UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN
College of Business
Finance 230
Fall, 2007
D E P A R T M E N T O F F I N A N C E
Assignment 10
Due: November 9, 2007
For the first nine questions on this assignment, assume that you have both the Homeowners Policy described in
Appendix A of your textbook and the State Farm Car Policy, including the Declarations page, handed out in class. For the Homeowners Policy, assume the policy limits exceed 80% of the replacement cost of the house.
Also, use the following information as a sample Declarations page for the Homeowners Policy:
Type of Coverage Limit of Liability
Cov A - Dwelling
Cov B - Other Structures
Cov C - Personal Property
$100,000
10% of Coverage A limit
$50,000
2.
Cov D - Loss of Use
Cov F - Medical Payments (per person)
Cov E - Personal Liability (per occurrence)
Actual Loss Sustained
$100,000
$1,000
Policy Deductible for Section I - Property Coverages $250
For each question, indicate how much both policies, in total, will pay.
1. One evening, while you are stargazing, a meteor crashes into your attached garage. It costs $15,000 to fix the garage, $20,000 to repair your spouse’s car (ACV $9,000), and $5,000 to repair your boat (ACV
$2500).
A. 0
D. $24,750
B.
E.
$16,000
None of the above
C. $17,250
Explanation: Your garage is covered by dwelling, your spouse’s car is not covered, and your boat is covered under personal property. This is what the calculations look like:
Dwelling Personal Property
$15,000 → garage
$2,500 → ACV boat
Total
$15,000 → Dwelling
- 250 → deductible
$2,250
+ 1,000 → Personal Property
$16,000 → Total
↓
$1,000 → Limit of liability (boat)
An unidentified driver runs over some of your bushes in front of your house and crashes into your garage door. You never find out who did this. It costs $500 to replace the bushes and $600 to repair your garage door.
A.
D.
0
$850
B.
E.
$350
None of the above
C. $600
Explanation: You bushes are covered by loss of sue, and your garage door is covered by dwelling.
This is what the calculations look like:
Loss of Use
$500 → bushes
Dwelling Total
$600→ garage door $500 → Loss of Use

3.
4.
5.
6.
-250 → deductible +350 → Dwelling
$350
$850 → Total
You are working at a grocery store part-time. Early one morning, you are mopping an aisle. Before you can setup your caution sign, an elderly man walks down the slippery aisle and falls and breaks his hip.
This man sues you and wins a bodily injury award of $135,000.
A.
D.
$1,000
$135,000
B.
E.
$99,750
None of the above ($0)
C. $100,000
Explanation: The answer to this problem is E ($0). You are working at the grocery store when the elderly is injured. Therefore, exclusion 1.b. on page 678 applies because the bodily injury arose out of the work/business you were engaged in.
You go on vacation for a week in the winter. When you return home, you find that the large snows have caused part of your roof to cave in, damaging some furniture stored in your attic. It costs $6,500 to repair your roof, and $3,200 to replace your furniture (ACV $1800).
A.
D.
$0
$9,350
B.
E.
$7,600
None of the above
C. $8,050
Explanation: Your roof is covered by dwelling, and your furniture is covered by personal property in this problem. This is what the calculations look like.
Dwelling
$6,500 → roof
Personal Property
$1,800→ ACV furniture
Total
$6,500 → dwelling
- 250 → deductible
$1,550
+1,550 → personal property
$8,050 → Total
A river near your house overflows its banks, destroying your home, your personal property and your car. It costs $108,000 to rebuild your home (ACV $90,000). It costs $45,000 to replace your personal property (ACV $35,000). It costs $15,000 to replace your car (ACV $9,100). While rebuilding your house, you rent an apartment for 6 months for $750 per month. You rent a car for 10 days at $30 a day until you buy a new car.
A.
D.
$0
$148,600
B.
E.
$9,100
None of the above
C. $138,350
Explanation: Your car is the only item that is covered, due to your auto policy’s comprehensive coverage. Your car rental is not covered because your car did not incur its loss due to theft. Also, your home, your personal property, and your rent for 6 months are not covered because flooding under exclusion 1.c.(1) on page 674 applies. This is what the calculations look like.
State Farm
$9,100 → ACV car
One day someone enters your home by breaking and entering through a basement window. They take
$75,000 in stamps, $4,000 in furs and $2,500 in cash from under your mattress. They also break your
$3,500 rifle in half, which makes it a total loss. It costs $350 to repair the window.
A.
D.
$5,800
$50,350
B.
E.
$6,050
None of the above
C. $9,050
Explanation: Your stamps, furs, cash, and rifle are covered by personal property, while your window is covered by dwelling. This is what the calculation look like.

