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  1. CHAPTER8 Property and Motor Vehicle Insurance Insurance: The Necessary Evil

  2. Insurance and Risk Management • Insurance is protection against possible financial loss • An insurance company, or insurer, is a risk-sharing firm that assumes financial responsibility for losses from an insured risk • People purchase a policy and the insurance firm assumes a risk for a fee called the premium which the insured policyholder pays periodically Are insurance companies non-profit organizations? No! Never forget this.

  3. Risk, Peril and Hazards • Risk is uncertainty or lack of predictability, such as a loss that a person or property faces • Peril is the cause of a possible loss, such as fire, windstorms, robbery, disease or death • Hazard is something that increases the likelihood of a loss, such as driving drunk, smoking in bed, or defective house wiring

  4. Coverage and Type of Risk • Pure Risk • Insurable • Accidental, unintentional • Nature and financial loss of the risk can be predicted • Can be personal, property, or liability risk • Speculative Risk • Chance of loss or gain • Uninsurable • Such as starting a small business or gambling

  5. Risk Management • Risk management is a long range, organized, planned strategy toprotect your assets and family • Risk Avoidance – Don’t drive or ride in a car • Risk Reduction – Ride but wear a seatbelt • Risk Assumption – Drive but post a bond “self-insurance” • Risk Shifting – Drive but buy insurance • Most people use a combination of these strategies • Usually without much planning or conscious forethought • All too often, most people are uninsured, under-insured, or they are insured for the wrong things

  6. Examples of Risks You Face • Disability – most widely neglected risk (disability) • Illness – (health insurance) • Death – (life insurance) • Property loss – (home and auto insurance) • Physical damage • Loss of use • Personal Liability – (liability insurance) • You are legally responsible for another person’s losses or injuries • Vicarious liability – you are responsible for the actions of another (example: parent/guardian)

  7. Liability and Negligence • Negligence • Failure to take ordinary and reasonable care – Example: Failure to remove items from a frequently used staircase • Beware the “Attractive Nuisance” • Examples: Pools, ladders, appliances, cars Foreseeability is a critical factor in determining what constitutes an attractive nuisance.

  8. Planning an Insurance Program • Set your insurance goals and prioritize them • Develop a plan to reach your goals • Put your plan into action • Review your results To put your risk management plan to work, ask yourself… • What or who should be insured? • For how much? • What kind of insurance? • From whom? Yet another example of our book’s sagacious pearls of financial planning wisdom.

  9. A More Practical Insurance Planning Program • Ask yourself, “How much could we lose?” • If the answer is, “Plenty!” you need insurance • For Home or Auto, there is no question as to whether or not you need insurance • You could lose “Plenty!” in both situations • Therefore, • If you own a home, you need homeowner’s insurance • If you own an automobile, you need automobile insurance (at least liability) • In fact, it is legally required

  10. Homeowner’s Insurance Coverages • Homeowners insurance is coverage for a place of residence and its associated financial risks • Buildings and other structures, plus trees, shrubs and plants • Additional living expenses • Personal property • Personal property floater • Household inventory – take photographs • Endorsements for specialized coverage • Flood, earthquake, etc. • Medical payments for minor injuries on your property • Personal liability • May need extra coverage for workers in the home

  11. Consider an Umbrella Policy • Supplements basic personal liability coverage • a.k.a. personal catastrophe policy • Average personal liability from homeowner’s insurance is only $100,000 to $300,000 • $1,000,000 or more in liability coverage is typical for umbrella policies • That’s a whole lotta’ personal liability protection Your home or auto insurer will also often offer you an umbrella policy.

  12. How an Umbrella Policy Works

  13. Personal Liability Example • You are playing baseball and accidentally swing a bat into a friend’s head (Hey, it happens!) • He now requires 24-hour skilled nursing care • The cost is $50,000 per year in perpetuity • Your homeowner’s personal liability limit is $300,000 • They will only pay $300,000 towards his care • The $1,000,000 umbrella policy will begin to pay for the care once the $300,000 limit is reached Given the cost of health care, personal liability awards can be enormous.

  14. Items Covered by Renter’s Insurance • Personal property loss or damage • Personal liability • Additional living expenses • A landlord’s insurance usually won’t cover personal belongings • Only 40% of renters have renter’s insurance

  15. Home Insurance Policy Forms • Basic form (HO-1) • Broad form (HO-2) • Special form (HO-3) • Tenant’s form (HO-4) • Comprehensive form (HO-5) • Condominium form (HO-6) • Modified coverage form (HO-8) Your lender is going to make you buy the HO-5 Comprehensive Form (HO-6 for condos) In addition, many homeowner policies cover such items as credit card fraud, check forgery, temporary repairs and fire department charges in areas with such fees.

