Transcript Home and Auto Insurance

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CHAPTER 8
Property and Motor Vehicle Insurance
Insurance: The Necessary Evil
Insurance and Risk Management
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Insurance is protection against possible
financial loss
An insurance company, or insurer, is a risksharing 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.
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Risk, Peril, and Hazards
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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
Coverage and Type of Risk
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Pure Risk
 Insurable
 Accidental, unintentional
 Nature and financial loss of the risk can be
predicted
 Can be personal, property, or liability risk
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Speculative Risk
 Chance of loss or gain
 Uninsurable
 Such as starting a small business or gambling
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Risk Management
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Risk management is a long range, organized,
planned strategy to protect your assets and family
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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
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All too often, most people are uninsured, underinsured, or they are insured for the wrong things
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Examples of Risks You Face
Disability – most widely neglected risk (disability)
 Illness – (health insurance)
 Death – (life insurance)
 Property loss – (home and auto insurance)
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 Physical damage
 Loss of use
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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)
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Liability and Negligence
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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.
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Planning an Insurance Program
Set your insurance goals and prioritize them
2. Develop a plan to reach your goals
3. Put your plan into action
4. Review your results
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To put your risk management plan to work, ask
yourself…
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What or who should be insured?
For how much?
Yet another example of our
What kind of insurance?
book’s sagacious pearls of
From whom?
financial planning wisdom.
A More Practical Insurance
Planning Program
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Ask yourself, “How much could we lose?”
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For Home or Auto, there is no question as to
whether or not you need insurance
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If the answer is, “Plenty!” 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)
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In fact, it is legally required
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Homeowner’s Insurance Coverages
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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
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Consider an Umbrella Policy
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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
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$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.
How an Umbrella Policy Works
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Personal Liability Example
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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.
Items Covered by Renter’s Insurance
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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
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Home Insurance Policy Forms
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Basic form (HO-1)
Your lender is going to
make you buy the HO-5
 Broad form (HO-2)
Comprehensive Form
 Special form (HO-3)
(HO-6 for condos)
 Tenant’s form (HO-4)
 Comprehensive form (HO-5)
 Condominium form (HO-6)
 Modified coverage form (HO-8)
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.
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How Much Coverage Do You Need?
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Full coverage versus a coinsurance clause
What would it cost to replace your home?
 What is the likely “worst case” loss?
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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!
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The Coinsurance Clause
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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
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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
Factors That Affect
Home Insurance Costs
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Location of residence
 How close is the fire department?
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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
www.consumerreports.org
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Claims history – the number and type of claims
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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
B. $4,000
C. $4,500
D. The insurance company would not pay anything.
A.
The correct answer is (B). You must pay the deductible before the
insurance company will pay anything towards a claim.
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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
B. $7,000
C. $1,000
D. The insurance company would not pay anything.
A.
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.)
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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
B. $1,000
C. $1,500
D. $2,000
A.
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)
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Home Insurance Availability
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For decades, availability was not an issue
 Every homeowner could easily find insurance
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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
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Also, some insurance companies are asking
homeowners to effect expensive repairs before
they will provide insurance
What About Earthquake Insurance?
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All insurance companies that sell homeowner’s
insurance must also offer earthquake coverage
 Minimum 10% Deductible! Even 15% to 25%
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 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
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Much depends on the type of home you own
 Wood frame versus brick; older versus newer
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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
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Automobile Insurance Coverages
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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
Have not changed
since the 1950’s!
 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…
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Motor Vehicle Insurance Coverage
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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.
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Motor Vehicle Insurance Coverage
(continued)
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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.
Motor Vehicle Liability Coverage
100/300/50
$100,000 limit that
will be paid to one
person in an accident
$300,000 limit that
will be paid to all
persons in an accident
bodily injury liability
$50,000 limit for
payment for damage
to property of others
property damage
liability
Handout
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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?
A.
B.
C.
D.
$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.
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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?
A.
B.
C.
D.
$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.
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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?
A.
B.
C.
D.
$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.
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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
B. $40,000
C. $60,000
D. None. The total amount would be covered.
A.
The correct answer is (A). $25,000 is the limit for property
liability.
Okay, ‘fess up!
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How many of you know the limits on your
automobile insurance policy?
A.
B.
C.
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.
How Much Coverage Do You Have?
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If you do know the limits on your
automobile insurance policy, what are
they?
A.
B.
C.
D.
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!
“How Much Coverage Do I Need?”
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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
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Property Damage Liability Coverage
 $50,000-$100,000 is usually suggested for
property damage liability
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We have 250/500/250
 Get the maximum – It’s not much more
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Motor Vehicle Insurance Coverage
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(continued)
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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
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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!
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No-Fault Liability Insurance
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Each driver collects from their own insurance
company
 Medical expenses, lost wages, related injury
costs
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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
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Systems vary from state-to-state
 When you enter a state that has no-fault, your
Calif insurance automatically becomes no-fault
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Collision Coverage
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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
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Comprehensive Physical Damage
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Covers damage to your vehicle that is not
caused by a collision, such as...
 Fire
 Theft
 Vandalism
 Glass breakage
 Hail, sand, or wind storm
Comprehensive is now
also being referred to
as “non-collision” by
some insurance
companies.
 Your car rolls downhill into a tree
 Why isn’t this covered under collision? My insurance
company said it was.
Auto Insurance Premium Factors
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Automobile type
 Year, make and model
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Rating territory
 Accident, theft, and vandalism rates in the area
where you live
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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.
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Legal Discrimination?
Because of the past driving records of young
adults, the insurance companies are justified
in charging the rates they do.
Strongly Agree
B. Agree
C. Disagree
D. Strongly Disagree
A.
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Now How Do You Feel?
What percentage of 16- to 19-year-olds
are expected to have at least one
accident within 3 years?
A. 25%
B. 50%
C. 75%
D. 100%
The correct answer is (D). That is the average. Some have
more than one!
Reducing Automobile Insurance
Premiums
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Find out how much it will cost to insure a car
before you buy it
Compare companies – www.insure.com
 The differences in prices are significant
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Have larger deductibles
Look for discounts
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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
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Your C.L.U.E. Report
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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
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One free each of both reports every year
 https://personalreports.lexisnexis.com/fact_act_claims_bundle/landing.jsp
 Similar to credit reports
 Used by insurance companies to rate your risk
Please no jokes about “getting a clue.”
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Bottom Line on Home & Car Insurance
 Get
Sufficient Coverage
 BOHICA
 Keep your back to the wall when you
deal with the insurance agents