Chapter 10 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 *Concept Check* 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 *Concept Check* 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 *Concept Check* IV. Other Property and Liability Insurance A. Supplemental Property Insurance Coverage B. Personal Liability Umbrella Policy *Concept Check* 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 *Concept Check* Summary Financial Planning Exercises Applying Personal Finance Insure Your Property! Critical Thinking Cases 10.1 The Salazars’ Homeowner's Insurance Decision 10.2 Auto Insurance for Seth Morris Money Online! Major Topics As long as you own valuable assets, you need a way to protect yourself financially should those assets be destroyed or be subject to a lawsuit or financial claim. Property insurance is available to protect these assets from damage and therefore to protect your financial goals from being displaced should property damage occur. Also available is liability insurance, which protects you from the consequences of potentially negligent acts that can cause financial ruin. The major topics covered in this chapter include: 1. Property and liability insurance is designed to protect against the loss of real and personal property that occurs because of various perils or your own negligence. 2. Homeowner's insurance includes two types of coverages: one on property and the second for personal liability and medical payments. 3. Losses that are covered by homeowner's insurance are paid out on an actual cash value basis, after considering deductibles and policy limits, with the exception of the house and garage, which are usually treated on a replacement basis. 4. There are many aspects to automobile coverage, including personal liability, property damage to your car and property or that of another, and medical payments. 5. There are many other kinds of property and liability insurance available besides homeowners and automobile insurance. 6. As with the purchase of any asset or service, you must evaluate your loss exposure to determine how much insurance you need. It is important to find a good insurance company and insurance agent to help in evaluating various coverages and in making claims. Key Concepts Few people generally understand what they are receiving when they buy insurance. What is even worse, those who do buy insurance often do not know if they are adequately covered. This chapter is designed to introduce the principles of property and liability insurance so that the student understands the types of coverages available and how to determine the necessary amount of insurance. The following phrases represent the key concepts stressed in this chapter. 1. Exposure to losses and liabilities 2. Negligence 3. Perils and insurable exposure 4. Indemnity, co-insurance, and subrogation 5. Homeowner's insurance, including property damage and personal liability coverage 6. Renter’s insurance 7. Insurance policy limits and deductibles 8. Automobile insurance, including liability and property damage 9. Other types of property and liability insurance, including flood and earthquake insurance, personal liability umbrella insurance, and insurance on other forms of transportation 10. Selecting an insurance agent and insurance company Answers to Concept Check Questions 10-1. The fundamental concepts related to property and liability insurance concern the types of exposure, the principle of indemnity, and co-insurance. The two basic types of exposures are the physical loss of property and the liability one might have as the result of alleged negligent actions. The principle of indemnity deals with restoring the insured person’s economic loss, but in an amount not to exceed his or her economic loss. Most property and liability contracts are based on this principle. Co-insurance is a provision commonly found in property insurance contracts that requires policyholders to buy insurance in an amount equal to a specified percentage of the value of their property; failure to do so implies that the policyholder will be responsible for part of the loss—or, in effect, becomes the co-insurer. 10-2. The principle of indemnity means the insured should be restored in whole or in part for a given economic loss. Restoration usually takes the form of a monetary payment for the loss, but occasionally the insurance company will instead repair or replace the damaged or destroyed property. At the same time, the principle of indemnity prohibits insured persons from being compensated by their insurance company for an amount exceeding the amount of economic loss. Most property and liability insurance contracts are contracts of indemnity. Concepts related to this principle are implemented in property and liability insurance: (1) actual cash value, (2) subrogation, and (3) other insurance. Actual cash value is defined as the replacement cost less depreciation. Some insurers guarantee replacement cost without taking depreciation into account if the proper type and amount of insurance has been purchased. Subrogation is the right given to an insurance company (after they pay a claim for a loss) to request reimbursement from the person who caused the loss or that person's insurance company. An "other-insurance" clause prohibits insured persons from insuring their property with two or more insurance companies and then collecting in full for a loss from all companies. A pro rata scheme is usually established for dealing with such situations. 