Risk Management Part 1 & 2

Requirements:

· If the question requires a calculation, please support your results with all necessary steps leading to the final answer.

· For essay type questions, please elaborate your reasoning.

Question 1 (30 points)

Ben owns an appliance and furniture store in a rented location at a shopping mall, and is insured under a commercial general liability (CGL) policy written on an occurrence basis. The CGL policy has the following limits:

General aggregate limit	$1,000,000
Products-completed operations aggregate limit	1,000,000
Personal and advertising injury limit	250,000
Each-occurrence limit	300,000
Damage to rented premises	100,000
Medical expense limit (any one person)	5,000

Part A (15 points): Please support your calculation with all necessary steps. Significant penalty will be imposed (i.e. deducting 75% of the total points) if only final results are provided.

A propane tank in the store exploded. Indicate the dollar amount, if any, that Ben’s insurer will pay for each of the following losses:

a. Three customers were injured by flying debris from the explosion and had medical expenses of $6,000, $7,500, and $5,000, respectively.

b. A fire resulted from the explosion. The damage to the rented building is $50,000.

c. A customer injured by the explosion sues Jillian for $200,000 for the bodily injury.

Part B (15 points). Please elaborate your reasoning. Your answer to the following should be at least 200 words.

Explain whether and why Ben’s CGL policy would or would not provide coverage for each of the following situations:

a. Ben forcibly detained a customer whom he erroneously accused of shoplifting. One month later, after the policy had expired, the customer sued Ben for defamation of character.

b. An advertising firm sues Ben for using copyrighted material without permission when the material first appeared in a special holiday ad. Ben maintains that the ad material is original and belongs to him.

c. Unknown to Ben, an automatic dishwasher had a defective part. One week after the dishwasher was installed in a customer’s house, it malfunctioned and caused considerable water damage to the kitchen carpet. The homeowner sues Ben for the damage.

d. An employee accidentally knocked over a heavy lamp that injured a customer’s foot. The customer later presents a bill for medical expenses to Ben for payment.

Question 2 (30 points)

Richard, age 45, is married with two children in high school. He estimates that his average annual earnings over the next 20 years will be $60,000. He estimates that one third of his average annual earnings will be used to pay taxes, insurance premiums, and the costs of self-maintenance. The remainder will be used to support his family. Richard wants to calculate his human life value and believes a 6 percent discount rate is appropriate. The present value of $1 payable for 20 years at a discount rate of 6 percent is $11.47.

Part A (10 points): Please support your calculation with all necessary steps. Significant penalty will be imposed (i.e. deducting 75% of the total points) if only final results are provided.

a. Calculate Richard’s human life value.

Part B (20 points): Please elaborate your reasoning. Your answer to the following should be at least 200 words.

Answer the following questions:

a. The human life value is one method for estimating the amount of life insurance Richard is to own. Keeping all other factors unchanged, explain the effect, if any, of each of the following on Richard’s human life value:

a. The discount rate used to calculate the human life value is increased.

b. The amount of average annual income going to the family is increased.

c. The period over which income is paid to the family is reduced.

b. Explain the limitations of the human life value approach as a method for determining the amount of life insurance Richard is to own.