Homework Assignment #1

This assignment draws on material from Chapters 3, 9, 10, and 11. Your answers are due by the start of class on Tuesday, October 12th (four weeks from now). Projects may be submitted late, up until the start of class on Thursday, October 14th. Late submissions will be docked 10 percent. Projects not submitted by the start of class on October 14th will be awarded no credit.

You are receiving this file as a word document. I suggest you save this file to your computer. You can answer the questions right on these pages. Then, you can print out your answers. The calculations may be hand-written. Hand in these printed pages on or before October 12th.

1. Tim and Tracy Bell started an extermination business. They incorporated the business. Tim and Tracy apply pesticides. When they work with insecticide, they wear gloves, goggles, and a mask over their mouth and nose. They bought insurance on the storage shed where they keep their supplies and equipment. The insurance on the shed includes a $500 deductible. For outdoor applications, Tim and Tracy will not spray pesticide if the wind speed is more than 15 miles per hour for fear the pesticide will drift outside the treatment area and hurt people or pets. From and Tim and Tracys perspective, which risk treatment measure (retention, transfer, risk control, or avoidance) do each of the following illustrate? (half-point each)

a. Not spraying pesticide when the wind speed is more than 15 miles per hour (be specific).

b. The $500 deductible in the physical damage insurance coverage.

c. Wearing gloves, goggles and masks when working with the pesticide.

d. Incorporating the business, rather than operating as a proprietorship.

2. We covered the legal characteristics of insurance contracts. Some of these characteristics are: unilateral contracts, aleatory contracts, contracts of adhesion, and personal contracts. Which one of these characteristic is illustrated by each of the following? (half-point each)

a. When Dan purchased a used car, the previous owner said that she had just paid her auto insurance premium, and that she would throw in her insurance coverage as part of the deal. The sellers auto insurance, however, will not cover Dan unless the insurer approves.

b. Chuck purchased a one-year homeowners policy. He was short of funds at the time of purchase. He paid one-fourth of premium when he purchased the coverage, and said he would make three additional quarterly premium payments; three months, six months, and nine months after the coverage went into effect. If his insurer does not abide by the terms of the contract, Chuck can sue the insurer and demand performance. The insurer, however, cannot sue Chuck if he fails to pay the future premiums. They can cancel coverage according to the terms of the contract, but they cannot sue Chuck if he does not pay the premium.

c. Hamburger Heaven (HH), was forced to close its six restaurants during the covid pandemic. The owner of HH, Vicky Murray, filed a claim with her insurer to recover lost business income. The insurer denied the claim, noting the policy did not cover losses attributable to sickness. Vicky sued the insurer, arguing the term sickness was not defined in the policy. The judge who heard the case agreed with Vicky. In her ruling, the judge said, If the insurer doesnt want to cover claims arising from a pandemic, its contract should clearly indicate that.

3. Cougar Insurance Company requires new employees to take their Basic Insurance Skills Test. One question on the test asks employees to identify sections of an insurance policy: declarations, insuring agreement, conditions, exclusions, definitions, and miscellaneous provisions. A portion of the test is reproduced below. Identify the section of the policy illustrated by each of the following. (half-point each, one answer only per part)

a. This insurance does not cover losses that are intentionally caused. In addition, losses that are caused by an earthquake or a flood originating outside the structure are not covered.

b. The home is a single-family residence located at 7810 Franklin Street in Springfield, Washington. The home is a single-story, ranch-style home that is of masonry non-combustible (brick) construction. The 3,400 square-foot home, which was built in 2008, includes a two-car garage. The roof of the home was replaced in 2016 after a windstorm damaged the roof.

c. This coverage is suspended if the property is left vacant or unoccupied for 60 or more days before a loss occurs.

d. Direct physical damage to the home is covered unless the cause of loss is specifically excluded. Losses to personal property are covered, provided the loss is caused by one or more of the following: fire, lightning, wind, hail, aircraft, riot, vandalism, explosion, or smoke.

e. This policy covers the occurrence of a loss. In this policy, occurrence means a sudden and accidental event or a loss that develops over time.

4. Calculations. Points as indicated. You must show your work to receive credit for your answer. It is in your best interest to show your work as partial credit may be awarded.

a. Culbreath Company purchased a building to store finished goods. They insured the building for $150,000 under a property insurance policy that included an 80 percent coinsurance clause and a $500 deductible. When the building was valued at $250,000 it was damaged by a fire. The damage was $90,000. Assuming fire is a covered peril, how much will Culbreath Company receive from their insurer to settle this claim? (2 points)

b. Jennings Company has a general liability insurance policy with Insurer #1 with a $250,000 per-occurrence limit. Jennings has a second general liability insurance policy with another insurer (Insurer #2) with a $100,000 per-occurrence limit. A customer was injured at a Jennings store, and Jennings was ordered pay $140,000 in damages to the injured customer. Assuming both policies would cover the claim, how would the claim be settled on a pro-rata liability basis? Clearly indicate how much would be paid under Policy #1 and under Policy #2. (2 points)

c. Audra purchased a living room set for $3,500. Her home and the contents were destroyed by a tornado (a covered peril). At the time of the loss, the living room set was worth $3,000 due to depreciation. Replacement furniture will cost $4,200. If the living room set was insured on an actual cash value basis, how much will Audra collect for this loss? Assume a $250 deductible applies to the loss. (2 points)

d. Eric would like to calculate his human life value. He believes his average annual earnings for the next 8 years will be $75,000. Of this amount, 55 percent will be used to support his family and 45 percent will be used to pay taxes and for his own personal maintenance expenses. Assuming an interest rate of 3 percent, what is Erics human life value? (2 points)