10-3. The right of subrogation allows the insurance company, once it has paid a claim for a client's loss, to request reimbursement from either the person who caused the loss or that person's insurance company. A person who is not at fault in an incident of loss but collects from his or her insurer must subrogate to the insurer the right to collect from the at-fault person or insurer. If a victim collected the full amount from both parties, he or she would be better off after the loss than before. This is a violation of the principle of indemnity. Through subrogation, insurers attempt to lower insurance costs by reducing the net amount they must pay out to satisfy claims. 10-4. The co-insurance feature requires policyholders to buy insurance in an amount equal to a specified percentage of the replacement value of their property. If the co-insurance requirement is not met, the maximum compensation allowable for total or partial loss may be based on a specified percentage of that loss and not on the policy limits. The policyholder, then, becomes the "co-insurer" and must bear part of the loss. 10-5. The perils against which most properties are insured under various homeowners' policies are usually assigned to one of two sections in the policy contract. Section I perils relate to the house, attached structures, and personal property. These include: fire; lightning; windstorm; hail; explosion; riots; damage by vehicle; smoke damage; vandalism; theft; glass breakage; damage by falling objects; weight of ice, snow, and sleet; collapse of building; accidental damage to or from heating or plumbing systems; freezing; and damage by electrical equipment. Section II perils relate to personal liabilities of the insured and medical payments to others. While policies offer protection against nearly any source of liability resulting from negligence, they do not insure against potential liability perils such as libel, slander, defamation of character, and contractual or intentional wrongdoing. 10-6. Under Section I, the homeowner's policy offers protection for the house, detached structures, and the personal property of the homeowners and their families. In addition, coverage for certain types of losses also apply to the lawn, trees, plants, and shrubs. Structures on the premises used for business purposes (except incidentally) are excluded from coverage, as are animals (pets or otherwise) and motorized vehicles not used in the maintenance of the property. For many expensive and easy to steal items, such as cash, jewelry, furs, cameras, guns, etc., there are specified limits which are quite low. It may be necessary to add a personal property floater (PPF) to provide the level of coverage needed. a. African parrot—not covered (animals are excluded). b. Motorbike—not covered (you’re expected to have coverage on the bike already). c. Avon cosmetics for sale—not covered (considered business inventory). d. Tupperware for home use—covered, but only the amount which exceeds your deductible (it’s your personal property). 10-7. a. A policyholder can suffer three different types of property-related losses when misfortune occurs. The types of losses covered by a homeowner's insurance contract usually include a direct loss of property, an indirect loss through the loss of use of damaged property, and any extra expenses that result from direct and indirect losses. b. Persons covered include those named in the policy, as well as members of their family who are residents of the household, and in many cases, guests of the insured. c. Locations. Most homeowner's policies offer coverage worldwide for personal property. The exception is property left at a second home—obviously you’re supposed to have that home insured also. 10-8. Replacement-cost coverage provides the insured with an amount necessary to repair, rebuild, or replace an asset at today's prices. The homeowner's policy is one of the few types of property insurance that provides replacement-cost coverage. Under this type of coverage, the insurer will repair or replace damaged items without taking any deduction for depreciation. Actual cash value coverage only reimburses on the depreciated value of an insured item. The actual cash value is found by subtracting an appropriate amount of depreciation from the property's replacement value. Since the actual cash value is always less than (or equal to) the replacement value, replacement-cost coverage is the preferred type of coverage and usually adds very little additional cost to the annual premium. 10-9. Deductibles place constraints on what an insurance company must pay on small losses. They help reduce insurance premiums by doing away with the frequent small loss claims that are proportionately more expensive to administer. The standard deductible in most states is $250 on the physical damage protection found in Section I of the homeowner's policy. However, deductibles of $500 or $1,000 are available on an optional basis. In general, higher deductibles result in lower premiums on a given policy. Deductibles do not apply to either the liability or medical payments coverage since insuring companies want to be notified of all claims, no matter how trivial. If companies did not set this policy, the insurer might be notified too late to properly investigate and prepare an adequate defense for a resulting lawsuit. 