Fundamentals
of Business Law
6th Edition
Chapter 30
Insurance, Wills and Trusts
©2005 by West Legal Studies in Business
A Division of Thomson Learning
Insurance
• Insurance is a contractual arrangement for
transferring and allocating risk.
• Risk.
– Prediction concerning potential loss based on known
and unknown factors.
• Risk Management.
– Involves the transfer of certain risks from the individual
to the insurance company by a contractual agreement.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
2
Insurance Terminology
• Policy (Insurance contract).
• Premium is the consideration to be paid to the
insurer.
• Underwriter (usually an insurance company).
• Broker v. Agent.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
3
Classifications of
Insurance
• Insurance is classified according to the
nature of the risk involved.
• See Exhibit 30-1 in textbook for Insurance
Classifications.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
4
Insurable Interest
• A person can insure anything in which he
or she has an insurable interest.
• Types of insurable interest:
– Life.
– Property.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
5
Life Insurance
• Anyone who has an insurable interest.
– Must have a reasonable expectation of benefit from
the continued life of another.
– Insurable interest must exist at the time the policy
is obtained.
• Policy remains valid, even after interest no longer exists
(divorce).
• Key-person insurance -- insurance obtained by an
organization on the life of a person important to that
organization.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
6
Property Insurance
• Anyone who has an insurable interest.
– A person who derives a pecuniary benefit from
the preservation and continued existence of the
property.
– Insurable interest must exist when the loss
occurs.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
7
The Insurance Contract
• Governed by the general principles of
contract law, and regulated by the state.
– Application is an offer, which insurance
company can either reject or accept.
• Acceptance sometimes conditional.
– Need consideration.
– Parties need capacity.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
8
The Insurance Contract
•
•
•
•
•
•
•
Application For Insurance.
Effective Date.
Provisions and Clauses.
Interpreting Provisions of an Insurance. Contract.
Cancellation.
Basic Duties and Rights.
Defenses Against Payment.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
9
Application For Insurance
• Filled in application attached to the policy
and made a part of the contract.
• Misstatements or misrepresentation can
void a policy, specially if company can
show it would not have issued policy if it
had known the facts.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
10
Effective Date
• Broker is agent for the applicant.
• Agent can issue a binder, if some consideration is paid,
which will immediately bind the insurance company,
depending on certain conditions being met.
• Parties may agree contract will not be effective until
policy is issued and delivered or sent to applicant.
• Parties may agree policy will be binding, not be
effective, until first premium paid, or physical exam
passed.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
11
Provisions and Clauses
•
•
•
•
•
•
Provisions Mandated by Statute.
Incontestability Clauses.
Coinsurance Clauses.
Appraisal and Arbitration Clauses.
Multiple Insurance Coverage.
Anti-Lapse Clauses.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
12
Coinsurance Clauses
• If owner insures her property for at least
80% of its value, owner will be able to
recover up to the face value of the policy.
• If owner insures for less than 80%, owner
will be responsible for a proportionate share
of the loss.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
13
Cancellation
• Insured can cancel policy at any time, and
the insurer can cancel according to terms
of policy.
• Insurer must give written notice of
cancellation.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
14
Basic Duties and
Rights
• Parties are responsible to fulfill the obligations
set forth in the insurance contract.
• Conditions include insured complete disclosure
of material facts.
• Then insurer must act in good faith and pay the
claim.
• Case 30.1 Columbia National Insurance Co. v.
Freeman (2002).
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
15
Defenses Against
Payment
• Insurance company can raise any of the defenses
that would be valid in any ordinary action or
contract:
– Fraud, misrepresentation.
• Not if information given was optional.
• Not incorrect statement of age.
– Concurrent causation doctrine.
• Case 30.2 Paul Revere Life Insurance Co. v.
Firma (1997).
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
16
Wills
• Will provides for a Testamentary disposition of
property.
– A will is the final declaration of how a person (Testator)
desires to have his or her property disposed of after death.
• Testate (One who dies after having made a valid
will). Intestate-no will.
• Executor v. Administrator.
• Effective only upon death of testator.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
17
Types of Gifts
• Devise or Bequest identifies real or
personal property.
• Types of Gifts: specific, general, or
residuary .
• Abatement.
• Lapsed Legacies.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
18
Probate Procedures
• Informal Probate Proceedings.
– Family Settlement Agreements.
– Small Estates.
• Formal Probate Proceedings.
– Larger Estates.
– Guardianship appointment to a minor or
incompetent person and trust has been created
to protect that minor or incompetent person.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
19
Property Transfers
Outside the Probate
Process
•
•
•
•
•
Living Trusts.
Joint Ownership of Property.
Gifts Intervivos (while one is alive).
Life Insurance Policies.
Individual Retirement Accounts (IRA).
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
20
Requirements for a Valid
Will
• Testamentary Capacity and Intent.
– Case 30.3 Estate of Klauzer (2000).
•
•
•
•
Writing Requirements.
Signature Requirements.
Witness Requirements.
Publication Requirements.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
21
Undue Influence
• Improper pressure by a third person upon
the Testator.
• Usually occurs when Testator ignores
blood relatives and includes a non-relative
as heir.
• Renders the will invalid.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
22
Revocation of Wills
• By Physical Act of the Maker.
– Intentional burning, tearing or canceling the
written will.
• By Subsequent Writing.
– Called a “codicil” to the will.
• By Operation of Law.
– Marriage, divorce, annulment.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
23
Intestacy Laws
• Statues of descent and distribution which
attempt to carry out the likely intent and
wished of the decedent.
– Surviving Spouse and Children, Not in-laws.
– Stepchildren, Adopted children, Illegitimate
children.
– Grandchildren.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
24
Surviving Spouse
and Children
• Surviving spouse usually receives only a share of
the estate.
– 1/3 if two or more children.
– 1/2 if one surviving child.
– Entire estate if no children or grandchildren.
• If no surviving spouse or child the order of
inheritance is:
– Lineal descendants.
– Collateral heirs (if no lineal descendants).
• Not spouses of the children, in-laws.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
25
Stepchildren, Adopted
Children, Illegitimate Children
• Stepchildren -- not considered children of
deceased.
• Adopted children -- considered children of
deceased.
• Illegitimate -- must prove paternity.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
26
Grandchildren
• Per stirpes.
– Method of dividing an intestate share by
which a class or group of distributees take the
share that their deceased parent would have
been entitled to inherit had that parent lived.
• Per capita.
– Each person takes an equal share of the estate.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
27
Trusts
• Trust -- A right of property (real or
personal) held by one party for the benefit
of another.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
28
Essential Elements
of a Trust
• Essential Elements:
– Designated beneficiary.
– Designated trustee.
– Fund sufficiently identified to enable title to
pass to the trustee.
– Actual delivery to the trustee with the
intention of passing title.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
29
The Trustee
• Trustee’s Duties.
– Act with honesty, good faith, and prudence in
administering the trust and must exercise a
high degree of loyalty toward the trust
beneficiaries.
• Trustee’s Powers.
• Allocation Between Principal and Income.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
30
Express Trusts
• Living (Intervivos) Trust: executed by the
Grantor while she is alive.
• Testamentary Trust: created by will upon
Grantor’s death.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
31
Implied Trusts
• Constructive Trusts.
– Arises by operation of the law in the interest
of equity and fairness.
• Resulting Trusts.
– Arises from the conduct of the parties.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
32
Special Types of Trusts
• Charitable Trust: designed for the benefit of a
segment of the public.
• Spendthrift Trust: prevents beneficiary from
spending all the money in the trust.
• Totten Trust: person deposits money in her own
name for benefit of another.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
33