Chapter 10 Protecting Your Property How Will This Affect Me? The chapter explains the key property insurance concepts of indemnity, subrogation, and co-insurance. It then describes the common sources of property and liability risk exposures and the insurance coverage available to address them. The main characteristics of homeowner’s and auto insurance are covered, as well as how to choose the version of each policy type that’s best for you. Supplemental insurance to protect against floods and earthquakes and personal liability umbrella policies are also described. Especially practical tips can be found in the discussions of how to choose an insurance agent and how to settle property and liability insurance claims. When you finish this chapter, you should understand the best and most cost-effective ways to use insurance to protect your property and associated liability exposures. The chapter has a lot of terminology that the students need to understand. A useful approach would be to select the major terms from the list of terms at the end of this material and create a matching question. Distribute as a quiz at the beginning of the session, but do not take it up. Then go around the room, asking students the definition of each term and what it means. You can then take up the “quiz” at the end of class. If students paid attention, they all should get 100, but you know that will not happen. 10 - 1 Discuss the importance and basic principles of property insurance, including types of exposure, indemnity, and co-insurance. This is terminology. I suggest the above “quiz” approach. 10 - 2 Identify the types of coverage provided by homeowner’s insurance. Exhibit 10.2 covers this material, but you need to explain what the various coverages mean. You need to go over examples of how to compute the amount that the insurance company will pay for the various coverages. Exhibit 10.3 gives an example of calculating replacement cost. There are other examples of computing replacement costs and actual cash value in the chapter. The computations are also covered in the problems at the end of the chapter. 10 - 3 Select the right homeowner’s insurance policy for your needs. Again, a look at Exhibit 10.2 discusses this material. It would be useful to give an example of an actual casualty that you know about, perhaps one that a “friend” suffered [that is, make up one.] 10 - 4 Analyze the coverage in a personal automobile policy (PAP) and choose the most cost-effective policy. Exhibit 10.4 presents a policy that you could discuss in class, explaining the terms and limits under the policy. 10 - 5 Describe other types of property and liability insurance. Briefly highlight the terms in this section. The power points are sufficient for this topic. 10 - 6 Choose a property and liability insurance agent and company, then settle claims. Going through an example of a casualty, the work involved in documenting the property lost, the replacement value of the property, the various insurance company representatives you have to work with, and the impact of having an agent on your side will do wonders for this material. Here is where you can advise the students how to prepare for a potential casualty, that is, to document their assets with pictures, invoices, and detail descriptions all stored in a fireproof locations. An offsite, i.e. local bank safe deposit box, location for documents is best. Financial Facts or Fantasies? These may be used as “teasers” to get the students on the right page with you. Also, they may be used as quizzes [see next page] after you covered the material or as “pre-test questions” to get their attention. • Homeowners insurance provides protection not only on the home itself but also most of its contents. Fact: Homeowners insurance covers the home itself and most of the contents in it, including furniture, stereos and TVs, computers, and clothing. On the other hand, cars, motorcycles, golf carts, and the like usually are not covered under a homeowner’s policy. • If you rent an apartment, you don’t need to worry about property insurance since your furniture and other personal belongings are already covered by the landlord’s insurance policy. Fantasy: If you rent and do not have some sort of insurance coverage on your furniture and other personal property, your possessions are uninsured and could be lost! Your landlord is liable only if you can prove that your loss was due to his or her negligence. • Uninsured motorists coverage is available as part of most automobile insurance policies. Fact: Such insurance is available under standard auto insurance policies and offers protection against uninsured, underinsured, or hit-and-run accidents. • The type of car you drive is a personal matter that has no bearing on how much you will have to pay for automobile insurance. Fantasy: The type of car you drive is one of the major determinants of auto insurance premiums. You can expect to pay a lot more for insurance on a sporty model than on a more “sedate” one. • You must generally obtain an umbrella personal liability policy if you want liability coverage of $1 million or more. Fact: Such policies provide added liability protection for both homeowners and automobile insurance (simultaneously). They are intended primarily for upper-income families, who are often viewed as targets for large liability claims. • Filing a property or liability claim is quick and easy to do. Just call your agent, provide a few basic details, and look for your check in a few days. Fantasy: Filing a property or liability claim is often a detailed and time-consuming process wherein you must prove your loss. The insurance company can offer you an amount less than loss you claim or deny your claim altogether. Financial Facts or Fantasies? These may be used as a quiz or as a pre-test to get the students interested. 1. True False Homeowners insurance provides protection not only on the home itself but also most of its contents. 2. True False If you rent an apartment, you don’t need to worry about property insurance since your furniture and other personal belongings are already covered by the landlord’s insurance policy. 3. True False Uninsured motorists coverage is available as part of most automobile insurance policies. 4. True False The type of car you drive is a personal matter that has no bearing on how much you will have to pay for automobile insurance. 