UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN College of Business D E P A R T M E N T O F F I N A N C E

Finance 230 Assignment 12 Fall, 2007 Due: December 7, 2007

1. What is a firemark in the context of insurance?

A. A plaque to indicate which company provides fire insurance on a house B. An metric used by claim adjusters that indicates the extent of damage from a fire C. A line on a map used by fire fighters to indicate the current location of a major conflagration D. The initial source of a fire as determined by an arson investigator E. None of the above

Answer: A. To view a picture of a firemark and learn more about the first property insurance company started by Benjamin Franklin, please visit this link http://www.philadelphiabuildings.org/contributionship/index.cfm.

2. What was the Supreme Court decision in the Southeast Underwriters Association case of 1944?

A. It upheld the verdict in Paul v. Virginia B. It overruled the verdict in Paul v. Virginia C. It allowed states to continue to regulate insurance subject to specific anti-trust conditions D. It required an insurance agent to obtain a state license in order to sell insurance in the state E. It ruled the Sherman Act did not apply to insurance

Answer: B. Paul v. Virginia in 1869 ruled insurance isn’t commerce and therefore state allowed to regulate insurance. Federal government can’t regulate insurance because not interstate commerce. US v. Southeast Underwriters Association (SEAU) in 1944 overruled the Paul v. Virginia verdict and stated that insurance is commerce and therefore should be regulated by federal government. Later in the McCarran Ferguson Act of 1946 the government decided that it is in the best interest to be regulated by the states except in certain cases. This still stands today.

For the next 7 questions, assume that you have the Homeowners Policy described in Appendix A of your textbook (with the limits and deductible as listed on Assignment 10), the State Farm Car Policy, including the Declarations page handed out in class, and the 2007-2008 University of Illinois Student Injury and Sickness Insurance Plan for Undergraduates (the health policy covers you only, not your dependents). Assume all medical expenses met the criteria listed on Assignment 7.

For each question, indicate how much all policies, in total, will pay.

3. Late one night after drinking in a bar you are driving home when you run into some bushes in front of your house and your garage, badly injuring yourself and damaging your car, the bushes and the garage. An ambulance takes you to the hospital, where you are later arrested for DUI (Driving Under the Influence). You are found guilty of this offense and fined $1,500. You are in the hospital for 30 days. You are billed $500 per day room and board, $25,000 for medical supplies while hospitalized, $10,000 for laboratory tests, and $1000 for the ambulance. It costs $12,000 to repair your car, $250 to replace the bushes and $8,000 to repair your garage.

A) 0 B) $36,900 C) $44,650 D) $70,900 E) None of the above

Answer: C. Your health policy will not pay for this loss because you were drinking (exclusion #14). To find how much your auto and homeowners policies will pay simply add up everything that is covered under each. You auto only pays for damages to your car and yourself, while your homeowners pays for damage to your home. The fine is not covered under either policy. Auto Homeowners 15,000 Room and Board ($500 per day * 30 days) 8,000 Repair Garage +25,000 Medical Supplies -250 Deductible Shrubs (not covered for damage by +10,000 Laboratory Tests 0 vehicles owned by insured p 670) +1,000 Ambulance 7,750 Total 51,000 Total

Limit of $25,000 for auto policy on 25,000 medical expenses

12,000 Repair your car -100 Deductible 11,900 Total Adding up each section you get a grand total of $44,650.

4. You are driving your car in Mexico, 60 miles from the U.S. border, when you are hit by an uninsured driver. You are badly injured and your car is damaged. You are hospitalized for 5 days and undergo surgery. You are billed $500 per day for hospital room and board, $8,000 for x-rays, $10,000 for the surgeon, $6,000 for the assistant surgeon and $4,000 for the anesthesia (which is administered by a licensed Physician who remained in constant attendance during your operation). You would be entitled to a $60,000 bodily injury award if the other driver had been insured. It costs $7,100 to repair your car.

A. 0 B. $24,400 C. $37,500 D. $67,000 E. None of the above

Answer: B. You auto policy will not pay anything because it is 60 miles into Mexico (beyond the 50 mile maximum) and your homeowners policy will not pay since there is no damage to your home or other personal property. Your health policy will pay for everything relating to your medical bills that are not excluded. The easiest way to do this is separate the In-Hospital Expense Benefit and everything else so you can apply the necessary deductibles. Auto In-Hospital Expense Benefit Other 2,500 Room and Board ($500 per day * 5 days) 4,800 Assistant Surgeon (80% of amount) +8,000 X-Rays +3,200 Anesthesia (80% of amount)

10,500 Subtotal +8,000 Surgeon (80% of amount) Coinsurance and deductible ($100 -2100 deductible + 20% of first $10,000) 16,000 Total 8,400 Total Adding up these two sections you get a grand total of $24,400.

5. You are a member of the U of I ultimate frisbee club and are driving to Purdue for a game against their club team when your car engine catches fire. You suffer serious burns and are hospitalized for 30 days. You are billed $500 per day hospital room and board, $15,000 for laboratory tests, $10,000 for surgery, and $8,000 for surgical dressings. Your car would cost $10,000 to repair; its ACV was $8,000 at the time of the loss. To make it worse, in your absence, your team loses every game it plays.

