Risk Management Chaper 1 Case Application

Michael is a college senior who is majoring in marketing. He owns a high-mileage 2003 Ford that has a current market value of $2500. The current replacement value of his clothes, television, stereo, cell phone, and other personal property in a rented apartment totals $10,000. He uses disposable contact lenses, which cost $200 for a six-month supply. He also has a waterbed in his rented apartment that has leaked in the past. An avid runner, Michael runs five miles daily in a nearly public park that has the reputation of being extremely dangerous because of drug dealers, numerous assaults and muggings, and drive-by shootings. Michael’s parents both work to help him pay his tuition.

For each of the following risks or loss exposures, identify an appropriate risk management technique that could have been used to deal with the exposure. Explain your answer.

a. Physical damage to the 2003 Ford because of a collision with another motorist

Risk (active) retention is the right risk management technique to use in this situation. Michael is aware of the risk of an accident and plans ahead to retain all or part of the risk by purchasing auto insurance.

b. Liability lawsuit against Michael arising out of the negligent operation of his car

Auto insurance is the appropriate risk management technique in this situation. Taking into consideration the risk of unexpected accidents, liability coverage on a vehicle is vital. Liability risks are a type of pure risk. Appropriate liability coverage will lessen the expense to Michael should he be sued.

c. Total loss of clothes, television, stereo, and personal property of his rented apartment

Loss Control - Prevention is the appropriate risk management technique in this situation. Should your rented apartment or home burn down the home owner will have insurance coverage to replace the actual home; however, your personal belongings will not be covered. Prevention by taking out a renter’s policy can help eliminate the loss of...