HUSC 3366 Chapter 8 Home and Automobile Insurance

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HUSC 3366 Chapter 8 Home and Automobile Insurance

  1. 1. Home and Automobile Insurance Chapter 8
  2. 2. Objectives <ul><li>Identify types of risks and risk management methods and develop a risk management plan. </li></ul><ul><li>Assess the insurance coverage and policy types available to homeowners and renters. </li></ul><ul><li>Analyze the factors that influence the amount of coverage and cost of home insurance. </li></ul>
  3. 3. Objectives cont’d <ul><li>Identify the important types of automobile coverage. </li></ul><ul><li>Evaluate factors that affect the cost of automobile insurance. </li></ul>
  4. 4. Lesson 1: Insurance and Risk Management
  5. 5. Insurance and Risk Management <ul><li>Insurance is protection against possible financial loss; it gives you peace of mind. </li></ul><ul><li>An insurance company, or insurer, is a risk-sharing firm that assumes financial responsibility for losses from an insured risk. </li></ul><ul><li>People purchase a policy and the firm assumes a risk for a fee called the premium, which the insured policyholder pays periodically. </li></ul>10-2
  6. 6. Types of Risk <ul><li>Risk is - Uncertainty or lack of predictability, such as the loss that a person or property, covered by insurance, faces. </li></ul><ul><li>Peril: is the cause of a possible loss, such as fire, windstorm, robbery, disease, or death. </li></ul><ul><li>Hazard: increases the likelihood of a loss, such as driving drunk, or defective house wiring. </li></ul><ul><li>Negligence: is the failure to take ordinary or reasonable care to prevent accidents. </li></ul>10-3
  7. 7. Coverage and Type of Risk <ul><li>Pure Risk. </li></ul><ul><ul><li>Personal risks, property risks, and liability risks are types of pure risk. </li></ul></ul><ul><ul><li>Insurable, chance of loss, not gain. </li></ul></ul><ul><ul><li>Accidental, unintentional. </li></ul></ul><ul><ul><li>Nature and financial loss of the risk can be predicted. </li></ul></ul><ul><li>Speculative Risk. </li></ul><ul><ul><li>Chance of loss or gain, such as starting a business. </li></ul></ul><ul><ul><li>Uninsurable. </li></ul></ul>10-4
  8. 8. Risk Management <ul><li>Risk management : Organized, planned strategy to protect your assets and family. </li></ul><ul><ul><li>Long-range planning process </li></ul></ul><ul><ul><li>Not just buying insurance </li></ul></ul><ul><li>There are four general risk management techniques. </li></ul>
  9. 9. 10-5 RiskAvoidance RiskShifting RiskAssumption RiskReduction Ways to Manage Risk
  10. 10. Risk Avoidance <ul><li>You can avoid traffic accidents by not driving. </li></ul><ul><li>A car manufacturer can avoid risk of product loss by not introducing new cars. </li></ul><ul><li>These are not practical and have serious tradeoffs. </li></ul><ul><li>However, you take precautions in high crime areas to avoid risk of being robbed. </li></ul>
  11. 11. Risk Reduction <ul><li>Decreasing the likelihood that risks will cause you harm. </li></ul><ul><li>Wearing a seatbelt to reduce the risk of injury in a car accident. </li></ul><ul><li>Not smoking to reduce the risk of developing lung cancer. </li></ul><ul><li>Eating properly and exercising regularly to reduce the risk of illness. </li></ul>
  12. 12. Risk Assumption <ul><li>Taking on responsibility for the negative results of a a risk. </li></ul><ul><li>It makes sense to assume a risk if the possible loss will be small </li></ul><ul><li>For example, not purchasing collision insurance on an older car. </li></ul><ul><li>If insurance coverage of an item is expensive it might not be worth insuring. </li></ul><ul><li>Self insurance is setting up a special fund or savings to cover cost of loss. </li></ul>
