Property and Motor Vehicle Insurance

1
CHAPTER 8
Property and Motor Vehicle Insurance
Insurance The Necessary Evil
2
Insurance and Risk Management

• Insurance is protection against possible
  financial loss
• 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 insurance firm
  assumes a risk for a fee called the premium which
  the insured policyholder pays periodically

Are insurance companies non-profit organizations?
No! Never forget this.
3
Risk, Peril, and Hazards

• Risk is uncertainty or lack of predictability,
  such as a loss that a person or property faces
• Peril is the cause of a possible loss, such as
  fire, windstorms, 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

4
Coverage and Type of Risk

• Pure Risk
• Insurable
• Accidental, unintentional
• Nature and financial loss of the risk can be
  predicted
• Can be personal, property, or liability risk
• Speculative Risk
• Chance of loss or gain
• Uninsurable
• Such as starting a small business or gambling

5
Risk Management

• Risk management is a long range, organized,
  planned strategy to protect your assets and
  family
• Risk Avoidance Dont drive or ride in a car
• Risk Reduction Ride but wear a seatbelt
• Risk Assumption Drive but post a bond
  self-insurance
• Risk Shifting Drive but buy insurance
• Most people use a combination of these strategies
• Usually without much planning or conscious
  forethought
• All too often, most people are uninsured,
  under-insured, or they are insured for the wrong
  things

6
Examples of Risks You Face

• Disability most widely neglected risk
  (disability)
• Illness (health insurance)
• Death (life insurance)
• Property loss (home and auto insurance)
• Physical damage
• Loss of use
• Personal Liability (liability insurance)
• You are legally responsible for another persons
  losses or injuries
• Vicarious liability you are responsible for the
  actions of another (example parent/guardian)

7
Liability and Negligence

• Negligence
• Failure to take ordinary and reasonable care
  Example Failure to remove items from a
  frequently used staircase
• Beware the Attractive Nuisance
• Examples Pools, ladders, appliances, cars

Foreseeability is a critical factor in
determining what constitutes an attractive
nuisance.
8
Planning an Insurance Program

• Set your insurance goals and prioritize them
• Develop a plan to reach your goals
• Put your plan into action
• Review your results
• To put your risk management plan to work, ask
  yourself
• What or who should be insured?
• For how much?
• What kind of insurance?
• From whom?

Yet another example of our books sagacious
pearls of financial planning wisdom.
9
A More Practical Insurance Planning Program

• Ask yourself, How much could we lose?
• If the answer is, Plenty! you need insurance
• For Home or Auto, there is no question as to
  whether or not you need insurance
• You could lose Plenty! in both situations
• Therefore,
• If you own a home, you need homeowners insurance
• If you own an automobile, you need automobile
  insurance (at least liability)
• In fact, it is legally required

10
Homeowners Insurance Coverages

• Homeowners insurance is coverage for a place of
  residence and its associated financial risks
• Buildings and other structures, plus trees,
  shrubs and plants
• Additional living expenses
• Personal property
• Personal property floater
• Household inventory take photographs
• Endorsements for specialized coverage
• Flood, earthquake, etc.
• Medical payments for minor injuries on your
  property
• Personal liability
• May need extra coverage for workers in the home

11
Consider an Umbrella Policy

• Supplements basic personal liability coverage
• a.k.a. personal catastrophe policy
• Average personal liability from homeowners
  insurance is only 100,000 to 300,000
• 1,000,000 or more in liability coverage is
  typical for umbrella policies
• Thats a whole lotta personal liability
  protection

Your home or auto insurer will also often offer
you an umbrella policy.
12
How an Umbrella Policy Works
13
Personal Liability Example

• You are playing baseball and accidentally swing a
  bat into a friends head (Hey, it happens!)
• He now requires 24-hour skilled nursing care
• The cost is 85,000 per year in perpetuity and
  rising
• Your homeowners personal liability limit is
  300,000
• They will only pay 300,000 towards his care
• The 1,000,000 umbrella policy will begin to pay
  for the care once the 300,000 limit is reached

