American Builders, Inc. has just completed construction of the Freedom Tower – a 250 floor skyscraper located in California, which is now the world’s largest building.

American Builders, Inc. has just completed construction of the Freedom Tower – a 250 floor skyscraper located in California, which is now the world’s largest building. This massive tower cost $50 billion to build, and its replacement cost is estimated at $65 Billion. Given its location, there is always the possibility that an earthquake may cause damage to the tower. Gubenator Insurance Company is the primary property = casualty insurance company in California, and is used to dealing with the risk of earth movement. The company has a capital base of $45 Billion, with net surplus of $4 billion. Gubenator has been asked to insure the Freedom tower.

Which of the following statements concerning this situation is correct?

a. Due to the possibility of earthquake damage, Gubenator should decline coverage for the Freedom Tower.

b. Given the notoriety of the tower and the likelihood of positive press for providing coverage, Gubenator should insure the Freedom Tower.

c. Gubenator has the financial capacity to issue the policy.

d. Gubenator should insure the Freedom Tower only if it can obtain reinsurance for part of the risk from other insurance companies, since a total loss could be catastrophic to Gubenator.

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