Question

The law firm of McGill, Swanson and Herer, LLP, maintains a $12 million insurance policy on its partner McGill, who each year would bring in $4 million worth of business annually. He was the lead earner in the firm, by far. Sadly, McGill died last week. Can the firm recover the $12 million?

a) Yes, the contract is enforceable for the full amount.

b) No, because the payout is usurious.

c) No, because an employer cannot maintain a life insurance policy on an employee.

d) Yes, the contract is enforceable but only up to $1 million.

Answer 1

The law firm can likely recover the $12 million from the key person's insurance policy on McGill if they can prove an insurable interest, which appears to be the case here since he was essential to the firm's business. Option (a) 'Yes, the contract is enforceable for the full amount' is the most appropriate answer provided.

Step-by-step explanation:

The question pertains to whether the law firm of McGill, Swanson, and Herer, LLP, can recover the $12 million from the insurance policy they maintained on their partner McGill following his death. In general, businesses can take out key person insurance policies on individuals whose expertise, management, or skill set is extremely valuable to the company's operations. Since McGill was a significant contributor to the firm’s revenue, his absence would likely have a substantial impact on the firm's financial health.

The legality of such an insurance policy is often governed by state and federal laws and would need to be based on the company having an insurable interest in the life of the insured. An insurable interest exists when the beneficiary would suffer a financial loss upon the death of the insured person. Given that McGill was a partner who brought in a considerable amount of business, it stands to reason that the firm had an insurable interest in his life.

Addressing the options provided: a) Yes, the contract is enforceable for the full amount seems to be the most likely answer here. The contractual principle does not generally limit the amount of insurance that can be purchased if a legitimate insurable interest is established at the time of purchase. The payout is not usurious because usury laws relate to excessive interest rates on loans rather than insurance policy pay-outs, and as such, option b) is incorrect. Option c) is also incorrect, as employers can indeed take out life insurance policies on employees, especially in situations where the individual contributes significantly to the business's success. Lastly, there is no information provided to support the limitation mentioned in option d), making an option a) the most correct.