Scan0046.rtf

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MODULE 5. c 32- INSURANCE 7.

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1st: _/8= - %

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MULTIPLE-CHOICE ANSWERS

MULTIPLE-CHOICE ANSWER EXPLANATIONS

B.6. Insurable Interest

E.6. Coinsurance Clause

1. (a) In the case of property insurance, the insurable interest must exist when the loss occurs. It need not exist when the policy is issued. Therefore, answer (b) is incorrect. Answers (c) and (d) are incorrect because there are no such requirements that the property be owned in fee simple or by individuals.

6. (b) Although Clark has insurance coverage exceeding the fair value of the warehouse, he may only recover the actual amount of his loss. The coinsurance clause does not apply when the insured property is totally destroyed. Fair Insurance will pay 1501225 of the $200,000 loss, or $133,333, while Zone Insurance will pay 751225 of the $200,000 loss, or $66,667. Thus, Clark will receive a total of $200,000 from Fair and Zone.

2. (a) To have an insurable interest in property, there must be both a legal interest and a possibility of pecuniary loss. Although a legal interest may involve ownership or a security interest, general creditors do not have the requisite interest to have an insurable interest. Answer (b) is incorrect because a mortgagee has an insurable interest for the mortgage balance still owed. Answer (c) is incorrect because Brown has an insurable interest in key company personnel whose death could result in pecuniary loss for Brown. Answer (d) is incorrect because Brown has an insurable interest in his partner whose death could cause him great monetary loss. 3. (c) An insurable interest in property exists if the insured has both a legal interest in the property and the possibility of incurring a pecuniary loss. The legal interest may be ownership or a security interest. A corporate retailer has an ownership interest in its inventory, and the possibility of incurring a monetary loss. A partner also has an ownership interest in partnership property, with the possibility of incurring a monetary loss. -

C. Subrogation 4. (b) Once the insurance company pays its insured, Massaro, it steps into Massaro's shoes and obtains the same rights against third parties that Massaro had. Since Lux was at fault in this accident, the insurance company has rights against Lux as well as any insurance company that has insured Lux. Answer (a) is incorrect because the insurance company can nevertheless recover from third parties based on the right of subrogation. Answer (c) is incorrect because the insurance company has the right to collect from Lux as well as an insurer. Answer (d) is incorrect because the relevant concept is the right of subrogation, not contribution.

E. Fire Insurance 5. (c) An important element of a property insurance contract is the existence of an insurable interest. The insurable interest requirement is met when an entity has both a legal interest in the property and a possibility of monetary loss if the property is damaged. Since Merit still owns the office building at the time of the fire, they fulfill both these requirements. 'Papco also has an insurable interest which began on Februaryx when they entered into the contract to purchase the building. Papco's legal interest results from their contract to purchase the building. Papco's monetary interest results from their potential loss of future use of the building. Thus, in this situation, both Papco and Merit have an insurable interest.

7. (c) The recoverable loss is calculated using the eoinsurance formula. Amount of insurance

Actual loss x

Coinsurance % x FMV of property at time of loss

The amount recoverable from Owners is calculated as follows: $180,000 x

$150,000. -8-0')l-'o:":;x":"$"-'2-=-5:":0,""0-00- = $135,000

8. (b) When property is covered by a coinsurance clause, the insured party agrees to maintain insurance equal to a given percentage of the value of the property, usually 80%. If the percentage of coverage is less thari the specified percentage and partial destruction of the property occurs, then the insured will be liable for a portion of the loss. However, a coinsurance clause applies only when there has been partial destruction of property. If the insured property is totally destroyed, the coinsurance clause does not apply and the insured party will recover the face value of the insu~ance policy. Thus, Pod will recover $150,000 from Owners Insurance Co. and $50,000 from Group Insurance Co. for a total of $200,000.