By Fatskills Exam Guides Team — the exam nerds behind 28,500+ quizzes and 2.1M practice questions across 500+ global exams.
A standard automobile policy consists of many different types of coverage. Although requirements vary from state to state, some basic types are:
1. Bodily injury liability, which protects you if you injure or kill someone while operating your vehicle. This is coverage you want to keep at a constant level, even as your vehicle ages and declines in value. In the event of a serious accident, you want enough insurance to protect assets that may become subject to a lawsuit. The level of protection is expressed as two numbers indicating the maximum coverage per person and the maximum coverage per accident, respectively, in thousands of dollars. For example, 50/100 means that your insurance company will pay up to $50,000 per person injured in an accident up to a maximum of $100,000 for the accident. Other common limitations are 100/100, 100/300, and 300/300. 2. Property damage liability, which protects you in the event that you damage someone else’s property. Limitations on this type of coverage are generally lower than bodily injury liability; $50,000 to $100,000 is typical coverage. 3. Medical payments and personal injury protection (PIP), which pays for the medical expenses of the driver and passengers in your car in the event of an accident. 4. Collision insurance, which will pay for damage done to your car in an accident. There is generally a deductible for this coverage, ranging typically from $100 to $1,000. Because you accept a larger part of the risk, premiums are lower for larger deductibles. The maximum protection is limited by the book value of your automobile; if it costs more to repair your car than the car is worth, the insurance company will render it a total loss and pay only the book value amount. For this reason many people elect not to take this coverage for older, less valuable, automobiles and trucks. 5. Comprehensive coverage, which pays for damage due to vandalism, flood, fire, and theft (but not the theft of contents of your vehicle). A deductible is usually associated with this coverage, although it may be different than your collision deductible. As with collision, the insurance company will pay up to the book value of your vehicle, so comprehensive coverage may not be desirable if your automobile is old and has lost its value.
Insurance premiums vary substantially from state to state and from locality to locality. Areas with high incidence of auto theft, for example, will have high comprehensive premiums. Similarly, collision premiums will vary according to the make, model, and year of your vehicle, and liability rates, as well as collision rates, will depend heavily on your age, sex, and driving record. Example Billy Williams has an automobile insurance policy with 50/100 bodily injury liability protection, $50,000 property damage liability, and collision coverage with $500 deductible. When Billy had an accident, he sustained $2,500 worth of damage to his automobile, $1,500 worth of damage to the other automobile, and the driver of the other car was awarded $57,000 for medical expenses and lost wages. How much did Billy’s policy pay?
Often an accident is not entirely the fault of one driver, but is attributable to both drivers, although perhaps not equally. In this case, after an investigation, the insurance company will assign a certain percentage of the fault to each driver. Each insurance company will pay benefits to the other driver proportional to the percentage of fault of their insured. Example One day Mrs. Kelly was driving home from shopping and skidded on ice and hit another car. Mrs. Kelly’s car sustained $800 worth of damage. Neither driver had collision coverage, but both had sufficient liability coverage. Even though Mrs. Kelly had the right-of-way, the insurance investigator attributed 30% of the fault to her because she was traveling too fast, considering the weather, and should have been able to stop in time. The percentage of fault given the other driver was 100%–30% = 70%. Mrs. Kelly was awarded 70% × $800 = $560 by the other driver’s insurance company. Suppose that the other car had $1,200 in damage. Then Mrs. Kelly’s insurance company would pay 30% of $1,200 = $360 to the driver of the other car. A driver who has collision coverage and shares responsibility for an accident will receive full payment for damages less a proportionate part of the deductible. Example If Mrs. Kelly (see Example 12) had collision coverage with a $500 deductible, she would be entitled to receive her full damages, $800, less 30% of her deductible. Solved Problems: 10.18 Bernard had an accident in which three people were injured. They sued in court and were awarded $30,000 and $40,000 and $50,000, respectively. If Bernard had a liability policy with 50/100 coverage, how much will he have to pay from his own pocket?
Solution Even though none of the injured people was awarded damages in excess of $50,000, the maximum coverage for the accident is limited to $100,000. Therefore Bernard will have to pay $20,000. 10.19 Allison had an accident and injured two people. Their medical bills and other costs amounted to $25,000 and $30,000, respectively. If Allison’s collision coverage was 20/60, how much of the claim is Allison responsible for?
