Deck 16: Insurance and Guarantee

Question 1

A wants to obtain life insurance for himself and contacts his insurance agent,who arranges the policy with an insurance company.A few days later,the insurance policy is issued and then it is delivered to A,but it requires him to pay the first premium,which he does.In this case,the contract is made

A)when A pays the first premium.
B)when A pays the first premium after the insurance policy is delivered to him.
C)when the insurance agent arranges the policy with the insurance company.
D)when A contacts his insurance agent.
E)when the insurance company issues the policy.

Answer 1

B

Question 2

LawnTrim Inc.is in need of working capital.It sold at a discount its account receivables to a factor-without recourse.LawnTrim is using a form of

A)credit insurance.
B)customer service.
C)liability insurance.
D)creditor guarantee.
E)fidelity insurance.

Answer 2

A

Question 3

John and Henry go to the bank so that Henry can borrow $50 000.00.The bank will only give Henry the money if John guarantees it,and John agrees in writing to do this.A couple of months later and unknown to John,Henry and the bank agree to material changes to Henry's loan,including increasing the interest rate substantially.If Henry defaults on the loan and the bank decides to sue both Henry and John,

A)John's guarantee and Henry's debt are discharged by the changes made to the loan.
B)John will be held liable on his guarantee,but Henry will not be because of the material changes to the loan.
C)John,as guarantor,will be held liable on his guarantee,and Henry,as principal debtor,will be held liable on the debt.
D)John's guarantee is discharged due to the changes made to the loan,and the bank can only sue Henry on the debt.
E)none of the above

Answer 3

D

Question 4

C guarantees the loan of A to Happy Bank.The guarantee provides that before the bank can sue C,it must give C notice.A defaults on the loan and the bank simply sues A and C.In this case,

A)C will be liable because A is party to the proceedings.
B)C will be liable on the guarantee.
C)C will not be liable because only A as principle debtor is liable.
D)C will not be liable because the bank made material changes to the guarantee.
E)C will not be liable because the bank breached the terms of the guarantee.

Question 5

A's building is insured by B Co.under a standard policy that covers all loss occasioned by fire.A's business is not doing well,and A figures that if his building is destroyed by fire,he can put part of the insurance proceeds into his business to keep it running.One evening,A starts a fire in his building that subsequently destroys it.In this case,

A)the insurance company is bound to pay the proceeds of insurance to A.
B)the insurance company is not bound to pay the insurance proceeds at all.
C)the insurance company is not bound to pay the proceeds of insurance to A,but must pay it to A's family.
D)the insurance company is bound to pay the insurance proceeds to A's business.
E)none of the above

Question 6

A is going on vacation in the middle of December when the temperature will be below zero degrees Celsius.His policy requires that while he is away,A must arrange to have his house looked after by someone.A makes arrangements with his friend B,who agrees to regularly look after the house while A is away,and A gives B a key.While A is away,the furnace,which was installed three weeks ago by the manufacturer,stops working and the house temperature drops below zero.As a result,the pipes in the upstairs washroom freeze and then burst,causing water damage throughout the entire house.An investigation discloses that B,believing that the house would be fine,decided not to check the house as he had promised to do.In this situation,

A)A's insurance company will not have to honour the policy and restore the house.
B)A's insurance company will only honour the policy and sue the furnace manufacturer to recover the cost of restoring the house.
C)A's insurance company will only honour the policy and restore the house.
D)A's insurance company will only honour the policy and will sue B to recover the cost of restoring the house.
E)A's insurance company will honour the policy and sue both B and the furnace manufacturer to recover the cost of restoring the house.

Question 7

Larson had a fire last month in his sportswear shop.Luckily he had "business interruption insurance." This insurance will NOT pay for

A)lost profits during the time the shop is closed.
B)reduction in the value of inventory.
C)overhead expenses while the shop is closed.
D)cost of moving to temporary accommodations.
E)money expended to reduce business losses.

Question 8

A company loans money from a bank.As part of the security for the loan,the bank takes security over the company's warehouse,the value of which is sufficient to pay off the loan.Henry,a shareholder in the company,also guaranteed the loan,but he did so because he knew that the value of the warehouse was enough to pay it off.The company defaults on the loan and the bank appoints a receiver-manager who is responsible for managing the company.The receiver-manager fails to renew the insurance on the warehouse,and one evening it catches fire and is badly damaged.Assume the company's loan is for $100 000.00 and that the value of the warehouse has been reduced from $120 000.00 to $60 000.If the company now defaults on its loan and the bank sues Henry on his guarantee,

A)Henry will have no liability because his guarantee is discharged by the wrongful omission of the receiver-manager.
B)Henry will have no defence and will be liable for $100 000.00.
C)the bank must first sell the warehouse before it can sue Henry.
D)Henry will rely on the bank's devaluation of the warehouse and will be liable for $40 000.00.
E)Henry will rely on the bank's devaluation of the warehouse and will be liable for $60 000.00.

