Law, Business 7e (Cheeseman)
Chapter 50 Insurance
1) The McCarran-Ferguson Act provides that insurance is regulated by the states.
Answer: TRUE
Diff: 1
Topic: Insurance
2) Insurance companies are not exempt from the federal antitrust laws.
Answer: FALSE
Diff: 1
Topic: Insurance
3) An insurance contract is one where one party indemnifies another against loss from an
unknown event.
Answer: TRUE
Diff: 1
Topic: Insurance
4) Insurance can be sold directly to the insured by the insurer.
Answer: TRUE
Diff: 1
Topic: Insurance
5) An insured that does not have an insurable interest in the property being insured is treated like
a wager and it cannot be enforced.
Answer: TRUE
Diff: 2
Topic: Insurance
6) An insurance broker typically works for a single insurance company.
Answer: FALSE
Diff: 1
Topic: Insurance
7) An insurance agent is the agent of the insurance company.
Answer: TRUE
Diff: 1
Topic: Insurance
8) An insurance broker is the agent of the insurance company.
Answer: FALSE
Diff: 1
Topic: Insurance
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9) State insurance laws generally provide that insurance must be sold through a broker or agent.
Answer: FALSE
Diff: 2
Topic: Insurance
10) Insurance acquired through an insurance agent becomes effective when the insured submits
an application and pays the premium.
Answer: TRUE
Diff: 1
Topic: Insurance
11) It is against public policy for a life insurance policy to be made contingent on passing a
physical exam.
Answer: FALSE
Diff: 1
Topic: Insurance
12) The insured owes a duty to defend against any suit brought against him or her that involves a
claim within the coverage of the policy.
Answer: FALSE
Diff: 2
Topic: Insurance
13) In the case of a life insurance policy on the insured's own life, it is not necessary for the
named beneficiary to have an insurable interest in the insured.
Answer: TRUE
Diff: 2
Topic: Insurance
14) The insurable interest in a piece of property must exist at the time of loss.
Answer: TRUE
Diff: 2
Topic: Insurance
15) An insurance deductible clause usually states that insurance proceeds are payable only after
the insured has paid a specified amount of the damage or losses.
Answer: TRUE
Diff: 1
Topic: Insurance
16) Preexisting medical conditions are usually covered by many medical insurance policies.
Answer: FALSE
Diff: 1
Topic: Insurance
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17) A coinsurance clause requires the insured to pay a percentage of an insured loss.
Answer: TRUE
Diff: 2
Topic: Insurance
18) If George represents that he will not store flammable products in an insured building, he is
making a promissory warranty.
Answer: TRUE
Diff: 2
Topic: Insurance
19) Incontestability clauses are invalid as they are not fair to insurers.
Answer: FALSE
Diff: 3
Topic: Insurance
20) Subrogation typically applies to life insurance policies.
Answer: FALSE
Diff: 2
Topic: Insurance
21) Life insurance is really death insurance.
Answer: TRUE
Diff: 1
Topic: Life Insurance
22) In a life insurance policy, it is possible for the owner of the policy and the insured to be the
same person.
Answer: TRUE
Diff: 1
Topic: Life Insurance
23) In a life insurance policy, the insured is the party who is to receive the insurance proceeds
upon the death of the insured.
Answer: FALSE
Diff: 1
Topic: Life Insurance
24) The usual time period for the validity of a suicide clause is 10 years.
Answer: FALSE
Diff: 1
Topic: Life Insurance
25) Insurance companies need only refund policy premiums if an insured commits suicide before
the date specified in the suicide clause of the life insurance policy.
Answer: TRUE
Diff: 1
Topic: Life Insurance
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26) With disability insurance, the payments are generally made to the insured even though the
insured does not document actual expenses.
Answer: TRUE
Diff: 2
Topic: Health and Disability Insurance
27) Most fire insurance policies are issued using the Delaware standard fire insurance policy
form.
Answer: FALSE
Diff: 2
Topic: Fire and Homeowners Insurance
28) Coinsurance clauses are not common in fire insurance policies.
Answer: FALSE
Diff: 2
Topic: Fire and Homeowners Insurance
29) Due to rising insurance costs, most modern fire insurance policies do not provide
replacement cost insurance.