A. $43,900 B. $51,900 C. $56,000 D. $76,900 E. None of the above

Answer: C. This question you just have your auto and health policy, but there will be a reduction of benefits calculation. Start with the value of the car since it will not affect your reduction of benefits, which is the replacement cost of $8,000. Next you will need to calculate your total eligible expenses and normal benefit for the health policy. The normal benefit is calculated below: Health In-Hospital Expense Benefit Other 15,000 Room and Board ($500 per day * 30 days) 8,000 Surgery (80% of amount) +15,000 Laboratory Tests 8,000 Total +8,000 Surgical Dressings

38,000 Subtotal Coinsurance and deductible ($100 -2,100 deductible + 20% of first $10,000) 35,900 Total Adding these two together you get $43,900 which is the normal benefit. To get the eligible expenses, just add all the expenses above with no deductibles or coinsurance for a total of $48,000. The initial benefit payment is then simply 50% of the normal benefit which is $21,950. The State Farm Auto policy will pay $25,000 which represents the other valid coverages. To find the additional benefit payable that the health policy will pay find the lower of: Normal Benefit – Initial Benefit Payment = 43,900 – 21,950 = 21,950 Eligible Expenses – (Initial Benefit Payment + Other Valid Coverage) = 48,000 – (21,950 + 25,000) = 1,050 This means in total, your health policy will pay $21,950 + $1,050 = $23,000 and your auto policy for medical expenses will pay $25,000. These two, plus the $8,000 for the ACV of your car, is the total your policies will pay of $56,000.

6. One day while you are at work, some vandals break into your house. They spray paint some of your walls, which cost $2000 to clean. They also break your rifle in half, destroying it. It costs $7,000 to replace your rifle; the ACV was $5,000. They also pour salt into your car’s gas tank, which costs you $1200 to repair. You report the loss to your insurance company immediately. In the meantime you rent a car that costs $50 a day. Five days later the insurance company offers to pay your claim.

A. $5,200 B. $7,850 C. $8,075 D. $9,950 E. None of the above

Answer: E ($7,950). This question you just have your auto policy to pay for your car and your homeowners policy to pay for the damage to your home by the vandals. Below is the break up of each loss. Auto Homeowners 1,200 Repair Car (Comprehensive) 2,000 Clean Spray Paint ACV of Rifle (Personal Property valued at ACV and no limit since damaged not +0 Car Rental (Not covered b/c car not stolen) +5,000 stolen) 1,200 Total -250 Deductible 6,750 Total Adding these together you get a total of $7,950.

7. A visitor to your house falls on the front stairs, injuring himself. The person incurs $5000 in medical bills. He sues you for $15,000, but does not win the award since he tripped over his own untied shoelaces.

A. 0 B. $1,000 C. $5,000 D. $14,000 E. None of the above

Answer: B. You only have your homeowners policy for this question regarding medical payments and liability payments. Because he does not win the liability award of $15,000 you do not have to pay that amount. Your homeowners policy will pay the first $1,000 of the $5,000 in medical bills because that is the limit. Medical payments pays for any incident occurring on the residence premise as long as it is not you or a regular resident of your household p 678. Also note that there is no deductible for Section II Liability Coverages. 8. You and your family are enjoying your new boat on a warm day in July on Lake Michigan. While you are soaking up the sun, you notice your boat is starting to sink. In a panic, you call the coast guard as the boat goes under and are forced to abandon ship. The boat is never recovered. The boat had an ACV of $15,000. You also lost some personal property that was on the boat but which was normally located at your residence; this personal property had an ACV of $10,000. Your family is alright, but you almost drown and must be treated at the hospital. You are billed $700 for your visit to the hospital emergency room.

A. $400 B. $6,400 C. $11,400 D. $25,400 E. None of the above

Answer: A. You only have your homeowners policy and health policy for this question. Below is the breakdown of each. Health Homeowners ACV of Boat (Water damage not a named 700 Emergency Room 0 peril) ACV of personal property (Water damage -200 Outpatient ($150) and ER Deductible ($50) +0 not a named peril) 500 Total before coinsurance 0 Total 400 Total after 80% coinsurance The boat is personal property and is only covered for named perils. Because this is not a listed peril, you do not have coverage for your boat or any of your other personal property normally located at your residence p 673-674. The total is then $400 for the visit to the ER.

9. You are burning some leaves in your backyard when the fire gets out of control. Your house and your neighbor’s house catch fire and burn to the ground. Your car is also destroyed in the fire. It costs $120,000 to rebuild your home. The ACV of your home was $95,000. It cost $80,000 to replace your personal property (ACV $60,000). While rebuilding, you rent an apartment for 6 months at $1,000 a month. Your car is a total loss (ACV $10,000). Your neighbor sues you for his losses and wins an award of $250,000.

A. $10,000 B. $266,000 C. $285,900 D. $295,900 E. None of the above

Answer: B. You have your homeowners policy and auto policy for this question. Below is the breakdown of each. Homeowners Auto 100,000 Rebuild home ($100,000 limit on dwelling) 10,000 ACV of car (Comprehensive) Personal Property (based on ACV and limit +50,000 of $50,000 on personal property) 10,000 Total +6,000 Loss of use ($1000 per day * 6 months) Liability payment for neighbor suing you +100,000 (limit of $100,000 for personal liability) 256,000 Total Adding these together you get the grand total of $266,000.

10. According to Sue Myers, the guest speaker on November 16, what was the first peril that was covered by insurance for property losses?

A. Flood B. Theft C. Windstorm D. Fire E. Vandalism

Answer: D. Fire was the first peril that was covered by insurance for property losses after the Great Fire of London in 1666.