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8
McGraw-Hill/Irwin
Home and Automobile Insurance
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Home and Automobile Insurance
Chapter Objectives
8-3
1. Identify types of risks, risk management method,
2.
3.
4.
5.
and develop a risk management plan.
Assess the insurance coverage and policy types
available to homeowners and renters
Analyze the factors that influence the amount of
coverage and cost of home insurance
Identify the important types of automobile insurance
coverage.
Evaluate factors that affect the cost of automobile
insurance
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Objective 1: Identify types of risks, risk management
methods, and develop a risk management plan
Insurance and Risk Management
 Insurance is protection against possible financial
loss, and gives you peace of mind.
 An insurance company, or insurer, is a risk-sharing
firm that assumes financial responsibility for losses
from an insured risk.
 People purchase a policy and the firm assumes
a risk for a fee called the premium,
which the insured policyholder pays
periodically.
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Types of Risk
 Risk is uncertainty or lack of predictability, such as
to loss that a person or property, covered by
insurance, faces.
 Peril is the cause of a possible loss, such as fire,
windstorm, robbery, disease, or death.
 Hazard is something that increases the likelihood of
a loss, such as driving drunk, smoking in bed, or
defective house wiring.
 Risk management is a long range, organized,
planned strategy to protect your assets and family.
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Coverage and Type of Risk
 Pure Risk.
– Personal risks, property risks, and
liability risks are types of pure risk.
– Insurable.
– Accidental, unintentional.
– Nature and financial loss of the risk
can be predicted.
 Speculative Risk.
– Chance of loss or gain.
– Such as starting a small business or gambling.
– Uninsurable.
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Risk
Shifting
Risk
Avoidance
Ways to
Manage
Risk
Risk
Assumption
Risk
Reduction
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Planning an Insurance Program
 To put your risk management plan to
work ask yourself…
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What should be insured?
For how much?
What kind of insurance?
From whom?
Set your insurance goals and prioritize them.
Develop a plan to reach your goals.
Put your plan into action.
Review your results.
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Property and Liability Insurance
 In recent years there have been major losses
from things such as Hurricane Katrina in 2005
caused $25 billion in damages. In 2003, floods
caused more than $2 billion worth of damage.
 Potential property losses and loss
of use.
– Home, automobiles,
furniture, clothing,
and personal belongings.
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Property and Liability Insurance
continued
 Losses to an individual can come from liability
losses, if you are found responsible for injury to
someone’s person or property.
 Liability due to negligence.
– Failure to take ordinary and
reasonable care. Such as
failure to remove items from a
frequently used staircase.
 Vicarious Liability.
– When you are held responsible for the actions of
another person, such as your child throwing a
ball through a neighbor’s window.
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Homeowner’s Insurance Coverages
 Homeowners insurance is coverage for a place of
residence and its associated financial risks.
– Damage to or destruction of your house and
other structures, plus trees, shrubs and plants,
– Additional living expenses.
– Personal property in or away from home.
– Personal property floater - high value items.
– Household inventory with documentation.
8-12
Homeowner’s Insurance Coverages
Personal Liability and Related Coverage
(continued)
 Medical Payment Coverage
– coverage payments for
minor injuries caused by you,
your family members, or pets,
occurring on your property or
away from home.
 Personal liability.
– Umbrella policy - also called a personal catastrophe
policy.
– Supplements basic personal liability coverage.
– $1,000,000 or more in liability coverage.
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Homeowner’s Insurance Coverages
(continued)
 Specialized Coverage
– Endorsements add coverage for things such as
earthquake damage, or damage from floods
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Renter’s Insurance
 Personal property loss or
damage.
 Additional living
expenses.
 Personal liability.
 A building owner’s insurance
usually won’t cover renter’s
personal property.
 Many renters do not have
insurance to cover a loss.
Home Insurance Policy Forms
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Basic form (HO-1)
Broad form (HO-2)
Special form (HO-3)
Tenant’s form (HO-4)
Comprehensive form (HO-5)
Condominium owner (HO-6)
In addition to the above, other items are covered
such as credit card fraud, check forgery, temporary
repairs and fire department charges in areas with
such fees.
