Assignment: Principles of Risk & Insurance

John lives in an apartment building and his hobby is creating fireworks shows. He has limited storage in his apartment so he decided to store fireworks in his oven, which he typically does not use.

He forgets that he stored explosives there and programs his oven to go on at 6 pm so he can roast a turkey. Unfortunately, when the oven turns on the fireworks ignite and explode.

As a result of this, the following damage is sustained:

a. Fire and smoke damage to John's apartment of $100,000.
b. Damage to John's furniture and possessions of $25,000.
c. Damage to property in other units in the building of $500,000.

1. John's neighbors sue him. What is the most likely basis for their claim?

A. Criminal Behavior - Arson
B. Breach of Contract
C. Unintentional Tort - Negligence

2. John asserts several defenses. Which of these is likely to succeed?

A. He has no liability because there was a trespasser in the building and trespassers are only protected against intentional injury.
B. He wasn't negligent because storing fireworks in an oven is a reasonable thing to do and no one could have predicted the outcome.
C. The neighbors have fire insurance and they need to collect on that before making a claim against him.
D. He rents his apartment and the landlord has vicarious liability.
E. In a previous fireworks accident John suffered a traumatic brain injury that significantly impairs his judgment. He was previously declared mentally incompetent by a judge.

3. John's building is managed by Star Realty Group (they maintain the building but do not own it). The residents with damage also sue Star because the building staff delivered the fireworks to John's apartment and placed them in the oven, at his request. What type of insurance would indemnify Star for losses related to these lawsuits?

A. Fire insurance
B. Commercial General Liability Insurance
C. Errors and Omissions Insurance
D. Directors and Officers Insurance

4. One of the neighbors with damage is Mary. She sustained $50,000 of damage but also received a $50,000 payment from her property insurance policy for the damage. She filed a $50,000 lawsuit against John. Which of the following is true?

A. Under the Collateral Source Rule the insurer is entitled to any award Mary receives from her lawsuit against John.
B. John will likely be relieved of any liability to Mary because the Collateral Source Rule says she can't collect twice.
C. The Collateral Source Rule says that John's obligation to Mary is independent of any collection she receives from her insurer.
D. Because Mary filed two claims for the same loss neither one is collectible

Raymond is a stockbroker who regularly meets with clients and prospective clients. He scheduled a meeting with Jane to discuss her financial position and the possibility of managing some of her investments. He offered to pick her up at her home and drive her to his office for the meeting. He also offered to drive his neighbors Jim and Sarah to the train station since that was along the way.Jim and Sarah were going on vacation. While he was driving with the three of them in his car he was involved in a serious accident. Raymond and all the occupants of his car were seriously injured.

Raymond suffered injuries that prevented him from working for two months but he was able to return to work then. Jane suffered more serious injuries and was permanently and totally disabled, meaning she was no longer able to perform any substantial work activity for the rest of her life. Jim lost the use of both his legs as a result of the accident but was able to return to work after one month. Sarah's doctors initially indicated that she was permanently and totally disabled but her condition unexpectedly improved after two years. At that point she returned to work but was only able to work half time as a result of her injuries.

All four people had a full suite of disability benefits including workers compensation, Social Security Disability benefits, group short term and long term disability coverage through their respective employers which included residual disability coverage under the long term portion and private short term and long term coverage also with residual disability coverage under the long term portion.The private long term disability policies also cover presumptive disability. In all cases the short term disability benefits covered disabilities lasting up to 6 months, with a one week exclusion period and the long term benefits covered disabilities lasting longer than 6 months (i.e., there was a 6 month exclusion period).

5. Based on the information provided fill out the following chart indicating whether each person is likely to be covered under each policy:

Fred is concerned about providing for his family in the event he dies. He is currently 45 years old and has a wife who does not have a paid job and two children, aged 15 and 17. He estimates that if he died unexpectedly his family would need $300,000 more than their current assets to maintain their lifestyle. However by the time Fred is 55 he is confident his children will be independent and his wife will have enough savings to retire.

He decides to buy life insurance to protect his family but wants to spend as little as necessary. He wants insurance coverage but is not particularly interested in using life insurance for savings.

6. Which life insurance policy would be most suitable for Fred?

A. A 10 year $300,000 term life policy
B. A $300,000 whole life policy
C. A One year renewable $300,000 term life policy
D. A $1 million whole life policy

In order to save money on premium, Fred decides to fib on the life insurance application. He says he doesn't smoke even though he does, says he's 5 years younger than he is and omits the fact that he has a rare condition that sometimes leads to sudden cardiac arrest and death.

7. If Fred dies from his heart conditionone year after buying the policy, which of the following is most likely?

A. The death benefit will be reduced based on his actual vs reported age.
B. The death benefit will be reduced because Fred will be assigned to a lower rated underwriting class.
C. The insurer will decline a claim on the life insurance policy because Fred made a material misrepresentation on the application.
D. Based on the Incontestable Clause, the policy will pay in full.

8. Assume the same situation as in question 7 but Fred dies 3 years after buying the policy. Which of the following is most likely?

A. The death benefit will be reduced based on his actual vs reported age.
B. The death benefit will be reduced because Fred will be assigned to a lower rated underwriting class.
C. The insurer will decline a claim on the life insurance policy because Fred made a material misrepresentation on the application.
D. Based on the Incontestable Clause, the policy will pay in full.