Chapter 10

1. Chapter 10 Managing Propertyand Liability Risk

2. Learning Objectives • Apply the risk-management process to address the risks to your property and income. • Explain how insurance works to reduce risk. • Design a homeowner’s or renter’s insurance program to meet your needs. • Design an automobile insurance program to meet your needs. • Describe other types of property and liability insurance. • Summarize how to make an insurance claim.

3. Introduction • Property Insurance – The protection from financial losses resulting from the damage to or destruction of your property • Liability Insurance – Protection from financial losses suffered when you are held liable for others’ losses.

4. Risk and Risk Management • What is the nature of risk? It is the uncertainty about the outcome of a situation or event. • Speculative risk – A potential for gain as well as for loss. Ex: Investments • Pure risk – No potential for gain only the possibility for loss. Ex: Fire, automobile accidents, illness and theft.

5. The Risk-Management Process • Step 1: Identify sources of risk or exposure. • Vehicle, Home, Jewelry, illness, death • Peril: Event that can cause a financial loss • Step 2: Estimate risk and potential losses. • Loss frequency – evaluate the likely number of times that a loss might occur over a period of time. • Loss severity – the potential magnitude of the loss

6. The Relationship Between Severity and Frequency of Loss • Insurance coverage targeted for high severity loss

7. The Risk-Management Process • Step 3: Choose how to handle risk: • Risk Avoidance– Refrain from owning items or engaging in activities that expose risk of loss • Risk Retention– Accept risk and plan for its possible effect • Loss Control – Designed to reduce severity and frequency of loss. Ex: Locks and Fire Alarms • Risk Transfer – Insurance provides transfer of financial loss burden to insurance provider • Risk Reduction – Reducing risk to acceptable levels by planning for possible loss such as a deductible for insurance coverage

8. The Risk-Management Process • Step 4: Implement the risk-management program. • Large-Loss Principle: Insure the losses that you cannot afford, pay the small losses out of your own pocket. • Evaluate the maximum possible loss and insure coverage meets this amount • Step 5: Evaluate and adjust the program. • Risk events and exposure are not static; they change over time • Consider life events such as marriage, home purchase and retirement planning for insurance coverage • http://www.insure.com

9. The Risk-Management Process

10. Understanding HowInsurance Works • Insurance – Method for transferring and reducing pure risk through which a large number of individuals share in the financial losses suffered by members of the group as a whole. • Premium – A small, predictable fee which individuals or companies can replace an uncertain and possibly large financial loss. • Insurance Policy – A contract between the person buying insurance (the insured) and the insurance company (the insurer).

11. Understanding HowInsurance Works • Hazards make losses more likely to occur. • Hazard: Any condition that increases the probability that a peril will occur. • Only certain losses are insurable (3 Types): • Fortuitous losses are unexpected in terms of both their timing and magnitude. Ex: Lightening strike or house fire • Financial loss – Any decline in value of income or assets in the present or future. Ex: Lost wages, medical bills, etc. • Personal loss – Any loss experienced by specific individuals or organizations rather than society as a whole.

12. Understanding HowInsurance Works • The Principle of Indemnity Limits: • Principle of indemnity – Insurance will pay no more than the actual financial loss experienced. • Policy limits – Specify the maximum dollar amounts that will be paid under the policy. • Factors that reduce the cost of insurance: • Deductibles – Requirements that the policyholder pays an initial portion of any loss • Coinsurance – Method by which the insured and the insurer share proportionately in the payment for a loss • Calculated as R = (1-CP)(L-D) R = Reimbursement, CP = coinsurance % required of the insured, L = Loss, D = Deductible • Ex: Assume $100 Deductible and 20% coinsurance. If loss is $1,350, the reimbursement would be $1,000 or: R = (1 – 0.20)($1,350-$100) = $1,000

13. Understanding HowInsurance Works • The essence of insurance: • Law of large numbers –As the number of members in a group increases, predictions about the group’s behavior become increasingly accurate. Recognizes that you should buy insurance against large losses and cover small losses yourself. • Insurance buyers benefit regardless if they suffer a loss because of risk reduction • Who sells insurance? • Exclusive Insurance agents – Representative of an insurance company authorized to sell, modify, service and terminate insurance contracts. • Independent insurance agents – Business people who act as third-party links between insurers and insured. Customer is placed with insurance carrier which best meets their individual needs • Direct sellers – companies that market their policies through mail-order promotions, newspapers and the internet.

