Examkin

Question

Difficulty: MediumWarranties, Representations, and Concealment

A distributor of high-value electronics purchases a commercial inland marine policy to cover its cargo in transit. The insurance contract contains a strict, written clause in which the insured guarantees that two armed guards will accompany any shipment valued over 100,000.Onemorning,a100,000. One morning, a 150,000 shipment is dispatched with only one guard because the second guard was unexpectedly absent. During the transit, the delivery truck is destroyed in a severe highway collision caused entirely by another driver. Based on the legal principles of the contract, how will the insurer most likely handle the claim for the destroyed cargo?

  1. The insurer can void coverage and deny the claim because the guard clause is a warranty, which requires strict compliance regardless of whether the breach caused the actual loss.Answer
  2. B
    The insurer must pay the claim because the guard clause is a representation, and the distributor did not intentionally commit fraud on the original application.
  3. C
    The insurer must pay the claim because, although the clause is a warranty, the absence of the second guard was not the proximate cause of the highway collision.
  4. D
    The insurer is legally estopped from denying the claim because the collision was an unforeseeable pure risk outside the distributor's immediate control.

Answer

The insurer can void coverage and deny the claim because the guard clause is a warranty, which requires strict compliance regardless of whether the breach caused the actual loss.
In insurance contracts, a warranty is an absolute guarantee that a specific condition will be met or maintained. Because warranties are fundamental to the insurer's agreement to take on the risk, strict compliance is required. If a warranty is breached—such as failing to provide the required number of armed guards—the insurer has the legal right to void the policy or deny coverage. This remains true even if the breach had absolutely nothing to do with the actual cause of the loss (in this case, an unrelated traffic collision).

Step-by-Step Solution

1
Identify the legal nature of the guard requirement in the policy.
The requirement is a strict, written guarantee incorporated into the contract, making it a warranty.
Warranties are absolute guarantees that specific conditions will be met to maintain coverage.
2
Determine if the insured complied with the requirement.
The insured breached the warranty by sending a $150,000 shipment with only one guard.
The contract explicitly required two guards for shipments over $100,000.
3
Apply the legal consequence of a breached warranty to the specific loss scenario.
The insurer has the right to deny the claim, even though the lack of a second guard did not cause the collision.
A breach of warranty fundamentally voids the coverage provided by the contract, irrespective of proximate cause.

Key Concept

Warranties vs. Representations
Estimated Time:1m 30s
Rate this question

Topics

Warranties, Representations, and Concealment

More questions from this topic