UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGNCollege of BusinessD E P A R T M E N T O F F I N A N C E Finance 230 Assignment 3Fall, 2007 Due: September 14, 2007For the following questions, assume that you have the State Farm Car Policy handed out in class, includingthe coverages and limits shown on the Declarations page. Also assume that the 2001 Sebring is the only car you own, unless the question indicates that you purchase another vehicle, and that any situations involving borrowing cars is done with permission, unless otherwise stated, and that you are willing to pay any additional premiums due for vehicle changes. For each situation, calculate how much your insurance policy would pay, in total. Unless otherwise indicated, assume the loss occurs during the policy period. Donot assume facts not given in the question.1. You borrow your neighbor’s car. Your neighbor is insured with Country Insurance with the same coverages and limits you have on your policy. As your neighbor is taller than you, the seat is much further back, and you don’t take the time to adjust it. When a traffic light turns red as you approach you are unable to reach the brakes in time to stop the car, and you run the red light and hit a school busin the intersection. Ten children are injured in the accident. Each child sues you and wins a bodily injury award of $50,000. It costs $80,000 to repair the bus, and $12,000 to repair your neighbor’s car.A. 0 B. $200,000 C. $291,200D. $391,900 E. None of the aboveExplanation: Insurance follows the car and therefore your neighbor’s policy will pay first. Your policy will then pay everything in excess. In total there is a $500,000 bodily injury award between the 10 children. Country will pay the first $300,000, and State Farm will then pay the remaining $200,000 above that. Country will pay for the $80,000 property damage liability, and the $11,900 to repair your neighbor’s car (your neighbor will have to pay the $100 deductible).2. While on a four week vacation, you rent a car. You decline the insurance coverage offered by the rentalagency. On the last day of your vacation, while you are checking out of the hotel, the car with all your luggage in it is stolen and never recovered. The rental agency holds you responsible for the loss. The car had an Actual Cash Value of $28,000. Your luggage was worth $800. A. 0 B. $200 C. $28,200D. $28,800 E. None of the aboveExplanation: You have no coverage because you only have coverage for the first 21 days for a non-owned car.3. You borrow your spouse's car. Your spouse has his/her own insurance with Nationwide with the same coverages and limits you have on your own policy. While driving that car, you are hit from behind by an uninsured driver and seriously injured. You incur $40,000 in medical bills and $20,000 in lost wages. You would be entitled to a bodily injury award of $140,000 if the other driver had been insured. It also costs $10,000 to repair your spouse's car. A. 0 B. $15,000 C. $125,000D. $134,900 E. None of the aboveExplanation: This is not a non-owned car because it is your spouse’s car. To avoid duplication of coverage, your spouse’s car is not covered by the State Farm Auto Policy, and therefore you have $0 coverage. Your spouse’s insurance policy would pay $134,900. 4. Your 22 year old son John, who resides with you but is attending college away from home, borrows his roommate’s car for an errand. His roommate has a policy with Country Companies that includesliability with 20/40/15 limits, and uninsured and underinsured motor vehicle coverage, both with 20/40 limits, but no medical payments or physical damage coverage. While driving this car, John is hit from behind by an uninsured driver. John incurs $27,000 in medical bills and would be entitled to a $58,000bodily injury award if the other driver had been insured. Also, the roommate’s car incurs damages that cost $7,400 to repair.A. 0 B. $7,300 C. $25,000D. $45,300 E. None of the aboveExplanation: Country will pay for $20,000 of the $58,000 in bodily injury under uninsured motor vehicle (coverage U). They will not pay for the car b/c he he does not have collision. State Farm will pay for the rest of the $58,000 ($38,000) and $7,300 of the damage to the car for a total of $45,300. Your roommate will have to pay the $100 deductible. 5. Your car won’t start one morning so you have it towed to a service station for repairs. It turns out that you need a new carburetor. While your car is being repaired, the service station lets you use one of their cars, but warns you that there is no insurance coverage on that car. While you are driving the garage's car, you run into a tree, damaging this car. It costs $25 for towing your car to the service station, $400 for a new carburetor in your car and $800 to repair the borrowed car. A. $25 B. $725 C. $1,100D. $1225 E. None of the aboveExplanation: This is a temporary substitute car so you have coverage for it. The $25 towing is covered and $700 of the $800 to repair the borrowed car is covered under collision. The $400 for the new carburetor is not covered.6. Your 21 year old daughter Alice, who lives with you, has her own car and carries liability with 50/100/25 limits, and uninsured motor vehicle coverage and underinsured motor vehicle coverage, bothwith 50/100 limits with Travelers, but no other coverages. Alice lets your son Jake, who lives with youbut does not own a car, borrow her car. Jake runs into a house, causing $3,000 in damage to her car and $30,000 in damage to the house.A. 0 B $2,900 C. $7,900D. $32,900 E. None of the aboveExplanation: Your policy will pay $2,900 to repair her car under your collision coverage. Her policy will pay $25,000 of the $30,000 in damage to the house, and your policy will then pay the remaining $5,000 for a total of $7,900.7. You decide that you would like a new car so on September 11, 2007, you go to University Auto Park and buy a 2007 Lamborghini for $350,000 (less the $9,100 you get in trade for your Sebring). In all the excitement, you forget to tell State Farm about this new car. Four days later, at 3 am when the Edens Expressway in Chicago is clear of traffic, you decide to see just how fast it can go. You learn that it can go faster than you can control it, and you run into a concrete bridge support. You call for a tow truck to take it to a nearby repair shop. It costs $100 for the tow and