Question 9

A wants to buy a building to use as a warehouse.A has seen the building he wants to buy and knows the purchase price is $500 000.00.A calls his agent and tells him he wants immediate insurance on the building.He gives him all the particulars and tells him to insure the building for $500 000.00,which the agent proceeds to do.After a month of negotiations,A finally enters into an agreement of purchase and sale,and two weeks later he becomes the owner of the building.A half a year later,the building is badly damaged by fire.In this case,

A)A has no coverage under the policy because it is void,since A had no insurable interest in the building at the time the insurance policy was taken.
B)A has no coverage for damage caused by fire because he did not comply with the disclosure requirements of the insurance company.
C)A's coverage under the policy began when A became the owner of the building,and the insurance company will pay for the damage to the building.
D)A's coverage under the policy began when A entered into the agreement of purchase and sale for the building,and the insurance company will pay for the damage to the building.
E)A's coverage under the policy began when he called his agent,and the insurance company will pay for the damage to the building.

Question 10

Simon purchased for cash a used boat and trailer from Haggard Maritime Inc.at 4:56 p.m.He phoned his insurance agent and asked if he could get insurance immediately so he could bring the boat and trailer home.The agent said,"You are covered as of 12:01 noon today." Simon got into a traffic accident at 6:32 p.m.the same day,whereby the boat and trailer were severely damaged.Will the insurance company pay this claim?

A)No,it won't,since the agent's actions were illegal and probably against company policy.
B)This would depend on who was at fault in the accident.
C)No,it won't,since acceptance had not been received from the company.
D)No,it won't,because the agent would not have been able to bind the company.
E)Yes,it will,because the agent would have authority to bind the company.

Question 11

Julie entered an art gallery with a bookbag over her shoulder.She was asked by a security guard to leave the bookbag at the front desk,but she refused to do so.As she looked at a display of pottery,she carelessly swung the bookbag around and knocked over a pottery display case,destroying its contents valued at $4000.Julie then asked the security guard if the gallery had insurance on the pottery,and she was told that it did.Will Julie need to pay the damages?

A)No,she won't,because it was "just one of those things."
B)No,she won't,because she lacks an insurable interest.
C)Yes,she will,because she lacked utmost good faith by taking the bookbag in after being told not to.
D)Yes,she will,because of subrogation.
E)No,she won't,because the art gallery's insurer will pay the loss.

Question 12

Which of the following is NOT one of the four basic aspects of an insurance contract?

A)nature of the risk covered
B)amount of the premium
C)amount of insurance coverage
D)duration of the protection
E)designation of the beneficiary

Question 13

Property insurance is not assignable without

A)consent of the insured.
B)novation.
C)subrogation.
D)acceptance of new policy holder.
E)promise of indemnity.

Question 14

Edward is the principal shareholder in Family Company,which has a loan with Nasty Bank.The company is experiencing financial difficulties that are making it difficult to pay off the loan on time.However,the bank tells the company that if Edward,as principal shareholder,guarantees the loan,it will give the company one more year to pay off the loan.A couple of weeks later and after Edward has given his guarantee to the bank,the branch of the bank that extended the loan has a change of managers.When the new manager sees the poor financial health of the company,he makes a demand for immediate payment on both the company and Edward and puts the company into receivership.In this case,if the bank decides to sue Edward and the company,

A)the company will be liable on its loan and Edward will be liable on his guarantee.
B)Edward will be liable as principal shareholder.
C)Edward will not be liable on his guarantee,because there was a material change in the term of the loan.
D)Edward will be liable on his guarantee so long as the bank sues the company first.
E)Edward will not be liable on his guarantee,which was discharged by the bank manager's arbitrary actions.

Question 15

Donna owns a commercial building that has a small retail shop,three offices,and a small warehouse.Each unit is rented out to a different company.She has taken out a standard fire insurance policy for the appraised value of the building.On July 1st,the building and its contents are destroyed by fire.The cause of the fire was never determined.Which of the following is true?

