Reference no: EM133036145

Problem: Far East Company (FEC) is a carpet dealer that sells hand-made carpets from Pakistan, India, and China, as well as an upscale line of wall-to-wall carpeting.

FEC is located in the downtown shopping district of a major U.S. city. The three-story joisted masonry building, which FEC leases, is protected by central station fire and burglar alarms. The front of the building has two large plate-glass windows in which rugs are prominently displayed. The first and second floors of the building are used to display all of the gallery's stock except for some extremely valuable rugs, which are kept in a vault in the basement. Most rugs are laid flat on the floor, sometimes piled several layers deep. The third floor contains office space. A cleaning and repair facility is located in the rear portion of the first floor, separated from the selling floor by an interior wall constructed of wood framing and gypsum wallboard. The building is located near the Red River which creates a 50-year flood plain.

To handle installation of wall-to-wall carpeting in customer's homes and businesses, FEC retains an independent contractor. Apart from installing the carpeting, the contractor also transports the carpeting to the customer's premises from a distributor's warehouse, where the carpeting is transferred to FEC on "Ex Warehouse" selling terms. Delivery and installation of all handmade area rugs is performed by FEC employees using a truck owned by FEC. FEC also allows qualified customers to take area rugs home on approval for a day or two prior to their purchase.

FEC provides cleaning services in two ways. Wall-to-wall carpets are cleaned at the customer's premises by FEC employees using a mobile cleaning unit installed in a minivan owned by FEC. Area rugs are transported in FEC's truck from the customer's premises to FEC's premises, where they are deep-cleaned in a mechanized carpet washer. Customers' rugs may be worth $20,000 or more. 

Once a year, FEC rents a hall and conducts an auction of hundreds of rugs. The rugs sold at the auction are a combination of rugs owned by FEC and rugs owned by others. 

FEC's owner imports all of the rugs directly, frequently traveling abroad on buying trips. The rugs are ordinarily sold under FOB Vessel terms from various nations. The packing methods selected by the sellers are often inadequate. Water damage and pilferage are the most common cause of loss to shipments.

1. FEC depends on three different local agents to arrange its insurance coverage. These relationships have remained unchanged for the past 20 years. Based on the information here, comment on the various exposures that you identify. 

2. One of FEC's risk management objectives is to use noninsurance transfers whenever possible, except with respect to customers. What are some loss mitigation, insurance coverage, and noninsurance techniques that you would recommend for the exposures that you have identified?

Thank you for your service.