5. True False You must generally obtain an umbrella personal liability policy if you want liability coverage of $1 million or more. 6. True False Filing a property or liability claim is quick and easy to do. Just call your agent, provide a few basic details, and look for your check in a few days. Answers: 1. True 2. False 3. True 4. False 5. True 6. False YOU CAN DO IT NOW The “You Can Do It Now” cases may be assigned to the students as short cases or problems. They will help make the topic more real or relevant to the students. In most cases, it will only take about ten minutes to do, that is, until the student starts looking around at the web site. But they will learn by doing so. YOU CAN DO IT NOW Check Out the Best Homeowners Insurance Companies When you’re considering buying new homeowners insurance, it’s good to know how the various insurance companies are rated. A good Internet site is http://www.consumeraffairs.com/insurance/home.html#buyers-guide, which summarizes industry ratings by A.M. Best, Standard & Poor’s, and J.D. Power & Associates. You can do it now. Evaluate the Best Auto Insurance Companies When you’re considering buying new car insurance, it’s helpful to know which insurance companies are considered the best. A good Internet site is http://www.consumeraffairs.com/insurance/car.html. The site discusses the key elements of auto insurance policies, which include liability, comprehensive coverage, uninsured motorist protection, collusion coverage, and personal injury protection. You can do it now. Financial Impact of Personal Choices Read and think about the choices being made. Do you agree or not? Ask the students to discuss the choices being made. Wade Saves on His Car Insurance Oscar Powell is a frugal and careful financial planner. One of his money-saving decisions is to continue driving his nine year-old car, which is now worth about $7,500. In order to save money on his car insurance, Oscar increased his deductible from $500 to $1,000, which reduced his annual premium by $200. He has just decided that he no longer needs the collision coverage on his policy, which pays for the repair or replacement of his car if damaged. Oscar has consequently decided that he should take the risk that he would have to pay for the repair or replacement of his low-value car rather than to continue taking the certain loss of the higher-priced insurance coverage. This decision will save him several hundred dollars a year. Financial Planning Exercises 1. Co-insurance clauses. Maya Ward had a homeowner’s insurance policy with $175,000 of coverage on the dwelling. Would a 90 percent co-insurance clause be better than an 80 percent clause in such a policy? Give reasons to support your answer. Co-insurance, a provision commonly found in property insurance contracts, requires policyholders to buy insurance in an amount equal to a specified percentage of the replacement value of their property, or else the policyholder is required to pay for a proportional share of the loss. In essence, the co-insurance provision stipulates that if a property isn’t properly covered, the property owner will become the “co-insurer” and bear part of the loss. If the policyholder has the stipulated amount of coverage (usually 80 percent of the value of the property), then the insurance company will reimburse for covered losses, dollar-for-dollar, up to the amount of the policy limits. For Maya, an 80% co-insurance will be better. The higher the co-insurance requirement, the more insurance she must maintain in order to have full coverage up to the policy limit. That also means, the greater the premium. So, from Maya’s view, the lower the co-insurance requirement the better. 2. Evaluating homeowner's policy coverage. Last year, Thea and Rory Brown bought a home with a dwelling replacement value of $350,000 and insured it (via an HO-5 policy) for $310,000. The policy reimburses for actual cash value and has a $500 deductible, standard limits for coverage C items, and no scheduled property. Recently, burglars broke into the house and stole a two-year-old television set with a current replacement value of $600 and an estimated useful life of eight years. They also took jewelry valued at $1,850 and silver flatware valued at $3,000. a. If the Brown’s policy has an 80 percent co-insurance clause, do they have enough insurance? For property with a replacement value of $350,000, an 80% co-insurance requirement means that the Brown family needs to have coverage of at least $280,000. They have $310,000 therefore they have enough insurance at this time. b. Assuming a 50 percent coverage C limit, calculate how much the Browns would receive if they filed a claim for the stolen items. An HO-5 provides comprehensive coverage on the real and personal property. Coverage C refers to personal property and the policy states that the coverage is actual cash value with a $500 deductible. Standard limits provide for 50% of total coverage limit for personal property, which in this case is 50% * $310,000 or $155,000. Remember that homeowner’s policies usually specify limits for certain types of personal property included under the coverage C category. These coverage limits are within the total dollar amount of coverage C and in no way act to increase that total. Loss from jewelry theft is limited to $1,000, and payment for theft of silverware, goldware, and pewterware has a $2,500 limit. The items lost and their value are:
Two year old television $600 replacement value less 2/8 or $150 yields actual cash value of $450
Jewelry $1,850, limited to $1,000
Silver flatware $3 000, limited to $2,500
Total Actual Cash Value, after applying limits 3,950
The deductible amount is $500
Amount to be received from insurance $3,450
c. What advice would you give the Brown family about their homeowner’s coverage? Probability of a second robbery is very low. With the current insurance, the have a total loss of $5,450 in replacement cost. Their insurance recovery is $3,450 or about 63% of loss. To overcome this deficiency, you can either add the personal property floater (PPF) as an endorsement to your homeowner’s policy or take out a separate floater policy. The PPF provides either blanket or scheduled coverage of items that are not covered adequately in a standard homeowner’s policy. The cost of the PPF is not given, but to cover the entire potential loss, it could be a relatively large amount. My advice is to keep the policy they have, increasing the coverage as the replacement cost of their home increases. 3. Need for renter's insurance. Charles and Layla Moore, both graduate students, moved into an apartment near the university. Layla wants to buy renter’s insurance, but Charles thinks that they don’t need it because their furniture isn’t worth much. Layla points out that, among other things, they have some expensive computer and stereo equipment. To help the Moores resolve their dilemma, suggest a plan for deciding how much insurance to buy and give them some ideas for finding a policy. Without insurance, a major casualty such as a fire, would be costly to the Moores. They have no insurance and their expensive computers and stereo would be costly to replace. Another asset is their clothes, which would be expensive to replace (unless you are a Jack Reacher type). Also, the cost of renter’s insurance is low, about $250 for $15,000 coverage. Most insurance companies offer renter’s policies, so finding quotes should be a matter of phone calls. Agencies in college towns write a lot of renter’s policies and are ready to give quotes. If they are in a four-year program, they would spend about $1,000 for the four years of insurance and the related peace of mind. It may help their marriage—give her what she wants. 4. Collecting on a homeowner’s insurance claim. Isabelle Howard’s home in Seattle was recently gutted in a fire. Her living and dining rooms were completely destroyed, and the damaged personal property had a replacement value of $25,000. The average age of the damaged personal property was 5 years, and its useful life was estimated to be 15 years. What is the maximum amount the insurance company would pay Isabelle assuming that it reimburses losses on an actual cash-value basis? Actual cash value is the replacement cost less an allowance for depreciation. 