Welcome to the Final Exam for Insurance Law, Spring Semester, 1995.

Professor Steve Liebo
 

1. This exam is a limited open book test. You may use the Abraham casebook, the Goldmine, handouts that you received in class, and any notes and outlines that you have prepared personally. No other materials may be used. The exam is also intended to be a solo effort.
 

2. At the beginning of each question I have indicated the percentage proportional value of that question and an estimate of the amount of time that should be expended on that question in a two hour exam.
 

3. Note that spotting the issues raised by the facts, identifying the relevant policy provisions, and presenting the applicable analytical standards are more important than stating the "correct" answers to questions. In addition, the test is pretty long, and it hits a lot of issues; so rather than writing exhaustively on one point before going on to the next, write the minimum information needed to show me that you understand the items that I mention at the beginning of this note, then move on. You can come back to the question for more exhaustive completion if you have time.
 

4. Where applicable, indicate which party would have the burden of proof on a particular issue.
 

5. Please write as clearly and legibly as you can.
 

6. Enjoy, and remember: This exam is only a single test on a two credit class. Compared to the length and fullness of your life, it will be over in the blink of an eye. So relax, think hard, and go for it!
 

QUESTION I. (40% of score - -50/120 minutes)
 

Mr. Shopt is an insured under a medical insurance policy issued by Mutual of Parsimony Accident and Health Insurance Company. The effective date of the policy was April 1, 1993. The relevant provisions of her policy are included.
 

Mr. Shopt is a young self-employed advertising executive. Having a lot of business, he worked very heavy hours (so many that you would think that he was an associate with a large law firm). In addition, he had a very active, and not altogether 90's social life, going out a lot, and being sexually active.
 

On August 5, 1992, Mr. Shopt saw Dr. Helth, his family practitioner, for a general examination. At the examination Mr. Shopt exhibited a low grade fever, and he had complaints of fatigue and lack of appetite. Dr. Helth told Shopt that Shopt worked and caroused too much, and suggested that Mr. Shopt cut back on both activities and get more rest.
 

Mr. Shopt returned to see Dr. Helth on February 3, 1993. At that visit, he told Dr. Friendly that he had cut his hours back as much as he could (which was not much if he wanted to stay successful in business) and had been resting as much as he could because he still suffered from fatigue. He had also cut back on his social life. Shopt reported that his lack of appetite continued, accompanied, at times, by nausea and abdominal pain on the upper left side. He had lost some weight between visits, but not a significant amount. He had a low grade fever, and was very slightly jaundiced at the visit. A blood test showed slightly raised liver enzymes, but it also showed some minor increases in other values and was equivocal. So Dr. Helth told Shopt that the symptoms were consistent with a range of things, from a persistent flu, to mononucleosis, hepatitis, or Chronic Fatigue Syndrome. In short, Dr. Helth told Shopt that some kind of virus was probably involved. Dr. Helth prescribed more rest to treat the virus, and suggested Shopt make an appointment to see Dr. May, an internist, for a more complete blood screening to narrow the cause of the symptoms.
 

Shopt decided that he better get some medical insurance if he was going to get involved with expensive blood tests. So he went to see I. B. Friendly, an insurance agent, and applied for coverage with Parsimony on February 5, 1993. He truthfully answered in the negative application questions asking whether in his knowledge he had ever suffered from, seen a physician for, or been hospitalized for diseases of organs, including the liver, spleen, pancreas, or stomach.
 

On April 1, Shopt's coverage under the Parsimony medical policy commenced. Shopt saw Dr. May on April 3. At the time he still had fatigue, lack of appetite, nausea, and periodic abdominal pain. His jaundice had become much worse. The blood screen showed a substantial elevation in liver enzymes, so Dr. May performed a liver biopsy. The biopsy and blood test led Dr. May, on April 15, to diagnose Shopt's condition as chronic active hepatitis that was causing cirrhosis of Shopt's liver. Shopt was treated with corticosteroids for over a year, but they did not help his condition. In fact the condition of Shopt's liver worsened to the point that Shopt's life was placed in jeopardy. So, on November 1, 1994, a liver transplant was performed on Shopt at the University Hospital Liver Transplant Center, using a liver from a deceased donor.
 

