8 Home and Automobile Insurance

• Insurance– Protection against possible financial loss

– Provides peace of mind

• Insurance company (insurer)– Risk-sharing firm that assumes financial

responsibility for losses from an insured risk

• Procedure– Purchase a policy known as coverage

– Insurance firm assumes a risk for a fee

– Insured policyholder pays a periodic premium

8-1

Objective 1Identify Types of Risks and Risk Management

Methods and Develop a Risk Management Plan

• Risk – Chance of loss or injury

– Uncertainty or lack of predictability

• Peril – Anything that may cause a loss

– Fire, windstorm, robbery, or accidents

• Hazard – Anything that increases the likelihood of a loss

– For example, driving drunk, defective house wiring 8-2

Most Common Types of Risk

• Personal Risks– Loss of income or life– Caused by illness, disability, old age, or unemployment

• Property Risks– Losses to property– Caused by perils such as fire or theft

• Liability Risks– Losses caused by negligence– Resulting in injury or property damage

• Pure Risk = Insurable – Accidental, unintentional

– Nature and financial loss of the risk can be predicted

• Speculative Risk = Uninsurable– Chance of loss or gain

– Starting a small business, gambling, or investing 8-3

RiskRiskAvoidanceAvoidance

RiskRiskShiftingShifting

RiskRiskAssumptionAssumption

RiskRiskReductionReductionWays toWays to

ManageManageRiskRisk

Don’t stop at a convenience store in a bad part of town after midnight

Wear seatbelts

Install an alarm system

Buy Insurance

Self Insurance

8-4

Planning an Insurance Program

1. Set insurance goals to reduce possible loss of:• Income due to premature death, illness, accident or

unemployment

• Property caused by perils

• Income, savings and property due to personal negligence

2. Develop a plan to reach your goals• What do you need to insure?

• How much should you insure it for?

• What kind of insurance should you buy?

• Who should you buy insurance from?

3. Put your plan into action

4. Check your results• Insurance needs and goals change 8-5

Property and Liability Insurance

• Potential property losses

– Home, automobiles, furniture, clothing, personal belongings

– Risk #1: Physical damage caused by perils (e.g., fire)

– Risk #2: Loss or damage caused by criminal behavior

• Liability = legal responsibility for the financial cost of another person’s losses or injury (if you are held legally liable)

• Liability due to negligence

– Failure to take ordinary and reasonable care

• Vicarious Liability

– You are held responsible for the actions of another person, such as your child throwing a ball through a neighbor’s window

8-6

Homeowner’s Insurance Coverage

– Damage or destruction of the building in which you live, and other structures on the property

• Garage, tool shed, trees, and shrubs

– Additional Living Expenses

• May be limited to 20-30% of property value

• May be limited to 6-9 months

Objective 2Assess the Insurance Coverage and Policy Types Available to

Homeowners and Renters

8-7

Homeowner’s Insurance Coverages

– Personal Property

• Furniture, appliances and clothing

• Household inventory advisable

• Usually 55%, 70%, or 75% of property value

• Limits on certain items such as jewelry

– Personal Liability and Related Coverage

• Covers injuries to others on property (e.g., fall on ice)

– Specialized Coverage

• Earthquake endorsement

• Flood coverage

8-8

Homeowner’s Insurance Coverages

• Medical Payments Coverage– Coverage for minor injuries caused by you,

your family members, or pets, occurring on your property or away from home

• Personal Liability Coverage– Umbrella policy - also called a personal

catastrophe policy– Supplements basic personal liability coverage– $1,000,000 or more in coverage

• Endorsements and Floaters– Endorsements add coverage – Personal property floater

• Covers specific items of high value• Jewelry, furs, art collections

8-9

Renter’s Insurance

• Broad Form – Covers personal property loss or damage specified

in the policy

• Comprehensive Form – Protects property against all perils not excluded

• Renter’s insurance is relatively inexpensive– Replacement value coverage more costly– Covers property only in your home– Usually includes liability coverage

• Many renters do not have insurance

8-10

Home Insurance Policy Forms

• Basic Form (HO-1)– Protects against perils such as fire, lightning, windstorms, hail, smoke,

theft, vandalism and riots (specific named perils)

• Broad Form (HO-2)– Wider coverage including falling objects and damage from ice, snow or

sleet (more specific named perils)

• Special Form (HO-3)– Basic + Broad form + all other risks unless specifically excluded

(commonly earthquake, flood, nuclear accidents, business usage)

• Tenant’s Form (HO-4)

– Covers personal property against listed risks

• Comprehensive Form (HO-5)

– Expands HO-3 coverage to replacement cost; increasingly rare!

