Deck 49: Insurance

Question 1

Provident Insurance, Inc., issued an insurance policy to a company providing an employee, Steve Matlin, with disability insurance. Soon thereafter, Matlin was diagnosed with "panic disorder and phobia of returning to work." He lost his job and sought disability coverage. Provident denied coverage, doubting the diagnosis of disability. Matlin and his employer sued Provident. During pretrial discovery, the insurer learned that Matlin had stated on the policy application that he had never been treated for any "emotional, mental, nervous, urinary, or digestive disorder" or any kind of heart disease. In fact, before Matlin filled out the application, he had visited a physician for chest pains and general anxiety, and the physician had prescribed an antidepressant and recommended that Matlin stop smoking. Using the information presented in the chapter, answer the following questions.
If Matlin is covered by the policy but is also disqualified by his misrepresentation on the application for coverage, might the insurer still be liable for bad faith denial of coverage Explain.
DEBATE THIS: Whenever an insurance company can prove that the applicant committed fraud during the application process, it should not have to pay on the policy.

Answer 1

Insurance is a contract; the courts interpret the contract. However, if an insurer acts in bad faith in its treatment of a policy holder, there can be a tort. Such kind of suit is not common so not applicable here, but it is possible.

Question 2

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)]

Answer 2

Insurer's Defenses:
In the case General Star Indemnity Co. v. Dufy, 191 F.3d 55 (1 st Cir. 1999) the federal district court issued a summary judgment in favor of General validating its rescission. The U.S. District Court affirmed.
The Court stated that the Duffys' application for insurance included a material misrepresentation regarding the sprinkler system required by city ordinance for his business. General relied on the misrepresentation when it issued the policy.
General cited 28 U.S.C. §§ 2201 2202 when it filed a complaint for declaratory judgment on its right to rescind the insurance policy based on the misrepresentation. The Court supported General's petition because General was justified in relying on the Duffys' representation that the Premises was sprinklered because of the Duffys' impending legal obligation to sprinkler the building.
Additionally, because the Duffys warranted that the premises was sprinklered in their renewal application, and subsequently it was found not to be, General was justified in cancelling the policy.

Question 3

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)]

Answer 3

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.

Question 4

Zurich American Insurance Co. v. ABM Industries, Inc.
United States Court of Appeals, Second Circuit, 2005. 397 F.3d 158.
CARDAMONE, Circuit Judge:
The terrorist attack on the World Trade Center complex in lower Manhattan on September 11, 2001 brought about a harvest of bitter distress and loss. Of the complex, one stone was not left on another, it was all thrown down, bringing about, in addition to human casualties, the loss and destruction of businesses. It is the loss of one business that is the focus of this appeal.
* * * *
ABM [Industries, Inc.] provided extensive janitorial, lighting, and engineering services at the World Trade Center. It operated the heating, ventilating, and air-conditioning (HVAC) systems for the entire WTC, essentially running the physical plant. ABM serviced the common areas of the complex pursuant to contracts with the owners Silverstein Properties and the Port Authority of New York and New Jersey.
Under these contracts ABM had office and storage space in the complex and had access to janitorial closets and * * * sinks located on every floor of the WTC buildings. ABM also had effective control over the freight elevators. At the time of the attacks, it employed more than 800 people at the WTC, and its exclusive and significant presence at the complex allowed it to secure service contracts with nearly all of the WTC's tenants.* * *
In order to handle these enormous responsibilities at the WTC, ABM created and manned a call center to which tenants reported problems. ABM's engineering department took complaints at the call center and dispatched its employees to remedy problems as they arose. Additionally, ABM developed complex preventative maintenance schedules through state-of-the-art software that tracked the equipment in the WTC. These procedures allowed ABM to repair equipment before it malfunctioned.
* * * *
ABM procured insurance coverage from Zurich [American Insurance Company] * * *. [T]he policy covers loss or damage to "real and personal property, including but not limited to property owned, controlled, used, leased, or intended for use by the Insured" (Insurable Interest provision).* * * [The policy includes business interruption (BI) coverage. Zurich filed a suit in a federal district court * * * against ABM to determine the extent of Zurich's liability for ABM's claims under the policy.]
* * * *
ABM's claims * * * arise out of the complete destruction of the WTC by the terrorist attacks of September 11,2001. ABM declares it has lost, as a result of these events, all income that it derived from its operations at the WTC.* * *
* * * *
On May 28, 2003 the district court granted Zurich's motion for partial summary judgment * * *. The district court held that ABM could obtain BI coverage only for the income it lost resulting from "the destruction of the World Trade Center space that ABM itself occupied or caused by the destruction of ABM's own supplies and equipment located in the World Trade Center." The court reasoned that the policy restricts BI coverage to "insured property at an insured location," and that the common areas and the tenants' premises in the WTC did not constitute insured property as that term is defined in the policy. Specifically, the court held that ABM neither "used" nor "controlled" these areas in a manner that sufficed for the creation of a "legally cognizable [recognizable] interest in the property." * * *
* * * *
* * * This appeal followed.
* * * We believe that ABM's activities at the World Trade Center created an insurable interest cognizable under New York law, and that this insurable interest falls within the scope of the policy's coverage.* * *
* * * *
* * * In light of ABM's substantial influence over, and availment of, the WTC infrastructure to develop its business, it is difficult to imagine what would constitute a "legally cognizable interest in the property," apart from ownership or tenancy. The terms of the insurance policy, however, do not limit coverage to property owned or leased by the insured. To the contrary, the policy's scope expressly includes real or personal property that the insured "used," "controlled," or "intended for use." [Emphasis added.]
The district court's imposition of the "legally cognizable interest in the property" requirement is an impermissible hurdle to insurance coverage, contemplated by neither the parties nor the New York legislature. The only prerequisite to coverage mandated by New York law is that an entity have an "insurable interest" in the property it insures. New York law embraces the sui generis [unique or particular] nature of an "insurable interest" and statutorily defines this term to include "any lawful and substantial economic interest in the safety or preservation of property from loss, destruction or pecuniary [monetary] damage." ABM's income stream is dependent upon the common areas and leased premises in the WTC complex, and thus ABM meets New York's requirement of having an "insurable interest" in that property. [Emphasis added.]
* * * *
* * * We reverse the district court's May 28,2003 order granting summary judgment in favor of Zurich and award summary judgment in favor of ABM * * *. Further, we vacate [declare the lower court's decision void] and remand the remaining issues * * * to the district court for further proceedings not inconsistent with this opinion.
1. On what issue was the court asked to rule in this case
2. On what did the court base its reasoning for its ruling on this issue