Given the cost of health care, personal liability
awards can be enormous.
14
Items Covered by Renters Insurance

• Personal property loss or damage
• Personal liability
• Additional living expenses
• A landlords insurance usually wont cover
  personal belongings
• Only 40 of renters have renters insurance

15
Home Insurance Policy Forms

• Basic form (HO-1)
• Broad form (HO-2)
• Special form (HO-3)
• Tenants form (HO-4)
• Comprehensive form (HO-5)
• Condominium form (HO-6)
• Modified coverage form (HO-8)

Your lender is going to make you buy the HO-5
Comprehensive Form (HO-6 for condos)
In addition, many homeowner policies cover such
items as credit card fraud, check forgery,
temporary repairs and fire department charges in
areas with such fees.
16
How Much Coverage Do You Need?

• Full coverage versus a coinsurance clause
• What would it cost to replace your home?
• What is the likely worst case loss?
• Have sufficient liability coverage (umbrella
  policy)
• Include protection for specific items such as
  collections, cameras, and jewelry floaters
• Determine the value of the contents of your home
• Actual cash value original cost less
  depreciation
• Replacement cost repair or replace with new
  item
• You want replacement cost coverage!

17
The Coinsurance Clause

• Coinsurance clause
• Requires the homeowner to pay for part of the
  losses if the property is not insured for
  (typically) 80 of the replacement value
• Example 40,000 loss on a 200,000 home
• Home worth 200,000 but only covered for 150,000
• 200,000 80 160,000 Insufficient
  coverage!
• The homeowner was not in compliance
• The home was underinsured
• The insurance company will only pay
• 40,000 loss (150,000 / 200,000) 30,000
• The homeowner must pay the extra 10,000

18
Factors That Affect Home Insurance Costs

• Location of residence
• How close is the fire department?
• Type and age of the structure
• Amount of coverage and deductibles
• Discounts alarm system, smoke detector, if you
  insure your car with the same company
• Company differences
• Compare costs and coverages at sites such as
  insure.com, insweb.com, lifeinsure.com
• Customer satisfaction information is available at
  www.consumerreports.org
• Claims history the number and type of claims

19
Coverage Example 1

• Your home insurance policy has a 500
  deductible. Your beautiful, towering eucalyptus
  tree drops a huge branch onto your roof and
  causes 4,500 worth of damage. What amount, if
  any, would be covered by your insurance?
• 500
• 4,000
• 4,500
• The insurance company would not pay anything.

The correct answer is (B). You must pay the
deductible before the insurance company will pay
anything towards a claim.
20
Coverage Example 2

• Your homeowners policy has replacement coverage
  for personal property. Guns and jewelry have a
  1,000 maximum. Ignoring any deductible, if a
  2,000 gun, a 3,000 bracelet, and a 2,000
  computer were stolen from your home, what amount,
  if any, would be covered by your insurance?
• 4,000
• 7,000
• 1,000
• The insurance company would not pay anything.

The correct answer is (A). 1,000 each for the
gun and bracelet and 2,000 for the computer.
(Note If an item is not specifically excluded or
limited, then it is fully covered.)
21
Coverage Example 3

• Your homeowners policy has actual cash value
  coverage for personal property. Ignoring any
  deductible, if a 2,000 computer with a 4-year
  life span were stolen from your home after 3
  years, what amount, if any, would be covered by
  your insurance?
• 500
• 1,000
• 1,500
• 2,000

The correct answer is (A). 2,000 divided by 4
years 500 per year. After 3 years, the item
now has an actual cash value of only 500.
(2,000 minus 500 per year for 3 years)
22
Home Insurance Availability

• For decades, availability was not an issue
• Every homeowner could easily find insurance
• Recently, insurers have become very picky about
  who they will insure
• Insurance companies are not only using claims
  history
• They are now using credit reports (?)
• And data from other homes in your area
• Also, some insurance companies are asking
  homeowners to effect expensive repairs before
  they will provide insurance

