Personal Finance Garman/Forgue Ninth Edition Chapter 10: Managing Property and Liability Risk PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Apply the risk-management process to address the risks to your property and income. Explain basic insurance terms and the relationship between risk and insurance. Design a homeowner’s or renter’s insurance program to meet your needs. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Design an automobile insurance program to meet your needs. Describe other types of property and liability insurance. Summarize how to make an insurance claim. Copyright ©Houghton Mifflin Company. All rights reserved.

Introduction Property Insurance Liability Insurance Copyright ©Houghton Mifflin Company. All rights reserved.

Risk and Risk Management What is the nature of risk? Speculative risk Pure risk Copyright ©Houghton Mifflin Company. All rights reserved.

The Risk-Management Process Step 1: Identify sources of risk. Peril: Event that can cause a financial loss Step 2: Estimate risk and potential losses. Loss frequency Loss severity Copyright ©Houghton Mifflin Company. All rights reserved.

The Risk-Management Process Step 3: Choose how to handle risk. Risk Avoidance Risk Retention Loss Control Risk Transfer Risk Reduction Copyright ©Houghton Mifflin Company. All rights reserved.

The Risk-Management Process Step 4: Implement the risk-management program. Large-Loss Principle: Insure the losses that you cannot afford, pay the small losses out of your own pocket. Step 5: Evaluate and adjust the program. Copyright ©Houghton Mifflin Company. All rights reserved.

Understanding How Insurance Works Premium Insurance Policy Copyright ©Houghton Mifflin Company. All rights reserved.

Understanding How Insurance Works Hazards make losses more likely to occur. Hazard: Any condition that increases the probability that a peril will occur. Only certain losses are insurable. Fortuitous losses Financial loss Copyright ©Houghton Mifflin Company. All rights reserved.

Understanding How Insurance Works The Principle of Indemnity Limits Principle of indemnity Policy limits Factors that reduce the cost of insurance: Deductibles Coinsurance Copyright ©Houghton Mifflin Company. All rights reserved.

Understanding How Insurance Works The essence of insurance Law of large numbers Who sells insurance? Insurance agent Independent insurance agents Copyright ©Houghton Mifflin Company. All rights reserved.

Homeowner’s Insurance Coverages Property insurance Named-perils policies All-risk (open-perils) policies Copyright ©Houghton Mifflin Company. All rights reserved.

Homeowner’s Insurance Liability insurance Homeowner’s general liability protection Homeowner’s no-fault medical payments protection Homeowner’s no-fault property damage protection Copyright ©Houghton Mifflin Company. All rights reserved.

Types of Homeowner’s Insurance Policies Basic Form (HO-1) Broad Form (HO-2) Special Form (HO-3) Renter’s Contents Broad Form (HO-4) Condominium Form (HO-6) Older Home Form (HO-8) Copyright ©Houghton Mifflin Company. All rights reserved.

Buying Homeowner’s Insurance How much coverage is needed on your dwelling? Replacement-cost requirement How much coverage is needed on your personal property? Actual cash value (of personal property) Contents replacement-cost protection Copyright ©Houghton Mifflin Company. All rights reserved.

Automobile Insurance – Losses Covered Coverage A: Liability insurance Automobile Bodily Injury Liability Automobile Property Damage Liability Family Auto Policy (FAP) Personal Auto Policies (PAP) Copyright ©Houghton Mifflin Company. All rights reserved.

Automobile Insurance – Losses Covered Coverage B: Medical payments insurance Automobile medical payments insurance Personal Injury Protection (PIP) Subrogation rights Copyright ©Houghton Mifflin Company. All rights reserved.

Automobile Insurance – Losses Covered Coverage C: Uninsured and underinsured motorist insurance Uninsured motorist insurance Underinsured motorist insurance Copyright ©Houghton Mifflin Company. All rights reserved.

Automobile Insurance – Losses Covered Coverage D: Physical damage insurance Collision insurance Comprehensive automobile insurance Copyright ©Houghton Mifflin Company. All rights reserved.

Automobile Insurance – Losses Covered Other protections: Towing coverage Rental reimbursement coverage Copyright ©Houghton Mifflin Company. All rights reserved.

Protection for Other Property and Liability Loss Exposures Comprehensive personal liability insurance Professional liability insurance Professional liability insurance (or malpractice insurance) Umbrella (or excess) liability insurance Floater Policies Copyright ©Houghton Mifflin Company. All rights reserved.

How to Collect on Your Property and Liability Losses Contact your insurance agents. Document your loss. File your claim. Claim adjuster Sign a release. Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps In Managing Property and Liability Risk People slip up in when they do the following: 1. Buy only the legal minimum coverage on the liability insurance on their car. 2. Fail to keep good records that could serve to document insured property losses. 3. Pay high premiums because they select low deductibles on property insurance. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Managing Property and Liability Risk Always insure your home and vehicle. Purchase insurance policies with very high liability limits to protect against the possibility of catastrophic losses. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in managing Property and Liability Risk Verify that your auto insurance policy covers rental car losses so you can wisely ignore sales pressure to purchase such overpriced coverage. Always comparison shop for insurance locally as well as online. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in managing Property and Liability Risk Maintain a verifiable inventory of all your insured property so that you can collect what is coming to you in the event of a loss. Once each year, reassess what types of and how much insurance coverage you need. Copyright ©Houghton Mifflin Company. All rights reserved.