14. Homeowner’s Insurance • Coverages: • Property insurance • Named-perils policies – Cover only losses caused by perils that the policy specifically mentions. Ex: Flood Damage, Tornado, Etc. • All-risk (open-perils) policies – Losses caused by all perils other than those that the policy specifically excludes. • This provides broader coverage due to variety of possible events

15. Homeowner’s Insurance • Liability insurance: • Homeowner’s general liability protection – Applies when you are legally liable for another person’s losses, other than those that arise out of use of vehicles or professional duties. • Homeowner’s no-fault medical payments protection – pays bodily injury losses suffered by visitors regardless of who was at fault. Ex: A visitor’s child touches a hot stove and burns their hand. • Homeowner’s no-fault property damage protection – pays for property losses suffered by visitors at your house. Ex: A playful dog chews a fine leather coat.

16. Types of Homeowner’sInsurance Policies • Basic Form (HO-1) – A named policy that covers 11 property damage causing perils • Coverage includes Personal Liability, Property Damage and Medical Payments • Broad Form (HO-2) – A named policy that covers 18 property damage causing perils • Special Form (HO-3) – A named policy that provides protection for all perils except war, earthquake and flood. • Coverage includes Dwelling Losses, Losses to Structures, Landscaping Losses and additional Living Expenses. • Renter’s Contents Broad Form (HO-4) – Named policy that covers 17 perils and protects the insured from losses to the contents of a rented dwelling rather than the dwelling itself. • Condominium Form (HO-6) – Insurance coverage for contents and personal property, living expenses, liability losses. • Older Home Form (HO-8) – Insurance to replace an older home that provides actual cash value protection to rebuild and make it serviceable

17. Buying Homeowner’s Insurance • How much coverage is needed on your dwelling? • Replacement-cost requirement – A home must be insured for at least 80% of its replacement value in order for any loss to be fully covered. • Partial Coverage Loss – Increases out of pocket costs to insured. Ex: $200,000 Home insured for $144,000 with $500 deductible and $80,500 damage would result in insurance payment of: R = ($80,500 - $500) X ($144,000/($200,000 X 0.80) R = ($80,000) X ($144,000/$160,000) R = $80,000 X 0.90 R = $72,000 Insurance Payment of $72,000 vs. $80,000 for 80% coverage

18. Buying Homeowner’s Insurance • How much coverage is needed on your personal property? • Actual cash value (of personal property) – Represents the purchase price of the property less depreciation applied. • Difficult as actual replacement cost is always higher than actual cash value • Reduces risk exposure but does not provide full replacement of damaged property • Ex: 9 year old air-conditioner with 12 year useful life cost $2,400 new has actual cash value of: • ACV = $2,400 – (9 x ($2,400/12)) = $2,400 – (9 x $200) = $600 • Contents replacement-cost protection – Optional insurance policy that pays the full replacement cost of any personal property. Standard coverage limit of 50% replacement would need to be raised for full replacement insurance.

19. AutomobileInsurance – Losses Covered • Coverage A: • Liability insurance: Insurance coverage when insured is responsible for losses of others • Automobile Bodily Injury Liability – Occurs when a car owner or driver is legally responsible for bodily injury losses that other people including pedestrians suffer. Nebraska minimum = $25K • Automobile Property Damage Liability – Occurs when a driver or car owner is legally responsible for damage to other’s property such as a car, building, etc. Nebraska minimum = $25K • Family Auto Policy (FAP) – Insurance coverage for car owner, relatives in the household and individuals with permission to drive the vehicle. Ex: 100/300/50 is $100K max per individual bodily injury, $300K for all injuries to all people and $50K for property damage liability. • Personal Auto Policies (PAP) – All property and bodily injury liabilities losses from an accident are paid until a limit is reached such as $250K.

