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Chapter 8 Home and Automobile Insurance Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective LO8.1 Insurance and Risk Management Insurance Insurance company (insurer) Procedure ◦ Protection against possible financial loss ◦ Provides peace of mind ◦ Risk-sharing firm that assumes financial responsibility for losses from an insured risk ◦ Purchase a policy known as coverage ◦ Insurance firm assumes a risk for a fee ◦ Insured policyholder pays a periodic premium 8-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Types of Risk Risk Peril Hazard ◦ Chance of loss or injury ◦ Uncertainty or lack of predictability ◦ Anything that may cause a loss ◦ Fire, windstorm, robbery, or accidents ◦ Anything that increases the likelihood of a loss ◦ For example, driving drunk, defective house wiring 8-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Risk Avoidance Methods Risk avoidance ◦ Taking precautions to avoid risk Risk reduction ◦ Taking actions to reduce risk Risk assumption ◦ Insurance company Risk Shifting ◦ Insurance buyer 8-8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Risk Avoidance Risk Shifting Ways to Manage Risk Risk Reduction Wear seatbelts Buy Insurance Self Insurance Don’t stop at a convenience store in a bad part of town after midnight Risk Assumption Install an alarm system 8-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Risk and Risk Management Strategies 8-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Planning an Insurance Program 8-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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? • Insurance needs and goals change Put your plan into action 4. Check your results 3. 8-13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Property and Liability Insurance Recent major losses: ◦ 2012: Superstorm Sandy = $18 billion in damages ◦ 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 8-14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Household Inventory Contents 8-18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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) 8-22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Home Insurance Policy Forms Tenant’s form (HO-4) Comprehensive form (HO-5) Condominium owner (HO-6) ◦ Covers personal property against listed risks ◦ Expands HO-3 coverage to replacement cost ◦ 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. 8-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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? 8-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Factors That Affect Home Insurance Costs Location of home Type of structure Coverage amount and policy type Home insurance discounts Company differences ◦ Alarm system ◦ Smoke detectors ◦ If you insure your car with the same company ◦ Compare cost, coverage and service 8-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Two Major Categories of Automobile Insurance 8-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Automobile Liability Insurance Coverage 8-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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. 8-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Other Coverages Wage loss insurance Emergency road service coverage Rental reimbursement coverage 8-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Motor Vehicle Insurance Premium Factors Vehicle type Rating territory Driver classification ◦ Year, make, model, and theft rate ◦ Accident, auto theft, and vandalism rates in the area where you live ◦ Age, sex, marital status, credit history, driving record, and driving habits ◦ Assigned risk pool for those unable to obtain insurance 8-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 ◦ ◦ ◦ ◦ 8-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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. 8-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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. 8-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 8-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter Summary Learning Objective LO8.5 Motor vehicle insurance costs depend on: ◦ ◦ ◦ ◦ Amount of coverage needed Vehicle type Rating territory Driver classification 8-45 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
