Risk Management and Insurance Case Study

Introduction

Risk management refers to the concept of identifying, assessing, evaluating, prioritizing, of possible risks that a firm or an individual faces in a bid to minimize, control, or monitor impact of identified risks through applications of resources. One of the ways of controlling or minimizing impact of risks is the risk transfer (Dorfman, 2007).

Risk transfer, also known as insurance, involves engagement of a third party through a contract to pay a given sum of money in the event that such a suspected loss occurs. Insurance contracts involve premium and principles of insurance.

One of the principles is subrogation and indemnity requiring insurer to pay insured sum assured in the event that a loss is caused by insured risks.

The following scenarios confirm how the principle of indemnity and contribution affects insurance practices.

Scenario:

You have purchased a homeowner’s insurance policy for your home that you live in with your spouse and 2 children of 19 and 17. You live in a single family residence built in 1996 that is 1 story with 3 bedrooms and 2 ½ bathrooms. The coverages for your policy are as follows:

Coverage A: $190,000

Coverage B: $19,000

Coverage C: $75,000

AOP Deductible: $1,000

Coverage D: $38,000

Coverage E: $300,000

Coverage F: $5,000

Hurricane Deductible: 2%

You also purchase for your insurance an auto policy covering all 4 drivers in your household and the 3 vehicles you own. The coverage in your auto policy is as follows:

• Personal Injury Protection: $10,000 ded: $0
• Liability: Bodily Injury $50,000 / $100,000
• Liability: Property Damage $50,000
• Uninsured Motorist: $50,000 / $100,000
• Medical Payments: $5,000
• Collision Deductible: $500
• Comprehensive Deductible: $500

Both policies were purchased on March 1st, 2012 and are for 1 year. During the year your household had the following claims. Please indicate how much the insurance company is required to pay for the claims and under which coverage are they paying:

1. April 12th,2012: a water pipe burst in your kitchen while the dinner was being cooked and it produced $69,000 to your home and $5,500 to some small appliances and kitchen items.Water pipe is part of the constructed house hence any losses associated with physical damages caused to any part of the property is compensated on the basis of coverage A (Dorfman, 2007). Therefore, the amount of $74,500 will be compensated from the $190,000 Coverage A taken by the policy holder.
2. May 21st, 2012: you son driving back from school while raining loses control of the vehicle and hits a traffic signal knocking it down. The city sues you to repair the damage and is awarded by the court a judgment for $83,525. Your son did not suffer any injuries but the vehicle required $8,600 in repairs. The insurance will pay a sum of $50,000, which was the principal sum insured for property damages under the auto policy. The owner will have to meet the cost of the remainder, which is $89,525 – $50,000 = 39,525. This is because the insurance firm only promised to indemnify the policy holder up to $50,000 in case of any property damages under the auto policy. However, the owner will not have to pay the remainder as the insurance policy will under Coverage E (Vaughan & Vaughan, 2007).
3. July 16th, 2012: Hurricane Jimmy barreled through South Florida and caused wind damage to your home in the amount of $105,000 in repairs and $91,500 to your personal property inside. The total damage of the hurricane is $204,500. Given the hurricane deductible of 2%, the insurance will pay the difference between damages caused and the deductible derived from the sum assured (Dorfman, 2007). The deductible is 2% of 672,000 = $12,450. Therefore, the insurance firm will pay $192,050 ($204,500 – $12,450) based on Coverage E.
4. August 20th, 2012: After several days of constant very heavy rains in the afternoon in South Florida, waters level went up and caused extensive flooding in your neighborhood. The rise of these flood waters caused $14,500 of damage to your home, $28,000 to your personal property, and $6,000 to your automobile. Total damages caused by the flood were $48,500. Coverage C takes care of all personal property loss caused by water losses, fires, floods, hurricanes, and any other causes that lead to damage of personal property (Harrington & Niehaus, 2003). Insurance firm will pay the $48,500 from the Coverage C policy.
5. February 14th, 2012: while cooking a Valentine’s Dinner for spouse and the kids were away at a friend’s house your kitchen caught on fire but this time it caused a major short circuit that caused the flames to grow quickly and the house totally burned down with all your belongings being destroyed. The fire also spread to two neighbors properties who then successfully sued you in court for their losses: the first had damage to their home for the amount of $109,000 and belongs for $98,000; the second for damage of $174,000 for their home, $103,000 for belongs, and $58,000 for their car that was completely destroyed in the garage. It was necessary to spend $61,000 to rent another place while your home was being rebuilt. The total damages will be paid by the insurance policy given that all the possible coverages and auto policies were taken enough to play a role in compensating the insured for the loss of the house. All the coverages taken will come into play to provide the compensation since the house was brought down by fire.
6. March 10th, 2013: Your son had a car accident where he hit another car and overturned your vehicle for a total loss. Your son fortunately was not hurt in the accident because of his seatbelt but your car had a total loss valued at $31,000. The other car he hit had two passengers who suffered extensive injuries: the driver required surgery and hospitalization for $101,500 and the passenger was in coma for 2 months and required surgery costing $233,000 in medical bills. The other car was also a total loss and was valued at $43,500.

Under the following, the insurance will provide compensations for the losses incurred during the accident. Liability policy that was taken in the amount of Property Damage $50,000 will be used to compensate for the $31,000 loss of the car.

Under the Bodily Injury liability policy of $50,000 / $100,000, the insurer will compensate for the loss caused to the other parties. Since the insured had a comprehensive policy with a deductible of $500, the insurer will pay all the losses caused to the third party less $500.

References

Dorfman, M. (2007). Introduction to risk management and insurance (9^th ed.). Upper Saddle River, NJ: Prentice Hall.

Harrington, S. & Niehaus, G. (2003). Risk management and insurance. New York, NY: McGraw-Hill.

Vaughan, E. & Vaughan, T. (2007). Fundamentals of risk and insurance. New York, NY: John Wiley & Sons.