5. Evaluating personal automobile policy features. Riley Bell of Atlanta, Georgia is a single, 40-year-old loan officer at a large regional bank; he has a 16-year-old son. He has decided to use his annual bonus as a down payment on a new car. One Saturday afternoon in late September, Riley visits Carlisle Motors and buys a new car for $32,000. To obtain insurance on the car, he calls his agent, Erin White, who represents Kane’s Insurance Agency, and explains his auto insurance needs. Erin says that she’ll investigate the various options for him. Three days later, Riley and Erin get together to review his coverage options. Erin offers several proposals, including various combinations of the following coverages: (i) basic automobile liability insurance, (ii) uninsured motorists coverage, (iii) automobile medical payments insurance, (iv) automobile collision insurance, and (v) comprehensive automobile insurance. a. Describe the key features of these insurance coverages. i. Basic automobile liability insurance -- As part of the liability provisions of a PAP, the insurer agrees to: 1. Pay damages for bodily injury and/or property damage for which you are legally responsible as a result of an automobile accident, 2. Settle or defend any claim or suit asking for such damages. ii. Uninsured motorist’s coverage -- Uninsured motorists coverage is available to meet the needs of “innocent” victims of accidents who are negligently injured by uninsured, underinsured, or hit-and-run motorists. iii. Automobile medical payments insurance --Medical payments coverage insures a covered individual for reasonable and necessary medical expenses incurred within three years of an automobile accident in an amount not to exceed the policy limits. iv. Automobile collision insurance -- Collision insurance is automobile insurance that pays for collision damage to an insured automobile regardless of who is at fault. The amount of insurance payable is the actual cash value of the loss in excess of your deductible. v. Comprehensive automobile insurance -- Comprehensive automobile insurance protects against loss to an insured automobile caused by any peril (with a few exceptions) other than collision. b. Are there any limitations on these coverages? Explain. Yes. The policy will have an overall limit and there will typically be limits on a per person and per accident level for each of these types of coverage. c. Indicate the persons who would be protected under each type of coverage. Essentially, an insured person includes you (the named insured) and any family member, any person using a covered auto, and any person or organization that may be held responsible for your actions. The named insured is the person named in the declarations page of the policy. The spouse of the person named is considered a named insured if he or she resides in the same household. Family members are persons related by blood, marriage, or adoption and residing in the same household. An unmarried college student living away from home usually is considered a family member. d. What kind of insurance coverages would you recommend that Riley purchase? Explain your recommendation. Riley Bell has purchased a new car and he has a 16-year old son. He needs insurance. Simply stated he needs all five types of coverage: liability, uninsured motorist, automobile medical payments insurance, automobile collision insurance, and comprehensive automobile insurance. His car is new and his 16-year old is likely to have a wreck that will damage the car. So collision insurance is recommended. If you have collision, adding comprehensive is not expensive. So both are recommended. The other three are basically required and should be purchased. When the car is older and less valuable, you can consider dropping collision insurance. 6. Personal automobile policy coverage. Zachary Lee has a personal automobile policy [PAP] with coverage of $25,000/$50,000 for bodily injury liability, $25,000 for property damage liability, $5,000 for medical payments, and a $500 deductible for collision insurance. How much will his insurance cover in each of the following situations? Will he have any out-of-pocket costs? a. Zachary loses control and skids on ice, running into a parked car and causing $3,785 damage to the unoccupied vehicle and $2,350 damage to his own car. His collision insurance will cover over a $500 deductible the damage to his car. The property damage liability insurance will cover the damage to the parked car. The insurance should pay $5,635. [$3,785 + $2,350 - $500 = $5,635] b. Zachary runs a stop sign and causes a serious auto accident, badly injuring two people. The injured parties win lawsuits against him for $30,000 each. The policy covers bodily injury liability of $25,000 per person with a limit of $50,000 per accident. Zachary will receive the full $50,000, but will have to pay the additional $10,000. c. Zachary’s 18-year old son borrows his car. He backs into a telephone pole and causes $450 damage to the car. The damage to the car is covered since Marc authorized his son use of the car. However, the collision deductible is $500, therefor Marc will have to pay the entire amount of the $450 damage. 7. Supplemental property insurance. Eva and Blake Lewis are a high-net-worth couple. They have appropriate auto and homeowner’s insurance, but are concerned that they could be sued by someone visiting or working at their home. What type of supplemental insurance might be appropriate for the Lewis family in light of their expressed concern? Explain your answer. Persons with moderate to high levels of income and net worth may want to purchase a personal liability umbrella policy, which provides added liability coverage for homeowner’s and automobile insurance. Umbrella policies often include limits of $1 million or more. The insured party must already have relatively high liability limits ($100,000 to $300,000) on their homeowner’s and auto coverage in order to purchase a personal liability umbrella policy. The premiums are usually quite reasonable for the broad coverage offered—$150 to $300 a year for as much as $1 million in coverage. 8. Auto insurance claims. Martin and Luna Perez recently went out for dinner on a rainy night. When the traffic unexpectedly slowed down, they were rear-ended by an inexperienced driver. Describe what steps the Perez family should have taken after the accident to assure that their auto insurance claim would be settled properly. First Steps Following an Accident After an accident, record the names, addresses, and phone numbers of all witnesses, drivers, occupants, and injured parties, along with the license numbers of the automobiles involved. Never leave the scene of an accident, even if the other party says it’s all right or if no one is injured. Immediately notify law enforcement officers and your insurance agent of the accident. Never discuss liability at the scene of an accident, or with anyone other than the police and your insurer. The police are responsible only for assessing the probability of a law violation and maintaining order at the scene of an accident—not for making liability judgments. Steps in Claims Settlement If you’re involved in an accident, one of the first things to decide is whether you want to file a claim. Most experts agree that unless it’s a very minor or insignificant accident, the best course of action is to file a claim. Be aware, though, that if you’ve made several claims then