  16. How Much Coverage Do You Need? • Full coverage versus a coinsurance clause • What would it cost to replace your home? • What is the likely “worst case” loss? • Have sufficient liability coverage (umbrella policy) • Include protection for specific items such as collections, cameras, and jewelry • Determine the value of the contents of your home • Actual cash value – original cost less depreciation • Replacement cost– repair or replace with new item

  17. The Coinsurance Clause • Coinsurance clause • Requires the homeowner to pay for part of the losses if the property is not insured for (typically) 80% of the replacement value • Example: $40,000 loss on a $200,000 home • Home worth $200,000 but only covered for $150,000 • $200,000 * 80% = $160,000 – Insufficient coverage! • The homeowner was not in compliance • The home was “underinsured” • The insurance company will only pay… • $40,000 loss * ($150,000 / $200,000) = $30,000 • The homeowner must pay the extra $10,000

  18. Factors That Affect Home Insurance Costs • Location of residence • How close is the fire department? • Type and age of the structure • Amount of coverage and deductibles • Discounts – alarm system, smoke detector, if you insure your car with the same company • Company differences • Compare costs and coverages at sites such as,, • Customer satisfaction information is available at • Claims history – the number and type of claims

  19. Deductible Example Your home insurance policy has a $500 deductible. Your beautiful, towering eucalyptus tree drops a huge branch onto your roof and causes $4,500 worth of damage. What amount, if any, would not be covered by your insurance? • $500 • $4,000 • $4,500 • None. The total amount would be covered. The correct answer is (A). You must pay the deductible before the insurance company will pay anything towards a claim.

  20. Home Insurance Availability • For decades, availability was not an issue • Every homeowner could easily find insurance • Recently, insurers have become very picky about who they will insure • Insurance companies are not only using claims history • They are now using credit reports (?) • And data from other homes in your area • Also, some insurance companies are asking homeowners to effect expensive repairs before they will provide insurance

  21. What About Earthquake Insurance? • All insurance companies that sell homeowner’s insurance must also offer earthquake coverage • Minimum 10% Deductible! Even 20% to 25% • On a $300,000 home, you pay for the first $30,000 of damage • Surprise! The amount of damage to a $300,000 home in an earthquake is usually much less than $30,000 • Much depends on the type of home you own • Wood frame versus brick; older versus newer • And if a major earthquake did occur, the insurance companies would just claim bankruptcy! • Bottom Line: We don’t have it • Instead, use the money you would spend on earthquake insurance to “earthquake-proof” your home

  22. Automobile Insurance Coverages • Financial responsibility law • Requires drivers to prove their ability to cover the cost of damage or injury caused by an automobile accident • Over 45 states have compulsory automobile insurance laws • California: Minimum 15/30/5 • Woefully inadequate insurance amounts! • Get 100/300/50 at the very least! • “But what do these numbers mean?” • Hold on a minute… Have not changed since the 1950’s!

  23. Motor Vehicle Insurance Coverage • Bodily injury liability • 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 accident for which you were responsible • Medical payments covers the cost of health care for persons injured in your automobile, including yourself As with personal liability, the compensatory awards for bodily injury liability can be enormous. Not only could you be forced to pay medical bills, you could be liable for a person’s missed wages.

  24. Motor Vehicle Insurance Coverage (continued) • Property damage liability covers damage to another person’s car when you are at fault – It also includes damage to such things as street signs and buildings • For example, during a rainstorm you might accidentally slide your vehicle into a neighbor’s mailbox or tree Review: In the event that the bodily injury or property damage liability limits are insufficient to cover the liability incurred, an umbrella liability policy will “kick in” and pay above and beyond those limits.

  25. Motor Vehicle Liability Coverage property damage liability bodily injury liability Handout

  26. Automobile Liability Example 1 Les Doulunche was judged at fault in an accident. The three occupants of the vehicle he hit were awarded damages of $30,000, $10,000, and $5,000. Les has 25/50/10 liability coverage. What amount, if any, would not be covered by his insurance and would be expected to be paid by Les? • $5,000 • $10,000 • $15,000 • None. The total amount would be covered. The correct answer is (A). $25,000 is the most that would be paid to any one person.

  27. Automobile Liability Example 2 Mustaffa Rongnumba was judged at fault in an accident. The two occupants of the vehicle he hit were awarded damages of $130,000 and $70,000. Mustaffa had 100/300/50 liability coverage. What amount, if any, would not be covered by his insurance and would be expected to be paid by Mustaffa? • $15,000 • $20,000 • $30,000 • None. The total amount would be covered. The correct answer is (C). $100,000 is the most that would be paid to any one person.