Question 5

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)]

Question 6

Go to academic.cengage.com/blaw/clarkson , the Web site that accompanies this text. Select "Chapter 49" and click on "Internet Exercises." There you will find the following Internet research exercises that you can perform to learn more about the topics covered in this chapter.
Legal Perspective
Disappearing Decisions

Question 7

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)]

Question 8

For updated links to resources available on the Web, as well as a variety of other materials, visit this text's Web site at
academic.cengage.com/blaw/clarkson
For a summary of the law governing insurance contracts in the United States, including rules of interpretation, go to
www.consumerlawpage.com/article/insureds.shtml
For more information on business insurance, visit AllBusiness.com's Insurance Center Web page at
www.allbusiness.com/business-finance/business-insurance/2986834-1.html

Question 9

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.

Question 10

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.

Question 11

VIDEO QUESTION
Go to this text's Web site at academic.cengage.com/blaw/clarkson and select "Chapter 49." Click on "Video Questions" and view the video titled Double Indemnity. Then answer the following questions.
(a) Recall from the video that Mrs. Dietrichson (Barbara Stanwyck) is attempting to take out an "accident insurance" policy (similar to life insurance) on her husband without his knowledge. Does Mrs. Dietrichson have an insurable interest in the life of her husband Why or why not
(b) Why would Walter (Fred MacMurray), the insurance agent, refuse to sell Mrs. Dietrichson an insurance policy covering her husband's life without her husband's knowledge
(c) Suppose that Mrs. Dietrichson contacts a different insurance agent and does not tell the agent that she wants to obtain insurance on her husband without his knowledge. Instead, she asks the agent to leave an insurance application for her husband to sign. Without her husband's knowledge, Mrs. Dietrichson then fills out the application for insurance, which includes a two-year incontestability clause, and forges Mr. Dietrichson's signature. Mr. Dietrichson dies three years after the policy is issued. Will the insurance company be obligated to pay on the policy Why or why not

Question 12

Provident Insurance, Inc., issued an insurance policy to a company providing an employee, Steve Matlin, with disability insurance. Soon thereafter, Matlin was diagnosed with "panic disorder and phobia of returning to work." He lost his job and sought disability coverage. Provident denied coverage, doubting the diagnosis of disability. Matlin and his employer sued Provident. During pretrial discovery, the insurer learned that Matlin had stated on the policy application that he had never been treated for any "emotional, mental, nervous, urinary, or digestive disorder" or any kind of heart disease. In fact, before Matlin filled out the application, he had visited a physician for chest pains and general anxiety, and the physician had prescribed an antidepressant and recommended that Matlin stop smoking. Using the information presented in the chapter, answer the following questions.
Did Matlin commit a misrepresentation on his policy application Explain.
DEBATE THIS: Whenever an insurance company can prove that the applicant committed fraud during the application process, it should not have to pay on the policy.