your insurance company may decide to drop you after settling the most recent one. The claims settlement process typically involves these steps: 1. Notice to your insurance company. You must notify your insurance company that a loss (or potential for loss) has occurred. Timely notice is extremely important. o Handle a Denied Insurance Claim 2. Investigation. Insurance company personnel may talk to witnesses or law enforcement officers and gather physical evidence to determine whether the claimed loss is covered by the policy. And they’ll check to make sure that the date of the loss falls within the policy period. If you delay filing your claim, you hinder the insurer’s ability to check the facts. All policies specify the period within which you must give notice. Failure to report an accident can result in losing your right to collect on it. 3. Proof of loss. This proof requires you to give a sworn statement. You may have to show medical bills, submit an inventory, and certify the value of lost property (e.g., a written inventory, photographs, and purchase receipts). You may also have to submit an employer statement of lost wages and, if possible, physical evidence of damage (e.g., X-rays if you claim a back injury; a broken window or pried door if you claim a break-in and theft at your home). After reviewing your proof of loss, the insurer may (1) pay you the amount you asked for, (2) offer you a lesser amount, or (3) deny that the company has any legal responsibility under the terms of your policy. Test Yourself 10-1 Briefly explain the fundamental concepts related to property and liability insurance. Property and liability insurance should be as much a part of your personal financial plans as life and health insurance. Such coverage protects the assets you’ve already acquired and safeguards your progress toward financial goals. Property insurance guards against catastrophic losses of real and personal property caused by such perils as fire, theft, vandalism, windstorms, and other calamities. Liability insurance offers protection against the financial consequences that may arise from the insured’s responsibility for property loss or personal injuries to others. 10-2 Explain the principle of indemnity. Are any limits imposed on the amount that an insured may collect under this principle? The principle of indemnity states that the insured may not be compensated by the insurance company in an amount exceeding the insured’s economic loss. Most property and liability insurance contracts are based on this principle. Several important concepts related to the principle of indemnity include actual cash value, subrogation, and other insurance. The “actual cash value” may be defined as the replacement cost minus the value of physical depreciation. Alternatively, it may be defined as just the replacement value. 10-3 Explain the right of subrogation. How does this feature help lower insurance costs? After an insurance company pays a claim, its right of subrogation allows it to request reimbursement from either the person who caused the loss or that person’s insurance company. Since your loss has been compensated, you have no right to make a claim to the person at fault. That right goes to the insurance company. Of course, the insurance may not compensate you for all of your losses, thus, you may have a claim against the person at fault for these additional losses. 10-4 Describe how the co-insurance feature works. Co-insurance, a provision commonly found in property insurance contracts, requires policyholders to buy insurance in an amount equal to a specified percentage of the replacement value of their property, or else the policyholder is required to pay for a proportional share of the loss. If the policyholder has the stipulated amount of coverage (usually 80 percent of the value of the property), then the insurance company will reimburse for covered losses, dollar-for-dollar, up to the amount of the policy limits 10-5 What are the perils that most properties are insured for under various types of homeowner’s policies? Property and liability insurance agreements, called comprehensive policies, cover all perils except those specifically excluded, whereas named peril policies name particular, individual perils covered. 10-6 What types of property are covered under a homeowner’s policy? When should you consider adding a PPF to your policy? Indicate which of the following are included in a standard policy’s coverage: (a) an African parrot, (b) a motorbike, (c) Avon cosmetics held for sale, (d) Tupperware® for home use. The homeowner’s policy offers property protection under Section I for the dwelling unit, accompanying structures, and personal property of homeowners and their families. Coverage for certain types of loss also applies to lawns, trees, plants, and shrubs. However, the policy excludes structures on the premises used for business purposes (except incidentally), animals (pets or otherwise), and motorized vehicles not used in maintaining the premises (such as autos, motorcycles, golf carts, or snowmobiles). Business inventory (for example, goods held by an insured who is a traveling salesperson, or other goods held for sale) is not covered. Although the policy doesn’t cover business inventory, it does cover business property (such as books, computers, copiers, office furniture, and supplies), typically up to a maximum of $2,500, while it is on the insured premises. (a) an African parrot, Not covered (b) a motorbike, Not covered—you have a separate policy on the motorbike. (c) Avon cosmetics held for sale, Not Covered, business inventory (d) Tupperware® for home use Covered Your homeowner’s policy may not protect your expensive personal property adequately. To overcome this deficiency, you can either add the personal property floater (PPF) as an endorsement to your homeowner’s policy or take out a separate floater policy. The PPF provides either blanket or scheduled coverage of items that are not covered adequately in a standard homeowner’s policy. 10-7 Describe (a) types of losses, (b) persons, and (c) locations that are covered under a homeowner’s policy. a. There are three types of property-related losses when misfortune occurs: 1. Direct loss of property 2. Indirect loss occurring due to loss of damaged property 3. Additional expenses resulting from direct and indirect losses Homeowner’s insurance contracts offer compensation for each type of loss. b. A homeowner’s policy covers the persons named in the policy and members of their families who are residents of the household. c. Most homeowner’s policies offer coverage worldwide. Consequently, an insured’s personal property is fully covered even if it is lent to the next-door neighbor or kept in a hotel room in Tibet. The only exception is property left at a second home (such as a beach house or resort condominium), where coverage is reduced to 10 percent of the policy limit on personal property unless the loss occurs while the insured is residing there at the time of the casualty. 