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 1 Due August 31 2007 Remember all assignments must be turned in by the beginning of class to get credit For the following questions assume that you have the State Farm Car Policy handed out in class including the coverages and limits shown on the Declarations page For each situation calculate how much your insurance policy would pay in total Unless otherwise indicated assume the loss occurs during the policy period Do not assume facts not given in the question 1 While you are driving your car in Mexico 20 miles from the U S border you run into a parked car and are injured It costs 800 to repair your car and 1200 to repair the car you hit You incur 500 in medical bills as a result of this accident Your policy will pay A D 0 2 400 B E 1 900 None of the above C 2 000 Explanation According to pg 4 of the policy the liability medical payments and physical damage coverages apply in Mexico within 50 miles of the U S border You are 20 miles from the U S border Therefore 1200 is covered under Coverage A Liability Property Damage 700 is covered under Coverage G Collision 800 to repair your car minus 100 deductible and 500 is covered under Coverage C Medical Payments 2 While you are driving your car in Urbana you lose control and run into a house injuring four people inside the house They all sue you and win the following bodily injury awards first person 50 000 second person 170 000 third person 40 000 and fourth person 60 000 It costs 125 000 to repair the house and 12 500 to repair your car Your policy will pay A D 0 412 400 B E 362 400 None of the above C 400 000 Explanation Your Coverage A is given as 100 300 100 meaning that your policy will pay 100 000 for bodily injury per person per accident 300 000 total for bodily injury per accident and 100 000 for property damage per accident All 50 000 of the first person s BI liability claims will be paid 100 000 of the second person s BI claims will be paid All 40 000 of the third person s BI claims will be paid and all 60 000 of the fourth person s BI claims will be paid This amounts to 250 000 of claims paid for BI which is less than the 300 000 aggregate BI liability limit 100 000 will be paid under Property Damage liability to repair the house 12 400 will be paid under Coverage G Collision to repair your car 12 500 repair cost minus 100 deductible 3 While driving your car across a bridge in Minnesota the bridge collapses and your car falls into the river below Someone pulls you from your car just before in sinks to the bottom of the river never to be recovered The Actual Cash Value of your car before it fell off the bridge was 9 100 You incur 30 000 in medical bills from this incident Your policy will pay A 0 B 9 000 C 30 000 34 100 E None of the above Explanation Damages to your car will be covered under Coverage D Comprehensive There is no deductible for comprehensive coverage so the actual cash value of 9100 will all be covered You incur 30 000 in medical bills but your Coverage C Medical Payments limit is 25 000 so your policy D will cover 25 000 in medical payments 4 While driving your brother who lives with you around campus you accidentally run into a tree Your brother is injured and incurs 17 000 in medical bills It costs 2 000 to repair your car Your brother sues you so much for his next birthday present and wins a liability award of 40 000 Your policy will pay A D 0 41 900 B E 1 900 None of the above C 18 900 Explanation Your brother s 17 000 in medical bills will be covered under Coverage C Medical Payments The 40 000 bodily injury award consists of 17 000 in medical bills and 23 000 of other expenses pain and suffering hedonic losses lost wages Your brother has already received the 17 000 of medical expenses under Coverage C He will not receive the other 23 000 because Coverage A will not pay for any bodily injury to any member of the family of the insured related by blood marriage or adoption residing in the same household as the insured pg 8 of the policy 1900 will be covered under Collision 2000 repair costs minus 100 deductible 5 You are at the North Carolina coast when Hurricane Felix hits Although you are able to get away you have to leave your car and luggage behind The hurricane winds blow your car over causing the trunk to open Your luggage is then blown away and never recovered It costs 3500 to repair your car The value of your luggage was 500 Your policy will pay A D 3 400 4 000 B E 3 600 C None of the above 3500 3 700 Explanation The 3500 in repair costs will be covered under Coverage D Comprehensive since the damage was caused by a factor other than collision Your luggage is NOT covered in this case pg 19 of the policy states that loss to clothes and luggage under comprehensive is only covered when the loss is caused by fire lightning flood falling objects explosion earthquake or theft of the entire car 6 After pumping gas you forget to remove the hose from your gas tank As you drive off the hose breaks spilling some gasoline and starting a fire The fire causes 325 000 in damage to the gas station You are held responsible for the entire loss Your policy will pay A D 0 325 000 B E 100 000 None of the above C 300 000 Explanation Your Coverage A Property Damage Liability limit is 100 000 per accident Therefore your policy will pay 100 000 of the damage to the gas station 7 Your car won t start one morning so you have it towed to the nearest garage for repairs Your ignition switch is defective and has to be replaced It costs 400 to replace your ignition switch and 40 for the tow Your policy will pay A D 0 440 B E 40 None of the above C 340 Explanation Coverage H Emergency Road Service will pay 40 for the tow to the gas station Since only the costs stipulated on pg 20 of the policy are covered the cost to replace the ignition switch is not covered 8 Your car is stolen and never recovered You immediately report the loss to your agent Ten days after you report your car stolen State Farm agrees to pay you for the loss The Actual Cash …