Chapter 10: Risk Management and Property/Liability Insurance

Objectives Define risk and apply the risk- management process to personal financial affairs. Define insurance terminology and explain the relationship between risk and insurance.

Objectives Design a homeowner’s insurance program to meet your needs and keep the cost of the plan to a minimum. Design an automobile insurance program to meet your needs and keep the cost of the plan to a minimum.

Objectives Describe property and liability insurance policies designed to meet needs other than those related to housing and automobiles. Outline the steps to make a claim against a property or liability insurance policy.

Risk Management A plan to protect accumulated resources and assets from the possibility of financial loss. CONSIDER…

Coverage and Type of Risk Pure Risk  Insurable  Accidental, unintentional  Always results in a loss  Can be personal, property or liability risk. Speculative Risk  Loss or gain possible  Uninsurable  Such as investing in stocks or gambling

What is Insurance? Insurer or Insurance Company Policy Premium Insured or Policy Holder Risk Peril Hazard

Decision Making Matrix

Risk Avoidance Risk Shifting Risk Assumption Risk Reduction Ways to Manage Risk

 Gather information  Evaluate risk and potential losses  Choose mechanisms  Administer program  Evaluate and adjust Risk and Risk Management RISK MANAGEMENT PROCESS:

What is Insurance? Insurance is strange. It's a product that most consumers buy, but few want to use. And many people find insurance confusing. It's unlike any other consumer product on the market. You can't see it, touch it, smell it, hear it or taste it. But without it, the world would be a much different place. Just think about it. Would you casually drive to the grocery store knowing that everything you ever worked for could be at risk if you were involved in an accident? How much would you be willing to spend on a home without insurance to cover it? Who would dare start a new business without the safety net of insurance? Insurance allows people to take risks, make investments, protect their hard- earned assets and provides peace of mind. Insurance and other risk management techniques have been around in some form for thousands of years. Insurance has its roots in ancient China. Shipping merchants in 2500 B.C. were the first to introduce a concept vital to the role and purpose of insurance -- spreading the risk of loss from the individual to a group of individuals. Before sailing through dangerous waters, merchants gathered and divided their goods so that each boat carried some of the contents of the others. That way no one merchant shouldered the risk alone, protecting themselves from a potential total loss of goods. Today's insurance business still bases its practices on this simple concept of spreading risk. Through a wide array of products and services, insurance companies provide citizens and businesses with the economic security necessary to survive the unpredictable and sometimes devastating events of modern everyday life. The Insurance Institute of America defines insurance as three things. First, insurance is a transfer technique whereby the insured transfers the risk of financial loss to another party, the insurance company or insurer. Second, it is a contract between the policyholder and the insurer that states what financial consequences of loss are transferred and expresses the insurer's promise to pay for those consequences. Third, insurance is a business and, as such, needs to be conducted in a way that earns a reasonable profit for its owners. The money a policyholder pays an insurer is small compared to the potential for loss. If a family's house were to burn down, they probably could not afford to replace it without insurance. The insurance system enables someone to transfer the financial consequences of this loss to an insurance company. The insurance company, in turn, pays for covered losses and distributes the costs among all of its policyholders. In that way, your fellow policyholders share the cost of your loss, as you share in theirs.

What is Insurance? (cont.) Private companies and state and federal governments provide insurance. There are three major types of private property/casualty insurers: mutual, stock and reciprocal exchanges. The primary difference among these types of insurers is in who owns them. A stock company is a corporation owned by individuals or stockholders who contribute capital in the hope of earning a profit through the sale of insurance. The stockholders direct the company's operations and share in any profits earned. A mutual insurance company is a corporation owned by its policyholders, who may receive dividends if the firm is profitable. A reciprocal insurance exchange is similar to a mutual company in that the policyholders are both the insurers and the insured. The exchange is a collection of individuals, firms and/or corporations that exchange insurance coverage on one another. Each member pays for a portion of the coverage on every other member. One of the most critical decisions any consumer must make when purchasing a product or service is how they will purchase the product. When buying insurance, consumers have several choices. They can work with an independent agent, an exclusive agent, an insurance broker or deal directly with a company. An independent insurance agent is a self-employed businessperson who typically represents a number of different insurance companies through contractual relationships and is paid on a commission basis. An exclusive agent represents only one insurance company and may be a salaried employee or work on a commission basis. An insurance broker is an intermediary between a customer and an insurance company. A broker typically searches the market for coverage appropriate to their clients' needs. While purchasing insurance through an independent or exclusive agent are the most popular methods of buying insurance, consumers also have the option of direct purchase. A number of companies sell their insurance products directly to customers through the use of a toll-free telephone service or the Internet.

Insurable interest Pooling risks Insurer Insured (Policy Holder) Factors that affect cost (Premiums)  Deductibles  Co-insurance What is Insurance?

Creating a Personal Insurance Plan

Reimbursement Formula

Property and Liability Insurance Liability  Legal responsibility for cost of another person’s losses or injuries Negligence  Failure to take ordinary, reasonable care, such as failure to supervise children in a pool. Vacarious Liability  When you are held responsible for the actions of another person, such as your child throwing a ball through a neighbor’s window.

