Texas Property & Casualty: Policy Provisions & Contract Law

Correct

The answer is D: Representation, which need only be substantially true

Statements made on an insurance application are representations, not warranties. Representations need only be substantially true. Even a material misstatement does not automatically void a Texas policy: a clause voiding coverage for a false application statement has no effect unless the matter misrepresented was material to the risk or contributed to the loss (Insurance Code §705.004), the insurer must give notice that it refuses to be bound within 90 days after discovering the falsity (§705.005), and Texas courts also require intent to deceive (Mayes v. Massachusetts Mutual, Tex. 1980). Maria honestly believed her statement, so intent is missing. Warranties, by contrast, are strict guarantees found in the policy itself and must be literally true.

Source: Insurance Code §705.004 · Insurance Code §705.005

Correct

The answer is C: Give the insured advance written notice of nonrenewal

Under Texas Insurance Code §551.105, an insurer that does not want to renew a homeowners policy must mail the insured written notice of nonrenewal at least 60 days before the policy expires; if it does not, it must renew the policy at the insured's request. (The deadline was 30 days for policies issued or renewed before 2024.) Commercial property and liability policies also require 60 days' notice of nonrenewal. This gives the insured adequate time to find replacement coverage. Unlike cancellation, nonrenewal occurs at the natural end of the policy term, but advance written notice is still legally required to protect consumers.

Source: Insurance Code §551.105

Correct

The answer is A: The claim may be denied, since the breach helped cause the loss

A warranty in an insurance policy is a guarantee by the insured that certain conditions exist or will be maintained. Unlike representations (which need only be substantially true), warranties must be strictly complied with, and a breach may give the insurer grounds to deny claims or void the coverage. Texas adds a limit: under Insurance Code §862.054, a breach of a warranty or condition of a fire insurance policy or a policy on personal property does not void the policy and is not a defense to a suit for loss unless the breach contributed to cause the destruction of the property. The Texas Supreme Court has left open whether that statute reaches buildings as well as personal property (Greene v. Farmers Insurance Exchange, 2014), but the answer here is the same either way: the failed sprinklers let the fire spread, so the breach contributed to the loss and the insurer may deny the claim. Because strict enforcement is so harsh, modern policies use warranties sparingly.

Source: Insurance Code §862.054

Correct

The answer is C: Yes, only with clear proof of fraud, malice or gross negligence

Under Texas law, an insured can bring a bad faith claim against an insurer that unreasonably denies, delays, or underpays a valid claim. Remedies may include actual damages, up to three times actual damages under the Texas Insurance Code for knowing violations (§541.152), attorney's fees, and in egregious cases, punitive (exemplary) damages. Punitive damages require clear and convincing evidence of fraud, malice or gross negligence; bad faith alone is not enough (Civil Practice and Remedies Code §41.003). The Prompt Payment of Claims Act (Insurance Code Chapter 542, Subchapter B) adds interest and attorney's fees for late payment.

Source: Insurance Code §541.152

Correct

The answer is C: 30 days

Texas Insurance Code §549.055 says a lender that requires insurance for a residential mortgage or commercial real estate loan must accept an insurance binder as evidence of coverage, and may not demand the original policy instead, if three conditions are met: the binder is issued by a licensed property and casualty agent who is appointed by the insurer and authorized to issue binders; it comes with evidence that the premium was paid; and the original policy will replace it on or before the 30th day after the binder is issued. A binder provides temporary coverage with the essential terms while the formal policy is being prepared.

Source: Insurance Code §549.055