Deck 18: Insurance and Guarantee

Question 1

Julie entered an art gallery with a book- bag over her shoulder. She was asked by a security guard to leave the book- bag at the front desk but she refused to do so. As she looked at a display of pottery, she carelessly swung the book- bag around and knocked over a pottery display case destroying its contents valued at $4,000. 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, because it was just "one of those things".
B) No, because she lacks an insurable interest.
C) Yes, because of subrogation.
D) No, because the art gallery's insurer will pay the loss.
E) Yes, because she lacked utmost good faith by taking the book- bag in after being told not to.

Answer 1

C

Question 2

IBM pays for a life insurance policy on each of its employees where the _ is usually the beneficiary. IBM has a second insurance policy on some of its key employees. On this second policy, is the beneficiary.

A) nearest of kin; the insured
B) spouse; IBM
C) company; the nearest of kin
D) insured; the insurer
E) employee; the company

Answer 2

B

Question 3

Property insurance is not assignable without

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

Answer 3

B

Question 4

Co- insurance is a technique used by insurance companies to

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

Question 5

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

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

Question 6

This means the insurance company can actively seek to recover from a third party the money that it has paid to the insured:

A) novation
B) encroachment
C) indemnity
D) imputed notice
E) subrogation

Question 7

Simon purchased for cash a used boat and trailer from Haggard Maritime Inc. at 4:56 PM. 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 PM the same day, where the boat and trailer were severely damaged. Will the insurance company pay this claim?

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

Question 8

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

Question 9

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 rider.
C) a recommendation.
D) a supplement.
E) an endorsement.

Question 10

Comprehensive general accident insurance for business is NOT likely to cover

A) vehicle accidents.
B) liability to others.
C) plate- glass breakage.
D) water and storm damage.
E) fire protection.

Question 11

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

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

Question 12

Contracts of insurance are enforceable because

A) they are in writing and of a standard form.
B) they are contracts of indemnity and are therefore enforceable.
C) the insured has an insurable interest in that he will suffer some pecuniary detriment from the loss or destruction of the property.
D) they are always under seal and therefore cannot be either illegal or void.
E) they are in the nature of wagering and such contracts are enforceable.

Question 13

Regarding property insurance,

A) the offer is not accepted until the insurance company delivers the policy to the insured.
B) property insurance is usually written for a term longer than a year.
C) one needs to pay the first premium to obtain coverage.
D) agreements for effecting property insurance are typically less formal than for life insurance.
E) the insurance agent would not have an agency contract with more than one insurer.

Question 14

This type of insurance includes both professional and business categories, the former referred to as malpractice insurance:

A) life insurance.
B) title insurance.
C) credit insurance.
D) public liability insurance.
E) medical insurance.

Question 15

A contract of insurance is a method of purchasing protection against a possible loss. The insurance company will and the risk of loss.

A) change; manage
B) sow; reap
C) assume; payoff
D) pool; isolate
E) shift; spread

Question 16

Subrogation in insurance law is the

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

Question 17

In June, Ken developed glaucoma, a condition of the eyes where if untreated, results in blindness. By August, Ken was legally blind yet he continued to drive. He neither informed the Dept. of Motor Vehicles nor his insurance company of the changed condition of his eyes. On September 12th 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) No, because "utmost good faith" is required.
B) No, because the insurer was not notified of the change in risk.
C) Yes, because the policy had not been changed nor canceled.
D) No, because his drivers license would be void.
E) Yes, because he had a valid drivers license.

Question 18

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

Question 19

An expert in the appraisal of property losses, who offers these services to insurance companies for a fee, is the insurance

A) arbitrator.
B) appraiser.
C) adjuster.
D) agent.
E) broker.

Question 20

A building owned by X Company is insured for $100,000 but the insurance contract contains an 80% 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) $5,000.
B) $15,000.
C) $8,000.
D) $10,000.
E) $20,000.

Question 21

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

Question 22

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

Question 23

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

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

Question 24

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

Question 25

Uncle Ralph told Jody's parents to; "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) the maker of a promise of Indemnity.
B) Jody's educational guarantor.
C) Jody's sponsor.
D) the one to provide a guaranteed education.
E) the guarantor of all university bills.

Question 26

Which of the following is TRUE regarding the significance of a guarantee?

A) A guarantee is a contingent rather than an absolute liability.
B) A guarantor makes her promise to the debtor, not to the creditor.
C) A guarantor's duty to pay arises upon notification by the debtor.
D) Strictly speaking, the creditor must notify the guarantor of the default.
E) The effect of a guarantee is more encompassing than that of an indemnity.

Question 27

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

Question 28

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 29

An integral part of the duty of utmost good faith is the duty of disclosure.

Question 30

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

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

Question 31

Rather than purchasing separate policies, the modern tendency is to issue comprehensive insurance.

Question 32

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 if Nancy wouldn't tell Lynn's husband. In response to Lynn's promise, what is the necessary consideration for the guarantee?

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

Question 33

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

Question 34

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

Question 35

In May, farmer Smith sold one of his tractors to farmer Jones for $26,000. Smith received $6,000 down and a 7% 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% for the note, whereas farmer Smith endorsed the note in favour of the bank. Farmer Smith performed an act of

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

Question 36

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

Question 37

A deductible clause is one that requires the insured to bear the loss up to a stated amount.

Question 38

A guarantee is

A) a contract that allows fluctuating debt to be incurred without the provision of additional security.
B) an agreement to repay the obligations of another upon that others default.
C) a contract that has a principal debtor liable for the primary debt and a subsidiary debtor liable for any additional indebtedness.
D) a contract that has a single creditor but more than one primary debtor.
E) a series of transactions between a creditor and its principal debtor that result in a primary debt and contingent liability.

Question 39

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

Question 40

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

Question 41

How do the functions of an insurance agent and an insurance broker differ?

Question 42

Term insurance is insurance that covers a person for the term of his or her life.

Question 43

Leah, while driving her vehicle on a narrow road in the mountains, came to a bridge which did not appear very stable. After considering her alternatives for a moment she decides to drive over the bridge. The bridge collapsed and her vehicle was totally destroyed. Is the insurance company liable on her auto insurance policy? What legal arguments could they raise if they wish to deny coverage?

Question 44

Dennis applied for a policy of life insurance and 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?

Question 45

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 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 46

In a guarantee, the guarantor is primarily liable for the debt owed by the debtor. In an indemnity, the guarantor is secondarily liable for the debt owed by the debtor.

Question 47

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 coverage? When this occurs, what options does the insurer have?

Question 48

Judy purchased a property and built a building on it at a cost of $200,000. She purchased fire insurance on the building in the sum of $150,000. A fire caused $150,000 damage to the building. Under normal circumstances would Judy be able to recover the full amount of the loss? Give reasons for your answer.

Question 49

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 50

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

Question 51

Contracts of insurance contain statutory terms which 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 52

Define the term "insurable interest" and state the effect on the insured where they do not have an insurable interest.

Question 53

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

Question 54

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 55

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 56

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

Question 57

Both Provincial and Federal governments regulate the insurance industry. What are the main purposes of insurance statutes?

Question 58

When does a life insurance policy become effective?

Question 59

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 60

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?