  13. 13. Risk Shifting <ul><li>The most common method of dealing with risk is to shift it. </li></ul><ul><li>In exchange for a fee you pay, the insurance company agrees to pay for your losses. </li></ul><ul><li>A deductible is the amount that the policyholder must pay per loss on an insurance policy. It is a combination of assumption and risk shifting. </li></ul>
  14. 14. Planning an Insurance Program pg 241 <ul><li>To put your risk management plan to work ask yourself… </li></ul><ul><ul><li>What should be insured? </li></ul></ul><ul><ul><li>For how much? </li></ul></ul><ul><ul><li>What kind of insurance? </li></ul></ul><ul><ul><li>From whom? </li></ul></ul><ul><li>Set your insurance goals and prioritize them. </li></ul><ul><li>Develop a plan to reach your goals. </li></ul><ul><li>Put plan into action. </li></ul><ul><li>Review results. </li></ul>10-6
  15. 15. Property and Liability Insurance <ul><li>Recently there have been major losses from things such as fires in the west, floods and tornadoes in the midwest, and hurricanes in Louisiana, Mississippi and Texas. </li></ul><ul><li>Potential physical damage and loss of use. </li></ul><ul><ul><li>Home, automobiles, furniture, clothing, and personal belongings. </li></ul></ul>10-7
  16. 16. Property and Liability Insurance <ul><li>Liability: legal responsibility for cost of another person’s losses or injuries. </li></ul><ul><li>Liability due to negligence . </li></ul><ul><ul><li>Failure to take ordinary, reasonable care, such as failure to supervise children in a pool. </li></ul></ul><ul><li>Vicarious Liability. </li></ul><ul><ul><li>When you are held responsible for the actions of another person, such as your child throwing a ball through a neighbor’s window. </li></ul></ul>10-8 (continued)
  17. 17. Lesson 2: Home and Property Insurance
  18. 18. Home Insurance Coverage House and other structures Personal Property Loss of use/additional living expenses while home is uninhabitable Personal Liability and related coverages
  19. 19. Homeowner’s Insurance Coverages <ul><li>Homeowners insurance is coverage for a place of residence & associated financial risks. </li></ul><ul><ul><li>Damage to or destruction of your house and other structures, plus trees, shrubs and plants, </li></ul></ul><ul><ul><li>Additional living expenses. </li></ul></ul><ul><ul><li>Personal property in or away from home. </li></ul></ul><ul><ul><li>Personal property floater - high value items. </li></ul></ul><ul><ul><li>Household inventory with documentation. </li></ul></ul><ul><ul><li>Endorsements add coverage for things such as earthquake damage, or damage from floods. </li></ul></ul>10-9
  20. 20. Homeowner’s Insurance Coverages <ul><li>Medical coverage payments for minor injuries caused by you, your family members, or pets, occurring on your property or away from home. </li></ul><ul><li>Personal liability- $100,000 or more. </li></ul><ul><ul><li>Umbrella policy - also called a personal catastrophe policy-supplements basic personal liability coverage. </li></ul></ul><ul><ul><li>$1,000,000 or more in liability coverage. </li></ul></ul>10-10 (continued)
  21. 21. Items Covered by Renter’s Insurance <ul><li>Personal property loss or damage. </li></ul><ul><li>Additional living expenses. </li></ul><ul><li>Personal liability. </li></ul><ul><li>A building owner’s insurance usually won’t cover renter’s personal property. </li></ul><ul><ul><li>Broad form- covers perils specified in the policy. </li></ul></ul><ul><ul><li>Comprehensive form protects all perils not specifically excluded in the policy. </li></ul></ul>10-11
  22. 22. Home Insurance Policy Forms pg 250 <ul><li>Basic form (HO-1) </li></ul><ul><li>Broad form (HO-2) </li></ul><ul><li>Special form (HO-3), All-risk </li></ul><ul><li>Tenant’s form (HO-4) </li></ul><ul><li>Comprehensive form (HO-5) </li></ul><ul><li>Condominium owner (HO-6) </li></ul><ul><li>Modified coverage form (HO-8), Older homes. </li></ul><ul><li>Other items covered: Credit card fraud, check forgery, temporary repairs and fire department charges in areas with such fees. </li></ul>10-12
