Property, Casualty, and Automobile Insurance CHAPTER THIRTY-EIGHT Property, Casualty, and Automobile Insurance

The Nature of Insurance Insurance is a means for a group of people to share the risks of loss. If a member of the group suffers a covered injury or damage, the insurance company will reimburse the injured party. The reimbursement from the insurance company is known as indemnification. Copyright © Houghton Mifflin Company. All rights reserved.

The Nature of Insurance (continued) To participate in the group sharing risks, a person applies to the insurance company for coverage. If the applicant is accepted, the insurance company will enter a contract with him or her. The contract with the insurance company is called an insurance policy. The insurance company is known as the insurer or underwriter. The person purchasing insurance is known as the insured. Copyright © Houghton Mifflin Company. All rights reserved.

The Nature of Insurance (continued) When a person’s application for insurance is accepted the insurer will issue a policy. A policy is a written contract of insurance. The policy will describe: The risks covered The amount of coverage (face value) The time period of the policy In exchange for coverage for certain risks the insured pays an amount known as the premium. Copyright © Houghton Mifflin Company. All rights reserved.

Purchasing Insurance Insurance policies can be obtained from: Insurance companies Savings banks Savings banks can sell life insurance in many states. Government agencies Government agencies will provide insurance where the risk of loss is high, such as: Flood insurance Crop insurance Bank deposit insurance Health and disability insurance Copyright © Houghton Mifflin Company. All rights reserved.

Purchasing Insurance (continued) Most insurance is purchased through an insurance agent or insurance broker. Insurance agent: an employee of a specific company who sells insurance policies for that company Insurance broker: an independent business person who works for the insured The broker determines the type and amount of insurance needed. The broker then seeks that insurance from several different companies. Both an insurance agent and a broker are usually licensed by the state where they operate. Copyright © Houghton Mifflin Company. All rights reserved.

Purchasing Insurance (continued) When one can pay a relatively small premium and demand a fairly high coverage the potential for insurance fraud is high. Companies try to learn as much as possible about the risk involved and the applicant. Based upon the application and the insurance company’s own investigation the company may issue a policy. Whether a policy is issued is based upon the insurance company’s evaluation of potential risks. Copyright © Houghton Mifflin Company. All rights reserved.

Purchasing Insurance (continued) False information, concealment, or misrepresentation by an applicant permits the company to cancel the policy, or The company could refuse to pay claims made on the policy. Further, false information can make the policy voidable. This is true whether the misrepresentation is intentional or deliberate. Copyright © Houghton Mifflin Company. All rights reserved.

The Insurance Policy An insurance policy is a contract and is subject to all the rules regarding a contract. A policy becomes effective when it is accepted by the company. A broker is not an agent of the company and cannot bind the company to a contract of insurance. However, an agent is an employee of an insurance company and may bind the company when application for insurance is made. An agent can issue a binder, a temporary insurance policy. The person obtaining a binder is insured until his or her application is accepted or rejected by the insurance company. Copyright © Houghton Mifflin Company. All rights reserved.

The Insurance Policy (continued) Insurable interest: generally, to insure property, the person purchasing the insurance must be in a position to lose financially if the property is lost or destroyed. To insure someone’s life, you must either stand to lose financially if the person insured dies or stand to lose in a very personal way, such as the loss of a parent. If there is no insurable interest, the policy is void. Without an insurable interest an insurance policy is just gambling. Copyright © Houghton Mifflin Company. All rights reserved.

The Insurance Policy (continued) Insurance policies are very specific about what is covered and any exceptions. An exception is a risk not covered and is called an exclusion. For example, an insurance company might exclude coverage if you play a particularly hazardous sport such as ice hockey. Copyright © Houghton Mifflin Company. All rights reserved.

The Insurance Policy (continued) Amount of coverage Valued coverage means the insurance company will pay original cost of the property less depreciation. Open coverage: (also called replacement cost coverage), means the insurance company will pay the cost of repairing or replacing the damaged item up to the face amount of the policy. Replacement cost coverage is more expensive than valued coverage. Copyright © Houghton Mifflin Company. All rights reserved.