Homeowner’s Insurance Coverages  Property  Liability Types Buying

Homeowner’s Insurance  Dwelling coverage  Personal property coverage  Liability losses  Homeowner’s insurance pricing BUYING:

Types of Home Insurance Policies Basic form (HO-1) Broad form (HO-2) Special form (HO-3) Tenant’s form (HO-4) Comprehensive form HO-5) Condominium form (HO-6) Country home form (HO-7) Modified coverage form (HO-8)

HO-1 (Basic Form) Fire, lightning, windstorm, hail, explosion, riot or civil commotion, aircraft, vehicles, smoke, vandalism or malicious mischief, theft, glass breakage, volcanic eruption. HO-2 (Broad Form) Covers all basic-form risks plus: Falling objects, weight of ice, snow, or sleet, discharge of water or steam, tearing apart of heating system or appliance, freezing, accidental damage from electrical current. HO-3 (Special Form) Covers all of the above risks, plus any other risks except those specifically excluded from the policy, such as: Flood, earthquake, war, nuclear accidents. HO-4 (Tenants Form) Covers personal belongings against the risks covered by the basic and broad forms of the homeowner’s policy. HO-5 (Comprehensive Form) Expands coverage of HO-3 to include endorsements for items such as replacement cost coverage on contents and guaranteed replacement cost coverage on building.

How Much Coverage Do You Need? Look for a policy with full coverage rather than a coinsurance clause What would it cost to replace your home? Have sufficient liability coverage Include protection for specific items such as collections, cameras, and jewelry Determine the value of the contents of your home

How Much Coverage Do You Need?

Items Covered in a Renter’s Policy Personal property Personal liability Additional living expenses A landlord’s insurance usually won’t cover your personal belongings! Only 40% of renters have renter’s Insurance

Replacement Cost vs. Actual Cash Value Actual cash value coverage  Insurer will cover the cost of what the burned or stolen item would cost at a garage sale or if you sold it through a newspaper ad. Replacement cost coverage  Insurer will cover what ever it costs you to replace the burned or stolen item with a new one.  May limit replacement cost to 400% of ACV  Costs 10-20% more than ACV.

Actual Cash Value Reimbursement Calculation

Value of a Home Inventory Proof of belongings and their value Helps you remember Helps you determine needed coverage

What Affects the Cost of Homeowner’s or Renter’s Policies? Location of home or apartment Type and age of the structure Amount of coverage and deductibles Discounts - alarm system, smoke detector Varies company to company - compare If you also insure your car with the same company

Automobile Insurance Financial responsibility law  40 states have one  Utah limits are 25/65/15 Requires you to carry certain minimum coverage if you damage someone’s person or property

Automobile Insurance  Liability  Medical  Uninsured/underinsured  Physical damage  Other LOSSES COVERED:

Auto Liability Coverage bodily injury liability property damage liability

Auto Insurance Coverages Bodily injury coverages  Bodily injury liability –  Covers the risk of financial loss due to legal expenses, medical expenses, lost wages and other expenses associated with injuries caused by an accident for which you were responsible  Medical payments –  Covers the cost of health care for persons injured in your automobile, including yourself.

Auto Insurance Coverages Uninsured motorist  Pays for the cost of injuries to you and your family if your vehicle is hit by a person without insurance, however, it does not cover property damages No-Fault Insurance  System is intended to provide fast, smooth methods of paying for damages without taking the legal action frequently necessary to determine fault Property damage liability  covers damage to others person’s car when you are at fault. It also includes damage to such things as street signs and buildings (continued)      

Collision Coverage When your car is in an accident, collision insurance pays for damage to your automobile, regardless of who is at fault. However, if you are not at fault they will try and collect from the other driver’s property damage liability first.

Comprehensive Physical Damage Covers damage to your car that is not caused by a collision, such as  theft  vandalism  glass breakage  hail, sand, or wind storm  your car rolls downhill into a tree

Other Automobile Insurance Coverages Wage loss insurance  Reimburse for any salary or income lost due to injury in an automobile accident Towing and Emergency Road Service  Pays for the breakdowns and mechanical assistance

Auto Insurance Premium Factors Automobile type  year, make and model Rating territory  accident, theft, and vandalism rates Driver classification  age, sex, marital status  driving record Assigned risk pool

Other Property/Liability Loss Exposures Floater policies Antique/specialty cars Professional liability Comprehensive personal liability Umbrella liability

To Lower Your Auto Premium Find out how much it will cost to insure a car before you buy it Compare companies Have larger deductibles Look for discounts  non-smoker  good driving record  airbags  car alarm or other security

Umbrella Policy $1,000,000 in liability coverage Covers you in your home, car, office etc.

Document loss File claim Sign release Collecting on Property/Liability Losses

Make Sense of an Insurance Policy Perils covered Property covered Types of losses People covered Locations covered Time period of coverage Loss control Amount of coverage

Save on Property or Liability Insurance Shop around Select appropriate coverages/limits Assume affordable risk Take advantage of discounts Engage in loss control Be properly classified