Garman/Forgue
Personal Finance
Ninth Edition
Chapter 10:
Managing Property
and Liability Risk
PPT slide program prepared by
Amy Forgue and Ray Forgue.
Learning Objectives
1. Apply the risk-management process to
address the risks to your property and
income.
2. Explain basic insurance terms and the
relationship between risk and insurance.
3. Design a homeowner’s or renter’s
insurance program to meet your needs.
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Learning Objectives
4. Design an automobile insurance
program to meet your needs.
5. Describe other types of property and
liability insurance.
6. Summarize how to make an
insurance claim.
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Introduction
• Property Insurance
• Liability Insurance
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Risk and Risk Management
• What is the nature of risk?
– Speculative risk
– Pure risk
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The Risk-Management Process
• Step 1: Identify sources of risk.
– Peril: Event that can cause a financial loss
• Step 2: Estimate risk and potential
losses.
– Loss frequency
– Loss severity
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The Risk-Management Process
• Step 3: Choose how to handle risk.
– Risk Avoidance
– Risk Retention
– Loss Control
– Risk Transfer
– Risk Reduction
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The Risk-Management Process
• Step 4: Implement the risk-management
program.
– Large-Loss Principle: Insure the losses
that you cannot afford, pay the small losses
out of your own pocket.
• Step 5: Evaluate and adjust the
program.
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Understanding How Insurance Works
•
Insurance
•
Premium
•
Insurance Policy
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Understanding How Insurance Works
• Hazards make losses more likely to
occur.
– Hazard: Any condition that increases the
probability that a peril will occur.
• Only certain losses are insurable.
– Fortuitous losses
– Financial loss
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Understanding How Insurance Works
• The Principle of Indemnity Limits
– Principle of indemnity
– Policy limits
• Factors that reduce the cost of
insurance:
– Deductibles
– Coinsurance
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Understanding How Insurance Works
• The essence of insurance
– Law of large numbers
• Who sells insurance?
– Insurance agent
– Independent insurance agents
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Homeowner’s Insurance
• Coverages
• Property insurance
– Named-perils policies
– All-risk (open-perils) policies
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Homeowner’s Insurance
•
Liability insurance
– Homeowner’s general liability protection
– Homeowner’s no-fault medical payments
protection
– Homeowner’s no-fault property damage
protection
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Types of Homeowner’s Insurance
Policies
•
•
•
•
•
•
Basic Form (HO-1)
Broad Form (HO-2)
Special Form (HO-3)
Renter’s Contents Broad Form (HO-4)
Condominium Form (HO-6)
Older Home Form (HO-8)
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Buying Homeowner’s Insurance
• How much coverage is needed on your
dwelling?
– Replacement-cost requirement
• How much coverage is needed on your
personal property?
– Actual cash value (of personal property)
– Contents replacement-cost protection
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Automobile Insurance – Losses
Covered
• Coverage A: Liability insurance
– Automobile Bodily Injury Liability
– Automobile Property Damage Liability
– Family Auto Policy (FAP)
– Personal Auto Policies (PAP)
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Automobile Insurance – Losses
Covered
• Coverage B: Medical payments
insurance
– Automobile medical payments insurance
– Personal Injury Protection (PIP)
– Subrogation rights
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Automobile Insurance – Losses
Covered
• Coverage C: Uninsured and underinsured
motorist insurance
– Uninsured motorist insurance
– Underinsured motorist insurance
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Automobile Insurance – Losses
Covered
• Coverage D: Physical damage
insurance
– Collision insurance
– Comprehensive automobile insurance
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Automobile Insurance – Losses
Covered
• Other protections:
– Towing coverage
– Rental reimbursement coverage
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Protection for Other Property and
Liability Loss Exposures
• Comprehensive personal liability insurance
• Professional liability insurance
– Professional liability insurance (or malpractice
insurance)
• Umbrella (or excess) liability insurance
• Floater Policies
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How to Collect on Your Property and
Liability Losses
• Contact your insurance agents.
• Document your loss.
• File your claim.
– Claim adjuster
• Sign a release.
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The Top 3 Financial Missteps In
Managing Property and Liability Risk
People slip up in when they do the
following:
1. Buy only the legal minimum coverage
on the liability insurance on their car.
2. Fail to keep good records that could
serve to document insured property
losses.
3. Pay high premiums because they
select low deductibles on property
insurance.
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Good Money Habits in Managing
Property and Liability Risk
•
Always insure your home and vehicle.
•
Purchase insurance policies with very
high liability limits to protect against
the possibility of catastrophic losses.
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Good Money Habits in managing
Property and Liability Risk
•
Verify that your auto insurance policy
covers rental car losses so you can
wisely ignore sales pressure to
purchase such overpriced coverage.
•
Always comparison shop for insurance
locally as well as online.
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Good Money Habits in managing
Property and Liability Risk
• Maintain a verifiable inventory of all your
insured property so that you can collect
what is coming to you in the event of a
loss.
• Once each year, reassess what types of
and how much insurance coverage you
need.
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