A business partner takes out a life insurance policy on the other partner when they form a partnership. The partnership later dissolves and the former partners have no ongoing financial relationship. Under California law, the existing policy:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Under California Insurance Code Section 10110, an insurable interest must exist when the policy is taken out, not at some later date. The partner had a clear economic insurable interest when the policy was issued. A later dissolution of the partnership does not retroactively invalidate the contract, so the policy remains in force and enforceable. This timing rule is specific to life insurance - unlike property insurance, which requires insurable interest both at issue and at the time of loss. The policy continues until it is surrendered, lapses under its own terms, or is otherwise terminated.
Why the other options are wrong
- B) Dissolution is not an automatic voiding event under Section 10110. The insurable interest requirement is measured at inception, and a later change in the business relationship does not cancel the contract.
- C) California law imposes no 30-day cancellation obligation tied to a dissolution of the business relationship. The policy simply continues according to its own terms.
- D) The policy does not lapse automatically at the next premium date because of the relationship change. Its continuation is governed by the premium, grace, and reinstatement provisions of the contract.
Memory hook
Interest at issue, not at loss; life insurance forgives later relationship changes.