Question 13

Cary v. United of Omaha Life Insurance Co.
Supreme Court of Colorado, 2005. 108 P.3d 288.
• Background and Facts Fourteen-year-old Dena Cary shot herself under the chin in an unsuccessful suicide attempt because she suffered a major depressive episode of her diagnosed bipolar disorder. Her injuries required extensive medical treatment. Dena's father, Thomas Cary, sought payment for these costs under his medical insurance policy covering injury and illness, but the insurer denied the claim. The insurer argued that coverage was excluded under a provision reading: "Injury. Injury means accidental bodily injury which occurs independently of Illness. Injury does not include self-inflicted bodily injury, either while sane or insane." The Carys filed an action in a Colorado state court for bad faith denial of coverage. The trial court found that the injury was covered by the policy, but the state intermediate appellate court reversed. The Carys appealed to the state supreme court.
RICE, Justice:
* * * *
* * * One reasonable interpretation of these definitions is * * * [that] the selfinflicted injury limitation in the second sentence of the "injury" definition modifies only the phrase "accidental bodily injury which occurs independently of Illness." As a result, injuries that occur as a result of illness, even if self-inflicted, are defined out of the "injury" definition and are covered by the Plan's promise to provide coverage for "treatment of an Illness."
* * * *
However, an equally reasonable interpretation is that both sentences in the "injury" definition are of like definitional value, that is to say that one does not modify the other. Thus, to be covered, an injury must be [an] "accidental bodily injury which occurs independently of Illness" and must not be [a] "self-inflicted bodily injury, either while sane or insane." Accordingly, if an injury is accidental or is the result of an illness, it nonetheless would be excluded from coverage if it is selfinflicted.
* * * Most importantly for our purposes, however, the plan is ambiguous because it is susceptible to each equally reasonable interpretation.* * * Because we resolve ambiguities in favor of coverage, Dena's injuries are covered. [Emphasis added.]
• Decision and Remedy The Colorado Supreme Court reversed the lower appellate court's decision, with instructions to return the case to the trial court for proceedings consistent with this opinion.
• What If the Facts Were Different Suppose that there had not been an ambiguity in this policy and that it had been subject to only one reasonable interpretation. Would the result have been different Explain.
• The Legal Environment Dimension Should insurance policy provisions be interpreted to avoid ambiguities if possible Why or why not

Question 14

Go to academic.cengage.com/blaw/clarkson , the Web site that accompanies this text. Select "Chapter 49" and click on "Internet Exercises." There you will find the following Internet research exercises that you can perform to learn more about the topics covered in this chapter.
Management Perspective
Risk Management in Cyberspace

Question 15

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.

Question 16

Provident Insurance, Inc., issued an insurance policy to a company providing an employee, Steve Matlin, with disability insurance. Soon thereafter, Matlin was diagnosed with "panic disorder and phobia of returning to work." He lost his job and sought disability coverage. Provident denied coverage, doubting the diagnosis of disability. Matlin and his employer sued Provident. During pretrial discovery, the insurer learned that Matlin had stated on the policy application that he had never been treated for any "emotional, mental, nervous, urinary, or digestive disorder" or any kind of heart disease. In fact, before Matlin filled out the application, he had visited a physician for chest pains and general anxiety, and the physician had prescribed an antidepressant and recommended that Matlin stop smoking. Using the information presented in the chapter, answer the following questions.
If there was any ambiguity on the application, should it be resolved in favor of the insured or the insurer Why
DEBATE THIS: Whenever an insurance company can prove that the applicant committed fraud during the application process, it should not have to pay on the policy.

