1. Home and Automobile Insurance
Chapter 8
Home and Automobile Insurance
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 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

3. Learning Objective LO8.1 Insurance and Risk Management
Protection against possible financial loss
Provides peace of mind
Insurance company (insurer)
Risk-sharing firm that assumes financial responsibility for losses from an insured risk
Procedure
Purchase a policy known as coverage
Insurance firm assumes a risk for a fee
Insured policyholder pays a periodic premium

4. Types of Risk Risk Peril Hazard Chance of loss or injury
Uncertainty or lack of predictability
Peril
Anything that may cause a loss
Fire, windstorm, robbery, or accidents
Hazard
Anything that increases the likelihood of a loss
For example, driving drunk, defective house wiring

5. 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

6. Types of Risk Pure Risk = Insurable Speculative Risk = Uninsurable
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

7. 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. Risk Avoidance Methods
Taking precautions to avoid risk
Risk reduction
Taking actions to reduce risk
Risk assumption
Insurance company
Risk Shifting
Insurance buyer

9. Risk Avoidance Risk Shifting Risk Reduction Risk Assumption
Don’t stop at a convenience store in a bad part of town after midnight
Risk Shifting
Risk Reduction
Ways to Manage Risk
Buy Insurance
Self Insurance
Wear seatbelts
Install an alarm system
Risk Assumption

10. Planning an Insurance Program
Exhibit 8-2 in the book

11. Planning an Insurance Program
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

12. Planning an Insurance Program
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?
Put your plan into action
Check your results
Insurance needs and goals change

13. Property and Liability Insurance
Recent major losses:
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

14. 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

15. 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

16. 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

17. Household Inventory Contents

18. 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

19. 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

20. Renter’s Insurance Broad form Comprehensive 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 residence
Usually includes liability coverage
Many renters do not have insurance

21. 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)

22. Home Insurance Policy Forms
Tenant’s form (HO-4)
Covers personal property against listed risks
Comprehensive form (HO-5)
Expands HO-3 coverage to replacement cost
Condominium owner (HO-6)
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.

23. 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?

24. 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

25. Factors That Affect Home Insurance Costs
Location of home
Type of structure
Coverage amount and policy type
Home insurance discounts
Alarm system
Smoke detectors
If you insure your car with the same company
Company differences
Compare cost, coverage and service

26. 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

27. Two Major Categories of Automobile Insurance

28. 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 (3+)
$50,000 maximum paid for property damage

29. 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

30. Motor Vehicle Bodily Injury Coverage
Uninsured Motorist’s Protection
Protection against the risk of getting into an accident (not your fault) 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

31. 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.  

32. 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 

33. 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

34. 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

35. Other Coverages Wage loss insurance Emergency road service coverage
Rental reimbursement coverage

36. 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

37. Motor Vehicle Insurance Premium Factors
Vehicle type
Year, make, model, and theft rate
Rating territory
Accident, auto theft, and vandalism rates in the area where you live
Driver classification
Age, sex, marital status, credit history, driving record, and driving habits
Assigned risk pool for those unable to obtain insurance

38. 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

39. 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.

40. 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

41. 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

42. 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

43. Chapter Summary Learning Objective LO8.5
Motor vehicle insurance costs depend on:
Amount of coverage needed
Vehicle type
Rating territory
Driver classification