Question

Kaycee obtains fire insurance on an empty warehouse. Later, Kaycee manufactures and stores fireworks in the building. A lightning strike in a thunderstorm explodes the fireworks and destroys the building. The fire insurance policy is:

a. valid, since the building was empty when the policy was obtained.
b. void, since a material change in risk occurred.
c. voidable if the lightning was not foreseeable.
d. valid, since there are negligible liabilities which applies to storing fireworks.

Answer 1

The insurance policy is likely considered void due to a material change in risk when fireworks were stored in the warehouse. Insurance policies require disclosure of such significant risks, and failure to inform the insurer of these changes can lead to the policy being invalidated.

Step-by-step explanation:

The fire insurance policy obtained by Kaycee is likely to be considered void because a material change in risk occurred when Kaycee started manufacturing and storing fireworks in the warehouse. Insurance policies require the policyholder to inform the insurance company of any significant changes that may affect the risk being insured. The storing of fireworks significantly increases the risk of fire damage, and since the insurance company was not informed, they could argue that the policyholder has not met their obligations, rendering the policy void.

In referencing the legal principle described by Coase, the determination of property rights is essential for resolving disputes. In the case of Kaycee's insurance policy, the property rights and responsibilities with respect to risk were initially defined when the policy was first obtained; therefore, any significant change in the use of the property that affects those risks would need to be communicated to the insurer for the property rights and responsibilities to be clear and enforceable.