10-10. The major coverages available under the personal auto policy (PAP) are: 1) Liability policy provisions which pay on the insured's behalf sums he or she has become obligated to pay because of accidental damages caused to another and to defend the insured against another who is seeking compensation arising out of a covered occurrence. 2) Medical payments insurance which provides payment to eligible insured individuals of an amount no greater than the policy limits for all reasonable and necessary medical expenses incurred within three years after an auto accident. 3) Uninsured motorist coverage which compensates the insured for damages caused by an uninsured or underinsured motorist. 4) Coverage for damage to your vehicle which includes: Collision insurance which pays for collision damage to an insured automobile regardless of fault and comprehensive insurance which provides for protection against damage to an insured automobile caused by any peril (with few exceptions) other than collision. a. Automobile medical payments insurance provides payment to a covered person up to the policy limit for medical expenses incurred within 3 years of an auto accident. It also covers injuries sustained as a pedestrian or bicycle rider in a traffic accident. It pays on an excess basis when you are injured as a passenger in someone else’s vehicle. If you have medical expenses greater than the limits of the owner’s coverage, your policy will pay the excess amount up to the medical payments limit. b. Uninsured motorists coverage applies to the named insured, their family members, and others occupying their covered auto where they are accident victims negligently injured by uninsured or hit-and-run motorists. In many states, this coverage is for bodily injury only and not for property damage. 10-11. a. Automobile Collision Insurance is a first party property damage coverage that pays for collision damage to an insured automobile regardless of who is at fault. The amount payable is the actual cash value of the loss (i.e., depreciated value) in excess of a stated deductible. The stated deductible may be as low as $50 and as high as $500 to $1,000. A collision occurs when you are driving your car and collide with anything, such as a tree or fence, not just with another auto. Most likely, your insurance coverage also protects you against collision when driving a rented vehicle. b. Automobile Comprehensive Insurance provides protection against loss to an insured automobile caused by any peril (with few exceptions) other than collision. This coverage includes, but is not limited to, damage caused by fire, theft, glass breakage, falling objects, malicious mischief, vandalism, riot, and earthquake. It ordinarily has a $50 to $100 deductible, and the maximum compensation provided is the actual cash value of the automobile. Theft of your property inside your auto is usually not covered by your auto insurance but may well be covered under your homeowner’s policy. 10-12. No-fault auto insurance is based upon the belief that the liability system should be replaced by a system that reimburses without regard to negligence. Under pure no-fault insurance, the driver, passenger, and injured pedestrians are reimbursed by the insurer of the car for economic losses stemming from bodily injury. The insurer does not have to provide coverage for claims made for losses caused to other motorists. Each insured party is compensated by his or her own company regardless of which party is at fault. The main argument in favor of no-fault suggests that the existing liability insurance does a poor job of compensating victims of automobile accidents for their losses. Proponents also suggest that it will reduce the number of lawsuits and will reduce auto insurance costs. Those against no-fault suggest that is has already proven to be more expensive than the existing liability system. Also, based upon existing data, it appears that the right to sue for damages has not been materially thwarted by states enacting no-fault legislation. 10-13. 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. 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. a. Earthquake Insurance—This 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—This 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—Insurance coverage 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. 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. 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. 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. Financial Planning Exercises 1. No, a 90% co-insurance clause on a homeowner’s policy would not be better than an 80% clause unless the homeowner could only obtain a policy with a 90% co-insurance clause. A 90% co-insurance clause would require Ms. Boyle to buy at least enough insurance to equal 90% of the replacement value of his property. If she had less coverage than that, then Ms. Boyle would be required to pay a proportional share of the loss. If she had at least that amount of coverage, then she would be reimbursed for covered losses (after meeting her deductible) dollar for dollar up to the amount of the policy limits. With an 80% co-insurance clause, she could get by with purchasing a little less insurance and still receive full coverage in the event of loss. 2. a. With an 80% co-insurance requirement, the minimum insurance policy the Still mans can have on their home and still be covered is $200,000 ($250,000 x 0.80). Their policy is for $210,000, so they have adequate coverage. b. Total Schedule C coverage is 50% of Schedule A ($210,000), or $105,000. However, internal policy limits apply. See "Policy Limits" on p. 376. Television: $600 value/8 year life = $75/year depreciation. Current value = $450. c. If the Still mans had increased their internal policy limits or purchased personal property floater insurance, they would have received more for their jewelry and silverware. If they had purchased replacement-cost coverage, they would have been reimbursed for the replacement cost of their television versus the depreciated value. 