Insurance Case Studies & Practical Application 3 — Questions and Answers
Question 1: A life insurance applicant discloses a history of high blood pressure but omits a recent diabetes diagnosis. The insurer issues the policy. The insured dies two years later. What is the likely outcome?
- The insurer must pay because the contestability period has passed (Correct answer)
- The insurer can rescind the policy due to material misrepresentation
- The insurer pays a reduced death benefit
- The insurer must honor the policy regardless of the omission
Correct answer: The insurer must pay because the contestability period has passed
Most life insurance policies have a two-year contestability period; after it expires, the insurer generally cannot contest the policy for misrepresentation and must pay the full death benefit.
Question 2: A small business experiences a fire that shuts down operations for three months, resulting in $150,000 in lost income. Which coverage responds to this loss?
- Commercial property insurance
- General liability insurance
- Business income (interruption) insurance (Correct answer)
- Workers' compensation insurance
Correct answer: Business income (interruption) insurance
Business income insurance (also called business interruption insurance) covers lost profits and continuing expenses when operations are suspended due to a covered loss.
Question 3: A contractor accidentally damages a client's expensive flooring while installing new cabinets. The contractor's CGL policy has a 'your work' exclusion. Will the policy cover the damage?
- Yes, CGL covers all third-party property damage
- No, damage to the work itself is typically excluded under CGL (Correct answer)
- Yes, because a third party's property is involved
- No, only workers' compensation covers contractor injuries
Correct answer: No, damage to the work itself is typically excluded under CGL
CGL policies typically exclude property damage to 'your work,' meaning damage caused to work the insured performed is not covered, though completed operations coverage may apply in some cases.
Question 4: An auto insured is hit by an uninsured driver and suffers $35,000 in medical bills. The insured's UM coverage limit is $25,000. What is the maximum the insured recovers from their own insurer?
- $35,000
- $25,000 (Correct answer)
- $10,000
- $0
Correct answer: $25,000
Uninsured motorist (UM) coverage pays up to its policy limit; the insured can recover a maximum of $25,000 regardless of the actual loss amount.
Question 5: A policyholder files a claim and later discovers the adjuster significantly undervalued the loss. The statute of limitations in their state for insurance bad faith is 3 years. The claim was settled 4 years ago. What is the likely outcome?
- The insured can still sue because insurance disputes have no time limits
- The insured is likely barred from suing due to the statute of limitations (Correct answer)
- The insurer must reopen the claim regardless of timing
- The insured can file a complaint with the state DOI for a full recovery
Correct answer: The insured is likely barred from suing due to the statute of limitations
Statutes of limitations set hard deadlines for filing lawsuits; once expired, the insured's legal remedy is generally barred even if the claim was mishandled.
Question 6: A health insurance policyholder receives treatment from an out-of-network specialist. Their PPO plan has a 70/30 out-of-network coinsurance after a $1,000 deductible. The bill is $5,000. How much does the insured owe (deductible already met)?
- $1,500 (Correct answer)
- $3,500
- $1,000
- $2,000
Correct answer: $1,500
With the deductible already satisfied, the insured pays 30% coinsurance on the $5,000 bill: $5,000 × 0.30 = $1,500.
Question 7: A tenant's apartment is destroyed by a fire caused by a neighbor's negligence. The tenant's renters insurance pays the claim. What legal right does the insurer then exercise?
- Indemnification
- Subrogation (Correct answer)
- Adhesion
- Contribution
Correct answer: Subrogation
After paying the insured's claim, the insurer exercises subrogation rights to pursue the negligent third party (the neighbor) to recover the amount paid.
Insurance Case Studies & Practical Application 3
A life insurance applicant discloses a history of high blood pressure but omits a recent diabetes diagnosis.
The insurer issues the policy.
The insured dies two years later.
What is the likely outcome?