  23. 23. Lesson: 3 Home Insurance Cost Factors
  24. 24. Home Insurance Cost Factors <ul><li>Two-thirds of homes in the United States are either not insured or are underinsured. </li></ul><ul><li>Billions of dollars of damage occur each year from fire, theft, wind and other risks. </li></ul><ul><li>Determine the amount of coverage you need by considering… </li></ul><ul><ul><li>Replacement value of your home. </li></ul></ul><ul><ul><li>Value of your home’s contents. </li></ul></ul><ul><ul><li>Protection for specific items like jewelry. </li></ul></ul><ul><ul><li>Liability coverage you need. </li></ul></ul>10-13
  25. 25. Policy Provisions <ul><li>Look for a policy with full coverage rather than a coinsurance clause, where you have to pay for part of a loss. </li></ul><ul><li>Which type of claim settlement method is used? </li></ul><ul><ul><li>Actual cash value - cost less depreciation. </li></ul></ul><ul><ul><li>Replacement cost - cost to repair or replace the damaged or lost item, without considering depreciation of the item. May limit replacement cost to 400% of actual cash value of item. Costs 10-20% more than actual cash value coverage. </li></ul></ul>10-14
  26. 26. Factors That Affect Home Insurance Costs <ul><li>Location of residence. </li></ul><ul><li>Type and age of the structure. </li></ul><ul><li>Amount of coverage, policy type, and deductibles. </li></ul><ul><li>Discounts - alarm system, smoke detector, if you insure your car with the same company. </li></ul><ul><li>Company differences. </li></ul><ul><ul><li>Compare costs and coverages at sites such as www.insuremarket.com </li></ul></ul><ul><ul><li>Customer satisfaction index information is available at www.ConsumerReports.org </li></ul></ul>10-15
  27. 27. Lesson: 4 Automobile Insurance Coverages
  28. 28. Automobile Insurance Coverages <ul><li>Financial responsibility law. </li></ul><ul><ul><li>State legislation. Forty-five states have compulsory automobile liability insurance laws as of 2003. </li></ul></ul><ul><li>Requires drivers to prove their ability to cover the cost of damage or injury caused by them in an automobile accident. </li></ul><ul><li>Two major categories of automobile insurance are bodily injury coverages and property damage coverages . </li></ul>10-16
  29. 29. Motor Vehicle Insurance Coverages <ul><li>Bodily injury </li></ul><ul><ul><li>Bodily injury liability covers the risk of financial loss due to: </li></ul></ul><ul><ul><ul><li>legal expenses, </li></ul></ul></ul><ul><ul><ul><li>medical expenses, </li></ul></ul></ul><ul><ul><ul><li>lost wages and </li></ul></ul></ul><ul><ul><ul><li>other expenses associated with injuries caused by an accident for which you were responsible. </li></ul></ul></ul>10-18
  30. 30. Motor Vehicle Insurance Coverages <ul><li>Bodily injury </li></ul><ul><ul><li>Medical payments covers: </li></ul></ul><ul><ul><ul><li>the cost of health care for persons injured in your automobile, including yourself and </li></ul></ul></ul><ul><ul><ul><li>pays medical expenses if you or your family are injured while riding with another person or if any of you are hit by a vehicle. </li></ul></ul></ul>
  31. 31. Motor Vehicle Liability Coverages 10-17 bodily injury liability property damage liability
  32. 32. Auto Insurance Coverages <ul><li>Uninsured motorist. </li></ul><ul><ul><li>Pays for 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 damages. </li></ul></ul><ul><li>Underinsured motorist </li></ul><ul><ul><li>Pays costs if your car is hit by a person who doesn’t have enough insurance to cover the damage they did to you and your car. </li></ul></ul>10-20