3. Assuming the company reimburses actual cash value, the most they would pay would be the difference between the $27,000 replacement price and the accumulated depreciation. Since five years of the assets' 15-year useful lives have expired, one third of the replacement value would be lost to depreciation (thus 1/3 of $27,000 = $9,000). By subtracting the $9,000 in depreciation from the $27,000 replacement value, an actual cash value of $18,000 results. This amount, less any deductible, would be paid to Sarah. In summary, the maximum amount that Sarah would be paid by the insurance company is equal to $27,000 – ($27,000 x 5/15) = $27,000 - $9,000 = $18,000. 4. The Seidels should have renter's insurance to protect their personal belongings against physical damage from water, fire, theft, etc. The cost of renter's policies is reasonable and also provides liability coverage, which is very important. The couple should inventory their possessions and meet with several knowledgeable casualty insurance agents to discuss appropriate property and liability coverage amounts. Then they should purchase the lowest cost policy that meets their needs. 5. a. The damage to David’s vehicle will be covered under the collision portion of his auto insurance and is subject to the $500 deductible. The full amount of the damage to the other car will be covered under the property damage liability portion of his policy as the damage is less than his $25,000 limit. Total paid by the insurance company: $3,785 + $1,850 = $5,635. b. The injuries to the other two people will be covered under the bodily injury liability portion of his auto policy and is subject to the limit of $25,000 per person and $50,000 total. Therefore, he will have to pay the additional $5,000 to each of the two injured persons. c. This would fall under the collision portion, and since the claim is below the $500 deductible, the insurance company pays nothing. Solutions to Critical Thinking Cases 10.1 The Salazars’ Homeowner's Insurance Decision 1. All homeowner’s policies include two sections: Section I which covers their property, and Section II which provides liability and medical payments. Section II is the same for all forms; only Section I differs. Section I coverage of the various forms is described below: In most parts of the country, there are 5 standard forms of homeowner’s policies: HO-2 —Homeowner’s 2 Broad Form HO-3 —Homeowner’s 3 Special Form HO-4 —Homeowner’s 4 Contents Broad Form (renter’s insurance) HO-6 —Homeowner’s 6 Unit-Owner’s Form (condo owner’s insurance) HO-8 —Homeowner’s 8 Modified Coverage Form (older homes) [HO-1 was the basic form which covered damage by fire, lightening, windstorm, hail, explosion, riots, aircraft, vehicles, smoke, vandalism, theft, and glass breakage. It applied to the house, detached structures, and other personal property and is being phased out nationally.] HO-2 is the broad form. In addition to the risks covered by HO-1, it covers falling objects—weight of ice, snow, and sleet, collapse of building, accidental damage to or from heating or plumbing systems, freezing, and damage by electrical equipment. This coverage applies to the house, detached structures, and other personal property. HO-3 is the special form. It covers all risks on personal property, except glass breakage, and all risks, except those specifically excluded, on buildings. By far, most homeowner’s policies now written are of this type and would be the best choice for the Salazars. Whereas, HO-1 and HO-2 covered specific perils, HO-3 covers by exclusion. That is, it covers everything except certain named perils. This “open-peril” coverage is superior to Forms 1 and 2, and some of the losses excluded under Form 3 can be insured by an endorsement or under a separate policy. Often Form 3 is used with the Homeowner’s Special Personal Property Coverage Endorsement, Form HO-15, which provides open-perils coverage on the contents. HO-8 is a modified coverage policy for older homes. It is used for houses with market values well below their replacement cost. As the Salazars are purchasing a new home, this is not a suitable choice. 2. The perils against which the house, detached structures, and personal property should be insured should certainly include all of those listed as being covered by the HO-2 form, particularly given the climate of the Houston area. The great thing about the HO-3 form is that it also includes the out-of-the-ordinary, as yet unthought-of perils (except for those specifically excluded) which invariably occur. 