35 a - - 3.

c - - MODULE
5. c 32- INSURANCE
- 7. c - - 1st: _/8= - %
22.
a - - 4. b - - 6. b - - 8. b - - 2nd: _/8= - %
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 incor-
rect. Answers (c) and (d) are incorrect because there are no
such requirements that the property be owned in fee simple
or by individuals.
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 mort-
gage 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. An-
swer (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 pos-
sibility 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 incur-
ring a monetary loss. - is totally destroyed, the coinsurance clause does not apply
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 in-
sured 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 rele-
vant concept is the right of subrogation, not contribution.
E. Fire Insurance
6. (b) Although Clark has insurance coverage exceed-
ing 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.
7. (c) The recoverable loss is calculated using the eo-
insurance formula.
Amount of insurance
Actual loss x
Coinsurance % x FMV of property at time of loss
The amount recoverable from Owners is calculated as fol-
lows:
$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
and the insured party will recover the face value of the in-
su~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.

5. (c) An important element of a property insurance

contract is the existence of an insurable interest. The insur-
able 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.