1. 8 Home and Automobile Insurance
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
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2. Objective 1 Identify Types of Risks and Risk Management Methods and Develop a Risk Management Plan
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
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3. Most Common Types of Risk
Personal Risks
Loss of income or life
Caused by illness, disability, 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
Pure Risk = Insurable
Accidental, unintentional
Nature and financial loss of the risk can be predicted
Speculative Risk = Uninsurable
Chance of loss or gain
Starting a small business, gambling, or investing
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4. 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
8-4

5. 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
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
8-5

6. Property and Liability Insurance
Potential property losses
Home, automobiles, furniture, clothing, personal belongings
Risk #1: Physical damage caused by perils (e.g., fire)
Risk #2: Loss or damage caused by criminal behavior
Liability = legal responsibility for the financial cost of another person’s losses or injury (if you are held legally liable)
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
8-6

7. Homeowner’s Insurance Coverage
Objective 2 Assess the Insurance Coverage and Policy Types Available to Homeowners and Renters
Homeowner’s Insurance Coverage
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 20-30% of property value
May be limited to 6-9 months
8-7

8. 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
Covers injuries to others on property (e.g., fall on ice)
Specialized Coverage
Earthquake endorsement
Flood coverage
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9. Homeowner’s Insurance Coverages
Medical Payments Coverage
Coverage for minor injuries caused by you, your family members, or pets, occurring on your property or away from home
Personal Liability Coverage
Umbrella policy - also called a personal catastrophe policy
Supplements basic personal liability coverage
$1,000,000 or more in coverage
Endorsements and Floaters
Endorsements add coverage
Personal property floater
Covers specific items of high value
Jewelry, furs, art collections
8-9

10. Renter’s Insurance Broad Form Comprehensive Form
Covers personal property loss or damage specified in the policy
Comprehensive Form
Protects property against all perils not excluded
Renter’s insurance is relatively inexpensive
Replacement value coverage more costly
Covers property only in your home
Usually includes liability coverage
Many renters do not have insurance
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11. Home Insurance Policy Forms
Basic Form (HO-1)
Protects against perils such as fire, lightning, windstorms, hail, smoke, theft, vandalism and riots (specific named perils)
Broad Form (HO-2)
Wider coverage including falling objects and damage from ice, snow or sleet (more specific named perils)
Special Form (HO-3)
Basic + Broad form + all other risks unless specifically excluded (commonly earthquake, flood, nuclear accidents, business usage)
Tenant’s Form (HO-4)
Covers personal property against listed risks
Comprehensive Form (HO-5)
Expands HO-3 coverage to replacement cost; increasingly rare!
Condominium Owner (HO-6)
Covers personal property and building additions
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12. Objective 3 Analyze the Factors that Influence the Amount of Coverage and Cost of Home Insurance
Determine amount of coverage needed:
Replacement value of home ?
Value of home’s contents ?
Protection for specific items ? (Jewelry, furs, art)
Liability coverage ?
Consider “loss frequency” (likely # of times for loss) and “loss severity” (potential magnitude of a loss)
Principle of Indemnity- insurance will pay no more than actual financial losses suffered
Policy Limits- specify the maximum dollar amounts that will be paid under a policy
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13. Policy Provisions Look for a policy with full coverage (100% value)
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
10-20% > actual cash value coverage
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14. Factors That Affect Home Insurance Costs
Location of Home (e.g., rural vs. urban)
Type of Structure (e.g., brick vs. wood)
Coverage Amount and Policy type
Home Insurance Discounts
Alarm system
Smoke detectors
If you insure car with the same company
Company Differences
Compare costs and coverages
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15. Objective 4 Identify the Important Types of 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
45 states have compulsory automobile liability insurance laws
NJ has very low liability limits:15/ 30/5
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16. 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 (2+ people)
$50,000 maximum paid for property damage
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17. Motor Vehicle Bodily Injury Coverage
Medical Payments 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
Uninsured Motorist’s Protection
Protection against the risk of getting into an accident 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
8-17

18. 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, telephone poles, 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  
8-18

19. 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 
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20. 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
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21. No-Fault Insurance
Each driver collects from his or her own insurance company for medical expenses, lost wages, and related injury costs
30 states have some variation of the system
Intended to provide fast, smooth method of paying for damages without determining fault
Variations among states; designed to reduce cost and time to settle cases
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22. Automobile Insurance Costs
Objective 5 Evaluate Factors that Affect the Cost of Automobile Insurance
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
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23. 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, driving habits
Assigned risk pool for those unable to obtain insurance
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
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24. Wrap Up
Chapter Quiz
Concept Check 8-1- Four Methods of Avoiding Risk with Examples
Concept Check 8-2- Complete the Statements
Concept Check 8-3- True of False?
Concept Check 8-4- True or False?