23
What About Earthquake Insurance?

• All insurance companies that sell homeowners
  insurance must also offer earthquake coverage
• Minimum 10 Deductible! Even 15 to 25
• On a 300,000 home, you pay for the first
  30,000, 60,000 or even 75,000 of damage
• Surprise! The amount of damage to a 300,000
  home in an earthquake is usually much less than
  30,000
• Much depends on the type of home you own
• Wood frame versus brick older versus newer
• And if a major earthquake did occur, the
  insurance companies would just claim bankruptcy!
• Bottom Line We do not have it
• Instead, consider using the money you would spend
  on earthquake insurance to earthquake-proof
  your home

24
Automobile Insurance Coverages

• Financial responsibility law
• Requires drivers to prove their ability to cover
  the cost of damage or injury caused by an
  automobile accident
• Over 45 states have compulsory automobile
  insurance laws
• California Minimum 15/30/5
• Woefully inadequate insurance amounts!
• Get 100/300/50 at the very least!
• But what do these numbers mean?
• Hold on a minute

Have not changed since the 1950s!
25
Motor Vehicle Insurance 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 payments covers the cost of health care
  for persons injured in your automobile,
  including yourself

As with personal liability, the compensatory
awards for bodily injury liability can be
enormous. Not only could you be forced to pay
medical bills, you could be liable for a persons
missed wages.
26
Motor Vehicle Insurance Coverage
(continued)

• Property damage liability covers damage to
  another persons car when you are at fault It
  also includes damage to such things as street
  signs and buildings
• For example, during a rainstorm you might
  accidentally slide your vehicle into a neighbors
  mailbox or tree

Review In the event that the bodily injury or
property damage liability limits are insufficient
to cover the liability incurred, an umbrella
liability policy will kick in and pay above and
beyond those limits.
27
Motor Vehicle Liability Coverage
Handout
28
Automobile Liability Example 1

• Les Doulunche was judged at fault in an
  accident. The three occupants of the vehicle he
  hit were awarded damages of 30,000, 10,000, and
  5,000. Les has 25/50/10 liability coverage. What
  amount, if any, would not be covered by his
  insurance and would be expected to be paid by
  Les?
• 5,000
• 10,000
• 15,000
• None. The total amount would be covered.

The correct answer is (A). 25,000 is the most
that would be paid to any one person.
29
Automobile Liability Example 2

• Mustaffa Rongnumba was judged at fault in an
  accident. The two occupants of the vehicle he hit
  were awarded damages of 130,000 and 70,000.
  Mustaffa had 100/300/50 liability coverage. What
  amount, if any, would not be covered by his
  insurance and would be expected to be paid by
  Mustaffa?
• 15,000
• 20,000
• 30,000
• None. The total amount would be covered.

The correct answer is (C). 100,000 is the most
that would be paid to any one person.
30
Automobile Liability Example 3

• Sydney First-Rowe was judged at fault in an
  accident. The four pedestrians he hit were
  awarded damages of 240,000, 200,000, 60,000
  and 40,000. Sydney had 250/500/100 liability
  coverage. What amount, if any, would not be
  covered by his insurance and would be expected to
  be paid by Sydney?
• 20,000
• 40,000
• 60,000
• None. The total amount would be covered.

The correct answer is (B). 500,000 is the most
that would be paid to all persons involved.
31
Automobile Liability Example 4

• C. S. Verdad was judged at fault in an accident.
  He caused 45,000 worth of damages to a person's
  home. Señor Verdad had 50/100/25 liability
  coverage. What amount, if any, would not be
  covered by his insurance and would be expected to
  be paid by Señor Verdad?
• 20,000
• 40,000
• 60,000
• None. The total amount would be covered.

The correct answer is (A). 25,000 is the limit
for property liability.
32
Okay, fess up!

• How many of you know the limits on your
  automobile insurance policy?
• I know them!
• I have no idea.
• I think I knew what they were when I signed up
  but I cant remember them now.

