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Insurance and Risk Management: Protecting Property and Motor Vehicles

This chapter explores the importance of property and liability insurance, the types of insurance coverage available to homeowners and renters, and factors that influence the cost of insurance. It also discusses the different types of automobile insurance coverage and factors that affect the cost of auto insurance.

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Insurance and Risk Management: Protecting Property and Motor Vehicles

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  1. Chapter 10 Property and Motor Vehicle Insurance

  2. Chapter 10Learning Objectives LO10-1 Develop a risk management plan using insurance. LO10-2 Discuss the importance of property and liability insurance. LO10-3 Explain the insurance coverage and policy types available to homeowners and renters. LO10-4 Analyze factors that influence the amount of coverage and the cost of home insurance. LO10-5 Identify the important types of automobile insurance coverage. LO10-6 Evaluate factors that affect the cost of auto insurance. 10-2

  3. Insurance and Risk Management: An Introduction LO10-1: Develop a risk management plan using insurance. • WHAT IS INSURANCE? • Insurance is protection against possible financial loss; it gives you peace of mind • An insurance company, or insurer, is a risk-sharing firm that assumes financial responsibility for losses from an insured risk • People purchase a policy. The firm assumes the risk for a fee called the premium, which the insured policyholder pays periodically 10-3

  4. Types of Risk • TYPES OF RISKS • Risk is uncertainty or lack of predictability, such as the loss that a person or property covered by insurance faces • Peril is the cause of a possible loss, such as fire, windstorms, explosions, robbery, accidents, and premature death • Hazard increases the likelihood of a loss, such as defective house wiring 10-4

  5. Types of Risk(continued) • Pure Risk • The most common risks are classified as personal risks, property risks, and liability risks • Insurable risk; chance of loss not gain • Accidental and unintentional risks • Nature and financial cost of the loss can be predicted • Speculative Risk • Chance of either loss or gain, such as starting a small business or gambling • Uninsurable risk 10-5

  6. Risk Management Methods • Risk management is an organized strategy for protecting assets and people • Risk Management Techniques • Risk Avoidance • Risk Reduction • Wear seat belt, install smoke alarms, eat a balanced diet and exercise • Risk Assumption • Self-insurance • Risk Shifting • Transfer risk to insurance company

  7. Planning an Insurance Program 10-7

  8. Property and Liability Insurance LO10-2: Discuss the importance of property and liability insurance. • Major disasters have caused catastrophic amounts of property loss in the United States. In recent years, hurricanes, tornadoes, and floods in various areas have caused billions of dollars of damage 10-8

  9. Potential Property Losses • Houses, automobiles, furniture, clothing, and other personal belongings • Risk: Physical damage • Caused by hazards such as fire, wind, water and smoke • Destruction of property or temporary loss of use • Risk: Loss of use • Due to robbery, burglary, vandalism, or arson 10-9

  10. Liability Protection • Liability is legal responsibility for financial cost of another person’s losses or injuries • Negligence • Failure to take ordinary or reasonable care, such as failure to supervise children in a pool • Strict Liability • A person is held responsible for intentional or unintentional actions • Vicarious Liability • When a person is held responsible for the actions of another person • Parent held responsible for child causing physical harm to another • Employer held responsible for an employee causing damage 10-10

  11. Home and Property Insurance LO10-3: Explain the insurance coverage and policy types available to homeowners and renters. • HOMEOWNER’S INSURANCE COVERAGES • House and Other Structures • Damage to or destruction of your house and garage, tool shed, gazebo, trees, shrubs, and plants • Additional living expenses • Personal property at home or while traveling • Personal property floater — high value items • Household inventory with documentation 10-11

  12. Personal Liability and Related Coverage • Medical payments coverage for minor accidental injuries on your property and minor injuries caused by you, family members, or pets • Most homeowner’s policies provide Basic Personal Liability coverage of $100,000 or more • Umbrella policy, also called a personal catastrophe policy, supplements basic personal liability coverage • $1,000,000 or more in liability coverage 10-12

  13. Personal Liability and Related Coverage(continued) • Specialized coverage • Homeowner’s insurance usually does not cover losses from floods and earthquakes • National Flood Insurance Program makes flood insurance available • Earthquake insurance can be obtained as an endorsement, addition of coverage to the homeowner’s policy • Anti-Concurrent Causation Clause • Gives insurer the right to reject your claim if your home is damaged by several factors at the same time, such as wind and rain, because they are unable to determine which factor came first and caused the damage 10-13

  14. Renter’s Insurance • Protection against financial loss due to damage or loss of personal property • Additional living expenses • Personal liability and related coverage • A building owner’s insurance usually won’t cover renter’s personal property • Only 4 out of 10 renters have insurance 10-14

  15. Home Insurance Policy Forms • Special form (HO-3), All-risk • Tenant’s form (HO-4) • Comprehensive form (HO-5) • Condominium form (HO-6) • Country Home form (HO-7) 10-15