Answer: FALSE
Diff: 2
Topic: Fire and Homeowners Insurance
30) A homeowners policy has the same coverages as a fire insurance policy except that it is
written for a homeowner rather than a business.
Answer: FALSE
Diff: 2
Topic: Fire and Homeowners Insurance
31) A homeowners policy includes coverage for theft of the insured personal property, but not
when the insured has the property away from the home.
Answer: FALSE
Diff: 1
Topic: Fire and Homeowners Insurance
32) Most insurance companies allow valuable items to be covered under an insured's
homeowners policy thereby eliminating the need for any additional insurance.
Answer: FALSE
Diff: 2
Topic: Fire and Homeowners Insurance
33) The primary coverage of renters insurance is for the possessions of the insured.
Answer: TRUE
Diff: 1
Topic: Fire and Homeowners Insurance
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34) Title insurance protects against defects in title such as liens or encumbrances that are not
disclosed on the title insurance policy.
Answer: TRUE
Diff: 1
Topic: Fire and Homeowners Insurance
35) Mold is generally not covered under the majority of insurance policies.
Answer: FALSE
Diff: 2
Topic: Fire and Homeowners Insurance
36) In automobile insurance, comprehensive coverage refers to a policy that covers all types of
losses related to the ownership and operation of an automobile.
Answer: FALSE
Diff: 2
Topic: Automobile Insurance
37) Under the collision coverage of an automobile insurance policy, loss to the insured
automobile is covered even in an accident that is the fault of the insured.
Answer: TRUE
Diff: 2
Topic: Automobile Insurance
38) An omnibus clause under an automobile liability policy covers other drivers of the insured's
automobile.
Answer: TRUE
Diff: 2
Topic: Automobile Insurance
39) Collision insurance pays for damages caused if an automobile owner's car is struck by
another car.
Answer: TRUE
Diff: 1
Topic: Automobile Insurance
40) Business interruption insurance was designed to reimburse the insured whose business is
severely destroyed or damaged during the time it takes to repair or reconstruct the damaged
property.
Answer: TRUE
Diff: 1
Topic: Business Insurance
41) Workers compensation was designed to make payments to those workers who put more time
in on the job.
Answer: FALSE
Diff: 1
Topic: Business Insurance
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42) Smaller companies usually do not carry directors' and officers' liability insurance as it is too
expensive.
Answer: TRUE
Diff: 2
Topic: Business Insurance
43) Because there are so many professionals in today's workforce, professional malpractice
premiums are reasonably priced.
Answer: FALSE
Diff: 1
Topic: Business Insurance
44) Fidelity insurance is designed to protect an employer against his or her dishonest employees.
Answer: TRUE
Diff: 2
Topic: Business Insurance
45) Under the McCarran-Ferguson Act:
A) insurance companies were exempted from federal antitrust laws
B) insurance rates became subject to regulation at the federal level
C) several large insurance companies were broken up into smaller companies
D) banks were allowed to begin selling life insurance
E) the whole life form of life insurance was authorized
Answer: A
Diff: 2
Topic: Insurance Industry
Skill: Legal Concepts
46) The insurance industry is regulated:
A) by Congress under the commerce clause
B) by the Central Insurance Regulatory Agency
C) by state law pursuant to the McCarran-Ferguson Act
D) by self-regulation
E) by the Sherman Act
Answer: C
Diff: 2
Topic: Insurance Industry
Skill: Legal Concepts
47) Insurance policy premiums are set at a level to cover the following except:
A) the expected losses
B) a profit for the insurance company
C) operating costs for the insurance company
D) insurance industry support costs
Answer: D
Diff: 1
Topic: The Insurance Contract
Skill: Legal Concepts
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48) When does an insurance contract usually become effective?
A) Upon application and payment of the premium in agent transactions and upon acceptance of
the application by the insurer in broker transactions.
B) Upon application and payment of the premium in broker transactions and upon acceptance of
the application by the insurer in agent transactions.
C) Upon application and payment of the premium in both broker and agent transactions.
D) Upon acceptance of the application by the insurer in both broker and agent transactions.