7.
Personal Property
$75,000 → stamps
- 250 → deductible
$74,750
Dwelling
$350 → window
↓
$1,000 → limit of liability (stamps)
+1,000 → limit of liability (furs)
+ 200 → limit of liability (cash)
Total
$5,700 → personal property
+ 350 → dwelling
$6,050 → Total
+3,500 → rifle (no special limit since the loss was not by theft)
$5,700
While trying to back your car out of your attached garage, you accidentally put the car in drive and run into the front wall of the garage and into your living room. It costs $12,000 to repair the wall, $1,500 to replace your living room couch (ACV $500) and $4,000 to repair your car.
A.
D.
0
$16,400
B.
E.
$3,900
None of the above ($16,150)
C. $12,250
8.
9.
Your son’s puppy is especially playful. One day, while your neighbor is over for dinner, the puppy gnaws on the laptop she uses for work, scattering pieces all over the house. It costs $3,250 to replace the laptop, $500 to rebuild the customer data your neighbor stored on the laptop and $250 for dog obedience lessons. Your neighbor sues you and wins a property damage award for the value of the computer and the cost to rebuild the data set.
A.
D.
$250
$3,750
B.
E.
$3000
None of the above
C. $3,250
Explanation: In this case, you are held liable for the computer and the customer data due to the property damage award that was won against you. Both of these items will be covered by your personal liability coverage. This is what the calculations look like.
Personal Liability
$3,250 → laptop
+ 500 → customer data
$3,750
You are an avid Second Life player and your avatar, unlike you in real life, is very aggressive and crude. In the game, your avatar harasses another avatar so severely that the player behind that avatar suffers a real life emotional breakdown. Unfortunately for you, that person is a lawyer in real life who hires a Second Life cyber sleuth to track down your real identity and get even with you. Once he determines your real identity, he sues you (in real life) for your actions (in Second Life) and wins a
$125,000 bodily injury claim for his injuries. This is the first ever legal judgment against someone for their actions in Second Life. How much will your Homeowners policy pay in this case?
A. $0 B. $100,000 C. $125,000

D. L$125,000 (Linden $s) E. None of the above
Explanation: In this problem, you are held liable for a bodily injury claim of $125,000 due to the virtual mental abuse that you impose upon the other person through Second Life. There is an exclusion for mental abuse under exclusion 1.k. on page 680, but this does not apply because you did not verbally or psychologically abuse the other individual in person and there is no exclusion for virtual life actions. As this is the first suit involving this situation, it is likely to be covered.
This is what the calculation looks like.
Personal Liability
$125,000 → bodily injury award
↓
$100,000 → limit of coverage (personal liability)
We will also accept A (0) since State Farm’s underwriting department thinks they could apply the mental abuse exclusion.
10. Jeff Gendron, the guest speaker on October 26, compared the claim frequency during the subsequent three year period for drivers with different claim experience in the prior three year period. He indicated that both the at-fault and not at-fault claim frequency is higher (compared to claims free drivers) for which of the following:
A.
B.
C.
D.
E.
Drivers with at-fault claims only
Drivers with not at-fault claims only
Drivers with no at-fault or not at-fault claims only
Drivers with either at-fault or not at-fault claims
None of the above