  33. 33. Motor Vehicle Insurance Coverages <ul><li>Property damage liability covers: </li></ul><ul><ul><li>damage to others person’s car when you are at fault and </li></ul></ul><ul><ul><li>includes damage to such things as street signs, telephone poles and buildings. </li></ul></ul><ul><ul><li>Also covers you when driving another person’s vehicle with the owner’s permission. </li></ul></ul>10-19 
  34. 34. Collision Coverage <ul><li>When your car is in an accident, collision coverage pays for damage to your automobile, regardless of who is at fault. </li></ul><ul><li>However, if you are not at fault, your insurer will try and collect from the other driver’s property damage liability first. </li></ul><ul><li>Coverage is limited to the retail value of your vehicle. </li></ul>10-22
  35. 35. Comprehensive Physical Damage <ul><li>Covers damage to your vehicle that is not caused by a collision, such as... </li></ul><ul><ul><li>Fire, theft or vandalism. </li></ul></ul><ul><ul><li>Glass breakage. </li></ul></ul><ul><ul><li>Hail, sand, or wind storm. </li></ul></ul><ul><ul><li>Falling objects or hitting an animal. </li></ul></ul><ul><ul><li>Some things in your car, like some radios and stereo equipment are not covered. </li></ul></ul>10-23
  36. 36. No-Fault Insurance <ul><li>Each driver collects from their own insurance company for medical expenses, lost wages, and related injury costs. </li></ul><ul><li>Thirty states have some variation of the system. </li></ul><ul><li>Intended to provide fast and smooth methods of paying for damages without taking the legal action frequently necessary to determine fault. </li></ul><ul><li>Time and cost is not always reduced since problems arise because systems vary among states. </li></ul>10-21
  37. 37. Other Coverages <ul><li>Wage loss insurance pays for any salary or income you might have lost because of being injured in a vehicle accident. </li></ul><ul><li>Emergency road service coverage pays for mechanical assistance in the event that your vehicle breaks down. </li></ul><ul><li>Rental reimbursement coverage pays for a rental car if you vehicle is stolen or being repaired. </li></ul>
  38. 38. Lesson: 5 Automobile Insurance Costs
  39. 39. Amount of Coverage <ul><li>Legal concerns include having enough coverage if you were sued. </li></ul><ul><ul><li>$100,000/$300,000 is recommended for bodily injury liability,with an additional $1,000,000 or more umbrella liability policy recommended. </li></ul></ul><ul><li>Property values of vehicles have gone up. </li></ul><ul><ul><li>$50,000-$100,000 is usually suggested for property damage liability. </li></ul></ul>10-24
  40. 40. Auto Insurance Premium Factors <ul><li>Automobile type. </li></ul><ul><ul><li>Year, make, model, and theft rate. </li></ul></ul><ul><li>Rating territory. </li></ul><ul><ul><li>Accident, auto theft, and vandalism rates in the area where you live. </li></ul></ul><ul><li>Driver classification. </li></ul><ul><ul><li>Age, sex, marital status, credit history, driving record, and driving habits. </li></ul></ul><ul><li>Assigned risk pool for people who are unable to obtain insurance. </li></ul>10-25
  41. 41. Reducing Automobile Insurance Premiums <ul><li>Find out how much it will cost to insure a car before you buy it. </li></ul><ul><li>Compare companies - www.insuremarket.com . </li></ul><ul><li>Have larger deductibles. </li></ul><ul><li>Look for discounts. </li></ul><ul><ul><li>Establish and maintain a good driving record. </li></ul></ul><ul><ul><li>Non-smoker. </li></ul></ul><ul><ul><li>Install security devices such as a car alarm. </li></ul></ul><ul><ul><li>If you have more than one vehicle, insure them both with the same company. </li></ul></ul>10-26
  42. 42. Class Activity <ul><li>Bring your automobile insurance policy to class. </li></ul><ul><li>Pair off with another student and compare your policies. </li></ul><ul><li>Discuss the similarities and differences of your policies. </li></ul>10-27

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