Answer: A
Diff: 2
Topic: The Insurance Contract
Skill: Legal Concepts
49) Modification of an existing insurance contract is usually accomplished by means of a(n):
A) endorsement
B) modifier
C) rider
D) A or B only
E) A or C only
Answer: E
Diff: 1
Topic: The Insurance Contract
Skill: Legal Concepts
50) The requirement that an insured would suffer a loss in the absence of insurance if the insured
property is damaged or destroyed is the requirement of:
A) indemnification
B) reinsurance
C) insurable interest
D) beneficiary interest
E) coinsurance
Answer: C
Diff: 1
Topic: The Insurance Contract
Skill: Legal Concepts
51) An insurable interest can best be described as:
A) the insured having paid the premiums of an insurance policy as called for in the policy
B) the insurance covering an item that, if damaged or destroyed, would cause a loss for the party
if it were damaged or destroyed in the absence of insurance
C) the item in question being fully covered under a valid insurance policy
D) the item in question being fully capable of identification at the time of a loss, even if it could
not have been identified at the time that the insurance policy was taken out
Answer: B
Diff: 2
Topic: The Insurance Contract
Skill: Legal Concepts
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52) When must an insurable interest exist for life insurance and property insurance, respectively?
A) At the time of policy issuance, and at the time of loss.
B) At the time of policy issuance, and at the time of payment of the premium.
C) At the time of loss, and at the time of policy issuance.
D) At the time of policy issuance for both life insurance and property insurance.
E) At the time of loss for both life insurance and property insurance.
Answer: A
Diff: 2
Topic: The Insurance Contract
Skill: Legal Concepts
53) Which of the following is true about insurable interest regarding property insurance?
A) Only one party can have an insurable interest in the same item at the same time.
B) A party has an insurable interest in any item for which the party can establish a value.
C) The insurable interest in the property must exist at the time there is a loss.
D) The insurable interest in the property must exist at the time of the policy issuance.
E) Both A and C.
Answer: C
Diff: 2
Topic: The Insurance Contract
Skill: Legal Concepts
54) What type of clause in an insurance policy states that the insurer will pay for a covered loss
only to the extent that it exceeds a certain stated amount that the insured pays toward that loss?
A) indemnity clause
B) coinsurance clause
C) endorsement clause
D) deductible clause
E) subrogation clause
Answer: D
Diff: 1
Topic: The Insurance Contract
Skill: Legal Concepts
55) Which of the following is not one of the parties to a standard life insurance contract?
A) owner
B) insurance company
C) insurance broker
D) insured
E) beneficiary
Answer: C
Diff: 2
Topic: Life Insurance
Skill: Legal Concepts
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56) The type of life insurance that is "straight insurance" for a fixed period of time is:
A) double indemnity life
B) universal life
C) whole life
D) variable life
E) term life
Answer: E
Diff: 2
Topic: Life Insurance
Skill: Legal Concepts
57) The following types of life insurance have a cash surrender value except:
A) term life
B) universal life
C) whole life
D) straight life
E) limited-payment life
Answer: A
Diff: 2
Topic: Life Insurance
Skill: Legal Concepts
58) The type of life insurance in which the investment portion pays a variable interest rate is:
A) double indemnity
B) universal life
C) whole life
D) variable life
E) term life
Answer: B
Diff: 2
Topic: Life Insurance
Skill: Legal Concepts
59) Universal life insurance combines the features of:
A) whole life and ordinary life
B) limited-payment life and whole life
C) ordinary life and straight life
D) whole life and annuity life
E) whole life and term life
Answer: E
Diff: 2
Topic: Life Insurance
Skill: Legal Concepts
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60) The basic difference between whole life insurance and universal life insurance is which of
the following?
A) Universal life includes health insurance and whole life does not.
B) The universal life investment portion pays interest at a variable rate and whole life does not.
C) Universal life is a single premium payment plan and whole life is not.
D) There is no difference because they are two terms for the same type of policy.
E) Universal life is usually purchased by corporations on its employees and whole life is usually
purchased by individuals for family members.
Answer: B
Diff: 2
Topic: Life Insurance
Skill: Legal Concepts
61) Which of the following is true about the parties to an insurance policy?
A) The insured and the owner can be the same person.
B) The owner and beneficiary can be the same person.
C) The insurer and the insured can be the same person.
