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Question

Difficulty: HardRepresentations, Warranties, and Concealment

Marcus applies for a Commercial Inland Marine policy for his jewelry inventory. On the application, he states that he employs a nighttime security guard, although he actually only employs one on weekends. He also leaves the question "Have you experienced any theft losses in the past 5 years?" completely blank. The insurer issues the policy without requesting the missing information.

The issued contract contains a clause, explicitly designated as a warranty, requiring that all inventory be secured in a locked Class-E vault during non-business hours. Six months later, a theft occurs on a Tuesday night while the jewelry is left on display counters rather than in the vault.

Based on insurance contract law, which of the following conclusions are correct? (Select all that apply)

  1. The insurer can deny the claim because leaving the jewelry on display counters constitutes a breach of an express warranty.Answer
  2. The insurer waived its right to void the policy over previous thefts because it issued the contract despite the blank application question.Answer
  3. C
    Marcus's written statement regarding the security guard is legally treated as an absolute warranty by default because it is part of the formal application.
  4. D
    The producer handling the account has the implied authority to unilaterally complete the blank application question post-issuance to protect the insurer.

Answer

The correct conclusions are that the insurer can deny the claim due to the breach of the express vault warranty, and that the insurer waived its right to contest prior thefts by accepting the incomplete application.
The insurer is justified in denying the claim because the applicant failed to comply with the express warranty requiring the use of a Class-E vault. Furthermore, by issuing the policy without requiring an answer to the blank question regarding prior losses, the insurer legally waived its right to use past thefts as a basis for rescission.

Step-by-Step Solution

1
Evaluate the vault requirement and the circumstances of the theft.
The vault requirement is an express warranty. Leaving the jewelry on counters during non-business hours breached this warranty, allowing the insurer to deny the claim.
A warranty is an absolute guarantee of conditions. Breaching it voids the associated coverage.
2
Analyze the legal effect of the blank question regarding prior thefts.
By issuing the policy without demanding an answer to the blank question, the insurer waived its right to that information.
Accepting an incomplete application establishes a legal waiver, preventing the insurer from later claiming concealment regarding the blank fields.
3
Classify the applicant's statement about the security guard.
The statement is a representation, not a warranty.
In insurance law, applicant statements on the application are representations (believed to be true) and only void coverage if they are both false and material.
4
Determine the producer's authority regarding the blank application question.
The producer has no authority to unilaterally fill in the blank question.
Any changes to an application must be approved and initialed by the applicant to remain legally binding.

Key Concept

Representations, Warranties, Concealment, and Waiver
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Topics

Representations, Warranties, and Concealment

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