Showplace Insures Its $160,000 Building with Two Insurers: with Hometown

question 57

Essay

Showplace insures its $160,000 building with two insurers: with Hometown Insurance for $60,000 and with National Insurance for $120,000. The building suffers a fire loss of $75,000. From whom and for how much can Showplace collect?

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Definitions:

Insurance Premium

The payment made to an insurance company for coverage, which usually occurs on a regular basis, such as monthly or annually.

Risk-Averse

Refers to the preference of individuals or organizations to avoid risks and opt for the most certain outcome.

Risk Aversion

The preference to avoid uncertainty and risky situations, often influencing economic and financial decisions.

Adverse Selection

The case in which an individual knows more about the way things are than other people do. Adverse selection problems can lead to market problems: private information leads buyers to expect hidden problems in items offered for sale, leading to low prices and the best items being kept off the market.