Property and Liability Insurance

Property and Liability Insurance Chapter 9

Introduction • Insurance may be the least understood of all areas of personal financial planning • 90% of Americans make fundamental mistakes when buying insurance • Buy wrong types and wrong amounts • Rarely review their coverage even though needs change over time

Understanding Risk • Risk – uncertainty of injury or loss • Speculative: possibility exists for gain as well as loss (gambling or investing • Uninsurable • Pure: threat of loss without possibility of gain • Insurable

Ways of Dealing with Risk • Avoid risk—don’t do things that can lead to negative consequences • Reduce risk—buy smoke detectors, don’t smoke, etc. • Assume risk—save money should the worst happen, such as your house catching fire • Transfer risk—buy an insurance policy • A contract in which the insurance company agrees to pay an individual or firm compensation for losses (for a fee, or premium)

The Characteristics of an Insurable Risk • Must be common to a large number of people • That which is not predictable for the individual is predictable for the group (if the group is large enough) • An insurable interest must be present • Policyholder must demonstrate that s/he stands to suffer a financial loss • For instance, you can’t purchase a life insurance policy on a stranger • The loss should be fortuitous (unexpected) • The loss must be definite (definable in monetary terms) • Risk should be spread over a wide geographical area • To avoid excessive exposure to catastrophic losses

Major Categories of Insurance • Property and liability insurance • Property: covers physical damage to or destruction of property • Liability: protects against financial losses to others for acts for which you were responsible • Exists for automobiles, homeowners, and personal liability

Major Categories of Insurance • Health and disability insurance • Cover potential financial losses due to sickness or accident • Disability insurance provides payments when insured is unable to work due to illness or injury • Over 72% of Americans have this type of insurance • Life insurance • Protects people against financial losses that occur with premature death • Over 75% of Americans have this type of insurance

Property and Liability Insurance • Automobile insurance • About ten million auto accidents yearly • A minimum amount of insurance is required in most states • Homeowners insurance • Protects your home from perils • Fire, windstorm, burglary • Most do not cover damage from floods or earthquakes • Mortgage lenders require homeowners’ insurance • Even if you don’t own home, you should have renters’ insurance

Basic Elements of Insurance • Insurance premium • How much you pay • Insurance company uses these premiums to pay operating expenses and current claims, while remainder is invested to pay future claims • Insurance policy • Contains all provisions of policy • Amount/type of insurance • Beneficiaries • Restrictions

Basic Elements of Insurance • Insurance agent • Receives a sales commission • Exclusive agents • Represent only one insurance company • Independent agents • Operate independent businesses and represent multiple companies

Basic Elements of Insurance • Insurance companies • Can be either: • Stockholder owned and run like any other company • Mutual associations • Technically owned by policyholders and may receive premium rebates in form of dividends • No evidence that this type of policy costs any less than a comparable policy from stockholder owned company

Determining Your Individual Insurance Needs • Need to know what to insure, how much insurance to buy, how long you need it and how to choose right policy • Life insurance – not everybody needs it • Health insurance – everybody should have it • Many people buy health insurance through employers • HMO: lower out-of-pocket expenses but fewer choices • Disability insurance – experts think many people are underinsured in this area • Suggest a policy that pays 60–70% of salary

Determining Your Individual Insurance Needs • Homeowners insurance • Best is policy that offers full replacement • Auto insurance • As a minimum, you need liability • If your car is old, you may not want collision and comprehensive coverage—may not be worth it • Personal liability • Is it likely someone will sue you and you’ll lose a substantial amount of assets? • If not, additional personal liability probably not necessary

Source: Based on data from IntelliChoice and the Insurance Information Institute. Figure 9.4: Classifying the Risks You Face & How You Should Handle Them

Buying an Insurance Policy • Insure against large financial losses, not small ones • Buy insurance with broad coverage, not narrow policies • Shop around • Consider buying insurance from companies that sell directly to consumers • Buy insurance only from financially strong companies

