Home and Motor Vehicle Home and Motor Vehicle InsuranceInsurance

Chapter 13Chapter 13

Insurance and Risk Insurance and Risk ManagementManagement

Section 13.1Section 13.1

What is Insurance?What is Insurance? Protection against possible Protection against possible

financial lossfinancial loss An insurance company agrees An insurance company agrees

to pay for losses that may to pay for losses that may happen to someone it insureshappen to someone it insures

A person must join a risk-sharing A person must join a risk-sharing group by purchasing a contract group by purchasing a contract and becomes a policyholderand becomes a policyholder

Policyholder must pay a Policyholder must pay a premium or feepremium or fee

Important Insurance TermsImportant Insurance Terms

Risk – Chance of loss or injuryRisk – Chance of loss or injury Peril – Anything that may cause a lossPeril – Anything that may cause a loss Hazard – Anything that increases the Hazard – Anything that increases the

likelihood of loss through peril for instance likelihood of loss through peril for instance defective wiringdefective wiring

Negligence – Failure to take ordinary or Negligence – Failure to take ordinary or reasonable care to prevent accidents for reasonable care to prevent accidents for instance failure to clear ice from a side instance failure to clear ice from a side walkwalk

Types of RisksTypes of Risks

Personal – loss of income due to illness, Personal – loss of income due to illness, disability, old age, or unemploymentdisability, old age, or unemployment

Property – losses to property caused by Property – losses to property caused by perils such as fire or theft, and hazards perils such as fire or theft, and hazards (defective electrical wiring)(defective electrical wiring)

Liability – losses caused by negligence Liability – losses caused by negligence that leads to injury or property damagethat leads to injury or property damage

What is Risk Management?What is Risk Management?

Long range, organized plan for protecting Long range, organized plan for protecting yourselfyourself

Risk management needs will change at Risk management needs will change at various points in your lifevarious points in your life

Risk Management MethodsRisk Management Methods

Risk Avoidance Risk Avoidance Avoid risks, but may have serious trade-offsAvoid risks, but may have serious trade-offs Can avoid traffic accident by not driving, but Can avoid traffic accident by not driving, but

may not be able to get to workmay not be able to get to work

Risk Reduction Risk Reduction Decrease the likelihood of harm or riskDecrease the likelihood of harm or risk Can reduce accident injury by wearing a Can reduce accident injury by wearing a

seatbeltseatbelt

Risk Management MethodsRisk Management Methods

Risk AssumptionRisk Assumption Taking responsibility for negative results of a riskTaking responsibility for negative results of a risk Makes sense to assume risk when the possible loss is Makes sense to assume risk when the possible loss is

small like not fully insuring an old carsmall like not fully insuring an old car Self-insurance is another option; set up a savings Self-insurance is another option; set up a savings

acct. to cover lossacct. to cover loss

Risk ShiftingRisk Shifting Use an insurance companyUse an insurance company May have a deductible, a combination of risk May have a deductible, a combination of risk

assumption and shifting, which is a set amount the assumption and shifting, which is a set amount the policyholder must pay on a losspolicyholder must pay on a loss

Risks and Management OfRisks and Management Of

DisabilityDisability What are the risks?What are the risks?

• Loss of incomeLoss of income• Increased expensesIncreased expenses

What can you do to manage your risks?What can you do to manage your risks?• Save and investSave and invest• Get disability insuranceGet disability insurance

DeathDeath What are the risks?What are the risks?

• Loss of incomeLoss of income• Increased expensesIncreased expenses

What can you do to manage your risks?What can you do to manage your risks?• Life insuranceLife insurance• Estate planningEstate planning

Property LossProperty Loss What are the risks?What are the risks?

• Storm damageStorm damage• Repair or replacementRepair or replacement• TheftTheft

What can you do to manage your risks?What can you do to manage your risks?• Property repair and upkeepProperty repair and upkeep• Motor vehicle insuranceMotor vehicle insurance• Homeowners insuranceHomeowners insurance• Flood or earthquake insuranceFlood or earthquake insurance

LiabilityLiability What are the risks?What are the risks?