Solution Even though the maximum coverage for the accident is $60,000, the maximum coverage for any one injured person is $20,000. Therefore Allison is responsible for $5,000 for the first person’s injuries and $10,000 for the second person’s, for a total of $15,000. 10.20 While driving by himself, Joel had an automobile accident which was, admittedly, his fault. He has an automobile policy which provides for 50/100 liability coverage, $500 deductible collision coverage, and $50,000 personal injury protection. The financial story is
How much will Joel collect from the insurance company?
Solution
10.21 While talking on his cell phone, Donald collided with another car. Because of the circumstances of the accident, an insurance investigator assigned him 65% of the blame. Neither driver had collision coverage. (a) If he sustained $900 in damage, how much money should Donald receive from the other insurance company? (b) If the other car had $1,600 in damage, how much money should the other driver receive from Donald’s insurance company?
Solution (a) Since Donald was deemed 65% at fault for the accident, the other driver received 35%. The other insurance company must pay Donald 35% of his damages: 35% of $900 = 0.35 × $900 = $315 (b) Since Donald received 65% of the blame for the accident, his insurance company must pay the other driver 65% of his damages, $1,600: 65% of $1,600 = 0.65 × $1,600 = $1,040 10.22 Suppose that both drivers in the problem 10.21 have collision coverage with $1,000 deductible. How much would each receive?
Solution (a) Since Donald has collision coverage, he will receive full payment for his damage less 65% of his deductible: $900 – 65% of $1,000 = $900 – 0.65 × $1,000 = $900 – $650 = $250 (b) The other driver will receive full payment for his damage less 35% of his deductible: $1,600 – 35% of $1,000 = $1,600 – 0.35 × $1,000 = $1,600 – $350 = $1,250 10.23 Ed Brady has an automobile insurance policy with $1,000 deductible collision coverage. One day Ed has a small “fender bender” with another car and sustains $2,300 in damages. How much money will Ed receive if (a) The accident is Ed’s fault? (b) The accident is the other driver’s fault? (c) Both drivers are equally at fault?
Solution (a) If the accident is Ed’s fault, his insurance company will pay $2,300 less the $1,000 deductible. Ed will receive $1,300. (b) If the accident is not Ed’s fault, Ed will receive his full damages of $2,300 from the other driver’s insurance company. [Typically, Ed’s insurance company will pay $1,300 as in part (a) and then subrogate, i.e., collect the full amount of damages from the other insurance company. If they are successful, Ed will then be paid his deductible.] (c) If both drivers are equally at fault, Ed will receive full damages less 50% of his deductible from his insurance company: $2,350 – 50% × $1,000 = $2,350 – $500 = $1,850 10.24 Marcia has an insurance policy with comprehensive coverage subject to a $250 deductible. One day her car was vandalized and she had to replace her windshield at a cost of $275, her driver’s side door lock at a cost of $75, and her radio at a cost of $125. Furthermore, $350 worth of merchandise, which she had just purchased at a local mall, was stolen from her car. How much will her insurance company pay?
Solution The windshield, door lock, and radio are covered under her comprehensive policy. Unfortunately, the contents of the car are not covered, so she receives nothing for her packages.
She will receive $225 from her insurance company.