D) The beneficiary cannot be changed during the period that the policy is in effect.
E) Both A and B.
Answer: E
Diff: 2
Topic: Life Insurance
Skill: Legal Concepts
62) What is the usual effect of a double indemnity clause?
A) It provides that a single life insurance policy covers the lives of two people, typically a
husband and wife.
B) It provides that the standard premiums purchase twice the amount of insurance coverage as
they usually do.
C) It provides that the policy will pay twice the policy amount if death occurs within the first 10
years that the policy is in effect.
D) It provides that the policy will pay twice the policy amount if death is caused by an accident.
Answer: D
Diff: 1
Topic: Life Insurance
Skill: Legal Concepts
63) Which of the following is not one of the common causes of death for which a life insurance
policy will exclude coverage?
A) suicide within a limited time after the policy becomes effective
B) accident involving a private airplane
C) incurable illness
D) military action
E) government execution
Answer: C
Diff: 1
Topic: Life Insurance
Skill: Legal Concepts
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64) The standard form fire insurance policy that is required to be used in most states comes from
which state?
A) Nebraska
B) Connecticut
C) New York
D) Delaware
E) Illinois
Answer: C
Diff: 1
Topic: Fire and Homeowners Insurance
Skill: Legal Concepts
65) A coinsurance clause in a fire insurance policy provides which of the following?
A) The insured must buy policies covering the insured property from at least two different
companies.
B) The insurer will contract with another company to share the risk for loss on the property.
C) The insured must purchase insurance coverage for a minimum percentage of the property's
value or will be required to bear a portion of any losses.
D) The insurance policies are backed up by the insurer obtaining reinsurance.
E) An independent government agency will cover any covered claims that the insurer is unable
to pay due to bankruptcy, and other factors.
Answer: C
Diff: 2
Topic: Fire and Homeowners Insurance
Skill: Legal Concepts
66) A policy provision that requires an insured to carry a certain minimum level of insurance
covering property in order to be able to recover the full policy amount is:
A) a deductible clause
B) a reinsurance clause
C) an exclusion clause
D) a coinsurance clause
E) an indemnity clause
Answer: D
Diff: 1
Topic: Fire and Homeowners Insurance
Skill: Legal Concepts
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67) In addition to the coverages provided in a policy of fire insurance, homeowners insurance
provides coverage for:
A) an annuity component
B) private mortgage insurance
C) flood insurance
D) personal liability
E) disability of the homeowner
Answer: D
Diff: 2
Topic: Fire and Homeowners Insurance
Skill: Legal Concepts
68) Which of the following is not covered under the typical homeowners insurance policy?
A) Damage to the primary dwelling unit.
B) Damage to appurtenant structures such as garages.
C) Theft of personal property from the primary dwelling unit.
D) Theft of personal property from the insured while the insured is traveling.
E) All of these are covered under the typical homeowners insurance policy.
Answer: E
Diff: 2
Topic: Fire and Homeowners Insurance
Skill: Concepts
69) Legal What can an insured do under a homeowners policy to provide insurance coverage for
specific valuable items, such as a rare and valuable painting?
A) Nothing in particular; it will be covered within the overall policy limits, but that might leave
less coverage for other items.
B) Execute an appurtenant structure substitution agreement in which the coverage for the rare
item will take the place of coverage for appurtenant structures.
C) Add a personal effects floater to the policy covering the artwork.
D) Add the standard artwork addendum to the policy.
E) Obtain an independent appraisal and submit it to the insurer.
Answer: C
Diff: 1
Topic: Fire and Homeowners Insurance
Skill: Legal Concepts
70) The type of auto insurance coverage that pays for the damage caused by the insured to the
car of the other driver in an accident is:
A) collision
B) comprehensive
C) liability
D) medical payments
E) no fault
Answer: C
Diff: 2
Topic: Automobile Insurance
Skill: Legal Concepts
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71) If a car insurance policy provides that it will pay the medical expenses of other drivers who
are injured through the actions of the insured, the coverage is:
A) collision
B) comprehensive
C) liability
D) medical payments
E) no fault
Answer: C
Diff: 2
Topic: Automobile Insurance
Skill: Legal Concepts
72) Under an automobile insurance policy, what does comprehensive coverage protect against?