• Claims and settlement costsClaims and settlement costs• Lawsuits and legal expensesLawsuits and legal expenses• Loss of personal assets and incomeLoss of personal assets and income

What can you do to manage your risks?What can you do to manage your risks?• Maintain propertyMaintain property• Homeowners insuranceHomeowners insurance• Auto insuranceAuto insurance

Planning an Insurance ProgramPlanning an Insurance Program

Step 1 – Set insurance goalsStep 1 – Set insurance goals Minimize personal, property, and Minimize personal, property, and

liability risksliability risks Factors to consider: income, age, Factors to consider: income, age,

family size, lifestyle, experience, and family size, lifestyle, experience, and responsibilitiesresponsibilities

Goals to achieveGoals to achieve• Reduce loss of income caused by Reduce loss of income caused by

premature death, illness, or premature death, illness, or unemploymentunemployment

• Reduce loss of property caused by Reduce loss of property caused by fire, theft, or hazardsfire, theft, or hazards

• Reduce possible loss of income, Reduce possible loss of income, savings, and property caused by savings, and property caused by personal negligencepersonal negligence

Planning an Insurance ProgramPlanning an Insurance Program

Step 2 – Develop a planStep 2 – Develop a plan What do they need to insure?What do they need to insure? For how much should they insure it?For how much should they insure it? What kind of insurance should they buy?What kind of insurance should they buy? Which insurance company should they Which insurance company should they

choose?choose?

Planning an Insurance ProgramPlanning an Insurance Program

Step 3 – Put your plan into actionStep 3 – Put your plan into action Must be flexible enough to allow plan to Must be flexible enough to allow plan to

respond to changing life situationsrespond to changing life situations

Step 4 – Review your resultsStep 4 – Review your results Should review every two to three Should review every two to three

years or when family circumstances years or when family circumstances

changechange

Property and Liability InsuranceProperty and Liability Insurance

Natural disasters as well as injuries and Natural disasters as well as injuries and property damage cost billions of dollars a property damage cost billions of dollars a yearyear

Two types of risk related to home and carTwo types of risk related to home and car 1) Risk of damage to or loss of property1) Risk of damage to or loss of property 2) Risk of responsibility for injuries to other 2) Risk of responsibility for injuries to other

people or damage to their propertypeople or damage to their property

Property and Liability InsuranceProperty and Liability Insurance

Property Damage or LossProperty Damage or Loss Two basic types of risks for property ownersTwo basic types of risks for property owners

• Physical damage such as wind, fire, floodingPhysical damage such as wind, fire, flooding• Loss or damage caused by criminal behavior such as Loss or damage caused by criminal behavior such as

robbery, burglary, vandalism, and arsonrobbery, burglary, vandalism, and arson

LiabilityLiability Legal responsibility for the financial cost of another Legal responsibility for the financial cost of another

person’s losses or injuries, even is it is not your faultperson’s losses or injuries, even is it is not your fault Usually found responsible because of negligence on Usually found responsible because of negligence on

your part helped cause the mishapyour part helped cause the mishap

Home and Home and Property InsuranceProperty Insurance

Section 13.2Section 13.2

Homeowners Insurance CoverageHomeowners Insurance Coverage

Coverage that provides Coverage that provides personal property personal property protection and injuries to protection and injuries to others at your residence others at your residence Home, building, other Home, building, other

structuresstructures Additional living expensesAdditional living expenses Personal propertyPersonal property Personal liability and related Personal liability and related

coveragescoverages Specialized coveragesSpecialized coverages

Buildings and Other StructuresBuildings and Other Structures

Home itselfHome itself Garage, tool shed Garage, tool shed LandscapingLandscaping

Additional Living ExpensesAdditional Living Expenses

Pays for you to stay somewhere else while Pays for you to stay somewhere else while home is being rebuilt or repairedhome is being rebuilt or repaired

May limit coverage to 10 to 20% of home’s May limit coverage to 10 to 20% of home’s total coveragetotal coverage

May limit to payment period to 6 to 9 May limit to payment period to 6 to 9 monthsmonths

