Learning Activity #1:

QUESTION 1

Alliance Clothing Stores ("Alliance") is a company specializing in high-end attire for both men and women. They have been banking with First State Bank for a number of years and had two loans with the bank totaling $10 million. EZA is an accounting firm and is Alliance's accountant. A complete audit had been recently completed by EZA. Later, when Alliance was seeking an additional loan from First State, Alliance instructed EZA to give the bank the audit report.

The audit report gave a summary of Alliance's financial condition and revealed that the company had some serious financial problems. In addition, the report classified a $1 million lawsuit against a third party as an asset, but in fact it was only a contingency that should not have been considered an asset. In addition, sales were inflated because sales of a licensee were considered sales of Alliance. Footnotes in the report noted that Alliance might not prevail in the lawsuit and Alliance's sales included sales of the licensee.

Nevertheless, First State made additional loans to Alliance, and when Alliance defaulted on the loans, First State brought a lawsuit against EZA alleging that EZA committed the tort of negligent misrepresentation and was therefore liable for the money lost by the bank as a result of the errors in the audit report prepared by EZA. The bank's position is that it was entitled to look no further than the bottom-line figures (and not the footnotes) and claimed that EZA had a duty to inform the bank whether lending money to the faltering firm made commercial sense. Bear in mind the bank is not EZA's client. Is this right? Who wins?

QUESTION 2:

Insurance companies require applicants to disclose certain information to help determine whether they will insure the risk and to calculate the premium. The insurer can avoid liability on a policy (1) if its decision is based on a material misrepresentation on the part of the applicant or (2) the applicant concealed material information from the insurer. This rule applies whether the misrepresentation was intentional or not intentional.

Many states have enacted laws that require incontestability clauses be placed in insurance agreements. An incontestability clause prevents insurers from contesting statements made by insureds in applications for insurance after the passage of a stipulated number of years (typically two to five years).

Why do you think states require incontestability clauses in insurance policies? Do they prevent unethical conduct by insurance companies? Do they promote unethical behavior by insureds?

Learning Activity #2

QUESTION 1:

A young and very attractive model, who was once a Playboy

Bunny, met a much older, but very wealthy, man who was widowed. They eventually entered into a relationship and as a result marriage ensued. During the course of the marriage the man rewrote his will, giving his entire estate to his young wife. When the man died, the will went to probate where it was revealed that the young widow got all and nothing went to the s children and other members of his family. If you represented the family, how would you go about contesting the will?

QUESTION 2:

Jack Slick was suffering from a terminal illness and was now confined to a hospice. His son Jim was by his side for the last few days of his father's life. Hours before his demise, Jack uttered words to the effect that all the assets of his automobile dealership, Slick Autos, were for his son Jim, and Jim alone. Jack dies and it is found that Jack had revoked a previous will but had not yet made a new one. He therefore died intestate. Under the state intestacy laws, the deceased estate goes to the widow. Jill, Jack's widow, claims the entire estate, despite the dying declaration by Jack to their son. In addition to the automobile dealership, there was a substantial amount of stocks and bonds, real and personal property and life insurance policies naming Jill as the beneficiary.

How should the estate be distributed?