Question

You are acting here as a risk manager or broker for the following scenario. Identify the insurance policies and endorsements and limits the client needs. Also identify any additional information you need to make further recommendations for coverage.

1. Arnold Schwarzengger, no longer governor of California and not much longer as star of The Apprentice, sets up his own chain of fitness centers, called Arnold’s Lean & Fit, (a California private corporation with several substantial investors). With his reputation and money, he quickly establishes a nationwide brand with many locations. Arnold’s does this by buying some local fitness facilities, merging with some other nationwide companies, and opening new stores. Like other national companies with many locations such as McDonald’s, Arnold’s has its own stores and sells franchises.
Arnold also knows very well from his experience as governor that public schools do not have money for physical recreation, although this physical activity is very important to children. He and the board of directors create a fitness program to offer to schools, called Arnie’s Rec, a subsidiary corporation run as a non-profit tax-exempt business. This will put student fitness centers in public schools, with supervision suitable for children. The school will provide the space and facilities (gymnasium and fields) at $1 per year, and the school will pay for each child who wants to participate $7 month, up to a fixed amount per school. Arnie’s Rec will provide the equipment and then lease it to the school for a fee (negotiable depending on equipment). The school can absorb these costs in its budget, or can charge the costs back to the student or family; this is up to the school. Arnie’s Rec will be responsible and liable only for the fitness space; the school will remain in charge of locker rooms and other school areas such as hallways and parking lots.

2. Savannah Glass Co. makes glass for offices, expensive homes, museums, labora-tories, and other high-end uses. These are double-pane and sometimes triple-pane glass (depending on client need), filled with inert gasses to provide enhanced insulation properties. They are installed in window frames, or any other places the client requests (e.g. atriums). The glass is also coated to block various wavelengths of light as specified by the client, such as ultraviolet light and infra-red light to reduce heat transmission further. Savannah Glass has standard glass sizes, and makes custom sizes. Savannah Glass will install its glass on location, or ship it to the location and let the contractor install it. There is a 5-year warranty. The company has also developed specialized glass suitable for extreme environments, such as ships, undersea research vessels, and hurricane/typhoon exposures. These extremely strong glass products meet or exceed specifications for bullet-proof glass, and these are used in embassies around the world.
Equipment at Savannah is mostly custom-made, some from U.S., some from Europe and Asia, and some that Savannah makes itself using its own engineers and craftsmen.
Savannah Glass’s location in Savannah allows it to ship easily by ship, truck or train, and because of its quality and expertise it is the top producer for this specialty glass in the Eastern North America, and has a strong international business. On the other hand, the location in Savannah has some risks that you should explore.

3. The main office of Sonoma V & H (as it is called in town) has 5 veterinarians who specialize in household pets. There is also staff: receptionists, bookkeepers, nurses, groomers (people who make the dogs and cats look good by clipping fur and nails), and volunteers who like to be around pets and help. Pets may stay for a day or more after surgery, which requires attention to their care in the hospital. Pets may also be boarded there in a typical boarding facility (for when people go away); the pets are given time and space to run, and of course must be fed and looked after. Because there are always pets on facility 24 hours a day, there must always be people there.

The Sonoma V&H has a small office about 60 miles away that always has one or two veterinarians on staff. This is a rural office, and the veterinarians here attend to household pets and farm animals. It has small staff. Sometimes the main office veterinarians work at this location when the usual veterinarians are unavailable. Sometimes it will hire contract veterinarians for a few days from the university veterinary school when staffing is short. Three things are different about this location: (1) It does only minor surgery for pets. (2) The veterinarians go to local farms to treat large animals. If a farm animal needs surgery, it goes to the university veterinarian school hospital. (3) It has a big outdoor boarding area, for people who want their animals to spend more time outdoors than in cages, while the people are away. For an additional fee, you can bring your pet to the main office and request it be taken to the rural office for boarding. This is a popular service. It used to be done by staff or employees using their own cars, but now Sonoma V&H has a van outfitted to carry animals for this, although sometimes staff still use their cars.

The Sonoma Veterinary and Hospital is a corporation. It provides the standard benefits to its employees – medical and dental insurance, 401(k), etc. The company has a website like any business, but it is display only with a few pages of information about the staff, facilities and services; nothing interactive.

4. Horatio Mannes is a private school for grades 6 to 12, with an impressive educational program and an equally impressive list of alumni. Enrollment is about 200 students per class. The cost is also impressive, but there are scholarships. The classroom and office facility is two buildings, one from the 1930’s, four stories high, that has had several major renovations over the years to the interior, while still retaining many of the old, charming, classic features of the original building. The replacement value is probably $25m, plus the cost of adapting to current energy efficiency codes. The other building is attached to this original building; it was built in the late 1990’s, and was designed by a significant architect (also a school alumnus); it is also four stories high with a large atrium. The replacement cost is $18m. There is also a third building that houses the gymnasium and competitive pool, and outdoor sports fields. Each building has its own air conditioning system, and hot water systems. The original building still uses steam heat from a heating system that was upgraded and rebuilt around year 2000. The school tuition is $25,000 per year, the school has a $30m endowment. Students do NOT live at the school. There is a cafeteria. There is a small dormitory that was donated to the school in the 1950s, about two blocks away, that some teachers live at that is probably worth $3m, with retail spaces below that are leased out to various stores.

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1) Risk Assessment and Recommendations:

The risk assessment on Arnold’s businesses involved separate analyses of risks between Arnold’s Lean & Fit and Arnie’s Rec. These assessments revolved on the following risks:
- nature of service: provision of fitness services may cause bodily harm to customers
- several substantial investors in Arnold’s Lean & Fit, a franchise system; potential for business income loss due to impacts on the entire system’s reputation by negative, isolated cases of business malpractice
- capital-intensive businesses
- property damage, theft, and other related risks

With respect to Arnold’s Lean & Fit, a CGL policy is proposed that would include the basic Coverages of A & C. In particular, the policy will address risks from provision of fitness services that may cause bodily harm to clients. In addition, the CGL policy will be integrated to include professional services endorsement. Hence, losses or damages due to errors and omissions from professional fitness trainers may be mitigated. Then, as a business operating under the franchise model, a separate business income interruption insurance policy is recommended so that losses from bad reputation due to malpractice or poor service quality of any member of the franchise will be compensated. Moreover, a commercial property insurance that covers for losses and damages due to catastrophic events and normal breakdown of fitness equipment is also necessary. Being a capital-intensive business, fixed assets may be low value items individually yet high value in aggregate. The need for insurance on these assets cannot be overemphasized. Lastly, it is recommended that an umbrella feature or even a separate policy is availed of due to the nature of the business. Being a franchise system, large liability lawsuits are possible. With this feature in the policy, protection against large claims exists....

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