3. The types of loss protection provided by the HO-2 and HO-3 coverages on the house and detached structures were enumerated in the answer to question 1 of this problem. Under both forms (HO-2 and HO-3), the coverage also applies to house contents, unlisted personal property, and personal property off the premises. The amount of coverage is set equal to 50% of the policy value for house contents and unlisted personal property and 10% of the policy value (but not less than $1,000) on personal property off premises. One important fact should be highlighted: The coverage on the house and detached structure is based upon replacement cost. Coverage on the house contents, unlisted personal property, and personal property off premises are typically based upon actual cash value. Note that recently many insurers began offering, for a slight premium increase, replacement-cost coverage on contents. These homeowner's policies may also specify internal limits for certain types of properties. For example, a $200 limit applies to money bank notes, bullion, silver, and coins and medals; a $1,000 limit applies to securities, manuscripts, evidences of debt, passports, tickets, and stamps; a $1,000 limit applies for loss by theft of jewelry, watches, furs, and precious and semiprecious stones; and a $2,000 limit applies to the loss of firearms by theft. The standard liability limit (coverage E) is $100,000, and the medical payments portion (coverage F) normally has a limit of $1,000 per person. Other expense coverages often included are claim expenses, such as court costs and attorney fees, first aid expenses such as ambulance costs, and damage to the property of others up to $500 per occurrence. 4. The Salazars should go with the HO-3 policy and shop for rates with reputable insurance companies. They should definitely get replacement-cost coverage and should also consider riders or endorsements for any special items in their home which may have limited coverage under the homeowner’s policy. Joaquin and Pilar should be sure to consider co-insurance clauses and obtain sufficient coverage to comply with this requirement. Also, they should make sure that adjustments are made periodically so that the amount of their insurance coverage increases as the value of their home increases. If they fail to do this, they may find that they would not have replacement-cost coverage. 10.2 Auto Insurance for Seth Morris 1. a. Basic Automobile Liability Insurance. Under this coverage, the insurer agrees: (1) to pay on the insured's behalf all sums for which the insured becomes legally obligated to pay because of accidental damages he or she caused another; and (2) to settle the claim or defend the insured against another who is seeking compensation arising out of a covered occurrence, up to policy limits only. b. Uninsured Motorist Coverage meets the needs of "innocent" accident victims injured by uninsured or hit-and-run motorists. Under this coverage, an insured is legally entitled to collect an amount equal to the sum that could have been collected from the negligent motorist's liability insurance, if such coverage had been available. c. Automobile Medical Payments Insurance provides for payment to eligible insured individuals of an amount no greater than the policy limits for all reasonable and necessary medical expenses incurred within three years after an automobile accident. It even provides for duplicate loss reimbursement even though other sources of recovery, such as accident or health insurance, also make payment. d. Automobile Collision Insurance provides property damage coverage that pays for collision damage to an insured automobile, regardless of fault. This coverage is written without outside limits, and the amount of insurance payable is the actual cash value of the loss (depreciated value) in excess of a stated deductible. e. Comprehensive Automobile Insurance provides protection against loss to an insured automobile caused by any peril (with few exceptions) other than collision. This coverage provides broad protection and includes, but is not limited to, damage caused by fire, theft, glass breakage, falling objects, malicious mischief, vandalism, riot, and earthquake. 2. Yes. The various limits available for each type of coverage are listed below: a. Basic Automobile Liability Insurance. Typically, this policy provides for different policy limits, depending on whether the damage is bodily injury or property damage. Limits are placed on both of these types of damages. Common terms are stated as $10,000/$20,000/$10,000. The first two amounts pertain to the maximum amounts for bodily injury to others: the first number is the maximum allowable per person, and the second number is the total maximum allowable per accident, no matter how many people are injured. The third number is the per accident amount of property damage liability protection. b. Uninsured Motorist Coverage. This coverage typically provides basic limits of $10,000/$20,000. This means that in the event the insured is involved in an accident with an uninsured motorist the maximum liability coverage per person injured in an accident is $10,000, and total liability per accident is $20,000. In many states, this part does not cover your property which has been damaged. c. Automobile Medical Payments Insurance usually provides per person limits of $1,000, $2,000, $3,000, $5,000, or $10,000. Most families are advised to buy the $5,000 or $10,000 limit because, even if they have other adequate health insurance coverage available, they cannot be certain that their passengers are equally well protected. d. Automobile Collision Insurance. This part covers the damage to your auto when you collide with anything, regardless of fault. There are no outside limits. The amount of insurance payable is the actual cash value of the loss in excess of a stated deductible, which is typically $50, $100, or $250. e. Comprehensive Automobile Insurance. This part covers the damage to your auto against most insurable perils, other than collision, regardless of fault. Again, the amount of insurance payable is the actual cash value less any applicable deductible, which is most commonly $50 or $100. Theft of personal property kept or left in the insured automobile is not covered under this policy. Such losses may be covered by the off-premises coverage of the homeowner's policy. 