A)The policy will pay for the damages to the building and all personal property contained within.
B)The policy will pay for the building and any furnishings owned by Donna up to the face value of the policy.
C)The policy will pay for damaged inventory in the warehouse.
D)The policy will pay for replacement costs of the building.
E)The policy will pay for the damaged inventory and lost profits of each tenant.

Question 16

Subrogation in insurance law is the

A)insurer's right to retain damaged goods and recover the residual value of them when an insurance payout has been made.
B)acquisition by the insurer of the insured's right to sue third parties upon the insurer paying the insured's losses.
C)protection afforded an employee under a fidelity bond.
D)process of making additions to coverage under an insurance policy through use of riders.
E)selling of book debts without recourse to a factor.

Question 17

A,a smoker,applies for life insurance,designating his wife,who is also a smoker,the beneficiary.When A fills out the insurance application,he does not disclose that he is a smoker,and the insurance company agrees to insure him.A few weeks later,A has heart by-pass surgery and is told not to get out of bed.However,A does not listen and decides to go to the washroom.On his way to the washroom A suffers a stroke and dies.A's wife now wants to collect the insurance proceeds.In this situation,

A)A's wife will succeed in collecting the insurance proceeds because she is A's designated beneficiary.
B)A's wife will not succeed in collecting the insurance proceeds because A failed to disclose his smoking on the application for insurance.
C)A's wife will succeed in collecting the insurance proceeds because the cause of A's death was not related to smoking.
D)A's wife will not succeed in collecting the insurance proceeds because there is no privity between her and the insurance company.
E)A's wife will not succeed in collecting the insurance proceeds because she is a smoker.

Question 18

A wants to insure his business property and contacts his insurance agent,who has agency contracts with a number of different insurance companies.The agent prepares a binder of insurance and sends it to A.A few days later,A receives the insurance policy.In this case,the contract is made

A)when A pays the first premium.
B)when the agent prepares the insurance binder.
C)when A receives the policy and pays the first premium.
D)when A receives the policy of insurance.
E)when A receives the insurance binder.

Question 19

In June,Ken developed glaucoma,a condition of the eyes that if untreated results in blindness.By August,Ken was legally blind,yet he continued to drive.He informed neither the Ministry of Transportation nor his insurance company of the changed condition of his eyes.On September 12,he got into a serious automobile accident where he was driving and was at fault.Will the insurance company need to pay this claim?

A)Yes,it will,because he had a valid driver's licence.
B)Yes,it will,because the policy had not been changed or cancelled.
C)No,it won't,because "utmost good faith" is required.
D)No,it won't,because his drivers licence would be void.
E)No,it won't,because the insurer was not notified of the change in risk.

Question 20

When the parties agree to a change in the terms of an existing insurance contract,they may do so by attaching a separate paper called

A)an amendment.
B)a supplement.
C)an endorsement.
D)a recommendation.
E)a rider.

Question 21

Exemption clauses in insurance contracts are strictly interpreted by the courts.

Question 22

Which of the following is NOT a defence available to a guarantor when an action is brought by the creditor to have the guarantor held liable for the debt of the principal debtor?

A)any defence that the primary debtor had
B)misrepresentation on the part of the creditor in selling the goods
C)res ipsa loquitur (the facts speak for themselves)
D)defences in contract,such as lack of consideration
E)set-off between the creditor and debtor

Question 23

Where certain terms are changed in a policy,the document that records the changes is not an endorsement.

Question 24

The concept of subrogation applies to the liability of a guarantor under a loan guarantee.Under the concept of subrogation,

A)the lender must attempt to realize on any security for the loan before claiming from the guarantor.
B)the guarantor that compensates a lender takes over the right of the lender to sue the borrower.
C)the lender can sue the guarantor if there is default by the borrower under the loan.
D)the lender must attempt to collect from the borrower before pursuing the guarantor for payment of the loan.
E)none of the above

Question 25

An offer to purchase life insurance is accepted when the agent provides the applicant with an insurance binder.

Question 26

Subrogation allows an insurance company to recover its loss from the person(s)responsible without having to pay the insurance proceeds to the insured.

Question 27

A comprehensive general insurance policy is one that covers most types of damage or loss to an insured's property as well as providing third party liability.

Question 28

While Stella was in Hong Kong,a loan came due that she had guaranteed.The creditor,a kindly old man,extended the due date on the loan for thirty days,interest free.Did this action by the creditor discharge Stella from her obligation?

A)Yes,it did,since Stella was not consulted on this change.
B)Yes,it did,since her position as a guarantor was clearly prejudiced.
C)No,it did not,since the change is obviously to the benefit of the guarantor.
D)Yes,it did,because consent by Stella would be required.
E)No,it did not,because the risk is not materially altered to her detriment.