A) All types of loss in connection with the ownership and operation of a vehicle.
B) All types of losses caused by the insured to other parties.
C) All types of damage to the covered vehicles of the insured.
D) All types of damage to the covered vehicles of the insured except for damage caused by
collision.
E) Coverage for all losses in connection with the vehicle of the insured that are caused by other
parties.
Answer: D
Diff: 2
Topic: Automobile Insurance
Skill: Legal Concepts
73) Which of the following is true about no-fault auto insurance?
A) It means that if there is no fault on the part of the insured, there will be no payment by the
insured's insurer.
B) A driver's insurer pays for the injuries to that driver regardless of who is at fault in the
accident.
C) No-fault insurance is broad, usually providing coverage for lost wages, pain and suffering,
and punitive damages.
D) No-fault insurance is lower cost coverage available only to good drivers who have never been
at fault in an accident.
Answer: B
Diff: 2
Topic: Automobile Insurance
Skill: Legal Concepts
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74) Which of the following best describes an umbrella insurance policy?
A) It is a policy that covers more than one type of risk.
B) It is a policy that provides coverage beyond the dollar limits of the insured's other policies.
C) It is a policy that covers damage only if it was caused by rain.
D) It is a policy that covers risks to a business.
E) It is a policy that combines life insurance and fire insurance protection.
Answer: B
Diff: 2
Topic: Other Types of Insurance
Skill: Legal Concepts
75) What does it mean for a group insurance plan to be a contributory plan?
A) The employer pays the full premium cost.
B) The employee pays the full premium cost.
C) The employee pays either some or all of the premium cost.
D) The employer is considered to make a charitable contribution in the amount of premiums paid
on behalf of employees.
Answer: C
Diff: 2
Topic: Other Types of Insurance
Skill: Legal Concepts
76) What is the effect of an incontestability clause?
A) The insured cannot file a claim more than a specified time following the insured event.
B) The insurer cannot challenge the information in the application after a specified time.
C) The insured is required to not challenge the statements made by its own insured.
D) The state is prevented from challenging any claim payment decisions of the insurer.
E) The insurer is prevented from canceling an insurance policy due to nonpayment.
Answer: B
Diff: 2
Topic: Other Types of Insurance
Skill: Legal Concepts
77) Two common types of warranties made in insurance contracts are:
A) limited and full
B) affirmative and promissory
C) express and implied
D) affirmative and negative
E) implied and promissory
Answer: B
Diff: 2
Topic: Defenses of the Insurer
Skill: Legal Concepts
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78) Bob is 25 years old and has a 40-year-old uncle who has recently entered his second
adolescence. Bob is close to this uncle although the uncle does not provide Bob with any
support. Within the past year, Bob's uncle has obtained a divorce, bought a large customized
motorcycle, and begun smoking and drinking heavily. In addition, he has begun hanging out in
bars known for periodic violence. Bob decides that taking out a life insurance policy on his uncle
could be a good investment. In this situation:
A) Bob has an insurable interest in his uncle because of the close family relationship.
B) Bob has an insurable interest, but only if he is named in his uncle's will to receive assets from
his uncle's estate.
C) Bob does not have an insurable interest because he took out the policy only after his uncle's
lifestyle change.
D) Bob does not have an insurable interest because the relationship is too remote and he receives
no support from the uncle.
E) Bob does not have an insurable interest because parents and children are the only persons who
can have an insurable interest in the life of another person.
Answer: D
Diff: 3
Topic: Insurance
Skill: Factual Application
79) Sandy signed a business liability insurance policy application and paid a premium to an
insurance broker, both of which the broker sent to the insurance company in that day's mail. An
hour later at Sandy's store, an employee negligently injured a customer. In this case:
A) The policy would not provide coverage because it was not yet in effect.
B) The policy would not provide coverage because Sandy's employee was negligent.
C) The policy would provide coverage because it had already gone into effect.
D) The policy would provide coverage on the basis of public policy.
Answer: A
Diff: 3
Topic: Insurance
Skill: Factual Application
80) Henry purchases an insurance policy under which he pays annual premiums for his entire
life, but ending at age 65. If he pays all the premiums then he is covered for his entire life, and
can receive a fixed amount of cash monthly for the remainder of his life after age 65. What type
of policy is this?
