FIN 230 Exam I Review Session

1. FIN 230 Exam I Review Session Assignment 1: Kathy Gu Assignment 2: Neal Simons Assignment 3: Brian Alvin Assignment 4: Bill Schneider Assignment 5: PC Wong Assignment 6: Eric Lam

2. Homework #1 Review State Farm Car Policy: Your Use of Your Car

3. Problem #1 • Ecstatically happy after U of I’s latest • football win, you swerve into your • driveway really fast. Unfortunately, you hit • your hand-carved mailbox. It costs $1000 • to repair your car and $800 to repair the • mailbox. Your policy will pay: • $0 • $900 • $1600 • $1700 • None of the above

4. Problem #1 - Answer B. $900 • Collision coverage will cover damages to your car less a $100 deductible ($1000-$100 = $900) • Damages to your mailbox are not covered b/c damages to property owned by an insured are excluded • $900 + $0 = $900

5. Problem #2 While driving your car in Mexico, 30.5 miles from the U.S. border, you run into a deer that had escaped from a nearby zoo. You incur $500 in medical bills and it costs $2500 to repair your car. Your policy will pay: • A. $0 • B. $2400 • C. $2900 • D. $3000 • E. None of the above

6. Problem #2 - Answer D. $3000 • Liability, medical payments, and physical damages coverages apply in Mexico within 50 miles of the U.S. border • $500 Medical Payments • $2500 Comprehensive (Hitting an animal is Comprehensive) • $500+$2500 = $3000

7. Problem #3 You are driving your friend home after a night out at the bars. You cross over the intersection and crash into another car. The police officer charges you with a DUI and fines you $1000. The driver of other car wins a bodily injury award of $50,000. His 4 passengers win bodily injury awards of $120,000, $80,000, $115,000, $20,000. It costs $20,000 to repair their car. Your friend incurs $30,000 in medical bills and wins a liability award of $40,000. You incur $40,000 in medical bills yourself. It costs $800 to repair you car. Your policy will pay: • A. $0 • B. $320,500 • C. $370,700 • D. $375,700 • E. None of the above

8. Problem #3 - Answer C. $370,700 • Bodily Injury Liability Awards: $100,000 per person / $300,000 per accident limit • $50,000 + $100,000 + $80,000 + $100,000 + $20,000 + $40,000= $390,000 (greater than $300,000 limit)  $300,000 BI Liability • Property Damage Liability: $100,000 limit • $20,000 • Medical Payments: $25,000 per person • $25,000 (friend) + $25,000 (yourself) = $50,000 • Collision: $800 - $100 Deductible = $700 • $300,000 + $20,000 + $50,000 + $700 = $370,700

9. Problem #4 While your car is parked outside the grocery store, a gang smashes your windshield and steal the clothes you just bought at the mall. It costs $400 to repair your windshield and your clothes are valued at $500. Your policy will pay: • A. $0 • B. $300 • C. $500 • D. $900 • E. None of the above

10. Problem #4 - Answer E. None of the above ($400) • Comprehensive: $400 • If loss of clothes and luggage is due to theft, your entire car must have been stolen • $400 + $0 = $400

11. Problem #5 While driving your car along the Mississippi River, you accidentally drive into the river. It costs $75 to tow your car to the nearest repair location and $4000 to repair your car. You rent a car for $30 a day for 5 days until your car is repaired. Your policy will pay: • A. $75 • B. $4075 • C. $4200 • D. $4225 • E. None of the above

12. Problem #5 - Answer B. $4075 • Emergency Road Service: $75 • Comprehensive: $4000 • NO Car Rental and Travel Expenses • $75 + $4000 = $4075

13. Homework #2 Review State Farm Car Policy: Uninsured/Underinsured

14. Problem #1 While driving your car in Utah on vacation, you swerve to avoid hitting an oncoming driver driving in the wrong lane and hit a tree. The other driver flees the scene and is never identified. You incur $30,000 in medical bills. It costs $11,000 to repair your car. You would be entitled to a bodily injury award of $90,000 against the other drive if he could be found. a) 35,900 b) 36,000 c) 100,900 d) 101,000 e) None of the above

15. Problem #1 - Answer Correct answer: A You are not entitled to collect anything under uninsured coverage because the driver did not hit you. In order to be covered under uninsured motor vehicle coverage, a hit and run driver must strike your vehicle. Medical payments: $25,000 Collision: $11,000 - $100 deductible = $10,900 Total: $25,000 + $10,900 = $35,900

16. Problem #2 While driving your car in Mexico 40 miles from the U.S. border, you are hit by an uninsured driver. You are injured and incur $3,000 in medical bills. You are entitled to a bodily injury award of $75,000 against the other driver. It also costs $10,000 to repair your car. a) 0 b) 12,900 c) 13,000 d) 84,900 e) None of the above

