Question

In: Accounting

Problem 3 Jimmy and Mary Sue, ages 28 and 27, respectively, are married and have a...

Problem 3

Jimmy and Mary Sue, ages 28 and 27, respectively, are married and have a net worth of $100,000. They both work, Jimmy has a 2010 Chevy truck, and Mary Sue has a 2012 Toyota Corolla. They also own a 1966 Indian motorcycle. They rent an apartment and have the following automobile and renter’s insurance policies:

Renters Insurance: • HO-4 renter’s policy without endorsements • Content Coverage: $25,000; Liability: $100,000

Automobile Insurance:

Both Car and Truck

Type

PAP

Bodily Injury

$25,000/$50,000

Property Damage

$10,000

Medical Payments

$5,000 per person

Physical Damage

Actual Cash Value

Uninsured Motorist

$25,000/$50,000

Comprehensive Deductible

$500

Collision Deductible

$500

Premium (annual)

$2,500

a. What risk exposures are not covered by the HO-4 policy?

b. Comment on the efficiency and effectiveness of the PAP.

c. Is the motorcycle covered under the PAP?

d. Do they have adequate liability coverage? If not, what would you suggest?

Solutions

Expert Solution

  1. & (d)

Homeowners insurance 4 policy generally covers the following:

The common parts of a home owners policy will be:

  1. Coverage A – Dwelling
  2. Coverage B – Other Structures
  3. Coverage C – Personal Property
  4. Coverage D – Additional Living Expenses
  5. Coverage E – Personal liability
  1. Liability protection:

Liability covers against lawsuits for bodily injury or property damage that the individual or his/her family members cause to other people.

It also pays for damage caused by pets.

Liability limits generally start at about $100,000, however, it’s a good idea to discuss whether you should purchase a higher level of protection with your insurance professional.

If you have significant assets and want more coverage than is available under your homeowners policy, consider purchasing an umbrella or excess liability policy, which provides broader coverage and higher liability limits

  1. Coverage for personal belongings:

Furniture, clothes, sports equipment and other personal items are covered if they are stolen or destroyed by fire, hurricane or other insured disasters.

The coverage is generally 50 to 70 percent of the insurance you have on the structure of the house

Personal belongings coverage includes items stored off-premise that is anywhere in the world.

Some companies limit the amount to 10 percent of the amount of insurance you have for your possessions. You also have up to $500 of coverage for unauthorized use of personal credit cards.

Trees, plants etc are also covered for an amount of 500$ per item.

  1. Coverage for structure of Home:

Homeowners policy pays to repair or rebuild if it is damaged or destroyed by fire, hurricane, hail, lightning or other disasters listed in your policy. Most policies also cover detached structures such as a garage, tool shed or gazebo—generally for about 10 percent of the amount of insurance you have on the structure of the house.

A standard policy will not pay for damage caused by a flood, earthquake or routine wear and tear.

  1. Additional living expenses:

ALE pays the additional costs of living away from home if you cannot live there due to damage from a an insured disaster. It covers hotel bills, restaurant meals and other costs, over and above your usual living expenses, incurred while your home is being rebuilt.

(c)

Vehicles not covered under Personal auto policy:

Vehicles for-hire that transport people, the policy considers that as using the vehicle as a livery conveyance, and is NOT included in the policy. (i.e. A taxi driver with fare paying customers) However, if the insured is car-pooling with acquaintances and sharing the expense of the commute, this would then be covered by the policy (i.e. HOV lane, toll expenses, etc).

Motorcycles and other vehicles with fewer than 4 wheels. (An endorsement can be added to cover this exposure)


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