Resolving Disputes with Insurance Companies • Start with the agent who sold you the policy • Next, contact company directly • Next, contact your state’s insurance commissioner • Keep copies of important documents

Personal Liability Insurance • Liability is the financial responsibility one person has to another—may result from negligence • Negligence is the failure to exercise due care to protect others from harm (even if unintentional) • Reasonable (or due) care is the action any responsible person would take in a similar position • Strict liability • Person can be held financially responsible for an action even if s/he was not directly at fault • Example: Your dog (although you made provisions to restrain it) escapes and eats the neighbor’s chickens • Vicarious liability • If someone for whom you are responsible destroys another’s property, you are held liable • Example: Your child breaks the neighbor’s window

Personal Liability Insurance • A legally liable person can be held financially responsible for property damage, medical expenses, lost wages, and pain and suffering • Can be VERY expensive • Liability insurance is designed to protect a person from financial risks associated with legal liability

Personal Liability Insurance • Liability portion of homeowners and auto insurance policies • Insurance company agrees to pay for personal injuries or property losses that occur to nonmembers of insured’s household at the insured’s home (and things that pets might do to others and their property) • Insurance company agrees to pay medical and repair bills on injured party/car if you are involved in an accident at which you are at fault

Personal Liability Insurance • Umbrella liability policy • If you desire excess personal liability protection in amounts of 1, 2, 5+ million • Provides more protection in areas not covered by homeowners and auto insurance • False arrest, invasion of privacy, defamation of character • High deductibles • If you have substantial assets, probably need umbrella policy • May need one also if involved in something that tends to increase your personal liability

Homeowners Insurance • What a homeowners policy covers • Damage to the house • Based on replacement cost • Must be caused by a peril • Damage to other structures • Damage to trees and shrubs • Up to a specified limit • Personal property losses • Usually up to half the value of house • Limits to certain items

Homeowners Insurance • What a homeowner policy covers (cont’d) • Additional living expenses • If a house becomes unlivable due to covered perils, policy pays for temporary living expenses • Liability • Most policies offer at least $50,000, with more protection available for additional premium

How Much Coverage Should You Have? • Mortgage loans require that you carry insurance equal to at least 80% of the current replacement value of structure • If you don’t, you might not get reimbursed for the full amount of loss

How Much Coverage Should You Have? • Experts recommend that you buy guaranteed full replacement cost coverage • Will pay the entire cost to repair or replace the structure, regardless of original cost of home, improvement, or covered personal property • Especially important if rising housing prices exist in your area • Many insurers began phasing out guaranteed replacement cost coverage in late 1990s • Replaced with extended replacement coverage • Pays only maximum amount stated on policy plus another 20 to 25%

The Deductible • What you pay before insurance kicks in • Standard is $250 • Charged on a per-claim basis • Higher the deductible, lower the premiums

Renters and Condominium Policies • Covers only the personal property for those who rent or own cooperative apartment • Can be purchased on a named-peril or all-perils basis • 2/3 of all renters do not carry insurance • Cost is typically quite low

Supplementing the Homeowners Policy • Endorsements • Amendments that increase the standard coverages • Example: inflation protection • Why would you want this? If your policy covers only the actual cash value of house/personal property • Floater policies • Designed to protect valuable personal property, but each item must be ‘scheduled’ • Completely described to insurer’s satisfaction • Often a professional appraisal is required

Supplementing the Homeowners Policy • Floods and earthquakes are excluded from standard homeowners policies, but can be purchased separately • Flood insurance • Offered through insurance companies but provided by federal government • Not available to everyone in flood-prone areas • Community must participate in National Flood Insurance Program • Earthquake insurance • Expensive (can be $1,000+ annually) • Terrorism coverage • Since 9/11/01, many insurance companies have begun to exclude terrorism • Can be purchased for an additional premium