10-8 Describe replacement-cost coverage and compare this to actual cash value coverage. Which is preferable? The amount necessary to repair, rebuild, or replace an asset at today’s prices is the replacement cost. When replacement-cost coverage is in effect, a homeowner’s reimbursement for damage to a house or accompanying structures is based on the cost of repairing or replacing those structures. This means that the insurer will repair or replace damaged items without taking any deductions for depreciation. Although coverage on a house is often on a replacement-cost basis, standard coverage on its contents may be on an actual cash-value basis, which deducts depreciation from the current replacement cost for claims involving furniture, clothing, and other belongings. Replacement cost coverage will give more to the policy holder and will allow that person to be “made whole” after the casualty. Of course, the cost of the policy will reflect the amount of coverage. The additional cost may be small and therefore, should be purchased. 10-9 What are deductibles? Do they apply to either liability or medical payments coverage under the homeowner’s policy? Deductibles, which limit what a company must pay for small losses, help reduce insurance premiums by doing away with the frequent small loss claims that are proportionately more expensive to administer. Deductibles don’t apply to liability and medical payments coverage because insurers want to be notified of all claims, no matter how trivial. Otherwise, they could be notified too late to properly investigate and prepare adequate defenses for resulting lawsuits. 10-10 Briefly explain the major types of coverage available under the personal auto policy (PAP). Which persons are insured under (a) automobile medical payments coverage and (b) uninsured motorist’s coverage? The personal automobile policy (PAP) is a comprehensive, six-part automobile insurance policy designed to be easily understood by the “typical” insurance purchaser. The policy’s first four parts identify the coverage provided. • Part A: Liability coverage • Part B: Medical payments coverage • Part C: Uninsured motorists coverage • Part D: Coverage for damage to your vehicle Part E pertains to your duties and responsibilities if you’re involved in an accident, and Part F defines basic provisions of the policy, including the policy coverage period and the right of termination. The named insured and family members have Part A liability coverage regardless of the automobile they are driving. However, for persons other than the named insured and family members to have liability coverage, they must be driving a covered auto. Uninsured motorists coverage is available to meet the needs of “innocent” victims of accidents who are negligently injured by uninsured, underinsured, or hit-and-run motorists. Nearly all states require uninsured motorists insurance to be included in each liability insurance policy issued. 10-11 Explain the nature of (a) automobile collision insurance and (b) automobile comprehensive insurance. Collision insurance is auto mobile insurance that pays for collision damage to an insured automobile regardless of who is at fault. The amount of insurance payable is the actual cash value of the loss in excess of your deductible. Remember that actual cash value is defined as replacement cost less depreciation. Comprehensive automobile insurance protects against loss to an insured automobile caused by any peril (with a few exceptions) other than collision. The maximum compensation provided under this coverage is the actual cash value of the automobile. This broad coverage includes, but is not limited to, damage caused by fire, theft, glass breakage, falling objects, malicious mischief, vandalism, riot, and earthquake. Contrary to popular belief, the automobile insurance policy normally does not cover the theft of personal property left in the insured vehicle. However, the off-premises coverage of the homeowner’s policy may cover such a loss if the auto was locked when the theft occurred. 10-12 Define no-fault insurance and discuss its pros and cons. No-fault automobile insurance is a system under which each insured party is compensated by his or her own company, regardless of which party caused the accident. In return, legal remedies and payments for pain and suffering are restricted. Pro, you deal only with your insurance company. Con, you give up the right for recovery of some types of losses. 10-13 Describe the important factors that influence the availability and cost of auto insurance. A number of factors influence the availability and cost of auto insurance. The factors that are important include: Rating Territory. Since accidents are more likely to occur in some geographic areas than others, higher rates are applied where the probability of claims is greatest. Use of automobile. Both the number of miles driven and whether or not the car is used for business purposes affect cost. Personal Characteristics of Driver. Age, sex, and the marital status of insureds affect the auto insurance premium assessed. Type of automobile. Automobiles are classified with respect to performance. If an automobile is not classified as standard performance, higher rates are usually charged. Driving Record. The driving records of the insured and those that live with them play an important part in the determination of premiums. A poor driving record will increase a given driver's premiums or affect the type of insurance plan the driver is offered. Those who have been refused regular coverage may be assigned to an automobile insurance plan, a plan for high-risk drivers which features less coverage for a much higher premium. Discounts. Some auto insurers give discounts to individuals for special reasons, such as demonstrated safe driving, driver's education, etc. Discounts can knock 5 to 50% off annual premiums. Deductibles. As a rule, the greater the deductible, the less costly the insurance coverage—using a high ($1,000) deductible on your comprehensive and collision insurance can result in premium savings of as much as 45–50%. 10-14 Discuss the role of financial responsibility laws and describe the two basic types currently employed. Financial responsibility laws attempt to force motorists to be financially responsible for the damages they become legally obligated to pay as a result of automobile accidents. Two basic types of laws compel motorists to assume financial responsibility. The first variety is one in which all automobile owners in a given state are required to show evidence that they have liability insurance coverage prior to obtaining registration for their motor vehicles. In the second type of financial responsibility legislation, motorists do not have to show their insurance coverage until after they are involved in an accident. If they then fail to demonstrate compliance with the law, their registration and/or driver's license is suspended. This latter type of law has been criticized on the basis that it allows negligent motorists to have one "free" accident. Even though the motorists who are not financially responsible lose their driving privileges, the losses to their victims may remain uncompensated. 