Personal PropertyPersonal Property

Household itemsHousehold items Usually 55%, 70%, or Usually 55%, 70%, or

75% of value of house75% of value of house Limits on theft ($1000 on Limits on theft ($1000 on

jewelry)jewelry) Covers items you take Covers items you take

on vacation or use at on vacation or use at schoolschool

Extends to property that Extends to property that you rentyou rent

Household InventoriesHousehold Inventories

Documentation of personal Documentation of personal belongings with purchase dates belongings with purchase dates and cost informationand cost information

Should keep receipts, serial Should keep receipts, serial numbers, brand names, proof of numbers, brand names, proof of valuevalue

Video of home including closets Video of home including closets and storage areasand storage areas

Photographs with dates and values Photographs with dates and values on backon back

Keep in fireproof box or safety Keep in fireproof box or safety deposit box and update regularlydeposit box and update regularly

Personal Property FloatersPersonal Property Floaters

Extra coverage for valuable itemsExtra coverage for valuable items ComputersComputers Musical instrumentsMusical instruments Expensive artExpensive art Stamp collectionsStamp collections

Personal Liability and Personal Liability and Related CoveragesRelated Coverages

Amounts of coveragesAmounts of coverages Most policies cover liability up to $100,000Most policies cover liability up to $100,000 Supplement with an umbrella policy to add protection Supplement with an umbrella policy to add protection

for all kinds of personal injury claims – if someone for all kinds of personal injury claims – if someone sues you for slander (writing or saying something sues you for slander (writing or saying something untrue)untrue)

More expensive policies are available for the wealthyMore expensive policies are available for the wealthy Medical payments coverage pays cost of minor Medical payments coverage pays cost of minor

accidental injuries to visitors on your propertyaccidental injuries to visitors on your property Supplemental coverage could cover damage Supplemental coverage could cover damage

you do to other people’s propertyyou do to other people’s property

Medical Payments CoverageMedical Payments Coverage

Pays cost of accidental injuries to others Pays cost of accidental injuries to others on your propertyon your property

Covers for injuries caused by you, family, Covers for injuries caused by you, family, or petsor pets

Does not cover injury to you or your familyDoes not cover injury to you or your family

Specialized CoveragesSpecialized Coverages

Homeowners coverage does not cover Homeowners coverage does not cover everythingeverything

For areas that have frequent floods or For areas that have frequent floods or earthquakes you need to purchase special earthquakes you need to purchase special insuranceinsurance

Attractive NuisancesAttractive Nuisances Something on your property both inviting Something on your property both inviting

and dangerous means a legal responsibility and dangerous means a legal responsibility to try to prevent injuries to children who may to try to prevent injuries to children who may wander onto the property. Rule based on:wander onto the property. Rule based on: Children are not fully expected to fully realize Children are not fully expected to fully realize

the dangers they may encounterthe dangers they may encounter A property owner who should realize that A property owner who should realize that

children are likely to come onto the property has children are likely to come onto the property has a heightened responsibility to prevent harma heightened responsibility to prevent harm

An owner who fails to take responsible An owner who fails to take responsible precautions to prevent injury is usually liable for precautions to prevent injury is usually liable for a child’s injuriesa child’s injuries

What is an Attractive NuisanceWhat is an Attractive Nuisance Unenclosed swimming pool, goldfish pool, idling Unenclosed swimming pool, goldfish pool, idling

lawnmower, paint sprayer, table saw, lawnmower, paint sprayer, table saw, construction sites, and equipmentconstruction sites, and equipment

Most natural conditions are not considered Most natural conditions are not considered attractive nuisances attractive nuisances

To be liable for injury, an owner must create or To be liable for injury, an owner must create or maintain the harmful objectmaintain the harmful object

Attractive nuisance doctrine arises when the Attractive nuisance doctrine arises when the child doesn’t realize the extent of the danger child doesn’t realize the extent of the danger

Who is ProtectedWho is Protected

Example 1 – 12 year old child climbed onto Example 1 – 12 year old child climbed onto the roof of building and fell 3 stories to the the roof of building and fell 3 stories to the ground.ground.