17. Problem #2 - Answer Correct answer: B Even though you are within 50 miles of the US border, you do not have un(der)insured coverage in Mexico. Only physical damage, medical payments, and liability coverage applies within 50 miles of the U.S. border. Medical: $3,000 in medical coverage Collision: $10,000 - $100 = $9,900 Total: $3,000 + $9,900 = $12,900

18. Problem #3 You are driving your car when you are hit from behind by another driver and seriously injured. You incur $5,000 in medical bills and are entitled to a $200,000 bodily injury award against the other driver. However, the other driver only carries 20/40/15 liability limits and no other coverage. a) 80,000 b) 85,000 c) 105,000 d) 125,000 e) None of the above

19. Problem #3 - Answer Correct answer: B When you have both un(der)insured motorist and medical payments coverage in the same accident, your medical payments will pay first. Any remaining un(der)insured coverage will pay on top of that. Medical: $5,000 Underinsured will only pay up to $100,000 including the payments made by the other driver. So $100,000 - $20,000 = $80,000 Total: $5,000 + $80,000 = $85,000

20. Problem #4 You are driving with your friend in your car when you are side-swiped by an uninsured driver. Both you and your friend incur $30,000 in medical bills and are each entitled to a $200,000 bodily injury award. • 0 • $50,000 • $200,000 • $250,000 • None of the above

21. Problem #4 - Answer Correct answer: D Remember, when you have both un(der)insured motorist and medical payments coverage in the same accident, your medical payments will pay first. Any remaining un(der)insured coverage will pay on top of that. Medical: $25,000 + $25,000 = $50,000 Underinsured: $100,000 + $100,000 = $200,000 Total: $50,000 + $200,000 = $250,000

22. Homework #3 Review State Farm Car Policy: - Your Use of Other Cars - Other People’s Use of Your Car - Other People’s Use of Other Cars

23. Brian’s Special Rules • First decide what type of car it is and if it is covered • Insurance follows the car, driver pays excess • Spouse’s car is never covered • Rental cars are covered up to 21 days • Replacement cars covered for up to 30 days • Additional Cars covered up to 30 days or until effective date of policy • Know the flow chart for non-owned cars

24. Problem #1 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, both with 50/100 limits with Travelers, but no other coverages. Alice lets your son Jake, who lives with you but 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. $7,900 • D. $32,900 E. None of the above

25. Problem #1 - Answer Correct answer: C • Non-owned car • Collision: $3,000 • Property: $30,000 • Alice’s Policy • Property: $25,000 • Your Policy • Property: $5,000 • Collision: $2,900 • Total: $7,900

26. Problem #2 While on a two week vacation in Florida, you rent a car. You decline the insurance coverage offered by the rental agency. On the last day of your vacation, while you are checking out of the hotel, the rental 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 $22,000. Your luggage was worth $500. • A. 0 B. $500 C. $22,000 • D. $22,200 E. None of the above

27. Problem #2 - Answer • Correct Answer: D • Non-owned car • Comprehensive: $22,000 • Luggage: $500 • Your Policy • Comprehensive: $22,000 • Luggage: $200 • Total: $22,200

28. Problem #3 You borrow your son Tom’s car for an errand. Tom lives with you. He has his own insurance policy with GEICO, with 20/40/15 liability limits, but no other coverage. While driving his car you run into a parked car, causing $4,400 damage to your son’s car and $12,000 damage to the other car. You are injured in this accident and incur $1,000 in medical expenses. • A. 0 B. $4,300 C. $5,300 • D. $17,300 E. None of the above

29. Problem #3 - Answer • Correct Answer: C • Non-owned • Collision: $4,400 • Property: $12,000 • Med Bills: $1,000 • Tom’s Policy • Property: $12,000 • Your Policy • Collision: $4,300 • Med Bills: $1,000 • Total: $5,300

30. Problem #4 Your neighbor borrows your car one day and drives up to Marketplace Mall. Your neighbor has his own car insurance policy with Progressive Insurance Company, with the same limits and coverages that you have on your policy. Your neighbor parks and is getting out of your car when he falls to the ground and hits his head. He is in a coma for 7 days. His medical bills are $39,000. A. 0 B. $14,000 C. $25,000 D. $39,000 E. None of the above

31. Problem #4 - Answer • Correct Answer: C • Your Car • Med Bills: $39,000 • Your Policy • Med Bills: $25,000 • Total: $25,000

32. Problem #5 You borrow your neighbor’s car that is insured by Progressive with the same limits and coverages that you have on your policy. You run into a school bus carrying 40 children. Each child is injured and incurs $5,000 in medical bills. They all sue you and each child wins an award for $10,000 in bodily injury damages. Both the school bus and your neighbor’s car are damaged. It costs $25,000 to repair the bus, for which you are held liable, and $15,100 to repair the car. On the good side, you aren’t injured. • A. 0 B. $100,000 C. $140,000 • D. $340,000 E. None of the above