3. a. Basic Automobile Liability Insurance. The persons covered under this coverage are the named insured and family residents of his or her household with respect to an owned automobile. Also protected are any other persons who use the automobile with the permission of the named insured owner as long as they stay within the scope of such permission. Coverage is also afforded to persons or organizations on whose behalf the automobile of the named insured owner is being driven. Coverage is also extended to the named insured while operating other nonowned automobiles and to his or her household relatives while they are operating any nonowned private passenger automobile or trailer. b. Uninsured Motorists Coverage. This coverage is applicable and/or offered to the named insured, his or her household relatives, and any other person driving the insured vehicle within the scope of permission. It is effective when those covered are "innocent" accident victims negligently injured by uninsured or hit-and-run motorists. c. Automobile Medical Payments Insurance. Coverage under an automobile medical payments insurance policy applies to a named insured and household relatives while occupying either an owned or an unowned automobile (with permission) or if struck by an automobile or trailer of any type. Auto insurance contracts also sometimes cover any other person occupying an unowned private passenger automobile that is being operated by a named insured or a covered relative. d. Automobile Collision Insurance. This coverage protects against loss to an insured automobile caused by collision. Due to the types of losses covered, the specification of persons covered is usually not necessary. This is a comprehensive property damage coverage, not a human loss coverage. e. Comprehensive Automobile Insurance. This coverage protects against loss to an insured automobile caused by any peril (with few exceptions) other than collision. Due to the types of losses covered, the specification of persons covered is usually not necessary. This is a comprehensive property damage coverage, not a human loss coverage. 4. Mr. Morris’ policy should, at a minimum, contain provisions for liability, uninsured motorists, and medical payments protection. In many states, minimum liability coverage (or financial responsibility) is required by law. At least the minimum limits of liability coverage should be purchased. He would also be wise to buy at least the basic $10,000/$20,000 uninsured motorist coverage. This coverage is attractive due to its low cost relative to the amount of protection it provides. Medical payments insurance is also advisable since it is also relatively low cost and provides protection above and beyond other health and accident insurance. Because Mr. Morris is buying a brand new car, he should also have both collision and comprehensive coverage. Buying these coverages with high deductibles ($250 or more) reduces the cost of the coverage. He will have to select the deductible amount on the basis of his own risk disposition. If Mr. Morris’ son is not yet driving, he will be shortly, and that means his auto insurance rates will increase dramatically. He can lessen the blow somewhat by selecting higher deductibles and paying for smaller bumps out of pocket. However, it would be wise to select higher liability limits, as unfortunately, new drivers are more likely to have accidents, and to also obtain umbrella liability insurance. Umbrella insurance would kick in if the amount of damage in an auto accident were to be greater than the amount of protection offered by the auto and homeowner’s policies. He needs to be sure to protect himself and his son against large losses which would be catastrophic for them. In summary, it is recommended that Mr. Morris buy an insurance policy on the new car that provides all five coverages. When shopping for this coverage, he should get quotes from several agents and not assume that Paula Rathbone, his agent with Chairman’s Insurance Company, will provide the lowest cost coverage. He should shop around since other insurers may offer even lower rates on comparable coverage for the two cars. It is important that Mr. Morris compare similar coverage and that he purchases the legal minimum of financial responsibility coverage required by Virginia insurance and motor vehicle laws. He should also compare the cost of various deductibles on the collision and comprehensive coverages to decide which deductible best fits his risk-cost preferences. The ultimate goal is to get the desired coverage at the lowest premium cost through a good agent representing a reputable, financially sound insurer that is known to have good claims settlement practices. Solution Manual for PFIN Personal Finance Lawrence J. Gitman, Michael D. Joehnk, Randall S. Billingsley 9781285082578
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