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Home and Automobile Insurance

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1 Home and Automobile Insurance
Chapter 8 Home and Automobile Insurance McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Home and Automobile Insurance Chapter Learning Objectives
LO8.1 Identify types of risks and risk management methods and develop a risk management plan LO8.2 Assess the insurance coverage and policy types available to homeowners and renters LO8.3 Analyze the factors that influence the amount of coverage and cost of home insurance LO8.4 Identify the important types of automobile insurance coverage LO8.5 Evaluate factors that affect the cost of automobile insurance

3 Learning Objective LO8.1 Insurance and Risk Management
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

4 Types of Risk Risk Peril Hazard 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

5 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

6 Types of Risk Pure Risk = Insurable Speculative Risk = Uninsurable
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

7 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

8 Risk Avoidance Methods
Taking precautions to avoid risk Risk reduction Taking actions to reduce risk Risk assumption Insurance company Risk Shifting Insurance buyer

9 Risk Avoidance Risk Shifting Risk Reduction Risk Assumption
Don’t stop at a convenience store in a bad part of town after midnight Risk Shifting Risk Reduction Ways to Manage Risk Buy Insurance Self Insurance Wear seatbelts Install an alarm system Risk Assumption

10 Planning an Insurance Program
Exhibit 8-2 in the book

11 Planning an Insurance Program
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

12 Planning an Insurance Program
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? Put your plan into action Check your results Insurance needs and goals change

13 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

14 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

15 Learning Objective LO8.2 Home and Property Insurance
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 10-20% of property value May be limited to 6-9 months

16 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

17 Household Inventory Contents

18 Homeowner’s Insurance Coverages
Personal Liability and Related Coverage Personal liability Umbrella policy - also called a personal catastrophe policy Supplements basic personal liability coverage $1,000,000 or more in coverage Medical Payment Coverage Coverage for minor injuries caused by you, your family members, or pets, occurring on your property or away from home

19 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

20 Renter’s Insurance Broad form Comprehensive 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 residence Usually includes liability coverage Many renters do not have insurance

21 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)

22 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.

23 Learning Objective LO8.3 Home Insurance Cost Factors
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?

24 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 Some companies limit to 400% of ACV 10-20% > actual cash value coverage

25 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 cost, coverage and service

26 Learning Objective LO8.4 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 All states have compulsory automobile insurance laws

27 Two Major Categories of Automobile Insurance

28 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 (3+) $50,000 maximum paid for property damage

29 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

30 Motor Vehicle Bodily Injury Coverage
Uninsured Motorist’s Protection Protection against the risk of getting into an accident (not your fault) 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

31 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.

32 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

33 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

34 No-Fault Insurance Each driver collects from his or her own insurance company for medical expenses, lost wages, and related injury costs Coverage varies by state Intended to provide fast, smooth method of paying for damages without determining fault Problems may arise due to variations among states

35 Other Coverages Wage loss insurance Emergency road service coverage
Rental reimbursement coverage

36 Learning Objective LO8.5 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

37 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

38 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

39 Chapter Summary Learning Objective LO8.1
The main types of risk are personal risk, property risk, and liability risk. Risk management methods include avoidance, reduction, assumption, and shifting. Planning an insurance program is a way to manage risks. Property and liability insurance protect your homes and motor vehicles against financial loss.

40 Chapter Summary Learning Objective LO8.2
A homeowner’s policy provides coverage for: Buildings and other structures Additional living expenses Personal property Personal liability and related coverages Specialized coverages. Renter’s insurance provides many of the same kinds of protection as homeowner’s policies

41 Chapter Summary Learning Objective LO8.3
Factors that affect home insurance coverage and costs include: Location Type of structure Coverage amount Policy type, discounts Choice of insurance company

42 Chapter Summary Learning Objective LO8.4
Motor vehicle bodily injury coverages include: Bodily injury liability Medical payments coverage Uninsured motorist’s protection Motor vehicle property damage coverages include: Property damage liability Collision Comprehensive physical damage

43 Chapter Summary Learning Objective LO8.5
Motor vehicle insurance costs depend on: Amount of coverage needed Vehicle type Rating territory Driver classification

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