4. Rejda Ch 9 and 10 HW Solutions

Ch 9 & 10 HW Ch 9 Case Application a-d Application Questions 1-5 Ch 10 Case Application #1 Application Question: 2a (1 & 2), 3, 4, 5, 6, 7
Ch 9 Solutions Case Application a-d a. (1) Jeff has an insurable interest equal to the full value of the building, since he would lose financially if a loss occurs. (2) Richard does not have an insurable interest, since the building was sold earlier. (3) Gateway Bank has an insurable interest equal to the unpaid balance of the loan. The mortgaged building serves as collateral for the loan. b. No. A property insurance contract is a personal contract between the insurer and policyholder. Richard cannot validly assign the policy to Jeff without the insurer's consent. In practice, new property owners get their own insurance, so consent of the previous insurer is not required. c. Yes. A restaurant on the premises can substantially increase the probability of a fire or other loss. Premiums must be substantially higher if the restaurant were also covered. Since the physical hazard would be substantially increased and this fact was not disclosed, the insurer could attempt to deny coverage on the basis of a material concealment. d. Subrogation applies when the insurer makes a loss payment to the insured because of a loss caused by the negligence of a third party. In this case, an electrician improperly wired an electrical outlet, which caused the fire. The insurer could attempt to recover the loss payment from the negligent electrician or from the firm employing the electrician. Application Questions 1-5 1. (a) (1) Gateway Bank has an insurable interest in the boat because it serves as collateral for the loan. Thus, the Gateway Bank has an insurable interest in the amount of $800,000. (2) The Harbor Company also has an insurable interest in the property. The Harbor Company is a bailee, and there may be possible legal liability if Jake is negligent while docking the boat and using the facilities. Also, the Harbor Company would lose rental income if the boat is damaged. The loss of rental income will support an insurable interest. (3) White Shark Fishing Company also has an insurable interest in the property. Jake is acting as the company's agent, and his negligence can be imputed to White Shark. Thus, potential legal liability for a negligent act by Jake would support an insurable interest. (b) Yes. Jake is using the boat and has potential legal liability if he should damage the boat. In addition, if the boat is damaged there may be a business income loss and the loss of earnings, which would also support an insurable interest. 2. Actual cash value (ACV) is replacement cost less depreciation. Replacement cost is $6,000. Depreciation is $3,000 because the dining room set is 50 percent depreciated. Ashley would collect $3,000 as shown by the following: Replacement cost depreciation $6,000 $3,000 $3,000 ACV
3. ACV is replacement cost less depreciation. Replacement cost of a new computer is $500. Depreciation is $250 because the laptop is 50 percent depreciated. Nicholas would collect $250. 4. Under a valued policy, the face amount of insurance is paid if a total loss occurs. Megan would collect $12,000. 5. (a) If Kristen collects from her own insurer, she gives her insurer the right to subrogate against the negligent driver who caused the accident. Her insurer then has the legal right to collect damages from the negligent driver or negligent driver's insurance company. (b) Subrogation supports the principle of indemnity since the insured does not profit from the loss. By giving up subrogation rights, the insured does not collect twice for the same loss, which supports the principle of indemnity.
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