Filing a Claim • Can only collect for personal property you can prove you lost • If everything you had in your home was lost, could you provide insurance company with a list of everything and how much it was worth? • If you can provide receipts, that’s great, but you can videotape, photograph, etc. • Record items on a personal software package, and store a copy off-premises

Filing a Claim • Notify police if you experience theft • Get copies of police report • Telephone insurance agent • May have to follow up with written statement • Take action (if necessary) to prevent further damage to house, etc. • Develop list of damaged, destroyed items • Submit receipts for additional living expenses to agent • Provide information to claims adjuster • Review settlement steps in your policy • If you are dissatisfied with settlement offer, meet with agent and adjuster • Still dissatisfied? Meet with insurer’s consumer affairs office or state insurance commissioner

Automobile Insurance • Americans pay about three times more a year in auto insurance than homeowners insurance • Each year over 30 million accidents occur, resulting in $100 billion in loss • Specific needs vary from driver to driver

Types of Coverage • Liability insurance • Bodily injury • Covers the insured if his car injures or kills someone • Anyone driving the insured’s car (with permission) is protected • Property damage • If insured’s car damages another car or property • Doesn’t pay for damage to insured’s car • Collision insurance does this

Liability Insurance • Most policies look something like this • 50/100/10 (represents 1,000s of dollars) • $50,000 is the max will pay for death/injury to one person in any one accident • $100,000 is the max amount for two or more people for a single accident • $10,000 is the max for property damage coverage • Most states require a minimum amount of liability insurance • Experts recommend more than the minimum required • If a judgment is made against you for greater than your insurance, you’ll be expected to pay it

Medical Payment Insurance • Pays for reasonable medical expenses up to max amount • May duplicate coverage under your health insurance • If you have adequate health insurance, you may wish to lower the amount of medical payment insurance you have • Covers auto accident-related medical expenses for • You • Your family • Additional passengers • All family members while riding in someone else’s car • All family members if struck by a car while walking

Uninsured/Underinsured-Motorist Insurance • Handles injuries to insured and family members caused by an uninsured (or underinsured) motorist or hit-and-run driver • About 13% of accidents are caused by uninsured motorists • Some states require coverage • Relatively inexpensive (about $40/year)

Collision Insurance • For an at-fault accident, collision pays for repairs to your car (or if car is totaled, pays for depreciated value of vehicle) • Not a compulsory insurance • But lender may insist on it • Not necessary if car is quite old and not very valuable

Comprehensive Physical Damage Insurance • Covers damage occurring from something other than collision • Not a compulsory insurance • Exact cost depends on dangers car is exposed to in an area • Likelihood of perils, car thefts, etc.

Auto Insurance Premiums • Average American pays about $700 per vehicle, but in some cities it’s about $1,500 a year • Exactly how much you pay depends on different factors • Type of vehicle + attributes • Your age, gender • Where you live • Driving record, etc.

Auto Insurance Premiums • Amount and type of coverage • Ask to see a breakdown of your premium • What portion of premium is going to pay for what • Place of residence • City dwellers pay more • Personal characteristics • Age more than any other personal factor affects likelihood of having an accident • 33% of drivers under age of 25 have accidents • Women generally have fewer accidents than men • Young married people have fewer accidents than young single people

Auto Insurance Premiums • Automobile usage • How often, and how far do you drive? • Business travel—higher rates • Pleasure vehicle—lower rates • Driving record • Any accidents, violations recently • If your driving record is really bad, you may not be able to get ‘regular’ coverage • Be placed in the assigned risk pool • Type of car driven • Expensive • Desired by thieves

Making the Right Auto Insurance Decision • As your life changes, your needs change • Review your coverage regularly • If you have ‘enough’ money, you may want to consider larger deductibles • It’s probably a good idea to have uninsured motorist coverage even if it’s not required • Have a sufficient amount of liability coverage • The more wealth you have, the more you have to lose • Shop around • Drive safely

Property and Liability Insurance