10-15 Briefly describe the following supplemental property insurance coverage: (a) earthquake insurance, (b) flood insurance, and (c) other forms of transportation insurance. a. Earthquake Insurance is a type of homeowner's insurance that provides financial protection from earthquake damage. Although this form of insurance is fairly inexpensive to purchase, policies typically carry a 15% deductible on the replacement-cost coverage of the home, meaning homeowners will have to bear significant out-of-pocket costs before they are able to collect on the policy. b. Flood Insurance is a type of coverage provides protection against the financial consequences of flood damage. This insurance is subsidized by the federal government and is sold in cooperation with private insurance agents to homeowners living in flood-prone areas. c. Other Forms of Transportation Insurance is available for other forms of transportation in addition to automobiles. Mobile home insurance provides homeowners with coverage similar to that for conventional homes. However, due to total losses occurring more frequently on mobile homes than on more permanent structures, rates per $100 of protection are typically higher for mobile homes. Recreational vehicle insurance is available for a variety of vehicles, including all-terrain vehicles, antique autos, minibikes, and camping vehicles. While full coverage is generally available, some restrictions may apply and rates can vary substantially. Boat insurance may be provided to some extent through the owner's homeowner's policy. However, a boat and motor endorsement may need to be added to the policy in order to attain sufficient coverage, or the owner may need to purchase a specially designed boat-owner's policy. 10-16 What is a personal liability umbrella policy? Under what circumstances might it be a wise purchase? A personal liability umbrella policy might be a wise purchase for persons with moderate to high levels of income and net worth who are viable targets for liability claims. An umbrella policy would cover legal judgments in excess of the amount of liability covered by a homeowner's or auto policy. Other persons who might need umbrella insurance would include those who rent out their home or have house sitters or unbonded hired help, such as gardeners and babysitters, and people who have clients visit in their home office. The homeowner would be responsible for any injuries incurred while such individuals are on the premises or in their employ, or for any injuries their workers might cause to other people. 10-17 Differentiate between captive and independent insurance agents. What characteristics should you look for in an insurance agent and an insurance company when you’re buying property or liability insurance? A captive agent represents only one insurance company and is more or less an employee of that company. Independent agents, however, typically represent between two and 10 different property insurance companies. You should find an agent who is knowledgeable and willing to take the time to go over your total property and liability exposures and develop a sound and affordable insurance program. In property insurance, agents who meet various experience and educational requirements and pass a series of written examinations qualify for either the Chartered Property and Casualty Underwriter (CPCU) or Certified Insurance Counselor (CIC) designations. These agents are known to have demonstrated above average knowledge and experience in their field. With respect to the insurance company itself, it is a good idea to pay particular attention to the company's financial soundness, claims settlement practices, and geographic extent of operations. Friends and acquaintances can often provide insight into its claims settlement policy. 10-18 Briefly describe key aspects of the claims settlement process, explaining what to do after an accident, the steps in claim settlement, and the role of claims adjustors. After an accident, you should record the names, addresses, and phone numbers of all witnesses, drivers, occupants, and injured parties, along with the license numbers of the automobiles involved, the license number of the drivers, their auto insurance policy number, and the name, address, and phone number of their insurance company. Try to sketch how the accident occurred on paper, and take pictures if you have a camera. Notify law enforcement officers as well as your insurance company representative of the accident. Don't admit liability at the scene of an accident or discuss it with anyone other than the police and your insurer. The typical insurance claim settlement process involves four steps: 1. Giving notice to the company that a loss (or potential for loss) has occurred. Timely notice is extremely important. 2. Investigation of the claim. To properly investigate a claim, insurance company personnel may have to talk with witnesses or law enforcement officers, gather physical evidence to tell whether the claimed loss is covered by the policy, and check to make sure the date of the loss fell within the policy period. 3. Providing proof of loss. This step usually requires the claimant to give a sworn statement, show medical bills, provide an inventory and certified value of lost property, provide an employer’s statement of lost wages, and, if possible, provide physical evidence of damage. 4. Payment by insurer of either the requested amount, a lesser amount, or nothing on the basis that the company has no legal responsibility under the terms of the policy. In the case of a disputed claim, most policies provide for claim arbitration. The claims adjustor may work for the insurance company, work as an independent adjustor, or work for an adjustment bureau. Primarily, the adjustor is looking out for the interests of the company. He or she must diligently question and investigate, and at the same time offer service to minimize settlement delays and financial hardship. In the situation where an individual must file a claim against another's insurance company, a question of fault arises, and the adjustor will only be concerned with the economic interest of the insurer and its policyholders. As the claimant is not a customer of the insurer, the adjustor will generally be unconcerned with keeping the claimant satisfied. In this situation, the claimant may have to seek the service of a public adjustor or attorney to settle the claim. These services will generally be costly but will be well worth it, particularly when the claimant is not being treated fairly by the insurance company's adjustor. Critical Thinking Cases 10.1 The Perkins’ Homeowners’ Insurance Decision Calvin and Danielle Perkins, ages 30 and 28, were recently married in Kansas City. Calvin is an electrical engineer with Analytical Solutions, a computer component design firm. Danielle has a master’s degree in education and teaches at a local middle school. After living in an apartment for six months, the Perkins have negotiated the purchase of a new home in a rapidly growing Kansas City suburb. Kansas City Savings and Loan Association has approved their loan request for $270,000, which represents 90 percent of the $300,000 purchase price. Before closing the loan, the Perkins must obtain homeowner’s insurance for the home. The Perkins currently have an HO-4 renter’s insurance policy, which they purchased from Calvin’s bridge partner, Gene Patterson, who is an agent with the Roberts Insurance Company. To learn about the types of available homeowner’s insurance, Calvin has discussed their situation with Tim, who has offered them several homeowner’s policies for their consideration. He has recommended that the Perkins purchase an HO-5 policy because it would provide them with comprehensive overage. Critical Thinking Questions 1. What forms of homeowner’s insurance are available? Which forms should the Perkins consider? 2. What are the perils against which the home and its contents should be insured? These two questions are answered with Exhibit 10.2 which is copied below for your reference. Exhibit 10.2 A Guide to Homeowner’s Policies The amount of insurance coverage you receive depends on the type of homeowner’s (HO) policy you buy. You can also obtain coverage if you’re a renter or a condominium
