Case Assignment
When you bought a business, a complicated custom-made packing machine was included in the sale. You estimate that if the machine were destroyed it would cost $125,000 to replace. You are changing your property insurance, and the new insurance agent is relying on you to provide a value for the packing machine. You are considering two policy options. The first insures your machinery for $50,000. You figure this policy has a lower premium, and it will save money on your insurance bills. Plus, you don’t think the machine will fail anytime soon. The other option is to insure your machinery for $200,000. With this policy, you figure you will pay more for the insurance, but if your machinery is destroyed, you will receive enough money to purchase new machinery and get a $75,000 bonus.
For both of these options, what kind of payment do you think you would receive if your machinery is destroyed and the actual value of your machinery is established? Explain your answers.