Chapter 8
Home and Automobile
Insurance
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
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
Learning Objective LO8.1
Insurance and Risk Management
• 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
8-3
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
8-4
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
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
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
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
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
Planning an Insurance Program
8-10
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
8-11
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
8-12
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
8-13
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
8-14
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
8-15
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
8-16
Household Inventory Contents
8-17
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
8-18
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
8-19
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 residence
– Usually includes liability coverage
• Many renters do not have insurance
8-20
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)
8-21
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.
8-22
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?
8-23
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
8-24
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
8-25
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
8-26
Two Major Categories of Automobile
Insurance
8-27
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
8-28
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
8-29
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
8-30
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.
 

 

8-31
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

8-32
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
8-33
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
8-34
Other Coverages
• Wage loss insurance
• Emergency road service coverage
• Rental reimbursement coverage
8-35
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
8-36
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
8-37
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
8-38
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.
8-39
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
8-40
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
8-41
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
8-42
Chapter Summary
Learning Objective LO8.5
• Motor vehicle insurance costs depend
on:
–
–
–
–
Amount of coverage needed
Vehicle type
Rating territory
Driver classification
8-43