Chronic active hepatitis is a progressive disease that can lead to liver failure, cirrhosis, and death. It is most commonly caused by hepatitis B or by non-A, non-B hepatitis; and it can be caused by a reaction to certain medications or can have no discernible cause. Its most common symptom is fatigue, but it can have no symptoms, or symptoms like lack of appetite, nausea, and jaundice. It is treated first by rest; then it is treated with corticosteroids if the liver becomes severely inflamed, although they may not prevent its progression to cirrhosis and liver failure.
 

Shopt survived the operation and seeks coverage for the $150,000 cost of the liver transplant. Parsimony has denied coverage on several grounds, and Shopt is suing to seek coverage. Thus, the issue is whether the Parsimony policy provides coverage for the Shopt liver transplant.
 

Please do the following with respect to the (endless) facts stated in this problem:
 

1. State each ground that Parsimony could raise to support its denial of coverage based upon the policy language stated in the excerpt at pages 7-8 of the test packet and provide legal arguments supporting that ground and the types of facts that you may need to assemble to support it, if factual support is necessary.
 

2. State the counterarguments that Shopt could raise to support coverage on each ground raised by Parsimony and provide legal arguments supporting each ground and any facts that you may need to assemble to support it.
 
 
 
 

QUESTION II. (60% of score - 70/120 minutes)
 

On October 1, 1994, Homer Sweet-Hoam (Hoam) made a very low offer of $300,000 to purchase a beautiful hillside residence located at 147 Hillwind Drive. The property extended up the hill to the top. The owners were seeking to sell the property for $700,000.
 

On October 4, 1994, Hoam met with I.B. Friendly, an insurance agent for Mutual of Parsimony Fire and Casualty Insurance Company, to obtain property insurance covering the Hillwind property. Friendly asked Hoam questions from the application and Hoam answered them. Pursuant to one question on the application, Friendly asked Hoam if Hoam owned the Hillwind property. Hoam responded "not yet, but I expect to own it very soon." Friendly then checked off the "yes" response to the ownership question, without saying anything about the answer to Hoam.
 

After completing the rest of the application, Friendly gave the application to Hoam to sign. Hoam skimmed the application briefly, then signed it on the signature line below a paragraph that stated: "I represent the statements and answers in this and in any other part of this application to be true and complete to the best of my knowledge and belief."
 

On November 1, 1994, Parsimony issued a property insurance policy to Hoam on the Hillwind property. The insurance policy contained terms exactly the same as the terms of the property insurance policy located at Abraham on pages 184-95. It covered the Hillwind residence for $300,000.
 

On November 12, 1994, Hoam's offer of $300,000 was miraculously accepted, and Hoam became owner of the Hillwind property in fee simple.
 

On November 26, 1994, Hoam entered a contract with AAA Aardvark Pool Builders (Aardvark) for construction of a large indoor swimming pool and building to house it on the top of the hill on the Hillwind property. Aardvark was insured under a CGL policy written by Frugality Insurance Company of America that had terms that were exactly the same as the terms of the CGL insurance policy located at Abraham pages 439-48. The policy had $500,000 occurrence limits and a deductible of $50,000 per occurrence. The policy period ran from January 1, 1994, to December 31, 1994.
 

The contract between Aardvark and Hoam provided that: "Aardvark promises not to blast unless necessary. Aardvark further promises not to damage the property of [Hoam] as a result of any blasting that it performs." Aardvark had blasted holes for pools in the past. In 3 out of 5 times that Aardvark had blasted previously, some degree of ensuing ground instability had taken place and landslides had occurred. Frugality had paid claims made against Aardvark by property owners as a result of two of the episodes, and it had recommended to Aardvark that blasting not be undertaken in the future.
 

On December 1, 1994, Aardvark commenced construction of the swimming pool, on attempting to dig the initial hole for the pool, Aardvark employees discovered that the hill was very rocky. Although the hole could be dug mechanically, construction would be much faster if the hole was blasted. Thus, Aardvark employees blasted a hole at the top of the hill.
 

On December 2, 1994, Aardvark employees blasted a second time to complete the hole for the swimming pool. The debris was cleaned up and construction of the pool and building continued.
 

On December 22, 1994, a heavy rainstorm occurred that required Aardvark to suspend construction for the day.
 

On December 27, 1994, a landslide occurred on Hoam's property, but not on adjacent property. The landslide badly damaged the pool that was still under construction. In addition, the landslide destroyed Hoam's residence.
 

