THE ETHICAL DIMENSION Is it ethical for an insurer to refuse to pay a claim under the terms of a policy that the insurer drafted? Discuss.

WHAT IF THE FACTS WERE DIFFERENT? Suppose that Tennessee Farmers’ policy had provided that foreclosure proceedings either voided the coverage or required notification to continue it. Would the result have been different? Explain.

Jessica Robbins bought a house in Humboldt, Tennessee. U.S. Bank, N.A., financed the purchase. Tennessee Farmers Mutual Insurance Company issued the homeowner’s insurance policy. The policy included a “standard mortgage clause” that promised payment to the bank unless the house was lost due to an “increase in hazard” that the bank knew of but did not tell the insurer. When Robbins fell behind on her mortgage payments, the bank started foreclosure proceedings. No one told the insurer. Robbins filed for bankruptcy, which postponed the foreclosure. Meanwhile, the house “blew up,” in Robbins’s words, and was destroyed in a fire caused by chemicals used to make methamphetamine. The bank filed a claim under the policy. The insurer refused to pay. The bank filed a suit in a Tennessee state court against the insurer claiming breach of contract. The insurer argued that it had not been told by the bank of an “increase in hazard”—the foreclosure. The court ruled in favor of the bank, an intermediate appellate court reversed in favor of the insurer, and the bank appealed.