Research and Reflect
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newChap10.docx10 Managing Property and Liability Risk
YOU MUST BE KIDDING, RIGHT?
Megan Blake recently caused an automobile accident when she had a blowout on the freeway. The cost of repairs to Megan's car will be $13,200. The damage to the other vehicle was $37,900, although no one was injured in the accident. Megan had purchased an auto insurance policy with a $500 collision deductible and liability limits of $25,000/$50,000/$15,000; the legal minimums in her state. What dollar amount of the losses will Megan have to pay?
A. $500
B. $13,400
C. $22,900
D. $23,400
The answer is D. Megan will be personally responsible for the $23,400. That's the balance remaining after the insurance company payments ($500 + $22,900 [$37,900 - $15,000]). The company will pay her $12,700 after her $500 deductible for the loss of her vehicle. The company will also pay $15,000 for the damage to the other vehicle as that is the limit for property damage liability under her policy. Like most people, Megan did not carry sufficient liability protection. You should!
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
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.
WHAT DO YOU RECOMMEND?
Nick and Amber Chandler of Nacogdoches, Texas, recently had a fire in their garage that destroyed two of their cars and did considerable damage to the garage and to the outside of their home. After receiving their reimbursements from their homeowner's and automobile insurance policies, the Chandlers realized that they were seriously underinsured. One vehicle was not insured for fire, and the insurance on their dwelling amounted to only 60 percent of its current replacement value.
What do you recommend to Nick and Amber about managing property and liability risk regarding:
1. The risk-management steps they should take to update their insurance coverages?
2. The relationship between severity and frequency of loss when deciding whether to buy insurance?
3. Adequately insuring their home?
4. The use of deductibles and policy limits to keep their automobile insurance premiums at a manageable level while still maintaining vital coverage?
YOUR NEXT FIVE YEARS
In the next five years, you can start achieving financial success by doing the following related to managing property and liability risk:
1. Maintain adequate auto insurance with appropriate limits and deductibles as well as under- and uninsured motorist protections.
2. Buy renter's insurance with limits tied to the actual cash value of your personal property.
3. Purchase an umbrella liability insurance policy with a minimum of a $1 million limit.
4. Once each year, reassess the types and amounts of insurance coverage you need and then comparison-shop for insurance prices and coverage.
5. Maintain a verifiable inventory of all your insured property and possessions so that in the event of a loss you can collect what is coming to you.
It is important to protect your income, property and possessions from the possibility of financial loss from accidents, acts of nature, illness or injury, and death. An uninsured loss can lead to overuse of credit that can easily get-out of control. It could lead to repossession and bankruptcy. You can manage the risk of such losses through the use of insurance.
Learning what insurance is, how to use it wisely, and how to collect on a loss are examples of smart money management. You can waste hundreds of dollars buying too much or the wrong kind of homeowners, renters and auto insurance. Purchasing insurance policies wisely will give you more money to spend, save, invest and donate.
10.1a People Often Misunderstand the Concept of Risk
Risk is uncertainty about the outcome of a situation or event. It arises out of the possibility that the outcome will differ from what is expected. In the area of financial losses, risk consists of uncertainty about both whether the financial loss will occur and how large it might be. There are two types of risk. Speculative risk exists in situations where there is potential for gain as well as for loss. Investments such as those made in the stock market involve speculative risk. Pure risk exists when there is no potential for gain, only the possibility of loss. Fires, automobile accidents, illness, and theft are examples of events involving pure risk. Insurance only addresses pure risk.
risk Uncertainty about the outcome of a situation or event.
Many people think of “odds” or games of chance when they hear the word risk. In fact, risk and chance are different concepts. The difference between the two is subtle but very important. An event with a 95 percent chance of occurring is highly likely to occur. Thus, both uncertainty and risk are low. An event with a 0.000001 percent chance of occurring is highly likely not to occur. Thus, both uncertainty and risk are low. When an event has a moderate chance of occurring—5 percent, for example—the uncertainty and risk are relatively high because it is difficult to predict the one person in 20 who will experience the event. In such cases, insurance often represents a wise choice for reducing risk.
