Basic Legal Concepts Relevant to Insurance: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Foundations of Risk Management and Insurance, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:

Nyce, C.M. Foundations of Risk Management and Insurance (Second Edition). 2006. American Institute for Chartered Property Casualty Underwriters. Chapter 9, pp. 9.3-9.11.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-25-1. What is the difference between the civil-law system and civil law?

Solution S5-25-1. The civil-law system is defined in Nyce 2006, p. 9.3, as "a basic legal system that relies on scholarly interpretations of codes and constitutions rather than court interpretations of prior court decisions, as in common-law systems." Civil law can exist both under a civil-law system and a common-law system. It is defined in Nyce 2006, p. 9.4, as "a classification of law that applies to legal matters not governed by criminal law and that protects rights and provides remedies for breaches of duties owed to others." A civil-law system pertains to how laws are arrived at and interpreted, whereas civil law is law that applies to a certain set of matters.

Problem S5-25-2. Which of the following statements about the legal environment of insurance are true? More than one answer may be correct.

(a) The doctrine of stare decisis applies to civil-law systems.

(b) Some states in the U.S., such as Louisiana and California, have primarily civil-law systems.

(c) Under a common-law system, a court cannot decide a case for which there is no applicable precedent.

(d) The common-law system tends to increase the uncertainty of the law for ordinary citizens, as it is difficult for ordinary citizens to learn and understand all of the many precedents that might apply to a given situation.

(e) Common-law systems allow for evolution in law and the reversal of prior precedents.

(f) In cases pertaining to criminal law, the victims of criminal acts are responsible for bringing suit against and prosecuting the perpetrators.

(g) A misdemeanor is a crime.

(h) Summary offenses are crimes that typically result in large monetary fines and imprisonment.

(i) Most remedies under civil law consist of monetary damages for harm.

Solution S5-25-2. This question is based on the discussion in Nyce 2006, pp. 9.3-9.5. The following answers are correct:

(b) Some states in the U.S., such as Louisiana and California, have primarily civil-law systems.

(e) Common-law systems allow for evolution in law and the reversal of prior precedents.

(g) A misdemeanor is a crime.

(i) Most remedies under civil law consist of monetary damages for harm.

Choice (a) is incorrect; the doctrine of stare decisis, where courts follow earlier decisions in similar cases,applies to common-law systems.

Choice (c) is incorrect; under a common-law system, cases for where there are no applicable precedents are called "threshold cases," for which the judges examine all applicable law in order to answer new legal questions.

Choice (d) is incorrect; the common-law system tends to add certainty to the law by establishing a general consistency in court decisions. Courts typically need to furnish strong justifications for departing from precedent.

Choice (f) is incorrect; in cases pertaining to criminal law, the government, not the victims, must bring charges against the alleged perpetrators.

Choice (h) is incorrect; summary offenses are the most minor crimes. They are neither felonies nor misdemeanors, and they typically result in monetary fines and no imprisonment.

Problem S5-25-3. Which of the following statements about the legal environment of insurance are true? More than one answer may be correct.

(a) An act can either be a crime or a civil wrong; it cannot be both. Prohibitions on double jeopardy prevent an individual from enduring separate trials for the same action.
(b) A tort is a wrongful act or omission which is not a crime or a breach of contract.
(c) A tortfeasor is somebody who brings forth a lawsuit as a result of a tort.
(d) The same action can be both a tort and a breach of contract.
(e) Negligence is the most prevalent basis of property-casualty insurance claims.
(f) Typically, courts have found individuals guilty of negligence irrespective of the precautions they took to avoid damage.
(g) Negligence does not require actual damage to the plaintiff.

Solution S5-25-3. The following answers are correct:
(b) A tort is a wrongful act or omission which is not a crime or a breach of contract.

(d) The same action can be both a tort and a breach of contract.

(e) Negligence is the most prevalent basis of property-casualty insurance claims.

Note that although a tort itself is not a breach of contract, the same action may involve wrongful conduct both within and outside the scope of a contract.

Choice (a) is incorrect; it is possible for a single act be both a civil and criminal wrong, in which case separate civil and criminal trials may occur.