Question 17

Woo v. Fireman's Fund Insurance Co.
Supreme Court of Washington, 2007. 161 Wash.2d 43, 164 P.3d 454.
• Background and Facts Tina Alberts worked for Robert Woo as a dental surgical assistant. Her family also raised potbellied pigs, and she often talked about them at work. Sometimes, Woo mentioned the pigs, intending to encourage a "friendly working environment." Alberts interpreted the comments as offensive. Alberts asked Woo to replace two of her teeth with implants. The procedure required the installation of temporary partial bridges called "flippers." While Alberts was anesthetized, Woo installed a set of flippers shaped like boar tusks, as a joke, and took photos. Before Alberts regained consciousness, he inserted the normal flippers. A month later, Woo's staff gave Alberts the photos at a gathering to celebrate her birthday. Stunned, Alberts refused to return to work. Woo tried to apologize. Alberts filed a suit in a Washington state court against him, alleging battery and other torts. He asked Fireman's Fund Insurance Company to defend him, claiming coverage under his policy. The insurer refused. Woo settled the suit with Alberts for $250,000 and filed a suit against Fireman's, claiming that it had breached its duty to defend him. The court awarded him $750,000 in damages plus the amount of the settlement and attorneys' fees and costs. A state intermediate appellate court reversed the award. Woo appealed to the Washington Supreme Court.
FAIRHURST, J. [Justice]
* * * *
The professional liability provision states that Fireman's will defend any claim brought against the insured "even if the allegations of the claim are groundless, false or fraudulent." It defines "dental services" as "all services which are performed in the practice of the dentistry profession as defined in the business and professional codes of the state where you are licensed." [Revised Code of Washington (RCW) Section] 18.32.020 * * * states:
A person practices dentistry * * * who * * * undertakes by any means or methods to diagnose, treat, remove stains or concretions from teeth, operate or prescribe for any disease, pain, injury, deficiency, deformity, or physical condition of the same, or take impressions of the teeth or jaw, or * * * owns, maintains or operates an office for the practice of dentistry * * *.
* * * [Woo] claims the joke was "intertwined with employee and patient relationships, areas of Woo's ownership and operation of the dental office." Fireman's responds that the allegations in Alberts' complaint unambiguously establish that Woo's practical joke was not connected to treating Alberts' condition. It asserts the boar tusk flippers were not intended to replace Alberts'teeth- they were intended only as a practical joke. Fireman's also asserts that insertion of the boar tusk flippers was not covered under the professional liability provision because Woo "interrupted his rendering of dental services."
* * * *
* * * In addition to covering the rendering of dental services, the professional liability provision covers ownership, maintenance, or operation of an office for the practice of dentistry and Alberts' complaint alleged Woo's practical joke took place while Woo was conducting his dental practice. The insertion of the boar tusk flippers was also intertwined with Woo's dental practice because it involved an interaction with an employee.* * * [Emphasis added.]
Moreover, Woo's practical joke did not interrupt the dental surgery procedure, as Fireman's argues. * * * The acts that comprised the practical joke were integrated into and inseparable from the overall procedure.
In sum, Alberts' complaint alleges that Woo inserted a flipper, albeit oddly shaped, during a dental surgery procedure while he was operating an office for the practice of dentistry. * * * Because [Revised Code of Washington Section] 18.32.020 defines the practice of dentistry so broadly, the fact that his acts occurred during the operation of a dental practice conceivably brought his actions within the professional liability provision of his insurance policy.
• Decision and Remedy The Washington Supreme Court held that Fireman's had a duty to defend Woo under the professional liability provision of his policy because "the insertion of boar tusk flippers in Alberts's mouth conceivably fell within the policy's broad definition of the practice of dentistry." The state supreme court reversed the decision of the lower court.
• The Ethical Dimension Are the acts of the principal parties-Woo, Alberts, and Fireman's- ethically justifiable in the circumstances of this case Discuss.
• The Legal Environment Dimension In determining if an insurer has a duty to defend an insured, should a court ask whether the insured had a "reasonable expectation" of coverage Explain.

Question 18

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.

Question 19

Provident Insurance, Inc., issued an insurance policy to a company providing an employee, Steve Matlin, with disability insurance. Soon thereafter, Matlin was diagnosed with "panic disorder and phobia of returning to work." He lost his job and sought disability coverage. Provident denied coverage, doubting the diagnosis of disability. Matlin and his employer sued Provident. During pretrial discovery, the insurer learned that Matlin had stated on the policy application that he had never been treated for any "emotional, mental, nervous, urinary, or digestive disorder" or any kind of heart disease. In fact, before Matlin filled out the application, he had visited a physician for chest pains and general anxiety, and the physician had prescribed an antidepressant and recommended that Matlin stop smoking. Using the information presented in the chapter, answer the following questions.
Assuming that the policy is valid, does Matlin's situation fall within the terms of the disability policy Why or why not
DEBATE THIS: Whenever an insurance company can prove that the applicant committed fraud during the application process, it should not have to pay on the policy.

Question 20

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.