Owner was liable because Owner was liable because 1. Children were known to play in area1. Children were known to play in area 2. Roof had an area that was sloped and 2. Roof had an area that was sloped and

slippery – something a child might not noticeslippery – something a child might not notice 3. Owner could’ve locked door to the rook3. Owner could’ve locked door to the rook

Who is ProtectedWho is Protected Example 2 – A 10 year old fell 3 stories Example 2 – A 10 year old fell 3 stories

from a roof after climbing up and playing from a roof after climbing up and playing on it. on it.

Owner was not liable becauseOwner was not liable because 1. This owner had no reason to know that 1. This owner had no reason to know that

children would play on the roofchildren would play on the roof 2. No hidden danger on the roof itself 2. No hidden danger on the roof itself

caused the allcaused the all

Who Is ProtectedWho Is Protected Example 3: During construction of a house, a Example 3: During construction of a house, a

contractor left sheetrock propped against a wall contractor left sheetrock propped against a wall and unattended. An 11 year old girl investigating and unattended. An 11 year old girl investigating the building site was injured when the sheetrock the building site was injured when the sheetrock tumbled down on her. tumbled down on her.

Owner was liable because:Owner was liable because: 1. Children were likely to come onto the building site1. Children were likely to come onto the building site 2. The sheetrock was left unattended for days2. The sheetrock was left unattended for days 3. It could have easily been stacked in a safer manner3. It could have easily been stacked in a safer manner

Typical Local LawsTypical Local Laws Pools – fences and locksPools – fences and locks Discard Refrigerators – removal of doorsDiscard Refrigerators – removal of doors Fences – barbed wire below a certain heightFences – barbed wire below a certain height Old Cars and Other Junk – must be fenced Old Cars and Other Junk – must be fenced

inin Chemicals – discard of pesticides, paints, Chemicals – discard of pesticides, paints,

etc.etc. Dangerous DogsDangerous Dogs

What Isn’t CoveredWhat Isn’t Covered

Jewelry, furs, boats, electronicsJewelry, furs, boats, electronics Animals and fishAnimals and fish Motorized vehicles not licensed for road use, Motorized vehicles not licensed for road use,

except those used for home maintenanceexcept those used for home maintenance Sound devices in motor vehiclesSound devices in motor vehicles Aircraft partsAircraft parts Property belonging to tenantsProperty belonging to tenants Property in rentalsProperty in rentals Business propertyBusiness property

Other CoveragesOther Coverages

Credit card fraud, check forgery, Credit card fraud, check forgery, counterfeit moneycounterfeit money

Removal of damaged propertyRemoval of damaged property Emergency removal of property to protect Emergency removal of property to protect

it from damageit from damage Temporary repairs after a loss to prevents Temporary repairs after a loss to prevents

further damagefurther damage Fire department user feesFire department user fees

How much coverage do you need?How much coverage do you need? 80% to full coverage for homes80% to full coverage for homes Must have coverage if borrowing money from Must have coverage if borrowing money from

bankbank Coverage for personal belongings is usually 55 Coverage for personal belongings is usually 55

to 75% of insurance you have on your hometo 75% of insurance you have on your home Claim settlementsClaim settlements

Actual cash value – receive replacement cost minus Actual cash value – receive replacement cost minus depreciationdepreciation

Replacement value – receive full cost of repairing or Replacement value – receive full cost of repairing or replacing itemreplacing item

Home Insurance Cost FactorsHome Insurance Cost Factors

Location – water supply, fire hydrant, Location – water supply, fire hydrant, crime, weathercrime, weather

Type of Structure – wood, brickType of Structure – wood, brick Price, Coverage Amount, Policy Type – Price, Coverage Amount, Policy Type –

higher deductible means lower premiumshigher deductible means lower premiums Home Insurance Discounts – smoke Home Insurance Discounts – smoke

detectors, fire extinguisher, dead boltsdetectors, fire extinguisher, dead bolts Company Differences – compare Company Differences – compare

companiescompanies

LocationLocation

Those close to water supply or hydrant get Those close to water supply or hydrant get discountdiscount

Those near high crime, severe weather Those near high crime, severe weather pay morepay more