LEARNING OBJECTIVE 1
Apply the risk-management process to address the risks to your property and income.
10.1b Apply the Five-Step Risk-Management Process
Risk management is the process of identifying and evaluating situations involving pure risk to determine and implement the appropriate means for its management. Risk management entails making the most efficient arrangements before a loss occurs. Risk management usually requires the purchase of insurance, although insurance is only one of the ways to handle risk, and it is not always the best choice.
risk management Process of identifying and evaluating purely risky situations to determine and implement appropriate management.
The risk-management process involves five steps:
Step 1: Identify Your Risk Exposures Sources of risk are called exposures and these include the items you own and the activities in which you engage that expose you to potential financial loss. Owning and/or driving an automobile are common exposures. To determine your exposures to risk, you should take an inventory of what you own and what you do. You also need to identify the perils that you face, which are any events that can cause a financial loss. Fire, wind, theft, vehicle collision, illness, and death are examples of perils.
perils Any event that can cause a financial loss.
The items you own and your day-to-day activities expose you to two types of losses: property and liability. Property insurance protects you from financial losses resulting from the damage to or destruction of your property or possessions. Liability insurance protects you from financial losses suffered by others for which you are held responsible (legally liable). Coverage includes your legal fees if you are sued but does not include coverage for your intentional acts and contractual obligations. The most commonly purchased forms of property and liability insurance are insurance for your home and its contents and insurance for your use and ownership of vehicles.
property insurance Protection from financial losses resulting from the damage to or destruction of your property or possessions.
liability insurance Protection from financial losses suffered when you are held liable for others' losses.
Step 2: Estimate Your Risk and Potential Losses Next you estimate loss frequency and severity. Loss frequency is the likely number of times that a loss might occur over a period of time. Loss severity describes the potential magnitude of a loss.
Many people wonder whether they should buy insurance when loss frequency is low, for example, if they are young and healthy or if they live in a safe neighborhood. This is not a good way to think about potential losses because they still could occur, and if loss frequency is low, the cost of insurance would be small. Figure 10-1 illustrates the relationship between loss frequency and loss severity in risk management.
What is most important is loss severity. “How much might I lose?” is the question to ask. When considering possible property losses, you simply make an estimate of the value of the property. Liability losses are more complicated because the severity of the loss depends on the circumstances of the person you harm. For example, if you caused an accident that permanently disabled a young heart surgeon with three small children, you would be liable for the surgeon's care, lost earnings over his or her lifetime, and future care and education of the children. A loss of several million dollars is not out of the question in such a situation.
Bias toward Underestimating Risk
People engaged in managing property and liability risk have a bias toward certain behaviors that can be harmful, such as a tendency toward underestimating risk. Many fail to buy insurance for events that are rare and think that a catastrophe will not happen to them. What to do? Recognize that the cost of insurance is very low for rare events and adding to our policy limits is inexpensive.
Step 3: Choose How to Handle Your Risk of Loss The risk of loss may be handled in five ways: risk avoidance, risk retention, loss control, risk transfer, and risk reduction . Each strategy may be appropriate for certain circumstances, and the mix that you choose will depend on the source of the risk, the size of the potential loss, your personal feelings about risk, and the financial resources you have available to pay for losses.
risk reduction Includes mechanisms, such as insurance, that reduce the overall uncertainty about the magnitude of loss.
• Risk avoidance. The simplest way to handle risk is to avoid it. For example, choosing not to own an airplane or not to sky-dive limits your exposures.
• Risk retention . A second way to handle risk is to retain or accept it. For example, you can use a deductible clause in an insurance policy to retain an initial portion of the risk. In this way, you pay the first dollars of a loss (perhaps $200 or $500) before the insurance company will reimburse for a loss.
risk retention Accepting that some risks simply arise in the course of one's life and consciously retaining that risk.
deductible clause Requires that the policyholder pays an initial portion of any loss.
