Question

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.

1- Explain the above case according to the IRAC Formula: Facts, Rule, Analysis and Conclusion.

Answer 1

IRAC:ISSUE, RULE, ANALYSIS, CONCLUSION

the problem the court faced (the issue); the relevant law the court used to solve it (the rule); how the court applied the rule to the facts (the application or “analysis”); and the outcome (the conclusion).

Issue or Case Facts:

1. Sapata jad appointed her son Rory as the beneficiary or nominee of the life policy and had specifically eliminated her right of change of nominee from the policy. Life insurance policy is silent on the right of assignment.

Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment of a death benefit to named beneficiaries upon the death of the insured. The insurance company promises a death benefit in consideration of the payment of premium by the insured.

Assignment is a feature in a life insurance policy allowing a policyowner to freely assign (give, sell) a policy to another person or institution. For example, in order to secure a loan, a bank asks to be assigned the policy. If the insured dies before repayment of the loan, the bank would receive a portion of the death benefit that equals the outstanding loan, the remainder of the death benefit being payable to the insured’s beneficiary. The fact that life insurance is freely assignable makes it a useful financial instrument through which to secure a loan.

In this case even though the life insurance policy document does not talk about the assignement covenants, it is an intrinsic feature of any life insurance policy and thus can be contracted unless otherwise specifically mentioned about non-assignment in the life insurance policy document. In this case Sapata offered her life insurance as a collateral to ensure repayment of the money borrower from leonard for her Europe trip. Here the rights of assignee are more than the rights of the policy nominee, Rory, her son.

2. FIRE INSURANCE :-A contract of fire insurance can be defined as a contract under which one party ( the insurer) agrees for consideration (premium) to indemnify the other party (The insured) for the financial loss which the latter may suffer due to damage to the property insured by fire during a specified period of time and up to an agreed amount. The document containing the terms and conditions of the contract is known as ‘Fire Insurance Policy’. A fire policy contains the name of the parties, description of the insured property, the sum for which the property is insured, amount of premium payable and the period insured against. The premium may be paid either in single installment or by way of installments. The insurer is liable to make good the loss only when loss is caused by actual fire. Fire Insurance never has the assignement clause and thus it cannot be assigned. Thus when Sapata assigns her fire insurance to Leonard the contract is void ab initio.

Sapata rents out her house to leonard and the rent proceeds can be used to repay the outstanding loan amount and is valid to be contracted.