Question

Fact Pattern #1:

Pat contracts with an Ajax Insurance Company agent for a $50,000 ordinary life insurance policy. The application form is filled in to show Pat's age as 32. In addition, the application form asks whether Pat has ever had any heart ailments or problems. Pat answers no, forgetting that as a young child he was diagnosed as having a slight heart murmur. A policy is issued. Three years later, Pat becomes seriously ill and dies. A review of the policy discloses that Pat was actually 33 at the time of the application and the issuance of the policy and that he incorrectly answered the question about the history of heart ailments.

Fact Pattern #2:

Best Insurance Company provides Eve Erickson with property insurance that contains an 80% coinsurance clause. The coinsurance clause states that if Eve insures the property up to 80% of its value, she will recover any loss up to the face amount of the policy. Eve purchases an $80,000 property insurance policy for property valued at $200,000. Due to a fire, Eve suffers a loss of $10,000.

Adapted from Business Law, 114h Edition, by Clarkson, Miller, Jentz and Cross, (2016).

Questions

Answer the following questions in a Word document and submit it by the due date.

1. In Fact Pattern #1, can Ajax void the policy and escape liability on Pat's death? Why or why not? Explain.
2. In Fact Pattern #1, if there was any ambiguity on the application, should it be resolved in favor of the insured or the insurer? Explain.
3. In Fact Pattern #2, what dollar amount will Eve recover from the insurance company? Explain and show your calculation of Eve's insurance recovery.
4. What are the advantages and disadvantages of an incontestability clause? Explain.

Answer 1

Solution -

Fact Pattern #1

In this case, Pat has misrepresented the facts in the insurance company contract. He has provided incorrect age and has also not disclosed a history of heart disease. The contract is voidable by the insurance Ajax Insurance Corporation on the grounds of wrong information provided at the time of contract. The reason for death is immaterial in such case. This is true if Pat dies within the incontestability clause. Else if the incontestability clause is over then the claim is liable for payment. It will be the responsibility of the insurer to prove that Pat had an intention to deceive the insurer and only then the claim can be held voidable. As Pat has died three years later of the enforcement of the policy then there is a good chance that he is outside the incontestability clause and his claim stands valid but it will depend on the tenure defined in the policy for this clause.

Any ambiguity in the insurance form Is always interpreted in favor of the insured. the Ambiguity law states that the drafter of the policy must ensure that the language and the conditions are clearly conveyed to the insured for the proper execution of the contract and any ambiguity is taken as a pretext that could have misled the insured and hence the law in such case will favor the insured and not the insurer.

Fact Pattern #2

80% coinsurance clause means that if the insured NGOs in for insurance of at least 80% or above of the asset value then in case of loss the insurance company is liable to pay the face value of the loss amount. If the insured goes for less than 80% then only the approximate amount of the insured amount and the total asset value is paid in case of any loss. In this case,Eve paid only $80,000 insurance for a $200,000 property (which is only 40% of the asset cost) and hence with the loss of $10,000 The insurance company is liable to pay only -

($80,000/$200,000)*$10,000 = $4000

The incontestability clause protects the insured’s claims from any misstatements made by the insured in the insurance policy after two or three years of enforcement of policy as defined in the policy after which the claim of the insured is valid. The advantages are that it protects the insured from any errors in the policy form. Such errors are common as there is a long queue of information that is required in the insurance policy and some omissions can happen. The insured is protected with this clause against such errors. The disadvantage is that the insurance company can still try to prove the claim as invalid on the pretext that the misstatements were made to deceive the company. This leads the claim to be declared as void. Again there could be certain ambiguity attached to such clauses which make it difficult for enforcement of this clause.