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 1Fall, 2007 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, includingthe 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. 0 B. $1,900 C. $2,000D $2,400 E. None of the aboveExplanation: 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 repairthe house and $12,500 to repair your car. Your policy will pay:A. 0 B. $362,400 C. $400,000D. $412,400 E. None of the aboveExplanation: 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. $30,000D. $34,100 E. None of the aboveExplanation: 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 policywill 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. 0 B. $1,900 C. $18,900D. $41,900 E. None of the aboveExplanation: 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 otherexpenses (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, youhave 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. Thevalue of your luggage was $500. Your policy will pay:A. $3,400 B. $3,600 C. $3,700D. $4,000 E. None of the above ($3500)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 lossis 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. 0 B. $100,000 C. $300,000D. $325,000 E. None of the aboveExplanation: 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 thetow. Your policy will pay:A. 0 B. $40 C. $340D. $440 E. None of the aboveExplanation: 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 Value of yourcar before it was