# 10.E: Structure and Analysis of Insurance Contracts(Exercises)

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1. Describe a few exclusions and a few endorsements and riders.
2. Joe Phelps is a chemistry aficionado. For his twenty-ninth birthday last month, Joe’s wife bought him an elaborate chemistry set to use in their attached garage. The set includes dangerous (flammable) substances, yet Joe does not notify his homeowner’s insurer. What problem might Joe encounter?
3. Joe has another insurance problem. He had an automobile accident last month in which he negligently hit another motorist while turning right on red. The damage was minor, so Joe just paid the other motorist for the repairs. Fearing the increase in his auto insurance premiums, Joe did not notify his insurer of the accident. Now the other motorist is suing for whiplash. What is Joe’s problem, and why?
4. “A Federal Reserve Board survey showing that banks are still making commercial real estate loans for ‘high profile’ properties does not tell the whole story of the impact of problems in the terrorism insurance market, insurance industry officials contend” (Steven Brostoff, “Loans Still Coming Despite Terror Risks,” National Underwriter, Property & Casualty/Risk & Benefits Management Edition, June 3, 2002).
1. Relate this story to the terrorism exclusion information you found in this chapter.
2. What is the actual problem?
5. “States approving terrorism exclusions for commercial property insurance are a help to the insurance industry, but two critical exposures aren’t excluded from terrorism—workers’ compensation and fire following a terrorist event” (“Even with Exclusions, Insurers Still Exposed to Workers’ Comp, Fire Losses,” Best’s Insurance News, January 10, 2002.) What can be the impact on insurers’ bottom line when such exclusions are not adopted?
6. Kevin Kaiser just replaced his old car with a new one and is ready to drive the new car off the lot. He did not have collision insurance on the old car, but he wants some on the new one. He calls his friend Dana Goldman, who is an insurance agent. “Give me the works, Dana. I want the best collision coverage you have.” Soon after he drives the car away from the lot, he is struck by an eighteen-wheeler and the new car is totaled.

Kevin then discovers that he has collision insurance with a $500 deductible, which he must pay. He is upset because to him “the works” meant full insurance for all losses he might have due to collision. Dana had thought that he wanted more cost-efficient coverage and had used the deductible to lower the premium. The applicable state law and insurer underwriting practices allow deductibles as low as$250, although they can be much higher.

1. Kevin wants to take Dana to court to collect the full value of the auto. What would you advise him?
2. What does this tell you about oral contracts?
7. What are the shortcomings of limited-peril health insurance policies, such as coverage for loss caused solely by cancer, from a personal risk management point of view?
8. A. J. Jackson was very pleased to hear the agent say that she was covered the moment she finished completing the application and paid the agent the first month’s premium for health insurance. A. J. had had some health problems previously and really didn’t expect to be covered until after she had taken her physical and received notice from the company. The agent said that the conditional binder was critical for immediate coverage. “Of course,” said the agent, “this coverage may be limited until the company either accepts or rejects your application.” The agent congratulated A. J. again for her decision. A. J. began to wonder the next morning exactly what kind of coverage, if any, she had.
1. What kind of coverage did A. J. have?
2. Did her submission to the agent of the first month’s premium have any impact on her coverage? Why?
3. If you were the agent, how would you have explained this coverage to A. J.?
9. LeRoy Leetch had a heck of a year. He suffered all the following losses. Based on what you know about insurance, which would you expect to be insurable and why?
1. LeRoy’s beloved puppy, Winchester, was killed when struck by a school bus. He has losses of burial expenses, the price of another puppy, and his grief due to Winchester’s death.
2. LeRoy has an expensive collection of rare clocks. Most are kept in his spare bedroom and were damaged when a fire ignited due to faulty wiring. The loss is valued at $15,000. 3. Heavy snowfall and a rapid thaw caused flooding in LeRoy’s town. Damage to his basement was valued at$2,200.
4. Weather was hard on the exterior of LeRoy’s house as well. Dry rot led to major damage to the first-story hardwood floors. Replacement will cost \$6,500.
10. When you apply for a life insurance policy, agent Dawn Gale says, “If you will give me your check for the first month’s premium now, the policy will cover you now if you are insurable.” Is this a correct statement, or is Dawn just in a hurry to get her commission for selling you the policy? Explain.

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