A business wants to buy a disability income policy on a key employee so the firm can survive the employee's prolonged absence. Under CIC §10110, for the policy to be valid, the employer must have an insurable interest in the employee:
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Why A is correct
CIC §10110 provides that every person has an insurable interest in the life and health of any person on whom they depend for support, and of any person under a legal obligation whose death or illness could delay or prevent performance. A business's dependence on a key employee fits this description, giving the employer an insurable interest in that employee. As with life and health contracts, the interest must exist at the inception of the contract, when the policy is applied for or issued. This is what makes key-person disability coverage, and partnership or buy-sell disability coverage, lawful and enforceable.
Why the other options are wrong
- B) Insurable interest must exist at the inception of the contract, not at claim time. If the employer had no interest when the policy was issued, the policy would lack a valid basis for enforcement.
- C) CIC §10110 recognizes insurable interest in persons on whom one depends for support or who owe obligations whose performance could be prevented by illness. A key employee fits this description, so a business may insure that interest.
- D) Shareholder status is irrelevant to the insurable interest analysis. The employer's economic dependence on the key employee is what creates the interest, whether or not the employee owns stock.
Memory hook
Key-person disability needs the employer's insurable interest at policy issue.