Choice (c) is incorrect; a tortfeasor is someone who commits a tort, not someone who sues as a result of a tort.

Choice (f) is incorrect; typically, courts have adopted the reasonably prudent person test to evaluate a defendant's behavior. If damage occurred despite reasonable precautions on the part of the defendant, then negligence may not be found.

Choice (g) is incorrect; one of the four essential elements of negligence is that the plaintiff must have suffered actual injury or damage.

Problem S5-25-4. Nyce 2006, p. 9.7, lists the four essential elements of negligence:
1. The defendant owed a legal duty of care to the plaintiff.

2. The defendant breached the duty of care owed to the plaintiff.

3. The defendant's breach of duty was the proximate cause of the plaintiff's injury or damage.

4. The plaintiff suffered actual injury or damage.

Each of the following allegations of negligence is likely to be thrown out of court because one or more of these four elements is missing. Identify the missing element(s) in each case.

(a) Mr. Λ alleges that Ms. Φ was negligent because she failed to give Mr. Λ a chocolate cake on his birthday.
(b) Mr. Π's car rammed into and completely destroyed the fence of Mr. Ψ, which Mr. Ψ wanted to get rid of for a long time. Mr. Ψ had hired a contractor to demolish the fence, and the contractor was scheduled to do so two days after the accident. Mr. Ψ informs the contractor that its services are no longer necessary and then files a negligence lawsuit against Mr. Π.
(c) In a zone where pedestrians always have the right of way, Mr. Ϋ always stopped for pedestrians while driving his car, and no pedestrians got hurt. However, Ms. Γ, a pedestrian, sues Mr. Ϋ for negligence.
(d) Mr. Q suffered a leg injury while walking outside. He tripped on a rock and fell. However, he sues Mr. Ϊ for negligence because of a heated dispute he and Mr. Ϊ had the previous day over Mr. Ϊ's breach of duty of care to Mr. Q. Mr. Q claims that the dispute led him to be distracted, so that that he did not notice the rock.
(e) Mr. Σ manufactures stomping robots that are often taken out to an exhibition at the center of the city. To make sure that no people are hurt by the robots, Mr. Σ has hired guards to accompany the robots all the time and to keep away people who come too close. He has also installed a security system in the robots which leads them to move away when a human who is not a guard gets too close. However, an extremely eager fan of the robots approaches one of them during an exhibition, pushes the guards aside, and turns off the robot's security switch - after which the robot stomps on him. The fan sues Mr. Σ for negligence.

Solution S5-25-4.

For (a), there was no legal duty of care owed to the plaintiff, as Ms. Φ was not obligated to give anyone a chocolate cake. Accordingly, there was no breach of care.

For (b), there was no actual damage to the plaintiff, who wanted the fence destroyed anyway. In fact, the plaintiff, Mr. Ψ, experienced monetary savings as a result of Mr. Π's action, since Mr. Ψ no longer had to hire the contractor.

For (c), there was no breach of duty of care by Mr. Ϋ, nor was there any actual damage.

For (d), any breach of duty of care that Mr. Ϊ might have exhibited was not the proximate cause of Mr. Q's tripping over a rock, since Mr. Q could have chosen not to walk that day or could have taken a different route.

For (e), Mr. Σ exercised reasonable care in preventing damage due to the robots, and the plaintiff flouted the extensive precautions Mr. Σ had taken. Thus, there was no breach of duty of care to the plaintiff.

Problem S5-25-5. Ms. Ξ has been actively and knowingly spreading false information about several of her former coworkers in order to prevent them from getting hired by other employers. This results in persistent unemployment for the former coworkers, who sue Ms. Ξ. Can Ms. Ξ be found guilty of negligence in this case? Why or why not?

Solution S5-25-5. Ms. Ξ cannot be found guilty of negligence in this case, because she committed an intentional tort; negligence typically involves the absence of an intention to do harm, which was clearly present in this case. Here, Ms. Ξ actively and deliberately inflicted harm on her former coworkers.

See the discussion of intentional torts in Nyce 2006, p. 9.8. This intentional tort would probably fall under the category of defamation.

See other sections of The Actuary's Free Study Guide for Exam 5.