  16. Home Insurance Cost Factors LO10-4: Analyze factors that influence the amount of coverage and the cost of home insurance. • Look for a policy with full coverage rather than a coinsurance clause, where you have to pay for part of a loss • Claim Settlement Method • Actual cash value • Payment you receive is based on the current replacement cost of the damaged or lost item less depreciation 10-16

  17. Claim Settlement Method • Replacement value • You receive the full cost to repair or replace the damaged or lost item; depreciation is not considered • May limit replacement cost to 400% of actual cash value of item • Costs 10-20% more than Actual Cash Value coverage 10-17

  18. How Much Coverage Do You Need? 10-18

  19. Factors • FACTORS THAT AFFECT HOME INSURANCE COSTS • Location Of Home • Type Of Structure • Brick house cost less to insure than wood house • Coverage Amount And Policy Type • Deductible affects cost of your insurance; Increase deductible to lower premium; common deductibles are $500 or $1,000 10-19

  20. Reducing Home Insurance Costs • Home Insurance Discounts • Alarm system, smoke detector, fire extinguisher, nonsmokers, if you insure your car with the same company • Company Differences • Compare costs, coverage, and service • Consider how claims are settled • Check customer satisfaction index at Consumer Reports 10-20

  21. Automobile Insurance Coverages LO10-5: Identify the important types of automobile insurance coverage. • Financial responsibility law • State legislation: Nearly all states have compulsory automobile insurance laws • Requires drivers to prove their ability to cover the cost of damage or injury caused by them in an automobile accident • Automobile insurance coverage falls into two categories: bodily injury coverage and property damage coverage 10-21

  22. Automobile Liability Insurance Coverage Property Damage Liability Bodily Injury Liability 10-22

  23. Motor Vehicle Bodily Injury Coverages • Bodily Injury Liability • Covers the risk of financial loss due to legal expenses, medical expenses, lost wages and other expenses associated with injuries caused by an automobile accident for which you were responsible • Medical Payments Coverage • Covers the cost of health care for persons injured in your automobile, including yourself; also covers if you are injured while riding in another person’s automobile or a pedestrian 10-23

  24. Motor Vehicle Bodily Injury Coverages(continued) • Uninsured Motorist Protection • Covers the cost of injuries to you and your family if your vehicle is hit by a person without insurance. However, it does not cover property damage • No-Fault Insurance • System is intended to provide fast, smooth methods of paying for damages without taking the legal action frequently necessary to determine fault; drivers collect from their own insurance companies 10-24

  25. Motor Vehicle Property Damage Coverages • Property Damage Liability • Covers damage to other person’s car when you are at fault. It also includes damage to such things as street signs and buildings • Collision • When your car is in an accident, collision coverage pays for damage to your automobile regardless of who is at fault • If you are not at fault, your insurer will try and collect from the other driver’s property damage liability first — called subrogation • Coverage is limited to the actual cash value of your vehicle from an appraisal service (National Automobile Dealers Association) 10-25

  26. Motor Vehicle Property Damage Coverages(continued) • Comprehensive Physical Damage • Covers damage to your vehicle that is not caused by a collision, such as... • Fire, theft, or vandalism • Glass breakage • Wind, hail, flood, tornado, etc. • Falling objects or hitting an animal • Some things in your car, like some radios and stereo equipment, are not covered 10-26

  27. Deductible • Example: Deductible If a broken windshield costs $250 to replace and you have a $100 deductible on your comprehensive coverage, the insurance company will pay $150 of the damages.

  28. Other Automobile Insurance Coverages • Wage Loss Insurance • Reimburse you for any salary or income lost due to injury in an automobile accident • Towing and Emergency Road Service • Pays for the cost of breakdowns and mechanical assistance 10-28

  29. Automobile Insurance Costs LO10-6: Evaluate factors that affect the cost of automobile insurance. • AMOUNT OF COVERAGE • Legal Concerns include having enough coverage if you were sued • $100,000/$300,000 is recommended for bodily injury liability, with an additional $1,000,000 or more umbrella liability policy recommended 10-29

  30. Amount of Coverage • Property Values • Cost of vehicles has gone up • $50,000-$100,000 is usually suggested for property damage liability 10-30

  31. Automobile Insurance Premium Factors • Automobile Type • Year, make, model, and theft rate • Rating Territory • Different costs due to number of claims made in the geographic area where you live • Driver Classification • Age, sex, marital status, credit history, driving record, and driving habits • Assigned risk pool for people who are unable to obtain insurance 10-31

  32. Reducing Automobile Insurance Premiums • Comparing Companies • Rates may be compared online at NetQuote • Premium Discounts • Establish and maintain a safe driving record • Avoid accidents and traffic violations • Install security devices such as a car alarm • Increase deductibles • Non-smoker • Insuring two or more vehicles with the same company 10-32

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