• Loss control . Loss control is designed to reduce loss frequency and loss severity. For example, installing heavy-duty locks and doors may reduce the frequency of theft losses. Installing fire alarms and smoke detectors cannot prevent fires but should reduce the severity of losses from them. Insurance companies often require loss-control efforts or give discounts to policyholders who implement them.
loss control Designing specific mechanisms to reduce loss frequency and loss severity.
Figure 10-1 The Relationship Between Severity and Frequency of LossRenters need insurance too.
• Risk transfer. Another way to handle risk is to transfer it to an insurance company.
• Reduce Risk to Acceptable Levels. The final way to handle risk is to reduce it to acceptable levels. Insurance is used by policyholders when they arrange for all or a portion of their risk to be covered by an insurance company, thereby reducing their personal level of risk.
Step 4: Implement Your Risk-Management Program The next step in risk management is to implement the risk-handling methods you have chosen. For most households, this means buying insurance to transfer and reduce risk. This involves selecting types of policies and coverages, dollar amounts of coverage, and sources of insurance protection. Always remember that your goal is to “buy” the insurance you need at a fair price. Do not let yourself be “sold” more or less insurance coverage than you need at unnecessary prices.
People often wonder what types of insurance to buy and how much coverage they should have. You should use the maximum possible loss as a guide for the dollar amount of coverage to buy. This way of thinking makes use of the large-loss principle , which states: “Insure the risks that you cannot afford and retain the risks that you can reasonably afford.” In other words, pay for small losses out of your own pocket and purchase as much insurance as necessary to cover large, catastrophic losses that might ruin you financially. The example earlier of an auto accident that injures a heart surgeon would bring you such financial ruin because a court would hold you responsible for those losses. Consequently, you would want high dollar amounts of liability coverage on your auto insurance.
large-loss principle A basic rule of risk management that encourages us to insure the risks that we cannot afford and retain the risks that we can reasonably afford.
Step 5: Evaluate and Adjust Your Program The final step in risk management entails periodic review of your risk-management efforts. The risks people face in their lives change continually. Therefore, no risk-management plan should be put in place and then ignored for long periods of time. An annual review is certainly important but also check your insurance needs when you move, make a major purchase, or if your family situation changes. Many people simply keep old insurance policies that no longer fit their needs (too little or too much coverage) and then find they are inappropriately covered when a loss occurs.
CONCEPT CHECK 10.1
1. Distinguish between pure risk and speculative risk.
2. Explain the distinctions between risk and odds.
3. Distinguish among the five common risk exposures that most people face.
4. Describe the five steps of risk management.
5. When considering likelihood of loss and severity of loss, explain which one of these two concepts is more important when deciding whether to buy insurance and why.
10.2 UNDERSTANDING HOW INSURANCE WORKS
Insurance is a mechanism 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. Insurance protects each individual in the group by replacing an uncertain— and possibly large—financial loss with a certain but comparatively small fee called the premium . Insurance premiums are paid for in advance and have four components:
insurance Mechanism 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 The fee paid for insurance.
1. The individual's share of the group's losses
2. A share of the company's expenses for administering the insurance plan
3. Insurance company reserves set aside to pay future losses
4. Profit when the plan is administered by a profit-seeking company
LEARNING OBJECTIVE 2
Explain how insurance works to reduce risk.
The insurance policy is the contract between the person buying insurance (the insured ) and the insurance company (the insurer). It contains language that describes the rights and responsibilities of both parties. Most people do not take the time to read and understand their insurance policies. As a result, insurance remains one of the least understood purchases people make. You can do a much better job of managing your risks if you understand the basic terms and concepts used in the field of insurance, and reading this chapter will improve your understanding.
insurance policy Contract between the person buying insurance (the insured) and the insurance company (the insurer).
10.2a Hazards Make Losses More Likely to Occur
A hazard is any condition that increases the probability that a peril will occur. Driving under the influence of alcohol and/or texting represent especially dangerous hazards. Three types of hazards exist:
hazard Any condition that increases the probability that a peril will occur.
• A physical hazard is a particular characteristic of the insured person or property that increases the chance of loss. An example of a physical hazard is high blood pressure in a person covered by health insurance.