20. AutomobileLiability Insurance Policy Limits

21. AutomobileInsurance – Losses Covered • Coverage B: Medical payments insurance: • Automobile medical payments insurance – Insurance that covers bodily injury losses suffered by the driver of the insured vehicle and any passengers, regardless of who is at fault. • Personal Injury Protection (PIP) – Medical payments coverage for the driver and any passengers for bodily injury losses as well as possibly lost wages and rehabilitation expenses common in no-fault accident states. • Subrogation rights – allows an insurer to take action against a negligent third party (and their insurance company) to obtain reimbursement for payments made to an insured.

22. AutomobileInsurance – Losses Covered • Coverage C: Uninsured and underinsured motorist insurance: • Uninsured motorist insurance – Protects the insured and the insured’s passengers from bodily injury losses resulting from an accident caused by an uninsured motorist. Provides protection above the automobile medical payments insurance. Nebraska minimum = $25K • Underinsured motorist insurance – Protects the insured and their passengers from bodily injury losses when the at-fault driver has insurance but that coverage is insufficient to reimburse the losses. Nebraska minimum = $50K • Ex: 50/100 is $50K max coverage for one person and $100K is max coverage for multiple bodily injuries

23. AutomobileInsurance – Losses Covered • Coverage D: Physical damage insurance: • Collision insurance – Reimburses insured for losses to their vehicle resulting from a collision with another car or object or from a rollover. • Covers driver of another vehicle if permission granted by owner • Collision insurance carries a deductible which ranges from $100 - $1,000. • Comprehensive automobile insurance – Protects against property damage losses to an insured vehicle caused by perils other than collision and rollover. • Fire, theft, vandalism, hail, wind, etc. • Deductible ranges from $100 - $1,000

24. AutomobileInsurance – Losses Covered • Other protections: • Towing coverage – pays the cost of having a disabled vehicle towed for repairs usually between $25 and $50 per tow. • Rental reimbursement coverage – provides a rental car when the insured’s vehicle is being repaired after an accident or has been stolen. Daily limit paid may apply and ranges from $20 to $30 Max.

25. Summary of Automobile Insurance Coverages

26. Protection for Other Propertyand Liability Loss Exposures • Comprehensive personal liability insurance – provides coverage for others due to loss caused by insured and not related to car or home injury • Professional liability insurance – Protects individuals and organizations that provide professional services when they are held liable for their clients’ losses. Ex: Insurance coverage for Lawyers, doctors, accountants, etc. • Umbrella (or excess) liability insurance – Catastrophic liability policy that covers liability losses in excess of those covered by any underlying homeowner’s, automobile or professional liability policy. • Floater Policies – Provide all risk protection for accident and theft losses to movable property regardless of where the loss occurs. Ex: cameras, sporting equipment and clothing. Is typically part of a home owners policy.

27. How Umbrella Liability Policies Work

28. How to Collect on YourProperty and Liability Losses • Contact your insurance agent – Follow their advice regarding next steps for claim • Document your loss – Take photo’s, log date purchased, price paid, description, model number, serial number, etc. • Keep items in a safe or deposit box • File Police Report if needed • File your claim – Formal written request to the insurance company for reimbursement for a covered loss. • Claim adjuster may be someone designated by the insurance company to assess whether the loss is covered and determine the dollar amount that the company will pay. • Sign a release – An insurance document affirming that the dollar amount of the loss settlement is accepted as full and complete reimbursement and insured will make no future claims for the loss against the insurance company.

29. TheTop 3 Financial Missteps In Managing Property and Liability Risk People experience challenges when they do the following: • Buy only the legal minimum coverage on the liability insurance on their car. • Fail to keep good records that could serve to document insured property losses. • Pay high premiums because they select low deductibles on property insurance for your home or car.

30. Good Money Habits inManaging Property and Liability Risk • Identifying your exposures to risk and the magnitude of the losses that could occur. Always insure your home and vehicle. • Purchase insurance policies with very high liability limits to protect against the possibilityof catastrophic losses. • Verify that your auto insurance policy covers rental car losses so you can wisely ignore sales pressure to purchase such overpriced coverage. • Always comparison shop for insurance locally as well as online.

31. Good Money Habits in Managing Property and Liability Risk • Maintain a verifiable inventory of all your insured property so that you can collect what is coming to you in the event of a loss. • Once each year, reassess what types of and how much insurance coverage you need. • Buying renter’s insurance if you rent your housing.