Cengage Advantage Books: Law for Business 18th Edition by John Ashcroft ,Janet Ashcroft

Exercise 10

Elizabeth Young, an employee of Paper Converting Machine Company (PCMC), was severely injured while working on a machine made by PCMC, and PCMC learned about the accident. At the time, PCMC was self-insured. Several months later, PCMC was purchased by another company, and it bought a $2 million policy from Admiral Insurance Co. (Admiral). In applying for the policy, PCMC disclosed the Young accident to Admiral's underwriting department. When Young sued PCMC, the company notified Admiral's claims department. Thinking the policy might cover Young's injuries, Admiral participated in settlement negotiations and agreed to pay $2 million. Before sending the money, Admiral decided the policy did not cover that claim, because its policy excluded known claims, and the Young accident occurred prior to the policy being issued. Admiral said it would not pay unless PCMC reimbursed it. PCMC alleged that Admiral was bound by the settlement agreement. In the resulting lawsuit, Admiral claimed it was not bound by the agreement because of mistake of fact or mistake of law. Decide the case.