More Problems: 10.25 How much must a business pay for a fire insurance policy with a face value $750,000, if the annual premium rate is $0.23 per $1,000? 10.26 The annual rate for a term life insurance policy is $1.95 per $1,000 of coverage. If Jimmy wants to purchase $50,000 of term life insurance, what will his yearly premium be? 10.27 How much liability insurance can Allen buy for $200 if the rate for such insurance is $2.67 per $1,000 of coverage? Assume that this insurance can be purchased only in $1,000 increments. 10.28 If Edward purchases $150 worth of casualty insurance at $1.25 per $1,000 of coverage, how much coverage does he have? 10.29 If it costs $4.25 per $1,000 to insure the structure of a factory and $3.25 per $1,000 to insure its contents, how much will it cost to insure a factory whose replacement value is $225,000 if its contents are worth $50,000? 10.30 It costs $2.50 per $1,000 to purchase liability insurance and $3.75 per $1,000 to purchase fire insurance. If a businessman needs $250,000 of liability protection and $150,000 of fire protection for his office, how much will a policy cost? 10.31 A homeowner’s policy from the RESTEZ Insurance Company costs $3.50 per unit of coverage. Each unit consists of $1,000 for the structure of the house and $200 for contents. Each additional $100 of contents coverage costs $0.25 to insure. How much will it cost to insure a house worth $150,000 if its contents are worth $40,000? 10.32 Samantha purchased a $100,000 fire insurance policy for her boutique at a rate of $4.50 per $1,000. After 15 days the insurance company canceled her policy because she received a citation from the fire department. How much refund should Samantha receive? 10.33 Juan Rodriguez purchased a $250,000 liability policy for his grocery store, effective July 1 at a rate of $1.75 per $1,000 of coverage. Because of a building code violation, the insurance company canceled his policy effective August 1. How much refund should Juan receive? 10.34 Adam purchased a $300,000 theft insurance policy for $275. Fifteen days later he canceled the policy because he obtained a cheaper rate elsewhere. It is the company’s policy to charge 110% of the normal 15-day premium for the period that insurance was in effect. How much refund will Adam be receiving? 10.35 Charles bought $150,000 of fire insurance on April 1 for $2.43 per $1,000 of coverage. On May 1 he went out of business and canceled the policy. If the insurance company charges a short premium of 10% of the annual premium for policies in effect one month or less, how much money will Charles be receiving from the insurance company? 10.36 Raymond’s business has a replacement value of $180,000 but is insured for $126,000 with an insurance policy containing an 80% coinsurance clause. How much money will Raymond receive if he has a $10,000 loss? 10.37 Mark and Mindy just purchased a $300,000 restaurant. Their fire insurance policy has an 80% coinsurance clause. Suppose that they have a $15,000 loss. How much money will they receive if their restaurant is insured for (a) $200,000, (b) $240,000, or (c) $300,000? 10.38 Adrienne has a home worth $150,000. She purchases a $120,000 property damage policy with a $500 deductible and an 80% coinsurance clause. How much will Adrienne receive from the insurance company if she has (a) a $12,000 loss or (b) a total loss? 10.39 Repeat Prob. 10.38 assuming that Adrienne purchases a $100,000 policy. 10.40 A fire damages a warehouse to the extent of $28,000. The building, whose replacement value is $75,000, is insured for $50,000 by a policy with an 80% coinsurance clause and a $1,000 deductible. How much will the owners collect? 10.41 Anne has a major medical policy with a 20% copayment and a $100 annual deductible. (a) If Anne’s first medical bill for the year was $150, how much was she reimbursed? (b) If Anne’s second medical bill for the year is $150, how much will she be reimbursed? 10.42 If Warren has a major medical policy with a 15% copayment and an annual deductible of $100, how much will he be reimbursed for a $325 stress test if he has previously satisfied $75 of his deductible? 10.43 How much will Benjamin be reimbursed for an appendectomy which leaves him with $12,000 in medical bills? He has a major medical policy with a $250 deductible, a 20% copayment, and an out-of-pocket maximum of $1,500. All physicians’ fees fall into the “reasonable and customary” guidelines. 10.44 Darlene and Tom are going to have a baby. The cost for delivery will be $3,000. They have a major medical policy, which has not yet been used this year, which has a $150 deductible and a 30% copayment. How much will the baby cost them? 10.45 Marilyn has a major medical policy which has a $500 deductible, 20% copayment, and $1,000 maximum out-of-pocket expense. She previously satisfied her deductible for the year, and her out-of-pocket expenses thus far have been $900. She is scheduled for a gynecological procedure for which she will be charged $750. How much will Marilyn be reimbursed from her insurance carrier? 