Form Coverages Covered Perils
Basic Form (HO-1) A—$15,000 minimum; B—10% of A; C—50% of A; D—10% of A; E—$100,000; F—$1,000 per person Fire, smoke, lightning, windstorm, hail, volcanic eruption, explosion, glass breakage, aircraft, vehicles, riot or civil commotion, theft, vandalism or malicious mischief
Broad Form (HO-2) Minimum varies; other coverages in same percentages or amounts except D—20% of A Covers all basic-form risks plus weight of ice, snow, sleet; freezing; accidental discharge of water or steam; falling objects; accidental tearing, cracking, or burning of heating/ cooling/sprinkler system or appliance; damage from electrical current
Special Form (HO-3) Minimum varies; other coverages in same percentages or amounts except D—20% of A Dwelling and other structures covered against risks of direct physical loss to property except losses specifically excluded; personal property covered by same perils as HO-2 plus damage by glass or safety glazing material, which is part of a building, storm door, or storm window
Renter’s Form (HO-4) Coverages A and B—Not applicable C—Minimum varies by company D—20% of C E—$100,000 F—$1,000 per person Covers same perils covered by HO-2 for personal property
Comprehensive Form (HO-5) Coverages A and B—Not applicable B—Not applicable C—Minimum varies by company D—40% of C E—$100,000 F—$1,000 per person Covers same perils as HO-4, but covered perils are dwelling, other structures, and personal property covered against risks of direct physical loss except losses that are excluded specifically
Condominium Form (HO-6) Coverage A—Minimum $1,000 B—Not applicable C—Minimum varies by company D—40% of C E—$100,000 F—$1,000 per person Covers same perils covered by HO-2 for personal property
Modified Coverage Form (HO-8) Same as HO-1, except losses are paid based on the amount required to repair or replace the property using common construction materials and methods Same perils as HO-1, except theft coverage applies only to losses on the residence premises up to a maximum of $1,000; certain other coverage restrictions also apply
* Coverages: A. Dwelling B. Other structures C. Personal property D. Loss of use E. Personal liability F. Medical payments to others
3. Discuss the types of loss protection provided by the homeowner’s policies under consideration. HO-5 Comprehensive coverage provides Coverage A, the dwelling; C, the personal property with limits typically 50% of coverage on dwelling; D. loss of use of dwelling limited to 40% of the personal property coverage, thus typically 40% of 50% of dwelling coverage or 20% of dwelling coverage; E, personal liability of $100,000; and F, medical payments limited to $1,000 per person. 4. What advice would you give the Perkins regarding Gene’s suggestion? What coverage should they buy? HO-5 Comprehensive coverage is the normal homeowner’s policy and that is what I would suggest. The value of their home is $300,000. Typical co-insurance is 80%, thus, they should purchase at least $240,000 of coverage. They should at least get two quotes from independent agents and one quote from a captive agent. They should consider the reputation of the adjustors in the area that work for the companies. Information about reputations may be gathered from the banker they are working with, the agent that are talking to, and any professionals [lawyers or accountants] with whom they have a relationship. 10.2 Auto Insurance for Dwight Fox Dwight Fox is a divorced 40-year-old loan officer at a large regional bank; he has a 16-year-old son. He has decided to use his annual bonus as a down payment on a new car. One Saturday afternoon Dwight visits Unique Motors and buys a new car for $32,000. To obtain insurance on the car, Dwight calls his agent, Carrie Dawson,, who represents Brown’s Insurance Company, and explains his auto insurance needs. Carrie says that she’ll investigate the various options for him. Three days later, Dwight and Carrie get together to review his coverage options. Carrie offers several proposals, including various combinations of the following coverages: (a) basic automobile liability insurance, (b) uninsured motorist’s coverage, (c) automobile medical payments insurance, (d) automobile collision insurance, and (e) comprehensive automobile insurance. Critical Thinking Questions 1. Describe the key features of these insurance coverages. a. Basic automobile liability insurance -- As part of the liability provisions of a PAP, the insurer agrees to: 1. Pay damages for bodily injury and/or property damage for which you are legally responsible as a result of an automobile accident 2. Settle or defend any claim or suit asking for such damages b. Uninsured motorist’s coverage -- Uninsured motorists coverage is available to meet the needs of “innocent” victims of accidents who are negligently injured by uninsured, underinsured, or hit-and-run motorists. c. automobile medical payments insurance --Medical payments coverage insures a covered individual for reasonable and necessary medical expenses incurred within three years of an automobile accident in an amount not to exceed the policy limits. d. automobile collision insurance -- Collision insurance is automobile insurance that pays for collision damage to an insured automobile regardless of who is at fault. The amount of insurance payable is the actual cash value of the loss in excess of your deductible. e. comprehensive automobile insurance -- Comprehensive automobile insurance protects against loss to an insured automobile caused by any peril (with a few exceptions) other than collision. 2. Are there any limitations on these coverages? Explain. Yes, each will have a limit stated in terms of a limiting amount per person and per accident. There is also an overall limit for the policy. 3. Indicate the persons who would be protected under each type of coverage. Essentially, an insured person includes you (the named insured) and any family member, any person using a covered auto, and any person or organization that may be held responsible for your actions. The named insured is the person named in the declarations page of the policy. The spouse of the person named is considered a named insured if he or she resides in the same household. Family members are persons related by blood, marriage, or adoption and residing in the same household. An unmarried college student living away from home usually is considered a family member. 4. What kind of insurance coverages would you recommend that Dwight purchase? Explain your recommendation. I suggest a basic policy with limits high enough to cover the property (I suggest $25,000 at least), liability (I suggest $500,000) and medical (I suggest $10,000). These amounts are on the “high” side given my fear of the result of an accident. Certainly each of the types of coverages listed in part 1 should be included. Terms Found in the Chapter
actual cash value A value assigned to an insured property that is determined by subtracting the amount of physical depreciation from its replacement cost.
