Chapter 8

Home and Automobile Insurance

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Home and Automobile Insurance

Chapter Objectives1. Identify types of risks and risk management

methods and develop a risk management plan

2. Assess the insurance coverage and policy types available to homeowners and renters

3. Analyze the factors that influence the amount of coverage and cost of home insurance

4. Identify the important types of automobile insurance coverage

5. Evaluate factors that affect the cost of automobile insurance

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Objective 1Identify Types of Risks and Risk

Management Methods and Develop a Risk Management Plan

• 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

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Types of Risk

• 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

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Most Common Types of Risk

• Personal risks– Loss of income or life

– Caused by illness, 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

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Types of Risk

• 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 or gambling

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Types of Risk

• Pure Risk = Insurable

– Personal risks = loss of income or life

– Property risks = losses to property

– Liability risks = losses caused by

negligence

• Negligence = Failure to take ordinary care

to prevent accidents

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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

8-8

Planning an Insurance Program

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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

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Planning an Insurance Program

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

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Property and Liability Insurance

• Recent major losses:– 2005: Hurricanes Katrina, Rita and Wilma = $50 billion

in damages

– 1993: Midwest floods >$2 billion worth of damage

– 1992: Hurricane Andrew = $22.3 billion

• Potential property losses – Home, automobiles,

furniture, clothing, and personal belongings

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Property and Liability Insurance

• Liability = legal responsibility for the financial cost of another person’s losses or injury

• 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

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Homeowner’s Insurance Coverages

– 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

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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• Injuries to others on your property

– Specialized coverage• Earthquake endorsement

• Flood coverage

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Homeowner’s Insurance Coverages

Personal Liability and Related Coverage• Medical Payment Coverage

– Coverage for minor injuries caused by you, your family members, or pets, occurring on your property or away from home

• Personal liability– Umbrella policy - also called a personal

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

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Homeowner’s Insurance Coverages

• Specialized Coverage– Endorsements add coverage

– Earthquake or flood damage

– Personal property floater• Covers specific items of high value• Jewelry, furs, art collections

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Renter’s Insurance

• Broad form – Covers personal property loss or damage specified

in the policy

• Comprehensive form – Protects property against all perils

• 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

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Home Insurance Policy Forms

• Basic form (HO-1)– Protects against perils such as fire, lightning,

windstorms, hail, smoke, theft and riots

• Broad form (HO-2)– Wider coverage including falling objects and

damage from ice, snow or sleet

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

specifically excluded (commonly earthquake, flood or nuclear accidents)

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Home Insurance Policy Forms

• Tenant’s form (HO-4)– Covers personal property against listed risks

• Comprehensive form (HO-5)– Expands HO-3 coverage to replacement cost

• Condominium owner (HO-6)– Covers personal property and building

additions

• In addition, policies usually cover items such as credit card fraud, check forgery, temporary repairs and fire department charges in areas with such fees.

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Objective 3Analyze the Factors that Influence

the Amount of Coverage and Cost of Home Insurance

• Determine amount of coverage needed:– Replacement value of your home ?– Value of your home’s contents ?– Protection for specific items ?

• Jewelry and furs• Art and collectibles• Computer equipment

– Liability coverage ?

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Policy Provisions

• Look for a policy with full coverage– 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 coverage

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Factors That Affect Home Insurance Costs

• Location of home• Type of structure• Coverage Amount and Policy type• Home Insurance Discounts

– Alarm system– Smoke detectors– If you insure your car with the same

company• Company differences

– Compare costs and coverages

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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

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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+)• $50,000 maximum paid for property damage

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Motor Vehicle Bodily Injury Coverage

• Medical Payment 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

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Motor Vehicle Bodily Injury Coverage

• 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

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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 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

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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

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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

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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

• Problems may arise due to variations among states

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Other Coverages

• Wage loss insurance

• Emergency road service coverage

• Rental reimbursement coverage

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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

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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, and driving habits

– Assigned risk pool for those unable to obtain insurance

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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

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