Question

In: Operations Management

Respond to the following scenario: Security Insurance, Inc., issued an insurance policy to a company providing...

Respond to the following scenario:

Security Insurance, Inc., issued an insurance policy to a company providing an employee, Jessica
Garcia, with disability insurance. Soon thereafter, she was diagnosed with “panic disorder and
phobia of returning to work.” Garcia lost her job and sought disability coverage. Security denied
coverage, doubting the diagnosis of disability. Garcia and her employer sued Security. During
pretrial discovery, the insurer learned that Garcia had stated on the policy application that she had
never been treated for any “emotional, mental, nervous, urinary, or digestive disorder” or any kind
of heart disease. In fact, before she filed out the application, Garcia had visited a physician for
chest pains and general anxiety, and the physician had prescribed an antidepressant and
recommended that she stop smoking.

1. Did Garcia commit a misrepresentation on her policy application? Explain.
2. If there was any ambiguity on the application, should it be resolved in favor of the
insured or the insurer? Why?
3. Assuming that the policy is valid, does Garcia’s situation fall within the terms of the
disability policy?
4. If Garcia is covered by the policy but is also disqualified by her misrepresentation on the
application for coverage, might the insurer still e liable for bad faith denial of coverage?
Explain.

Solutions

Expert Solution

1. Did Garcia commit a misrepresentation on her policy application? Explain.

Yes, Garcia has not informed regarding her visit to physician for chest pains and general anxiety, and the physician had prescribed an antidepressant and recommended that she stop smoking. This was before she filled the insurance application form and had not mentioned this in the form. In fact she had stated on the policy application that she had never been treated for any “emotional, mental, nervous, urinary, or digestive disorder” or any kind of heart disease.


2. If there was any ambiguity on the application, should it be resolved in favor of the insured or the insurer? Why?

If the default is committed by the insured, then the matter will have to be resolved in favor of the insurer , same as described in the above mentioned case. Garcia withheld vital information from the insurance company.

3. Assuming that the policy is valid, does Garcia’s situation fall within the terms of the disability policy?

No, she is covered against disability but her situation is related to emotional ill-health, i.e.  “panic disorder and
phobia of returning to work.”


4. If Garcia is covered by the policy but is also disqualified by her misrepresentation on the application for coverage, might the insurer still e liable for bad faith denial of coverage? Explain.

No, because Garcia is at fault and not the insurer.

keosha answered 2 years ago
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