• Condominium Owner (HO-6)

– Covers personal property and building additions8-11

Objective 3Analyze the Factors that Influence

the Amount of Coverage and Cost of Home Insurance

• Determine amount of coverage needed:– Replacement value of home ?

– Value of home’s contents ?

– Protection for specific items ? (Jewelry, furs, art)

– Liability coverage ?

• Consider “loss frequency” (likely # of times for loss) and “loss severity” (potential magnitude of a loss)

• Principle of Indemnity- insurance will pay no more than actual financial losses suffered

• Policy Limits- specify the maximum dollar amounts that will be paid under a policy

8-12

Policy Provisions

• Look for a policy with full coverage (100% value)

– Coinsurance clause requires you to pay a part of a loss.

• Claim settlement methods:

– Actual Cash Value (ACV)• Replacement cost less depreciation

– Replacement Cost • Full cost to repair or replace the damaged or

lost item

• 10-20% > actual cash value coverage8-13

Factors That Affect Home Insurance Costs

• Location of Home (e.g., rural vs. urban)

• Type of Structure (e.g., brick vs. wood)

• Coverage Amount and Policy type

• Home Insurance Discounts

– Alarm system

– Smoke detectors

– If you insure car with the same company

• Company Differences

– Compare costs and coverages8-14

Objective 4 Identify the Important Types of Automobile Insurance Coverage

• Financial Responsibility Law

– State legislation requiring proof of financial

ability to cover the cost of damage or injury

caused in an automobile accident

– 45 states have compulsory automobile

liability insurance laws

– NJ has very low liability limits:15/ 30/5

8-15

Motor Vehicle Bodily Injury Coverage

• Bodily Injury Liability– Covers financial loss due to legal expenses, medical

expenses, lost wages, etc. associated with injuries caused by an accident for which you were responsible

– Expressed as 3 numbers: 100/300/50 • Maximum coverage in $1,000’s• $100,000 maximum paid for injuries to any one

person• $300,000 maximum paid in total (2+ people)

• $50,000 maximum paid for property damage

8-16

Motor Vehicle Bodily Injury Coverage

• Medical Payments Coverage– Covers the cost of health care for persons injured in your

automobile, including yourself– Also covers you or family members injured while riding in or hit by another vehicle

• Uninsured Motorist’s Protection– Protection against the risk of getting into an accident with

someone with no insurance

• Underinsured Motorist’s Coverage– Pays costs if your car is hit by a person who doesn’t have

enough insurance to cover the damage they did to you and

your car

8-17

Motor Vehicle Property Damage Coverage

Property Damage Liability

– Covers damage to the other person’s car when you are at fault.

– Includes damage to such things as street signs, telephone poles, and buildings

• Example: during a snow storm you accidentally slide your vehicle into a neighbor’s mailbox. This coverage would pay for repair or replacement of the mailbox

8-18

Collision Coverage

Pays for damage to your automobile, regardless of who is at fault. – If you are not at fault, your insurer will try to

collect from the other driver’s property damage liability first.

– Coverage limited to the retail value of your vehicle

8-19

Comprehensive Physical Damage

Covers damage to your vehicle not caused by a collision, such as:– Fire, theft or vandalism

– Glass breakage

– Hail, sand, or wind storm

– Falling objects or hitting an animal

8-20

No-Fault Insurance

• Each driver collects from his or her own insurance company for medical expenses, lost wages, and related injury costs

• 30 states have some variation of the system

• Intended to provide fast, smooth method of paying for damages without determining fault

• Variations among states; designed to reduce cost and time to settle cases

8-21

Objective 5Evaluate Factors that Affect the Cost of Automobile Insurance

Automobile Insurance Costs

• Legal Concerns

– Have enough coverage if you are sued

– Recommendations:

• $100,000/$300,000 bodily injury liability

• Additional $1,000,000+ umbrella liability policy

• Property Values

– $50,000-$100,000 suggested for property damage liability

8-22

Motor Vehicle Insurance Premium Factors

• Vehicle Type– Year, make, model, and theft rate

• Rating Territory– Accident, auto theft, and vandalism rates in the area where you live

• Driver Classification– Age, sex, marital status, credit history, driving record, driving habits– Assigned risk pool for those unable to obtain insurance

Reducing Automobile Insurance Premiums• Compare Companies • Premium Discounts

– Establish and maintain a good driving record– Non-smoker– Install security devices such as a car alarm– If more than one vehicle, insure with the same company– Larger deductibles

8-23

Wrap Up

• Chapter Quiz

• Concept Check 8-1- Four Methods of Avoiding Risk with Examples

• Concept Check 8-2- Complete the Statements

• Concept Check 8-3- True of False?

• Concept Check 8-4- True or False?