A) whole life
B) universal life
C) an annuity
D) term life
E) indemnity life
Answer: C
Diff: 2
Topic: Life Insurance
Skill: Factual Application
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81) Mary purchases automobile insurance including all types of coverage available. Mary is
driving home from work one afternoon when there is a severe thunderstorm threatening the town
in which she lives. She hears on the radio that this storm contains large hail. She considers going
directly home without making a planned stop at a building supply store so that she can put the
car in her garage, but decides to take a chance and stop at the store anyway. While she is in the
store, heavy hail falls and breaks out three of the windows in her car. Just as she is leaving, she
notices a couple of vandals who break out the remaining windows of her car and flee. Which
would be covered under the comprehensive portion of Mary's auto insurance policy?
A) Both the hail damage and the vandalism damage.
B) The vandalism damage, but not the hail damage, because she assumed the risk by choosing to
leave her car parked outside in the storm.
C) Damage from neither source would be covered because her actions choosing to park outside
in the storm was the proximate cause of both types of damage.
D) The damage from the hail storm, but not the vandalism because it was the willful act of third
parties who are responsible for the damage they caused.
E) The damage from the hail storm, but the vandalism damage only if the vandals are caught and
prosecuted.
Answer: A
Diff: 3
Topic: Automobile Insurance
Skill: Factual Application
82) Sam owns his own business. He has several different types of insurance policies to cover
various risks to his business. The policies have various coverage limits. Sam is considering
purchasing a policy that would add coverage in excess of all these individual policies up to $1
million. The type of policy that Sam is interested in adding is:
A) double indemnity
B) comprehensive
C) fidelity
D) umbrella
E) group
Answer: D
Diff: 2
Topic: Automobile Insurance
Skill: Factual Application
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83) Fred has an automobile liability insurance policy of $100,000 and an umbrella policy with $1
million dollars in coverage. Fred is driving negligently and crashes into Barney's car. Barney
suffers $500,000 in damages. How will the policies pay for the damages?
A) The $500,000 will be paid directly from the umbrella policy.
B) The first $100,000 will be paid from the automobile liability policy, and the
remaining $400,000 will be paid from the umbrella policy.
C) Barney will receive the $100,000 from the automobile liability policy, but nothing from the
umbrella policy.
D) Barney will receive $50,000 from the automobile liability policy and $450,000 from the
umbrella policy.
Answer: B
Diff: 2
Skill: Factual Application
84) When major natural disasters strike, there are some insurance companies that are not able to
pay their claims because they have not purchased adequate reinsurance. How might this problem
be minimized? Would disclosure requirements or reinsurance coverage requirements be better?
Answer: A difficulty is that large numbers of policyholders are simultaneously affected when an
insurance company fails in this situation. Because most policyholders do not understand the
concept of reinsurance, disclosures to policyholders might not accomplish much in this area.
This is probably an area appropriate for state regulation.
Diff: 2
Skill: Ethics and Policy
85) What are the advantages and disadvantages of no-fault automobile insurance? What is the
purpose of no-fault coverage? Should no-fault coverage be mandatory, optional, or not offered?
Give reasons for your answer.
Answer: No-fault insurance reduces litigation costs, which theoretically saves money for the
policyholder. It also should result in faster payment of claims. Opponents of no-fault say that it
removes incentives to drive carefully and does not hold persons responsible for the consequences
of their behavior.
Diff: 2
Skill: Ethics and Policy
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86) Should an insurance company have a duty to defend the insured when the defense will cost
the insurance company more than it will cost to simply pay the claim? For example, should an
auto insurance company have a duty to spend $10,000 to defend an insured when the claim is
under $10,000? What ethical problems arise when the outcome would affect the insured's driving
record, and therefore the rates that the insured would charge? What ethical problems can arise
with this duty to defend when both drivers are covered by the same insurance company?
Answer: A conflict can arise here because the only cost to the insurer is the payment of the
claim, whereas the insured might incorrectly be assumed to be partly at fault for an accident if
the fault is not determined in a court of law. In fact, the insurer might stand to gain in the form of
higher premiums collected if its insured is at fault. Where both drivers are covered by the same
insurer, the insurer will pay the claim regardless of who is at fault, and thus has no incentive to
determine fault.