Lower DeductiblesLower Deductibles

Decreases cost because insurance Decreases cost because insurance company pays less out because you are company pays less out because you are assuming more financial reasonabilityassuming more financial reasonability

DiscountsDiscounts

Smoke detectorsSmoke detectors Fire extinguisherFire extinguisher DeadboltsDeadbolts Alarm systemAlarm system

Selecting Insurance CompaniesSelecting Insurance Companies

Consider prices, but also service and Consider prices, but also service and coveragecoverage

Not all settle claims in the same wayNot all settle claims in the same way

Motor VehicleMotor VehicleInsuranceInsurance

Section 13.3Section 13.3

Motor Vehicle InsuranceMotor Vehicle Insurance

In 2003, 45 states required people to carry In 2003, 45 states required people to carry motor vehicle insurancemotor vehicle insurance

When injuries and property damage occur, When injuries and property damage occur, drivers are required to report itdrivers are required to report it

Two categories: Two categories: Protection for bodily injuryProtection for bodily injury Protection for property damageProtection for property damage

Motor Vehicle InsuranceMotor Vehicle InsuranceBodily Injury

Coverage

Bodily Injury Liability

Medical PaymentsCoverage

UninsuredMotorist’sProtection

PropertyDamage

Coverages

PropertyDamageLiability

CollisionComprehensive

Physical Damage

Bodily Injury LiabilityBodily Injury Liability

Covers injuries caused by an accident you Covers injuries caused by an accident you causedcaused

Covers pedestrians, people in your and Covers pedestrians, people in your and other vehiclesother vehicles

Expressed in three numbers 100/300/50Expressed in three numbers 100/300/50 $100,000 maximum amnt. paid to one person$100,000 maximum amnt. paid to one person $300,000 maximum amnt. paid to all people$300,000 maximum amnt. paid to all people $50,000 maximum amnt. for damage to $50,000 maximum amnt. for damage to

propertyproperty

Medical Payments CoverageMedical Payments Coverage

Covers you and those in your vehicleCovers you and those in your vehicle Covers you and your family members Covers you and your family members

riding in another person’s vehicleriding in another person’s vehicle Covers if you or other passenger if your Covers if you or other passenger if your

car is hit by another carcar is hit by another car

Uninsured Motorist’s ProtectionUninsured Motorist’s Protection

Covers injury to you and family when you Covers injury to you and family when you are in an accident with someone without are in an accident with someone without insurance or in a hit-and-run accidentinsurance or in a hit-and-run accident

Does not cover damage to vehicle itselfDoes not cover damage to vehicle itself

Motor Vehicle InsuranceMotor Vehicle InsuranceBodily Injury

Coverage

Bodily Injury Liability

Medical PaymentsCoverage

UninsuredMotorist’sProtection

PropertyDamage

Coverages

PropertyDamageLiability

CollisionComprehensive

Physical Damage

Property Damage LiabilityProperty Damage Liability

Covers when you damage others propertyCovers when you damage others property Covers when you drive another vehicle Covers when you drive another vehicle

with permissionwith permission Covers buildings, equipment, signs, and Covers buildings, equipment, signs, and

polespoles

CollisionCollision

Covers damage to your carCovers damage to your car Doesn’t matter who is at faultDoesn’t matter who is at fault Amount limited to current value of your carAmount limited to current value of your car

Comprehensive Physical DamageComprehensive Physical Damage

Protects against non-accidentsProtects against non-accidents Fire, theft, falling objects, vandalism, hail, Fire, theft, falling objects, vandalism, hail,

floods, tornados, earthquakes, and floods, tornados, earthquakes, and avalanchesavalanches

No-Fault InsuranceNo-Fault Insurance

Cuts time and cost of court settlementsCuts time and cost of court settlements Your insurance company will cover you no Your insurance company will cover you no

matter who is at faultmatter who is at fault

Other Possible CoveragesOther Possible Coverages

Rental feesRental fees Wage-lossesWage-losses Emergency road serviceEmergency road service