10.46 Casper has a major medical policy with a 20% copayment. He had medical bills totaling $7,000 and received $5,200 in benefits. What is his annual deductible? 10.47 If an insurance policy with no deductible pays $600 for an $800 series of medical tests, what is the patient’s copayment? 10.48 If an insurance policy with a 10% copayment pays $360 for a $500 medical procedure, what is the policy’s deductible? 10.49 How much will Susan be reimbursed for the year if she has a major medical policy with an annual deductible of $250, a 20% copayment, and a $1,000 out-of-pocket maximum? 10.50 What would the annual premium be for a 35-year-old male, nonsmoker on a 20-year endowment policy whose face value is $90,000? (Refer to Table on top.) 10.51 If a 25-year-old nonsmoking male buys a $50,000 straight life policy, how much will his annual premium be (a) today and (b) in 5 years? (See Table on top.) 10.52 Franco is 20 years old and does not smoke, drink, or gamble. How much (a) 5-year term insurance and (b) straight life insurance can he purchase for $500 a year? Assume that policies are available only in $1,000 increments. (See Table on top.) 10.53 Jack and Joe are twin brothers, 30 years of age. Neither of them smoke. They both purchase $60,000 worth of life insurance. What will be the difference in their annual premium if Jack purchases a 20-year limited payment life and Joe purchases a 20-year endowment policy? (See Table on top.) 10.54 Brenda hits a telephone pole and does $650 worth of damage to her car. How much will she be reimbursed from her insurance company if her collision coverage has a (a) $250 deductible, (b) $500 deductible, (c) $1,000 deductible? 10.55 If Dick has an accident with another car, and the driver and two passengers sustain injuries of $40,000, $30,000 and $40,000, respectively, how much will Dick be liable for if his liability coverage is (a) 50/100, (b) 30/150, and (c) 100/200? 10.56 George has the following coverage on his automobile insurance policy:
George had an accident and is liable for the following amounts:
Assuming that George was 100% at fault, how much money will he have to pay? 10.57 Ida had an automobile accident on her way home from work. Neither she nor the other driver had collision coverage on their automobiles. Ida’s car sustained $3,500 in damages and the other car, $4,500. An investigation of the accident determined that Ida was 75% responsible for the accident. Assuming that neither driver was hurt (a) How much did the other driver receive from Ida’s insurance company in settlement of the claim? (b) How much did Ida receive from the other driver’s insurance company? 10.58 Victor has collision coverage on his automobile with a $250 deductible. If Victor has an accident with damages totaling $2,750, for which he is 80% responsible, how much will his insurance company pay toward repair of his car? 10.59 Peter and Paul have an automobile accident. Each driver has sufficient liability insurance, and each car sustains $1,800 in damage. An investigation of the accident puts each driver equally at fault. If Peter has $500 deductible collision coverage but Paul has no collision coverage, how much of a settlement will each driver receive from insurance? 10.60 Marge and Harriet collide with one another in a shopping-mall parking-lot. Each driver has 100/300 liability insurance, but Marge has collision coverage with a $500 deductible while Harriet has only $1,000 deductible collision coverage. Marge’s car had $600 in damage, and Harriet has to pay $1,400 to have her car repaired. If Marge was determined to be 70% at fault, how much will each receive from her insurance company? 10.61 Henry’s car caught fire on the expressway last night. Thankfully, Henry was not hurt but his car, whose book value is $14,000, will cost $10,000 to be restored. Furthermore, Henry’s violin, valued at $2,300, was ruined in the fire. If Henry’s comprehensive insurance has a $250 deductible, how much should Henry expect to receive from his insurance company? 10.62 Roger’s car was broken into and vandalized. The following is a list of damage to his car: If Roger has comprehensive coverage with $500 deductible, how much will his insurance company pay him?
Answers to Above Problems: 10.25 $172.50 10.26 $97.50 10.27 $74,000 10.28 $120,000 10.29 $1,118.75 10.30 $1,187.50 10.31 $550 10.32 $431.51 10.33 $400.34 10.34 $262.57 10.35 $328.05 10.36 $8,750 10.37 (a) $9,583.33, (6) $15,000, (c) $15,000 10.38 (a) $11,500, (ib) $119,500 10.39 (a) $9,500, (b) $99,500 10.40 $22,500 10.41 (a) $40, (b) $120 10.42 $255 10.43 $10,250 10.44 $1,005 10.45 $650 10.46 $500 10.47 25% 10.48 $100 10.49 $428 10.50 $2,385 10.51 (a) $361, (b) $361 10.52 (a) $259,000, (b) $86,000 10.53 $531 10.54 (a) $400, (b) $150, (c) $0 10.55 (a) $10,000, (b) $20,000, (c) $0 10.56 $13,000 10.57 (a) $3,375, (b) $875 10.58 $2,550 10.59 Peter, $1,550; Paul, $900 10.60 Marge, $250; Harriet, $1,100 10.61 $9,750 10.62 $2,450
Note: Some states have no-fault laws, in which case each insurance company pays their own insured regardless of who is at fault.
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