Question

In: Accounting

Please read the following and then you will address the issue of capacity in that situation....

Please read the following and then you will address the issue of capacity in that situation.

Globe Life Insurance Company undertook a new sales program that targets neighborhoods in Los Angeles where drive-by shootings were a nightly occurrence. In two such shootings, children were killed as they sat in their living rooms.

Globe salespeople were instructed to “hit” the houses surrounding those where children were victims. They were also told to contact the parents of those children to sell policies for their other children.

Tom Raskin, an experienced Globe salesman, read of a drive-by shooting at Nancy Leonard’s home, in which Leonard’s five-year-old son was killed. The Los Angeles Times reported that Leonard was a single parent with four other children.

Raskin traveled to Leonard’s home and described the benefits of a Globe policy for her other children. He offered her the $10,000 term life policy for each of the children for a total cost of $21 per month. Leonard was in the process of making funeral arrangements for her son, and Raskin noted, “See how much it costs for a funeral.”

Leonard had been given several tranquilizers the night before by a physician at the hospital’s emergency room. The physician had also given her 15 more tranquilizers to help her through the following week. She had taken one additional tranquilizer an hour before Raskin arrive, using a Coors Lite beer to take the pill.

Leonard signed the contract for the policy. After her son’s funeral, she received the first month’s bill for it and exclaimed, “I didn’t buy any life insurance! Where did this come from?”

In general, why is capacity a required element for a contract to be valid? What is the issue regarding capacity in the fact situation presented? What mistake did this salesman make? How can this insurance company make sure that it sells only to people who have legal capacity to enter into a contract? What should any business do to ensure that other parties in the contract meet the capacity requirement?
Business law

Solutions

Expert Solution

Capacity is a required element for a contract to be valid because a contract is a binding agreement. It’s important that the persons entering into the contract fully understand what they are agreeing to before they agree to it.
At the time Nancy Leonard was presented with the contract and signed it, she was intoxicated because of the tranquilizers she had been prescribed by her doctor due to the emotional stress caused by the loss of her 5 year old son. Having been given tranquilizers the night before, a prescription for tranquillizers, and having taken a pill with a beer an hour before Raskin arrived she would have been extremely intoxicated at the time she signed the contract. Not only is having Leonard sign a contract while intoxicated ethically wrong it is also illegal. Nancy Leonard was clearly taken advantage of.
The salesman made multiple mistakes. First Raskin actively sought out Leonard because she had lost her son. Second, he preyed on the fact that she had other children and used what may be considered undue influence as a trusted life insurance salesman to sway her to purchase the life insurance for the children. He also pointed out how expensive funerals were and she signed believing that it could cost her less money if something were to happen to another one of her children in the future. This is an example of someone pressuring her to sign under economic duress. Lastly, he allowed her to enter into a contract when she was intoxicated. With the amount of tranquilizers she was on at the time, she had to have been visibly intoxicated and he shouldn’t have had her sign and commit to the insurance policy.
Businesses have a responsibility to be ethical in their business practices. One way this insurance company could have made sure they were entering into a contract with someone who had the capacity to do so would be to not target specific demographics of people for the insurance. The company unfairly targeted families living in an area where multiple children were killed by drive by shootings. They preyed on emotions and economic situations of the potential policy holders. The insurance company could have offered insurance to everyone in the area and surrounding areas instead of targeting Leonard specifically. To make sure the other parties have the capacity is as simple as training your employees who present the contracts and making sure that the presenters of the information are clear on why it’s important to not allow a person who may not have the capacity to sign the contract.

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