A bank lends $50,000 to a borrower and wants to purchase life insurance on the borrower to protect the loan. Under California Insurance Code Section 10110, which statement is correct?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Section 10110 grants every person an insurable interest in the life of, among others, any person under a legal obligation to that person for the payment of money — which is exactly the creditor-debtor relationship. The bank therefore has an insurable interest in the borrower's life. As a matter of public policy, however, the coverage is generally limited to the amount of the outstanding debt, so that the arrangement is an indemnity for the loan rather than a wagering contract. Insurable interest for life insurance need only exist at the time the policy is issued.
Why the other options are wrong
- B) Section 10110(c) expressly includes persons under a legal obligation to pay money, so a creditor does have an insurable interest in a debtor.
- C) A creditor may not insure a debtor for an unlimited amount; the insurable interest is tied to the debt so the creditor does not profit from the borrower's death.
- D) No written waiver is required by Section 10110; consent is not the source of a creditor's insurable interest — the legal obligation to pay money is.
Memory hook
Creditor insurable interest = the debt, and no more. Cover what you are owed, never to profit from death.