Question 29

In May,farmer Smith sold one of his tractors to farmer Jones for $26 000.Smith received $6000 down and a 7 percent note payable (for $20 000)to be paid on October 15th.In need of cash,farmer Smith brought the note to his bank for discounting.The bank gave cash less 5 percent for the note,whereas farmer Smith endorsed the note in favour of the bank.Farmer Smith performed an act of

A)indemnity.
B)subrogation.
C)discharge.
D)novation.
E)guarantee.

Question 30

Uncle Ralph told Jody's parents,"Supply Jody with what she needs to get off to a good start at university and I'll take care of all the bills." Legally,we identify Uncle Ralph as

A)Jody's educational guarantor.
B)the maker of a promise of indemnity.
C)Jody's sponsor.
D)the guarantor of all university bills.
E)the one to provide a guaranteed education.

Question 31

A building owned by X Company is insured for $100 000,but the insurance contract contains an 80 percent co-insurance clause.The building is damaged by fire to the amount of $20 000.The depreciated replacement value of the insured property is $250 000.The insurance company will then pay

A)$8000.
B)$15 000.
C)$5000.
D)$10 000.
E)$20 000.

Question 32

An insurance contract is one that is usually said to require utmost good faith on the part of the parties.

Question 33

James was the guarantor for a loan Edward had at the bank.Edward had also pledged a coin collection as security for the loan.The loan came in default,so James made the remaining payments.Who gets the coin collection?

A)The bank does,since it is the bank's loan that was defaulted.
B)James does,since the coin collection is his consideration for the guarantee.
C)James does,since he has the right of subrogation.
D)Edward does,since the loan is now fully paid up.
E)James does,since he has the right of set-off.

Question 34

Co-insurance is a technique used by insurance companies to

A)prevent policy holders from working the system.
B)have a competitive edge over their competitors.
C)keep from being ripped off by insurance fraud.
D)meet government mandates.
E)provide extra service to their customers.

Question 35

The act of forbearance of some deed at the request of the guarantor is usually consideration to the guarantor in a contract of guarantee.

Question 36

A guarantee occurs when a third party agrees to pay off a loan made to another.

Question 37

A tenant carelessly drops a candle,and the resulting fire destroys the landlord's premises.The landlord's loss is fully covered under the landlord's fire insurance policy,and the insurance company compensates the landlord for the loss.In these circumstances,

A)the tenant will have to indemnify the landlord for any increase in the landlord's insurance premiums.
B)the tenant will be liable to compensate the insurer.
C)the tenant will have no liability.
D)the tenant will be liable only if the tenant acted deliberately.
E)the landlord can recover fully from the tenant.

Question 38

Which of the following does NOT affect the enforceability of a guarantee?

A)the release by the creditor of security placed in support of the loan without the guarantor's approval
B)the absence of a note or memorandum signed by the guarantor
C)lack of consideration
D)the release of other guarantors by the creditor without the knowledge of the remaining guarantors
E)the death of the primary debtor

Question 39

Nancy missed a payment on her signature loan to Pacific Bank.The bank threatened to bring her to court unless she could pledge some assets or find someone to be a guarantor.Nancy's friend Lynn agreed to sign as guarantor provided Nancy wouldn't tell Lynn's husband.In response to Lynn's promise,what is the necessary consideration for the guarantee?

A)the bank's act of forbearance
B)that Nancy not tell Lynn's husband
C)that Lynn sign the contract under seal
D)Nancy's endearment to a friend
E)There is no consideration-that's a problem.

Question 40

Key Bank would not give Tony a business loan without a suitable guarantor.So Tony's father signed as a guarantor.He must make the loan payments when

A)the bank requests.
B)notified in writing by the creditor.
C)notified in writing by the debtor.
D)Tony requests.
E)Tony defaults.

Question 41

Why it is important for a contract of guarantee to be in writing and signed by the guarantor?

Question 42

Kathleen,feeling quite depressed,decides that a few rounds of Russian Roulette would cheer her up.Unfortunately,she loses.Two years earlier,a life insurance policy was issued to her mother,Joan.Will the insurance company pay Joan under this policy? Discuss the legal basis for the insurance company's argument that they are not liable.

Question 43

What is the purpose of insurance,and how does it achieve its purpose?

Question 44

If a material change in risk occurs after a fire insurance policy has been entered into,what must the insured do in order to maintain his or her coverage? When this occurs,what options does the insurer have?