33. Problem #5 - Answer • Correct Answer: B • Non-Owned • Med Bills: $200,000 • Bodily Liability: $400,000 • Property Liability: $25,000 • Collision: $15,100 • Neighbor’s Policy • Bodily Liability: $300,000 • Property Liability: $25,000 • Collision: $15,000 • Your Policy • Bodily Liability: $100,000

34. Homework #4 Review - Introduction to Risk and Insurance - Fundamental Doctrines of Insurance - Insurance Contracts

35. Problem #1 Calculate the expected loss for bodily injury liability insurance if the loss frequency is 27 in 500 and the loss severity is $4000. • A. $216 • B. $432 • C. $2,400 • D. $74,000 • E. None of the above

36. Problem #1 - Answer • Correct Answer: A. $216 • Explanation: Expected loss = (loss frequency)(loss severity) Expected loss = (27/500)($4,000) Expected loss = $216

37. Problem #2 You, a 21-year-old junior are at an Illini Baseball game. You see your 22-year-old co-worker Jeff, who has had too much to drink at the game and is intoxicated. You ask him to cover your shift at the ice cream shop next Friday night. In return, you will pay Jeff $15. He agrees to the deal, and you do not notify your manager. Next Friday night, Jeff fails to show up and you are fired for your absence since your manager expected you to show up. You sue Jeff for losing your job. Which of the requirements for a contract is missing?

38. Problem #2 - Choices • A. Offer and acceptance • B. Consideration • C. Competent parties • D. Legal purpose • E. None are missing

39. Problem #2 - Answer • Correct Answer: C. Competent parties • Explanation: Pg. 81 in the Pritchett text discusses the issue of competent parties. An insane or intoxicated party is not considered a competent party. Only in rare instances are minors considered competent parties.

40. Problem #3 Insurance for failing out of the University of Illinois violates which ideal requisite for insurability: • A. Many similar exposure units • B. Fortuitous losses • C. Definite losses • D. Small possibility of a catastrophe • E. Economic Feasibility

41. Problem #3 - Answer • Correct Answer: B. Fortuitous losses • Explanation: The definition of fortuitous losses in the Pritchett text is, “losses that occur as a matter of chance [and] losses are not controlled or influenced by the insured.” Thus, this is a fortuitous loss since you can control whether you do or do not fail.

42. Problem #4 You purchase a life insurance policy on your spouse. Ten years later you divorce, and the following year your ex-spouse dies. Which one of the following statements will apply?

43. Problem #4 - Choices • A. You can collect on this policy because this is a contract of adhesion • B. You cannot collect on the policy because you misstated a material fact • C. You can collect on this policy because you had an insurable interest at the proper time • D. You cannot collect on this policy because you no longer have an insurable interest • E. You can collect on this policy because you bought the policy in utmost good faith

44. Problem #4 - Answer • Correct Answer: C. You can collect on this policy because you had an insurable interest at the proper time • Explanation: Pg. 87 in Pritchett states that, “ life insurance requires an insurable interest only at the inception of the contract.” This holds true since you had an insurable interest in your spouse since you were still married at the inception of the policy.

45. Homework #5 Review - Introduction to Risk and Insurance - Buying Insurance

46. Problem #1 Which of the following is the best reason that the State Farm Car policy excludes coverage for driving in Europe? • To make the policy economically feasible • To standardize the risk • To reduce the risk of a catastrophe • To avoid losses that are not fortuitous • Because this is a contract of adhesion

47. Problem #1 - Answer Which of the following is the best reason that the State Farm Car policy excludes coverage for driving in Europe? • To make the policy economically feasible • To standardize the risk • To reduce the risk of a catastrophe • To avoid losses that are not fortuitous • Because this is a contract of adhesion

48. Problem #2 Which of the following factors should be the most important consideration when trying to decide whether or not to buy insurance from a particular insurer? • Its rates are the lowest of any insurer • It has a very low complaint ratio from the state of Illinois • The company issues binders • It is rated B- by A.M. Best • Consumer reports indicates that the customer satisfaction rating is over 90 for this company

49. Problem #2 - Answer Which of the following factors should be the most important consideration when trying to decide whether or not to buy insurance from a particular insurer? • Its rates are the lowest of any insurer • It has a very low complaint ratio from the state of Illinois • The company issues binders • It is rated B- by A.M. Best • Consumer reports indicates that the customer satisfaction rating is over 90 for this company

50. Problem #3 You have an auto policy with State Farm. However, the nearest State Farm agent is 100 miles away. Howie, your cousin, has just built a new car out of spare parts lying around the yard. Illinois law requires that he have insurance on his new vehicle. You copy your policy and tell Howie to give you a check for the same amount of premium. You forward this check to State Farm with a letter indicating that your cousin needs some liability insurance. Later that month, Howie’s bank statement indicates that State Farm has deposited his check. Are you State Farm’s new agent? A. Yes, by waiver B. Yes, by estoppel C. No, not a mutual acceptance D. No, invalid agency E. None of the above