Diff: 2
Skill: Ethics and Policy
87) Kirk was recently visited by a life insurance salesperson. The salesperson did an especially
good job of selling, and Kirk decided to buy several policies. In addition to a policy on himself,
Kirk purchased one policy each on the life of his wife, his mother, his son, his aunt, his uncle,
and the old man who lives next door. Kirk has been married for 12 years. His mother is 62 years
old and provides no support to Kirk. In fact, Kirk has very little contact with her. His aunt
provides no support, but had provided support when Kirk was young and his parents had
difficulty making ends meet. Kirk receives $10,000 each year as a gift from his uncle, but
otherwise receives nothing from him. Kirk has known the old man next door for 11 years and
often assists the old man when he needs help. For which of these policies does Kirk have an
insurable interest?
Answer: Kirk has an insurable interest in close family members. This includes his wife, son, and
mother, even though he does not have much contact with his mother. Kirk probably does not
have an insurable interest in his aunt because she is not currently providing any support. Whether
Kirk has an interest in his uncle would depend on if the gift each year is looked at as support.
Kirk would not have an insurable interest in the next-door neighbor.
Diff: 3
Topic: Insurance
Skill: Factual Application
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88) Mindy has decided to open a business that sells novelty exploding chocolates. Mindy has
actually been in the candy business for many years, but recently learned of a way to encase highpressure carbon dioxide into a special piece of sugar. The sugar piece will be surrounded by
chocolate. As the hollow piece of sugar melts in someone's mouth, or if the person bites on the
sugary center, the carbon dioxide will explode with surprising force. The force is not so great as
to be painful most of the time, but it will certainly shock anyone who is not expecting it. Thus,
Sandy expects that some customers will by the candy for themselves, but many will buy it to
offer to others as a practical joke. From the outside, the candy looks like any other candy. Sandy
has formed a new corporation for this venture. Sandy has come to you for information on the
types of insurance that she should consider purchasing for this business. What would you tell
her?
Answer: Apart from the wisdom of this product, Sandy should investigate several types of
insurance. Sandy should buy a fire insurance policy for her buildings and their contents. She
should buy a general business liability policy, as well as a product liability policy, assuming she
could find an insurer willing to insure this product. Sandy will probably be required to participate
in her state's workers' compensation insurance program. Sandy should acquire business
interruption insurance, and depending on the access that her employees have to cash or other
such assets, possibly fidelity insurance. If not covered on other policies, she should acquire
automobile insurance for any vehicles owned by the business. She should look into directors' and
officers' insurance and key-person life insurance for key personnel. She might also want to look
into group health insurance for her employees. Lastly, she should consider an umbrella policy.
Diff: 3
Topic: Other Types of Insurance
Skill: Factual Application
89) Steve has a car insurance policy that provides full coverage. Steve was involved in an
accident recently that resulted in significant damage to his car, and he also received some
bruises. Steve suspected he was partly at fault and decided not to report the accident to his
insurance company. Steve made a small payment to the other driver involved, who did not have
insurance. Steve also paid to have his own car repaired. Several months later, Steve receives a
summons and has been sued by the other driver for $200,000. Steve also learns at about the same
time that he has an internal injury that will require surgery to correct. Steve notifies his insurance
company about the accident, the amounts he has spent in connection with it, and the lawsuit.
Steve is afraid that his insurance company will cancel his insurance if it learns too much about
the accident or learns about Steve's eyesight problem, which he did not mention on his
application with the company four years ago. Thus, he has been avoiding the insurance
company's phone calls and requests for information about the accident. However, Steve believes
the company has an obligation to reimburse him and defend the suit. Discuss the legal issues
involved.
Answer: Steve has breached his duties of notifying the insurer within a reasonable time
following the accident and is violating his duty of cooperation. In addition, the insurance
company could try to avoid liability to Steve based on the concealment of his eyesight problems
in the application, although an incontestability clause may prevent this as it is 4 years later. The
insurer's duty to pay and defend may survive these problems if Steve's breaches end and the
earlier breaches did not increase the cost to the insurer.
Diff: 3
Topic: Other Types of Insurance
Skill: Factual Application
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