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.