The Insurance Policy (continued) Deductible clause: a clause that helps reduce premium cost by making the insured pay a portion of the cost of a loss. The deductible is usually offered in amounts of $250, $500, and $1000. The policy will spell out the specific steps the insured must take to file a claim. Usually, the claim must be filed within a reasonable time after the loss. The insured must usually provide proof of the claim. If the property is stolen, the police must be notified. The insurance company will often investigate to ensure the claim is valid and should be paid. Copyright © Houghton Mifflin Company. All rights reserved.

The Insurance Policy (continued) When a claim is filed the person from the insurance company who handles the claim is called the adjuster. The adjuster usually collects all the claim details. When the insurance company pays for loss caused by someone other than the insured the insurance company has the right to recover what it paid out from the person causing the loss. This right is known as subrogation. After a claim is paid, the insured is asked to sign a release before being paid. Copyright © Houghton Mifflin Company. All rights reserved.

Property and Casualty Insurance Property and casualty insurance provides protection for loss or damage to real or personal property. Most policies will provide protection against damage from: Fire Theft Windstorm Water Almost any risk can be insured against. Risks not covered would include military invasion. Copyright © Houghton Mifflin Company. All rights reserved.

Property and Casualty Insurance (continued) Fire insurance protects against loss caused by fire or lightning. The damage must be caused by a hostile fire. Hostile fire is accidental and uncontrollable. The damage must be as a result of the fire (or proximately caused by the fire). Every state has adopted a similar fire policy known as the standard fire insurance policy. Most policies add extended coverage for protection from windstorm, hail, aircraft, riot, vehicles, explosions, and smoke. Copyright © Houghton Mifflin Company. All rights reserved.

Property and Casualty Insurance (continued) Burglary or theft insurance covers loss of property stolen from a residence or business It also covers property placed in a bank or warehouse for safekeeping. Personal liability insurance protects against loss from claims made by people injured by actions of the insured. Example: malpractice insurance Copyright © Houghton Mifflin Company. All rights reserved.

Property and Casualty Insurance (continued) Marine insurance protects against loss to ships, cargo, crew, and passengers. All-risk insurance (also called a floater policy) insures people against all losses except those specifically excluded Multiperil insurance The most common type is the homeowners policy, which combines fire and liability insurance into one policy and covers: Loss of a house Loss of personal property Injuries to guests Copyright © Houghton Mifflin Company. All rights reserved.

Standard Clauses in Policies Coverage: a statement of what risks will be and will not be covered Removal of property: coverage is for property in a specific place. If the property has been moved to another location, coverage can be lost. Vacancy: insurance for a home is often provided on the basis that the property is occupied because property will be safer when occupied. Copyright © Houghton Mifflin Company. All rights reserved.

Standard Clauses in Policies (continued) Pro-rata liability: no matter how many different insurers have written policies for the same property, the insured may collect the full value of the damages only one time. Multiple insurers will share proportionately in the loss paid to the insured. Increase in risk: insurance policies cover specifically-named risks. If the insured does something to change or increase the risks to the insurance company, the policy protection may be lost. Copyright © Houghton Mifflin Company. All rights reserved.

Standard Clauses in Policies (continued) Coinsurance: requires that the insured carry a specific minimum amount of insurance. This is usually stated as a percentage of the current property value. If the insured carries the required amount of insurance, insurer will pay the loss up to the face value of the policy. If the insured does not carry the required amount of insurance, the insurance company will pay only a portion of the loss. Copyright © Houghton Mifflin Company. All rights reserved.

Cancellation and Termination Most property and casualty policies expire at the end of their terms. Most policies can be cancelled by the insured or the insurer at any time. Each party must notify the other of cancellation. If the insured cancels, cancellation is effective when the insurance company receives notice. If the insurer cancels, it must notify the insured that coverage will terminate in a certain number of days. Copyright © Houghton Mifflin Company. All rights reserved.

Automobile Insurance Financial responsibility for accidents is required by all states. The reason is to ensure that the owner of a vehicle involved in an accident will be able to pay for damages and injury. States require that drivers have proof of that insurance at all times. Some states require the proof of insurance to register the vehicle. Copyright © Houghton Mifflin Company. All rights reserved.

Types of Automobile Insurance Coverage Financial responsibility laws are usually satisfied by insurance that meets minimum bodily injury and property damage liability coverage. Bodily injury liability insurance: protects the insured against claims for injuries or the death of a person in the insured’s car, a pedestrian, or an occupant of another car It protects not only the insured but also the insured’s family and anyone else who has permission to drive the insured’s car. The insurance company is liable for claims and expenses only up to the face value of the policy. Copyright © Houghton Mifflin Company. All rights reserved.