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Objective 3: Analyze the factors that influence the amount of coverage
and cost of home insurance Home Insurance Cost Factors
 Two-thirds of homes in the United States are either
not insured or are underinsured.
 Billions of dollars of damage occur each year from
fire, theft, wind and other risks.
 Determine the amount of coverage you need by
considering…
– Replacement value of your home.
– Value of your home’s contents.
– Protection for specific items like jewelry.
– Liability coverage you need.
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Policy Provisions
 Look for a policy with full coverage rather than a
coinsurance clause, where you have to pay for
part of a loss.
 Which type of claim settlement method is used?
– Actual cash value - cost less depreciation.
– Replacement cost - full cost to repair or
replace the damaged or lost item, without
considering depreciation of the item. Costs 1020% more than actual cash value coverage.
Factors That Affect Home Insurance Costs
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Location of residence.
Type and age of the structure.
Coverage Amount and Policy type
Home Insurance Discounts - alarm system, smoke
detector, if you insure your car with the same
company.
 Company differences.
– Compare costs and coverages at sites such as
www.independentagent.com
– Customer satisfaction index information is
available at www.trustedchoice.com
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Objective 4: Identify the important types of automobile
insurance coverage Automobile Insurance Coverages
 Financial responsibility law.
– State legislation. Forty-five states have
compulsory automobile liability insurance
laws.
– see Exhibit 8-7 to see the minimum limits for
financial responsibility (liability) in your state.
 Requires drivers to prove their ability to cover the
cost of damage or
injury caused by them in
an automobile accident.
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Motor Vehicle Bodily Injury Coverage
 Bodily injury Liability
– 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 Payment Coverage
– Medical payments covers the cost
of health care for persons injured
in your automobile, including yourself.
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Motor Vehicle Bodily Injury Coverage
(continued)
 Uninsured Motorist’s Protection
– Protection against the risk of getting into an
accident with someone who has 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.
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Motor Vehicle Property Damage Coverage
 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.
– For example, during a snow storm you might
accidentally slide your vehicle into a neighbor’s
mailbox. This coverage would pay for repair or
replacement of the mailbox.
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Collision Coverage
 When your car is in an accident, collision
coverage pays for damage to your automobile,
regardless of who is at fault. However, if you
are not at fault, your insurer will try and collect
from the other driver’s property damage
liability first. Coverage is limited to the retail
value of your vehicle.
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Comprehensive Physical Damage
 Covers damage to your vehicle that is not
caused by a collision, such as...
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Fire, theft or vandalism.
Glass breakage.
Hail, sand, or wind storm.
Falling objects or hitting an animal.
It also covers things like damage to your vehicle if
your car rolls downhill into a light pole.
– Some things in your car, like some radios and
stereo equipment are not covered.
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No-Fault Insurance
 Each driver collects from their own insurance
company for medical expenses, lost wages, and
related injury costs.
 Thirty states have some variation of the system.
 Intended to provide fast and smooth methods of
paying for damages without taking the legal action
frequently necessary to determine fault.
 Time and cost is not always reduced since
problems arise because systems vary among
states.
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Objective 5: Evaluate factors that affect the cost of
automobile insurance
Automobile Insurance Costs
 Legal concerns include having enough coverage if
you were sued.
– $100,000/$300,000 is recommended for bodily
injury liability,with an additional $1,000,000 or
more umbrella liability policy recommended.
 Property values of vehicles have gone up.
– $50,000-$100,000
is usually suggested for
property damage liability.
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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 people who are unable to
obtain insurance.
8-28
Reducing Automobile Insurance Premiums
 Find out how much it will cost to insure a car before
you buy it.
 Compare companies – www.insuremarket.com..
 Premium discounts.
– Establish and maintain a good driving record.
– Non-smoker.
– Install security devices such as a car alarm.
– If you have more than one vehicle, insure them
both with the same company.
 Have larger deductibles