Finance - Risk Management

Please answer only 1 of the 3 questions.

1. Clancy knew he could not meet the physical requirements for insurability, so he had his twin brother, Clarence, take thephysical examination in his place. A policy was issued, and three years later, Clancy died. The insurance company claims manager learned that Clancys twintook the examination in his place and refused to pay the claim. Clancys beneficiary sued the company for the proceeds, claiming that the two-yearcontestable period had expired.

a. Did the company have to pay? Why or why not?

2. Bill Boggs just applied for life insurance. During the application process, he indicated that he had never had pneumonia, when the truth is that he did have the disease as a baby. He did fully recover, however, and there were no permanent ill effects. Bill was unaware of having had pneumonia as a baby until a few weeks after he completed the application when his mother told him of the event.

a. Will this misstatement on the life insurance application be grounds for the insurer to cancel his life insurance after it is issued? Why or why not?

b. If he discovers his error, should he notify the insurer? Will his statements be treated as warranties, or as representations?

3. The following insureds have accidental death benefit riders on their life insurance policies. Discuss why you think this rider will or will not pay the beneficiary in each of the following situations.

a. The insured dies from a fall through a dormitory window on the tenth floor. The door to his room is locked from the inside, and the window has no ledge. There is no suicide note. He had not appeared despondent before his death.

b. The insured dies in a high-speed single-car automobile accident on a clear day and with no apparent mechanical malfunction in the vehicle. He had been very depressed about his job and had undergone therapy with a counselor, during which he had discussed suicide; however, there is no note.