33
How Much Coverage Do You Have?

• If you do know the limits on your automobile
  insurance policy, what are they?
• The minimum 15/30/5 (or just a bit above)
• Maybe they are 50/100/25
• Somewhere around 100/250/50
• The maximum 250/500/100 or higher

25/50/10 is popular and would not even be enough
property damage if you smashed into a parked new
car at 10 mph!
34
How Much Coverage Do I Need?

• Bodily Injury Liability Coverage
• 100,000/300,000 is recommended for bodily
  injury liability, with an additional 1,000,000
  or more umbrella liability policy recommended
• Property Damage Liability Coverage
• 50,000-100,000 is usually suggested for
  property damage liability
• We have 250/500/250
• Get the maximum Its not much more

35
Motor Vehicle Insurance Coverage
(continued)

• Uninsured motorist
• Pays for the cost of injuries if your vehicle is
  hit by a person without insurance However, it
  does not cover property damages
• Underinsured motorist
• Pays costs if your car is hit by a person who
  doesnt have enough insurance to cover the damage
  they did to you and your car

How many vehicles on the road are uninsured? I am
not going to dare to ask you if you are uninsured!
36
No-Fault Liability Insurance

• Each driver collects from their own insurance
  company
• Medical expenses, lost wages, related injury
  costs
• Intended to provide fast and smooth methods of
  paying for damages without taking the legal
  action frequently necessary to determine fault
• Has not always lived up to its expectations
• Systems vary from state-to-state
• When you enter a state that has no-fault, your
  Calif insurance automatically becomes no-fault

37
Collision Coverage

• When your car is in an accident, collision
  insurance pays for damage to your automobile,
  regardless of who is at fault
• However, if you are not at fault, the insurance
  company will try and collect from the other
  drivers property damage liability first

38
Comprehensive Physical Damage

• Covers damage to your vehicle that is not caused
  by a collision, such as...
• Fire
• Theft
• Vandalism
• Glass breakage
• Hail, sand, or wind storm
• Your car rolls downhill into a tree
• Why isnt this covered under collision? My
  insurance company said it was.

Comprehensive is now also being referred to as
non-collision by some insurance companies.
39
Auto Insurance Premium Factors

• Automobile type
• Year, make and model
• Rating territory
• Accident, theft, and vandalism rates in the area
  where you live
• Driver classification
• Age, sex, driving record, marital status, credit
  history, professional or group membership, and
  driving habits (how close to work, etc.)

Once you get your drivers license, the clock
starts. After three years, your premiums go down
substantially (providing you have been a decent
driver). After you turn 25, they go down again.
40
Legal Discrimination?

• Because of the past driving records of young
  adults, the insurance companies are justified in
  charging the rates they do.
• Strongly Agree
• Agree
• Disagree
• Strongly Disagree

41
Now How Do You Feel?

• What percentage of 16- to 19-year-olds are
  expected to have at least one accident within 3
  years?
• 25
• 50
• 75
• 100

The correct answer is (D). That is the average.
Some have more than one!
42
Reducing Automobile Insurance Premiums

• Find out how much it will cost to insure a car
  before you buy it
• Compare companies www.insure.com
• The differences in prices are significant
• Have larger deductibles
• Look for discounts
• Establish and maintain a good driving record
• Non-smoker professional or group discounts
• Install security devices such as a car alarm
• If you have more than one vehicle, insure them
  both with the same company

43
Your C.L.U.E. Report

• A company called LexisNexis keeps track of
  personal property and automobile claims that you
  make
• They are called C.L.U.E. reports
• Comprehensive Loss Underwriting Exchange
• C.L.U.E. Personal Property Loss Report
• C.L.U.E. Auto Loss Report
• One free each of both reports every year
• https//personalreports.lexisnexis.com/fact_act_cl
  aims_bundle/landing.jsp
• Similar to credit reports
• Used by insurance companies to rate your risk

Please no jokes about getting a clue.
44
Bottom Line on Home Car Insurance

• Get Sufficient Coverage
• BOHICA
• Keep your back to the wall when you deal with the
  insurance agents