UNIVERSITY OF ILLINOIS AT URBANA CHAMPAIGN College of Business D E PAR T M E N T O F F I NAN C E Finance 230 Fall 2007 Assignment 5 Due September 28 2007 1 Which of the following is the best reason that the State Farm Car Policy excludes physical damage coverage for war of any kind page 22 A To make the policy economically feasible B To standardize the risk C To reduce the risk of a catastrophe D To avoid losses that are not fortuitous E To avoid duplication of coverage Explanation War is a form of catastrophic event which can cause damages to many policyholders at the same time 2 You purchase an insurance policy with the Hartford Insurance Company through an independent insurance agent At renewal the agent does not send your premium to the company but uses a Hartford form to indicate that you have coverage When you have a claim which of the following will occur A B C D E The company will pay your claim due to the law of agency The company will not pay your claim due to the law of agency The company will not pay your claim since they did not receive consideration The company will pay your claim based on utmost good faith None of the above Explanation Because of law of agency the agent is an agent of the company and they are responsible for their agent s actions In this case you have fulfilled your part of the agreement by paying the premium to the agent and you are entitled to receive payment for the claim you made The company may be able to collect damages from the agent but is still responsible to you for paying the claim 3 On September 14 2007 a man submitted an application and payment as a conditional receipt for life insurance naming his wife as a beneficiary On September 25 2007 he died in an auto accident If the insurer declined coverage on September 30 2007 due to a health condition revealed in a medical exam performed one week after the application was submitted would the company have to pay the policy proceeds to the wife A D E Yes B No C It depends on the company s policy Only if the accident was caused by the health condition that was the reason for rejection None of the above Explanation As this is a conditional receipt you only have coverage if the company accepts the risk As the man did not qualify for insurance based on information provided prior to the accident the insurer is not responsible for paying the claim 4 Which part of the insurance contract is the statement on page 3 that states Relative means a person related to you or your spouse by blood marriage or adoption who resides primarily with you It includes your unmarried and unemancipated child away at school A Application D Conditions B E Declarations C Insuring clause Exclusions and exceptions Explanation The Declarations identify the person covered and clarify and define terms that are used throughout the policy 5 Based on the large loss principle which of the following is the most important coverage in your State Farm Car Policy A Collision D Emergency Road Service B Comprehensive E Medical Payments C Liability Explanation Due to current legal system there is no cap on liability litigations meaning that losses can be potentially huge and unaffordable Other damages such as comprehensive and collision can be measured monetarily Your policy provides bodily injury liability coverage up to 100 000 for any one person or 300 000 in total from one accident plus up to 100 000 property damage liability This protection is much higher than under any other coverage 6 An A rating from which of the following rating services indicates a financially strong insurer I II III IV V A D A M Best Standard and Poor s Moody s Duff Phelps Weiss I only I II and III B E II and V None of the above C II III and IV Explanation A is a favorable rating based on Professor Belth s advice for A M Best and Weiss Slide 7 from Session 9 7 When buying auto insurance through an agent all things being equal you would prefer to deal with an agent with the following designation A CLU D CFP B E ChFC FSA C CPCU Explanation CPCU stands for Charted Property Casualty Underwriter and it is an important credential for agents who are involved in auto insurance Collision and liability are examples of property and casualty losses 8 Your neighbor who has his own insurance policy with Allstate with the same coverages you have with your State Farm Policy borrows your car and runs into a tree causing 2500 in damage to your car Which of the following provisions keeps you from collecting for this loss under both your policy and your neighbor s A C E Lack of an insurable interest Other insurance provisions None of the above B D Subrogation Estoppel Explanation Your neighbor is an insured under your policy while driving your car Your policy is primary and your neighbor s policy is excess This is an Other insurance provision Answer B is a wrong answer since State Farm cannot subrogate when it is providing coverage for the driver 9 You would like to obtain information about the level of service an insurance company can be expected to provide if you were to purchase coverage from them Which of the following sources would be useful in evaluating this factor I II III IV V A B C D E A M Best The policy Consumer Reports Illinois Complaint Ratios Weiss II and III III and IV II III and V I II III IV and V None of the above Explanation Choice I and V find out the fiscal shape of insurance companies Choice II has no direct relationship to services in that it is the promised coverage that insurance companies are selling to you Choice III and IV are reports of the company s level of service 10 According to Gail Ross the guest speaker on September 14 what was the first risk that Gail Ross underwrote for Traveler s Insurance and what happened to that risk A B C D E An individual for an auto policy who got into an accident the next day An ice cream parlor for a building that burned down a week later A middle aged man for life insurance who died within the year A workers compensation policy for what was a fictitious off shore business An umbrella policy for a business that was later sued for product liability Explanation Gail did not have an auspicious start to her underwriting career