mother told him about it. Bill was aware, however, that he regularly smoked three or four cigarettes a day when he answered a question on the application about smoking. He checked a block indicating that he was not a smoker, realizing that nonsmokers qualified for lower rates per $1,000 of life insurance. The insurer could have detected his smoking habit through blood and urine tests. Such tests were not conducted because Bill’s application was for a relatively small amount of insurance compared to the insurer’s average size policy. Instead, the insurer relied on Bill’s answers being truthful.

   Twenty months after the issuance of the policy on Bill Bogg’s life, he died in an automobile accident. The applicable state insurance law makes life insurance policies contestable for two years. The insurer has a practice of investigating all claims that occur during the contestable period. In the investigation of the death claim on Bill Boggs, the facts about Bill’s case of pneumonia and his smoking are uncovered.

   1. Will Bill’s statements on the application be considered misrepresentations? Discuss what you know about misrepresentations as they could apply in this case.
   2. Because the cause of Bill’s death was unrelated to his smoking habit, his beneficiary will not accept the insurer’s offer to return Bill’s premiums plus interest. The beneficiary is insisting on pursuing this matter in court. What advice do you have for the beneficiary?
3. A smart college senior accepted a job. After the celebration in a bar, he caused an accident. The employer wanted to change the contract and not hire him. Do you think the senior has grounds to dispute the decision?
4. An insurance company denied a claim. Three years earlier, the insurer paid for a similar claim. What concept of the law can help the insured? Explain.
5. Michelle Rawson recently moved to Chicago from a rural town. She does not tell her new auto insurance agent about the two speeding tickets she got in the past year. What problem might Michelle encounter? Explain.
6. You cannot assign your auto policy to a purchaser without the insurer’s consent, but you can assign your life insurance policy without the insurer’s approval. Is this difference really necessary? Why or why not?