10. Property and Motor Vehicle Insurance

Insurance

protection against possible financial loss

insurance company/insurer

risk-sharing firm that assumes financial responsibility for losses from an insured risk

insured/policy holder

purchase a policy, the firm assumes the risk for a fee called the premium, which the insured policyholder pays periodically

Risk

uncertainty or lack of predictability

Peril

the cause of a possible loss

hazard

a factor that increases the likelihood of loss

pure risk

there is only a chance of loss

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personal, property, liability risks

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THIS IS INSURABLE

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only chance for loss, no gain

speculative risk

a risk in which there is a chance of either loss or gain, uninsurable (small business/gambling)

Risk managment

organized strategy for protecting assets and people


1. avoidance
2. reduction (wear seatbelt, eat a balanced diet/exercise)
3. assumption (self insurance = process of establishing funds to cover the cost of loss)
4. shifting (deductible = set amount that the policyholder must pay per loss on an insurance policy)

Planning insurance program

1. set insurance goals
2. develop plan to reach goals (clear picture of available insurance, the reliability of different insurers and the comparative costs of the coverage needed
3. put plan into action
4. review your results

main reason to get insurance

need protection against things that happen to you and things you do to others

damage

physical damage (fire, water, wind -- temporary loss)

loss of use (robbery, vandalism…)

Liability

legal responsibility for financial cost of another person’s losses

negligence

failure to take ordinary responsible care

strict liability

intentional/intentional actions

vicarious liability

held responsible for another persons actions

homeowner’s insurance coverage

house and structure, additional living expenses

personal property floater (percentage of money given to cover loss of items) - household inventory

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personal liability and related coverages - $100,000 or more

umbrella policy/personal catastrophe policy

medical payments coverage - minor accidental injuries on your property ($500-$1,000)

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

how much coverage do you need

built in inflation clause: a provision that allows for adjustment to the policy’s coverage and premiums over time to account for the effects of inflation

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full coverage vs. coinsurance clause (pay for part of a loss)

Ex) If Carissa has a $168,000 home insured for $100,000, based on the 80 percent coinsurance provision, how much would the insurance company pay for a claim of $14,700?

Coinsurance requirement = 0.80 × Value of home = 0.80 × $168,000

= $134,400

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Amount paid = (Insurance coverage / Coinsurance requirement) × Claim amount

= ($100,000 / $134,400) × $14,700

= $10,937.50

actual cash value (ACV)

Payment you receive is based on the current replacement cost of the damaged or lost item less depreciation.

Replacement value

You receive the full cost to repair or replace the damaged or lost item; depreciation is not considered.

Ex) What amount would a person with actual cash value (ACV) coverage receive for three-year-old furniture destroyed by a fire? The furniture would cost $2,500 to replace today and had an estimated life of five years.

Insurance payment = Replacement cost − Depreciation

= $2,500 − \[($2,500 / 5) × 3\]

= $1,000

Ex) What would it cost an insurance company to replace a family’s personal property that originally cost $48,000? The replacement costs for the items have increased by 6 percent.

Replacement cost = Original cost × (1 + Price increase)

= $48,000 × (1 + 0.06)

= $50,880

Factors that affect home insurance costs

location

type of structure

coverage amount and policy type

deductible

Ex) For each of the following situations, what amount would the insurance company pay?

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a) Wind damage of $860; the insured has a $300 deductible.

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b) Theft of a home entertainment system worth $2,080; the insured has a $500 deductible.

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c) Vandalism that does $509 of damage to a home; the insured has a $650 deductible.

a) insurance payment = $860 - $300 = $560

b) Insurance payment = $2,080 − $500 = $1,580

c) Since the deductible exceeds the loss, the insurance payment will be $0.

Ex) When Carolina’s house burned down, she lost household items worth a total of $95,000. Her house was insured for $210,000 and her homeowner’s policy provided coverage for personal belongings up to 55 percent of the insured value of the house.

Calculate how much insurance coverage Carolina’s policy provides for her personal possessions. Will Carolina be reimbursed in full for her household items?

Personal property coverage = Personal property percent × Coverage on home= 0.55 × $210,000 = $115,500

Since the personal property coverage of $115,500 exceeds the claim amount of $95,000, Carolina will receive a full reimbursement for her loss.

Ex) Matt and Kristin are newly married and living in their first house. The yearly premium on their homeowner’s insurance policy is $300 for the coverage they need. Their insurance company offers a 6 percent discount if they install dead-bolt locks on all exterior doors. The couple can also receive a 1 percent discount if they install smoke detectors on each floor. What discount will Matt and Kristin receive if they install the dead-bolt locks? If they install smoke detectors?

Annual discount = Annual premium × Discount percent

Dead-bolt locks:

Annual discount = $300 × 0.06 = $18.00

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Smoke detectors:

Annual discount = $300 × 0.01 = $3.00

(Continued Ex) Matt and Kristin have contacted a locksmith, who will provide and install dead-bolt locks on the two exterior doors for $55 each. At the local hardware store, smoke detectors cost $6 each, and the new house has two floors. Kristin and Matt can install them themselves.

Dead-bolt locks:

Annual discount = $300 × 0.06 = $18.00

Years to recover cost = Total cost / Annual discount = ($55 × 2) / $18.00

= 6.11 years

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Smoke detectors:

Annual discount = $300 × 0.01 = $3.00

Years to recover cost = Total cost / Annual discount = ($6 × 2) / $3.00

= 4 years

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 covereage

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 struck by an automobile.

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.

property damage liabilty

Covers damage to another person’s car when you are at fault

also includes damage to such things as street signs and buildings

100/300/50

Bodily injury liability:

$100,000 limit that will be paid to one person in an accident

$300,000 limit that will be paid to all persons in an accident

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Property damage liability:

$50,000 limit for payment for damage of property of others

collision coverages

covers damage to your car

subrogation

If you are not at fault, your insurer will try and collect from the other driver’s property damage liability first

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.

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Some things in your car, like some radios and stereo equipment, are not covered.