On December 31, 1994, Aardvark's CGL policy terminated. Frugality had refused to renew it because of Aardvark's poor claims history and its continued use of blasting.
 

Hoam did not take destruction of his home lightly. In January 1995, he sought coverage for the loss of the residence and for damage to the swimming pool from Parsimony under the property insurance policy. Parsimony denied coverage on the grounds that the policy was void due to Hoam's misrepresentation, that Hoam did not have an insurable interest in the property, and that the loss was caused by an excluded risk.
 

Hoam also sued Aardvark, in January 1995, seeking $1,000,000 for the loss of the residence and pool, and for personal injuries suffered in the landslide. The suit makes claims of breach of contract, negligence, recklessness, and intentional acts against Aardvark. Aardvark submitted the suit to Frugality for defense and indemnification, if necessary, under the CGL policy. Frugality is assessing what action to take on the submitted suit.

Please do the following with respect to the facts stated in this problem:
 

Property Policy Issues
 

1. Assess whether Hoam made a misrepresentation that would permit Parsimony to void the policy, analyzing the issue in terms of the six misrepresentation factors and assuming that the jurisdiction follows the Minnesota misrepresentation rule expressed in Minn. Stat. § 60A.08 (Goldmine page 8), as interpreted in Johnson (Goldmine 9).
 

2. Assess whether Parsimony will prevail on its defense that Hoam lacked an insurable interest in the property.
 

3. Assess whether the damage to the pool and the destruction of Hoam's residence resulted from covered or an excluded risk(s) under the Parsimony policy.
 

Please include a discussion of the policy provision(s) involved and why they result in the risk being covered or excluded. Use only policy provisions on pages 189-91 of Abraham and any related legal rules in your discussion, and assume that all other policy requirements are met.
 

Liability Policy Issues
 

4. Based upon the face of Hoam's claim, does Frugality owe Aardvark a duty to defend against all or part of the claim? Please discuss your conclusion very briefly.
 

5. Are the CGL Coverage A Insuring Agreement Requirements (Abraham 440) met on the facts? (Assume that the occurrence took place in "coverage territory.")
 

6. How many occurrences arguably took place? Why?
 

7. What Coverage A Exclusions (Abraham 440-42) could Frugality raise as a defense against coverage of Hoam's claims against Aardvark? Please discuss briefly why each exclusion that you mention can be raised and whether it might be successful against all or part of the claim.
 

8. If Parsimony pays Hoam's full property loss of $400,000 and Hoam settles the lawsuit against Aardvark for $400,000, can Parsimony recoup from the settlement any of the amount that it paid Hoam to compensate Hoam for his property losses? Please discuss some.
 

That's all. Enjoy your summer!!
 
 
 
 

DEFINITIONS
 

Covered Charge: Covered Charge means an expense of You or a Family Member due to Sickness or Injury which:
 

6. Is due to one or more of the following, subject to the expressed limitations:
 

(r) The transplant of a natural organ by a living donor. We will treat the donor's charges as incurred by you or the Family Member. This includes charges directly due to the transplant and for 6 months after the transplant but does not include transportation other than local emergency ambulance service.
 

Experimental and/or Investigational Services: Services which have not been clinically proven to be safe and effective based upon available professional assessments.
 

Medical Necessity: Medically necessary charges are charges for appropriate services and procedures provided by a health care provider in an appropriate setting in diagnosis or

treatment which are consistent with the standards of good medical practice in the medical community.
 

COVERED CHARGES
 

We will pay Covered Charges for all Medically Necessary Services, subject to any charges excluded in this policy.
 

EXCLUDED CHARGES
 

We will not pay for any expenses that are due to:
 

(5) Experimental or Investigational services.
 

PRE-EXISTING CONDITION LIMITATION
 

We will not pay benefits for any covered charge incurred during the first two years after the Effective Date of coverage on account of a Pre-existing Condition; unless it was admitted on the application and not excluded by rider.
 

Pre-existing Condition means the existence of symptoms which would cause an ordinarily prudent person to seek diagnosis, care, or treatment within a two (2) year period preceding the Effective Date of coverage or a condition for which care or treatment was recommended by or received from a Physician within a two (2) year period preceding the Effective Date of coverage.