Question 45

The right of subrogation does not apply in all cases,but it is presumed to apply if it is not expressly excluded.

Question 46

Explain the difference between an indemnity and a guarantee.

Question 47

Contracts of insurance contain statutory terms that require,for example,that the insured give prompt notice to the insurer of any loss suffered by the insured.If the insured fails to meet such terms,what effect does it have on the contract of insurance?

Question 48

To be entitled to the proceeds of an insurance policy,a person must have an economic interest in the property that is the subject matter of the insurance policy.

Question 49

What constitutes the consideration to the guarantor in a contract of guarantee?

Question 50

As between a principal debtor and a guarantor,what are the rights of the creditor on the principal debtor's default,and why are they important?

Question 51

Why is obtaining insurance important for most businesses?

Question 52

Sam needs a loan for his carpet business.The bank agrees to make him a loan provided that his wife Pam gives the bank a personal guarantee agreeing to be responsible is there is default under the loan agreement.Pam signs a guarantee for the loan.Sam defaults under the loan agreement and the bank sues Pam on the personal guarantee.Pam's defence is that there was no consideration for the guarantee because she had no ownership or financial interest in her husband's business,and she received none of the loan proceeds.Is she correct that she is not bound by the guarantee because there is no consideration?

Question 53

Explain the difference between an insurance agent and an insurance broker.

Question 54

Milton,who is 19 years old,purchased a car but found that he was in a position of having to pay extremely high insurance rates.As a way of avoiding those high payments,he had a bill of sale made out to his father and had the car registered in his father's name.His father took out an owner's policy from All Risk Insurance Limited.As was later revealed,Milton's father never paid for the vehicle and Milton remained the true owner and operator.Then,later,when Milton was involved in an accident,the claim was submitted by the father (since the policy was in his name).Upon discovering the true state of affairs,the insurance company refused to pay for damage caused by the accident.What legal basis would the insurance company have to refuse to pay the claim?

Question 55

Bill was a good friend of John and thought that John was gradually getting quite sickly.In fact it looked so serious that Bill thought John might lose his job due to depression and illness.Hoping to benefit from the situation,Bill purchased a life and disability policy on John.This policy would provide monthly payments to Bill if John was disabled due to illness.As it turned out,John was disabled due to illness,and pursuant to the terms of the policy of insurance,Bill made a claim under the policy.Will the insurance company pay Bill the monthly payments provided for under the policy? Explain your answer and comment on the applicable legal principles.

Question 56

In the case of Demeter v.Dominion Life Assurance Co. ,a husband applied to the court as owner and beneficiary of a policy of life insurance for payment of the proceeds as a result of the death of his wife.She died because he murdered her.Why will courts not enforce a contract of insurance in these circumstances?

Question 57

Joe obtains a loan from a bank,and his wife,Mary,gives a personal guarantee as security.The guarantee is expressed as being a continuing guarantee.Two months later,Joe also obtains a line of credit from the same bank.This time Mary does not sign a guarantee.Mary is happy because she believes that the bank will not come after her if Joe defaults on the line of credit.Is Mary's belief true or false?

Question 58

If an insured has been negligent,the insurance policy will generally be void.

Question 59

Define the term "insurable interest" and state the effect on the insured where he or she does not have an insurable interest.

Question 60

Leah,while driving her vehicle on a narrow road in the mountains,comes to a bridge that does not appear very stable.After considering her alternatives for a moment,she decides to drive over the bridge.The bridge collapses and her vehicle is destroyed.Is the insurance company liable on her car insurance policy? What legal arguments could they raise if they wish to deny coverage?

Question 61

Medical malpractice insurance protects doctors from significant judgments in negligence suits.For many years the costs of this insurance in North America has been rising;however,doctors in the United States pay significantly more in premiums than do doctors in Canada.Why is there such a discrepancy between these levels of premiums?

Question 62

When Dennis applied for a policy of life insurance,one of the questions on the medical questionnaire asked: "Have you ever been hospitalized?" Dennis answered truthfully that he had been hospitalized in 1993 to have his tonsils out and in 1996 to have his appendix out.The life insurance policy was issued.Sixteen months later Dennis died of a heart attack and the insurance company discovered that he had been hospitalized in 1985 due to a mild heart attack.The beneficiary of the life insurance policy applied for the death benefit,claiming quite correctly that Dennis had been truthful in the application,but the insurance company refused to pay the death benefit.What legal basis does the insurance company have for refusing to pay?