bodily injury liability losses A PAP provision that protects the insured against claims made for bodily injury.
captive agent An insurance agent who represents only one insurance company and who is, in effect, an employee of that company
claims adjustor An insurance specialist who works for the insurance company, as an independent adjustor or for an adjustment bureau, to investigate claims.
collision insurance Automobile insurance that pays for collision damage to an insured automobile regardless of who is at fault.
comprehensive automobile insurance Coverage that protects against loss to an insured automobile caused by any peril (with a few exceptions) other than collision.
comprehensive policy Property and liability insurance policy covering all perils unless they are specifically excluded.
co-insurance In property insurance, a provision requiring a policyholder to buy insurance in an amount equal to a specified percentage of the replacement value of their property.
financial responsibility laws Laws requiring motorists to buy a specified minimum amount of automobile liability insurance or to provide other proof of comparable financial responsibility.
independent agent An insurance agent who may place coverage with any company with which he or she has an agency relationship, as long as the insured meets that company’s underwriting standards.
liability insurance Insurance that protects against the financial consequences that may arise from the insured’s responsibility for property loss or injuries to others
named peril policy Property and liability insurance policy that individually names the perils covered.
negligence Failing to act in a reasonable manner or to take necessary steps to protect others from harm.
no-fault automobile insurance Automobile insurance that reimburses the parties involved in an accident without regard to negligence.
peril A cause of loss.
personal automobile policy (PAP) A comprehensive automobile insurance policy designed to be easily understood by the “typical” insurance purchaser.
personal liability umbrella policy An insurance policy providing excess liability coverage for homeowner’s and automobile insurance as well as additional coverage not provided by either policy.
personal property floater (PPF) An insurance endorsement or policy providing either blanket or scheduled coverage of expensive personal property not adequately covered in a standard homeowner’s policy.
principle of indemnity An insurance principle stating that an insured may not be compensated by the insurance company in an amount exceeding the insured’s economic loss.
property damage liability losses A PAP provision that protects the insured against claims made for damage to property.
property insurance Insurance coverage that protects real and personal property from catastrophic losses caused by a variety of perils, such as fire, theft, vandalism, and windstorms
replacement cost The amount necessary to repair, rebuild, or replace an asset at today’s prices.
right of subrogation The right of an insurer, who has paid an insured’s claim, to request reimbursement from either the person who caused the loss or that person’s insurer.
underinsured motorists coverage . Optional automobile insurance coverage, available in some states, that protects the insured against damages caused by being in an accident with an underinsured motorist who is found liable.
uninsured motorists coverage Automobile insurance designed to meet the needs of “innocent” victims of accidents who are negligently injured by uninsured, underinsured, or hit-and-run motorists.
Protecting Your Property Chapter Outline Learning Goals I. Basic Principles of Property Insurance A. Types of Exposure 1. Exposure to Property Loss a. Property Inventory b. Identifying Perils 2. Liability Exposures B. Principle of Indemnity 1. Actual Cash Value versus Replacement Cost 2. Subrogation 3. Other Insurance C. Co-insurance II. Homeowner's Insurance A. Perils Covered 1. Section I Perils 2. Section II Perils B. Factors Affecting Home Insurance Costs C. Property Covered D. Personal Property Floater (PPF) E. Renter's Insurance: Don't Move In Without It F. Coverage: What Type, Who, and Where? 1. Types of Losses Covered a. Section I Coverage b. Section II Coverage 2. Persons Covered 3. Locations Covered G. Limitations on Payment 1. Replacement Cost 2. Policy Limits 3. Deductibles H. Homeowner's Insurance Premiums III. Automobile Insurance A. Types of Auto Insurance Coverage 1. Part A: Liability Coverage a. Policy Limits b. Persons Insured 2. Part B: Medical Payments Coverage a. Policy Limits b. Persons Insured 3. Part C: Uninsured Motorists Coverage a. Policy Limits b. Persons Insured c. Underinsured Motorists Coverage 4. Part D: Coverage for Physical Damage to a Vehicle a. Collision Insurance b. Comprehensive Automobile Insurance B. No-Fault Automobile Insurance C. Automobile Insurance Premiums 1. Factors Affecting Premiums 2. Driving Down the Cost of Car Insurance D. Financial Responsibility Laws IV. Other Property and Liability Insurance A. Supplemental Property Insurance Coverage B. Personal Liability Umbrella Policy V. Buying Insurance and Settling Claims A. Property and Liability Insurance Agents B. Property and Liability Insurance Companies C. Settling Property and Liability Claims 1. First Steps Following an Accident 2. Steps in Claims Settlement 3. Claims Adjustment Solution Manual for Personal Finance Michael Joehnk , Randall Billingsley , Lawrence Gitman 9780357033609
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