Title: Property and Motor Vehicle Insurance
1CHAPTER 8
Property and Motor Vehicle Insurance
Insurance The Necessary Evil
2Insurance 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.
3Risk, 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
4Coverage 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
5Risk 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
6Examples 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)
7Liability 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.
8Planning 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.
9A 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
10Homeowners 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
11Consider 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.
12How an Umbrella Policy Works
13Personal 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.
14Items 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
15Home 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.
16How 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!
17The 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
18Factors 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
19Coverage 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.
20Coverage 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.)
21Coverage 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)
22Home 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
23What 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
24Automobile 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!
25Motor 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.
26Motor 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.
27Motor Vehicle Liability Coverage
Handout
28Automobile 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.
29Automobile 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.
30Automobile 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.
31Automobile 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.
32Okay, 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.
33How 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!
34How 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
35Motor 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!
36No-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
37Collision 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
38Comprehensive 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.
39Auto 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.
40Legal 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
41Now 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!
42Reducing 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
43Your 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.
44Bottom Line on Home Car Insurance
- Get Sufficient Coverage
- BOHICA
- Keep your back to the wall when you deal with the
insurance agents