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 – Don’t 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 person’s losses or injuries
Vicarious liability – you are responsible for the actions of another (example: parent/guardian)

7. Liability and 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 book’s 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 homeowner’s insurance
If you own an automobile, you need automobile insurance (at least liability)
In fact, it is legally required

10. Homeowner’s 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 homeowner’s insurance is only $100,000 to $300,000
$1,000,000 or more in liability coverage is typical for umbrella policies
That’s 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 friend’s head (Hey, it happens!)
He now requires 24-hour skilled nursing care
The cost is $85,000 per year in perpetuity and rising
Your homeowner’s 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 Renter’s Insurance
Personal property loss or damage
Personal liability
Additional living expenses
A landlord’s insurance usually won’t cover personal belongings
Only 40% of renters have renter’s insurance

15. Home Insurance Policy Forms
Basic form (HO-1)
Broad form (HO-2)
Special form (HO-3)
Tenant’s 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
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
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 homeowner’s 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 homeowner’s 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 homeowner’s 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 1950’s!

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 person’s missed wages.

26. Motor Vehicle Insurance Coverage
(continued)
Property damage liability covers damage to another person’s 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 neighbor’s 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
bodily injury liability
property damage
liability
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 can’t 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 – It’s 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 doesn’t 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 driver’s 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 isn’t 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 driver’s 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 –
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
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