Types of Automobile Insurance Coverage (continued) Property damage liability insurance: protects the insured whose car damages the property of others. It also protects members of the insured’s family and anyone who drives the car with the insured’s permission. Medical payments insurance: pays the medical expenses, up to the policy limits, for injuries suffered by anyone in the insured’s car when an accident occurs. It also protects the insured or members of the insured’s family who are injured while riding in someone else’s car. Copyright © Houghton Mifflin Company. All rights reserved.

Types of Automobile Insurance Coverage (continued) Uninsured motorist insurance: pays for injuries caused by an uninsured or hit-and-run driver. It does not cover property damage. It protects the insured and members of his or her family who are injured while in another person’s car or while walking. The insurance company pays up to the amount of coverage required by a state’s financial responsibility laws. Copyright © Houghton Mifflin Company. All rights reserved.

Types of Automobile Insurance Coverage (continued) Collision insurance: The insurance covers damage to the insured’s car when it collides with another car or object. The insurance company pays no matter who is at fault. The insured can collect from his or her insurance company immediately; he or she need not wait for the other party’s insurance company to pay a claim. Collision insurance often has a deductible clause. Usually, the insurance will pay a claim over the deductible amount. (Deductibles are often in amounts of $250, $500, or $1,000.) The insured can only collect for the actual damages to the car Copyright © Houghton Mifflin Company. All rights reserved.

Types of Automobile Insurance Coverage (continued) Comprehensive insurance covers damages due to: Theft Vandalism Falling objects Fire Flood Windstorm Earthquake Riot Breakage of windows Copyright © Houghton Mifflin Company. All rights reserved.

Who Is Covered by Automobile Insurance Automobile insurance protects the owner of an automobile. It also protects another person operating the car with the owner’s permission. Guest laws: A guest is a passenger who rides free of charge. Guest laws relieve drivers of private vehicles of all liability to guests for injuries from an accident unless gross negligence is proven. In states without guest laws, the driver may be liable for the guests’ injuries if the driver was negligent. Copyright © Houghton Mifflin Company. All rights reserved.

No-Fault Insurance No-fault insurance is guided by the principle that an injured person should be compensated fully and quickly regardless of who is at fault. Basic elements of no-fault insurance: If an accident occurs, the injured person collects from his or her own insurance company for medical expenses and loss of income, regardless of fault. Except in a few states, property damage is not covered. The right to sue other parties to the accident is limited to death or serious or permanent injury. Copyright © Houghton Mifflin Company. All rights reserved.

How Premiums Are Determined Auto insurance premiums are based on the risks involved. Risk varies according to a number of factors: Age of the driver Gender of the driver Type of car Whether driver is married or single Copyright © Houghton Mifflin Company. All rights reserved.

Cancellation of Automobile Insurance Reasons for cancellation of automobile insurance: Fraudulent statements in the insurance application Failure to pay the premium Suspension or revocation of the driver’s license Revocation of the automobile registration At the end of the policy term: The insured may change the company that provides his or her policy The insurance company has the right not to renew the policy. The company must notify the insured that it does not plan to renew the policy. Copyright © Houghton Mifflin Company. All rights reserved.

What to Do If You Are Involved In an Accident At the accident scene: Stop and help anyone injured. Call the police and ambulance. Give first aid if capable of doing so. Trade information with the other driver: Names Addresses Phone numbers License and registration numbers Insurance information Copyright © Houghton Mifflin Company. All rights reserved.

What to Do If You Are Involved In an Accident (continued) Other things you should do after exchanging information: Note the time, place, weather, and road conditions. Write down your recollection of the accident. Draw a diagram of the scene. Get names and addresses of witnesses. Copyright © Houghton Mifflin Company. All rights reserved.

What to Do If You Are Involved In an Accident (continued) After the accident: Report the accident to your insurance company as soon as possible after the accident. Report the accident to the state motor vehicle bureau or other agency charged to receive accident reports. If the damage is substantial and looks like it will exceed your insurance coverage, you should consult an attorney. Copyright © Houghton Mifflin Company. All rights reserved.