Managing Risk – Home & Auto Insurance (Concise Exam Notes)

Insurance = contract transferring $ext{risk of financial loss}$ from insured to insurer for a $ext{premium}$ .
Key terms
• $ext{Risk}$ – chance of loss/injury
• $ext{Peril}$ – event causing loss (fire, theft)
• $ext{Hazard}$ – condition raising likelihood of loss (faulty wiring)
Main risk categories
• Personal (income, life, health)
• Property (physical loss/damage)
• Liability (legal responsibility for others’ loss/injury)
Pure (insurable) vs. speculative (non-insurable) risks

Avoidance – eliminate activity (don’t drive).
Reduction – lower likelihood/severity (seat belts, alarms).
Assumption – self-insure/pay small losses; may set aside $ext{fund}$ .
Shifting – buy insurance; often includes a $ext{deductible}$ (insured pays first $X$ ).

Renter’s policy: covers personal property, liability, additional living expenses; no building coverage.
• Broad Form – named perils.
• Comprehensive – all-risk except exclusions.
Homeowner’s policy major sections
• Building & other structures
• Additional living expenses
• Personal property (typically $55\%-75\%$ of dwelling limit)
• Personal liability (base $\$100{,}000$ )
• Specialized (flood, earthquake via endorsements/NFIP)
Policy forms:
• $\text{HO-1}$ Basic; $\text{HO-2}$ Broad; $\text{HO-3}$ Special (all-risk except listed); $\text{HO-4}$ Tenant; $\text{HO-5}$ Comprehensive; $\text{HO-6}$ Condo.
Key addons
• Personal property floater – high-value items
• Umbrella ( $\ge \$1\text{M}$ ) – extra liability
• Medical payments – guest injuries (no fault)
Inventory: list, photos, receipts kept off-site.

Coverage basis
• Actual Cash Value $=\text{Replacement Cost} - \text{Depreciation}$
• Replacement Cost – pays full rebuild/replace (higher premium)
Factors: location (fire, crime, weather), structure/material, coverage amount & deductible (raising from $\$250$ to $\$500$ may cut premium $\approx15\%$ ), discounts (alarms, no claims), insurer pricing.

Bodily injury

Bodily Injury Liability – injuries you cause.
Medical Payments – medical for occupants/you.
Uninsured/Underinsured Motorist – injuries from uninsured or inadequately insured driver.
Property damage
Property Damage Liability – others’ property.
Collision – damage to your car from crash (pays up to ACV).
Comprehensive – non-collision losses (fire, theft, hail, etc.).
Other
No-fault: each driver’s insurer pays own insured regardless of fault (state specific).
Optional: wage loss, towing/road service, rental reimbursement.
Liability limits written $100/300/50$
• $100\text{k}$ per person BI, $300\text{k}$ per accident BI, $50\text{k}$ property damage.

Amount of coverage – higher limits ⇑ cost.
Vehicle type – repair cost, theft rate.
Rating territory – city > rural.
Driver classification – age (< $25$ , > $70$ ), sex, marital status, record, mileage.
Claims history/credit score – frequent or costly claims ⇑ premium; assigned-risk pool if uninsurable.
Savings strategies
Raise deductibles, maintain clean record, good-student/driver-training, anti-theft & safety devices, multi-policy/vehicle discounts, shop multiple insurers (rates may vary >30\%).

Personal property share of dwelling limit: $55\% – 75\%$ .
Typical basic liability: $100/300/50$ ; recommended $\ge100/300$ BI and $50\text{k}+$ PD.
Deductible impact: increasing $\$250 \to \$500$ may lower premium $\approx10 – 15\%$ .
Liability umbrella starts at $\$1\text{ million}$ .

Flood, earthquake, war, nuclear events, business property, motorized off-road vehicles, pets.