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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 2

Fall, 2007 Due: September 7, 2007
For the following questions, assume that you have the State Farm Car Policy handed out in class, including the 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. You are driving your car to the football game when you are hit by an uninsured driver from Western Illinois. Fortunately you are not hurt, but your car is damaged and does not run. You immediately report the loss to your insurance company. It takes four days and costs $5,100 to repair your car. While your car is being repaired, you rent a replacement vehicle that costs $35 a day. Your policy will pay:


A. $5,000 B. $5,100 C. $5,140

D. $5,240 E. None of the above


Explanation: Your car would be covered for collision in this case. Uninsured coverage only covers the cost of any bodily injury liability award you would be entitled to collect against the other driver. Your physical damage coverage will pay for the damage to your car. So your policy will pay the $5,100 less the $100 deductible = $5,000. The rental car is not covered. Renting a car is only covered under your policy with your comprehensive coverage when your car is stolen. Note that you do not have Car Rental Expense coverage (R or R1) on your dec page.


  1. While walking to class, you are hit by a car and seriously injured. You incur $15,000 in medical bills. You are entitled to collect a bodily injury award of $150,000, but the driver is not insured. Your policy will pay:

A. $15,000 B. $100,000 C. $115,000

D. $125,000 E. None of the above
Explanation: When you have both uninsured motorist and medical payments coverage in the same accident, your medical payments will pay first. Any remaining uninsured coverage will pay on top of that (page 14 item 3 under coverage U and also item 3 under coverage W). So in this case, your medical payments coverage will pay $15,000. Your uninsured motor vehicle coverage will then pay $100,000 on top of that.


  1. You are driving to Indiana to see the Illini football game when you see a driver going the wrong way on I-74 coming straight at you. You swerve to avoid a collision and lose control of your car. Your car goes off the road and rolls over several times. Since you were not wearing your seatbelt (your bad) you are thrown from the car and severely injured. You incur $50,000 in medical bills, and would be entitled to a $250,000 bodily injury award against other driver, but he did not stop and is never identified. It costs $10,000 to repair your car; the Actual Cash Value of your car was $9,100. Your policy will pay:

A. $9,000 B. $34,000 C. $134,000

D. $259,900 E. None of the above

Explanation: In this case, your policy will pay only for your medical bills and your physical damage. You are not entitled to anything under underinsured 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. Because you swerved to avoid colliding, you cannot collect under your uninsured coverage. Therefore, your policy will pay up to $25,000 in your medical bills and $9,100 - $100 deductible = $9,000 in collision (going off the road and rolling over several times is a “collision” with the ground).


  1. You are driving your car in Urbana, with two friends as passengers, when you are hit from behind by a drunk, uninsured driver. You are all injured. You incur $40,000 in medical bills and are entitled to a $90,000 bodily injury award against the at fault driver. Each of your friends incurs $20,000 in medical bills and is entitled to a $60,000 bodily injury award. Your policy will pay:

A. $25,000 B. $65,000 C. $130,000



D. $210,000 E. None of the above
Explanation: When you have both uninsured motorist and medical payments coverage in the same accident, your medical payments will pay first. Any remaining uninsured coverage will pay on top of that (page 14 item 3 under coverage U and also item 3 under coverage W). In this case, you will get $25,000 in medical bills and each of your friends will get $20,000. You will then get $90,000 - $25,000 = $65,000 in uninsured coverage and your friends will each get $60,000 - $20,000 = $40,000 in uninsured motor vehicle coverage.


  1. While driving your car in Mexico, 10 miles from the U. S. border, you are hit by a driver with only 10/20/5 liability limits. The accident is the fault of the other driver. You are injured and your car is damaged. You incur $10,000 in medical bills. You are entitled to a $25,000 bodily injury award. It costs $2,100 to repair your car. Your policy will pay:

A. 0 B. $10,000 C. $15,000

D. $17,000 E. None of the above
Explanation: 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. So in this case, you would only get the $10,000 in medical payments. The entire $2,100 it takes to repair your car would be covered under the other driver’s coverage since he has up to $5,000 in property damage liability.


  1. You are sitting in your car at a stop sign in Champaign, when someone runs into the back of your car. You were not wearing your seatbelt and end up smashing through your windshield, incurring permanent brain damage. You incur $200,000 in medical bills. You are entitled to a bodily injury award of $500,000 and a property damage award against the other driver. It costs $5,100 to repair your car. The other driver only carries 50/100/25 liability limits. Your policy will pay:

A. 0 B. $30,000 C. $75,000

D. $130,000 E. None of the above
Explanation: Your medical bills will first pay the limit of $25,000. Your underinsured motor vehicle coverage will then pay on top of that but only pay up to $100,000 including the payments made by the other driver. Because the other driver had $50,000 bodily injury liability coverage per person, your policy will pay the difference up to $100,000 (so $100,000 - $50,000 = $50,000).


  1. You are driving your car in Illinois when you run into the back of a bus, causing it to leave the road and land in a ditch. Ten people on the bus are injured, and each wins a bodily injury award against you for $50,000. It costs $140,000 to repair the bus and $8,100 to repair your car.

A. $158,000 B. $408,000 C. $608,000

D. $648,000 E. None of the above
Explanation: Your bodily injury liability coverage pays up to $100,000 per person and $300,000 per accident (100/300). Because each person on the bus is entitled to $50,000, the first limit is not a problem. However, all ten people would be entitled to $500,000 together. Your policy will only pay the first $300,000 since this is all the same incident. You have property damage liability coverage up to $100,000 so your policy will pay the first $100,000 of the $140,000 to repair the bus. Finally, your collision coverage will handle your own car. You would get $8,100 - $100 deductible = $8,000.


  1. You are playing golf one day up in Chicago when a 10 year old girl driving a golf cart for her parents accidentally runs over your foot. Trying to be polite, you tell the family, whom you do not know, that you are fine. However, the next day your foot hurts so badly that you have to go to the doctor. It turns out your toe is broken. You incur $15,000 in medical bills. You would be entitled to a $30,000 bodily injury award if you could find the people involved, but you never find out who they were.


A. 0 B. $15,000 C. $25,000

D. $30,000 E. None of the above


Explanation: On the top of page 12, your policy states than an uninsured motor vehicle does not include a vehicle “2. Designed for use mainly off public roadways and not licensed for public roadway use at the time of the accident. This does not apply while the vehicle is on public roadways.” Because a golf cart is not licensed for public roadway use and the accident did not occur on a public roadway, you do not have coverage.


  1. According to Todd Hart, the guest speaker on August 24, what does the term “underwriting” mean?


A. Risk assessment B. Strategic planning C. Policy review

D. Profitability analysis E. Providing equity capital


Explanation: Todd Hart repeatedly stated that the function of underwriters is to assess the risk and decide whether or not to insure it.


  1. According to Todd Hart, the guest speaker on August 24, what proportion of cars in the state of Illinois does State Farm insure?

A. 1 in 10 B. 1 in 5 C. 1 in 3



D. 1 in 2 E. None of the above
Explanation: Todd Hart stated that State Farm insures 1 in 5 cars in the nation but 1 in 3 in Illinois.

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