Motor Vehicle Insurance CostsMotor Vehicle Insurance Costs Average household pays more than $1000 Average household pays more than $1000

per yearper year

Motor Vehicle Insurance Motor Vehicle Insurance Premium FactorsPremium Factors

Vehicle TypeVehicle Type Expensive cars cost moreExpensive cars cost more Frequently stolen cars cost moreFrequently stolen cars cost more

Rating TerritoryRating Territory Based on where you liveBased on where you live Rural areas less than cityRural areas less than city

Driver ClassificationDriver Classification Age, sex, marital status, driving record, driving habits, Age, sex, marital status, driving record, driving habits,

number of claims, number of claims, Assigned risk pool – people who cannot get insured Assigned risk pool – people who cannot get insured

are assigned to different companiesare assigned to different companies

Reducing Vehicle Insurance Reducing Vehicle Insurance PremiumsPremiums

Comparing CompaniesComparing Companies Premium DiscountsPremium Discounts

Drivers education programsDrivers education programs Good gradesGood grades Security devicesSecurity devices Multi-car policyMulti-car policy Increased deductiblesIncreased deductibles

Personal Personal EventsEvents

Financial ImpactFinancial Impact Strategies for Reducing Strategies for Reducing Financial ImpactFinancial Impact

DisabilityDisability Loss of incomeLoss of incomeIncreased expensesIncreased expenses

Savings and investmentsSavings and investmentsDisability insuranceDisability insurance

DeathDeath Loss of incomeLoss of income Life insuranceLife insuranceEstate planningEstate planning

Property Property LossLoss

Catastrophic storm Catastrophic storm damagedamageRepair or replacementRepair or replacementCost of theftCost of theft

Property repair and upkeepProperty repair and upkeepMotor vehicle insuranceMotor vehicle insuranceHomeowners insuranceHomeowners insuranceFlood or earthquake Flood or earthquake insuranceinsurance

LiabilityLiability Claims and settlement Claims and settlement costscostsLawsuits and legal Lawsuits and legal expensesexpensesLoss of personal assets Loss of personal assets and incomeand income

Maintaining propertyMaintaining propertyHomeowners insuranceHomeowners insuranceAuto insuranceAuto insurance

Renters InsuranceRenters Insurance

Covers your personal items lost or Covers your personal items lost or damaged in the house or apt.damaged in the house or apt.

If loss or damage is caused by owner, If loss or damage is caused by owner, then the owner’s insurance coversthen the owner’s insurance covers

Special CoveragesSpecial Coverages

Flood or earthquake areas must buy Flood or earthquake areas must buy special coveragespecial coverage

Items Not Covered by Homeowners Items Not Covered by Homeowners InsuranceInsurance

Expensive jewelry, furs, collectionsExpensive jewelry, furs, collections Animals or fishAnimals or fish Motor vehicles licensed for road useMotor vehicles licensed for road use Items in vehiclesItems in vehicles Aircrafts or partsAircrafts or parts Business propertyBusiness property

How Much Coverage How Much Coverage Do You Need?Do You Need?

Insurance based on what it would cost to rebuild Insurance based on what it would cost to rebuild or repair, not what you paid for itor repair, not what you paid for it

Used to cover 80% of replacement value, now Used to cover 80% of replacement value, now insurance companies recommend full coverageinsurance companies recommend full coverage

Insurance companies use two methods for Insurance companies use two methods for settlements:settlements: Actual cash value – replacement value minus Actual cash value – replacement value minus

depreciation for itemdepreciation for item Replacement value – full value of repairing or Replacement value – full value of repairing or

replacing an itemreplacing an item

Home Insurance Cost FactorsHome Insurance Cost Factors

Location – fire hydrants, water supply, crime, Location – fire hydrants, water supply, crime, regions of severe weatherregions of severe weather

Type of structure – brick vs. wood, older vs. Type of structure – brick vs. wood, older vs. newernewer

Price, coverage, policy – cost of home, coverage Price, coverage, policy – cost of home, coverage you have, deductibleyou have, deductible

Home insurance discounts – smoke detectors, Home insurance discounts – smoke detectors, fire extinguishers, dead-bolts, alarm systemsfire extinguishers, dead-bolts, alarm systems

Company differences – offer different ratesCompany differences – offer different rates