  28. Automobile Liability Example 3 Sydney First-Rowe was judged at fault in an accident. The four pedestrians he hit were awarded damages of $240,000, $200,000, $60,000 and $40,000. Sydney had 250/500/100 liability coverage. What amount, if any, would not be covered by his insurance and would be expected to be paid by Sydney? • $20,000 • $40,000 • $60,000 • None. The total amount would be covered. The correct answer is (B). $500,000 is the most that would be paid to all persons involved.

  29. Automobile Liability Example 4 C. S. Verdad was judged at fault in an accident. He caused $45,000 worth of damages to a person's home. Señor Verdad had 50/100/25 liability coverage. What amount, if any, would not be covered by his insurance and would be expected to be paid by Señor Verdad? • $20,000 • $40,000 • $60,000 • None. The total amount would be covered. The correct answer is (A). $25,000 is the limit for property liability.

  30. Okay, ‘fess up! How many of you know the limits on your automobile insurance policy? • I know them! • I have no idea. • I think I knew what they were when I signed up but I can’t remember them now.

  31. How Much Coverage Do You Have? If you do know the limits on your automobile insurance policy, what are they? • The minimum: 15/30/5 (or just a bit above) • Maybe they’re 50/100/25 • Somewhere around 100/250/50 • The maximum: 250/500/100 or higher 25/50/10 is popular and would not even be enough property damage if you smashed into a parked new car at 10 mph!

  32. “How Much Coverage Do I Need?” • Bodily Injury Liability Coverage • $100,000/$300,000 is recommended for bodily injury liability, with an additional $1,000,000 or more umbrella liability policy recommended • Property Damage Liability Coverage • $50,000-$100,000 is usually suggested for property damage liability • We have 250/500/250 • Get the maximum – It’s not much more

  33. Motor Vehicle Insurance Coverage (continued) • Uninsured motorist • Pays for the cost of injuries if your vehicle is hit by a person without insurance – However, it does not cover property damages • Underinsured motorist • 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 How many vehicles on the road are uninsured? I am not going to dare to ask you if you are uninsured!

  34. No-Fault Liability Insurance • Each driver collects from their own insurance company • Medical expenses, lost wages, related injury costs • Intended to provide fast and smooth methods of paying for damages without taking the legal action frequently necessary to determine fault • Has not always lived up to its expectations • Systems vary from state-to-state • When you enter a state that has no-fault, your Calif insurance automatically becomes no-fault

  35. Collision Coverage • When your car is in an accident, collision insurance pays for damage to your automobile, regardless of who is at fault • However, if you are not at fault, the insurance company will try and collect from the other driver’s property damage liability first

  36. Comprehensive Physical Damage • Covers damage to your vehicle that is not caused by a collision, such as... • Fire • Theft • Vandalism • Glass breakage • Hail, sand, or wind storm • Your car rolls downhill into a tree • Why isn’t this covered under collision? My insurance company said it was. Comprehensive is now also being referred to as “non-collision” by some insurance companies.

  37. Auto Insurance Premium Factors • Automobile type • Year, make and model • Rating territory • Accident, theft, and vandalism rates in the area where you live • Driver classification • Age, sex,driving record, marital status, credit history, professional or group membership, and driving habits (how close to work, etc.) Once you get your driver’s license, the clock starts. After three years, your premiums go down substantially (providing you have been a decent driver). After you turn 25, they go down again.

  38. Legal Discrimination? Because of the past driving records of young adults, the insurance companies are justified in charging the rates they do. • Strongly Agree • Agree • Disagree • Strongly Disagree

  39. Now How Do You Feel? What percentage of 16- to 19-year-olds are expected to have at least one accident within 3 years? • 25% • 50% • 75% • 100% The correct answer is (D). That is the average. Some have more than one!

  40. Reducing Automobile Insurance Premiums • Find out how much it will cost to insure a car before you buy it • Compare companies– • The differences in prices are significant • Have larger deductibles • Look for discounts • Establish and maintain a good driving record • Non-smoker – professional or group discounts • Install security devices such as a car alarm • If you have more than one vehicle, insure them both with the same company

  41. Your C.L.U.E. Report • A company called LexisNexis keeps track of personal property and automobile claims that you make • They are called C.L.U.E. reports • Comprehensive Loss Underwriting Exchange • C.L.U.E. Personal Property Loss Report • C.L.U.E. Auto Loss Report • One free each of both reports every year • • Similar to credit reports • Used by insurance companies to rate your risk Please no jokes about “getting a clue.”

  42. Bottom Line on Home & Car Insurance • Get Sufficient Coverage • BOHICA • Keep your back to the wall when you deal with the insurance agents