• A morale hazard exists when a person is indifferent to a peril. For example, a morale hazard exists if the insured party, knowing that theft insurance will pay for the loss, becomes careless about locking doors and windows.
• A moral hazard relates to the possibility that the insured person will want or even cause a peril to occur in order to collect reimbursement from the insurance company.
Insurance companies often limit or deny coverage if a loss occurs as a result of a morale or moral hazard. An investigation often reveals the truth.
10.2b Only Fortuitous and Financial Losses Are Insurable
Certain minimum requirements must be met for a loss to be considered insurable—in particular, the loss must be fortuitous and financial. Fortuitous losses are unexpected in terms of both their timing and their magnitude. A loss caused by a lightning strike and fire to your home is fortuitous; a loss caused by a decline in the market value of your home is not because it is reasonable to expect home values to rise and fall over time. A financial loss is any decline in the value of income or assets in the present or future. Financial losses can be measured objectively in dollars and cents.
Your Credit Report Affects Your Insurance Rates
It is common for insurance companies to use an applicant's credit rating to provide information in order to help set their premiums. This is another reason for maintaining good credit and for making sure your credit bureau files are accurate!
10.2c The Principle of Indemnity Limits Insurance Payouts
The principle of indemnity states that insurance will pay no more than the actual financial loss suffered. For example, an automobile insurance policy will pay only the actual cash value of a stolen automobile. This principle prevents a person from gaining financially from a loss (certainly a moral hazard). The principle of indemnity does not guarantee that insured losses will be totally reimbursed. Every policy includes policy limits that specify the maximum dollar amounts that will be paid under the policy. As a result, insurance purchasers must carefully select policy limits sufficient to cover their potential losses.
principle of indemnity Insurance will pay no more than the actual financial loss suffered.
policy limits Specify the maximum dollar amounts that will be paid under the policy.
Full Coverage Insurance Is a Myth
Every insurance policy has limits. There is no such thing as “full coverage” insurance—because there is always the possibility that a loss will exceed the limits on a policy.
10.2d Ways to Pay Less for Insurance and Still Maintain Sufficient Coverage
Some features of insurance policies can lower your premiums without significantly reducing the protection offered. These features include deductibles, coinsurance, hazard reduction, and loss reduction.
1. Pay the first dollars of a loss yourself. A deductible is an initial portion of any loss that must be paid before the insurance company will provide coverage. For example, automobile collision insurance often includes a $500 deductible and that means that the first $500 of loss to the car must be paid by the insured. The insurer then pays the remainder of the loss, up to the limits of the policy. The higher the deductible, the more you will save on your premium.
2. Pay a share of any loss yourself. Coinsurance is a method by which the insured and the insurer share proportionately in the payment for a loss. For example, a health insurance policy may require that the insured pay 20 percent of a loss and the insurer pay the remaining 80 percent. Substantial premium reductions can be realized through coinsurance, but you must be prepared to pay your share of losses. The following deductible and coinsurance reimbursement formula can be used to determine the amount of a loss that will be reimbursed when the policy includes both a deductible and a coinsurance clause:
coinsurance Method by which the insured and the insurer share proportionately in the payment for a loss.
where
As an example, assume you have a health insurance policy with a $100 deductible per hospital stay and a 20 percent coinsurance requirement. If the hospital bill is $1350, the reimbursement will be $1000, calculated as follows:
3. Reduce the chances that a loss will occur. Hazard reduction is action taken by the insured to reduce the probability of a loss occurring. Quitting smoking is an example of hazard reduction related to life and health insurance.
4. Reduce the dollar amount of a loss. Loss reduction is action taken by the insured to lessen the severity of loss if a peril occurs. Smoke alarms and fire extinguishers in the home are examples of loss reduction efforts. These items will not prevent fires, but their use may lead to less severe damage.
10.2e Risk Is Reduced for the Insurer through the Law of Large Numbers
Insurance consists of two basic elements: (1) the reduction of risk and (2) the sharing of losses. When you buy insurance, you exchange the uncertainty of a potentially large financial loss for the certainty of a fixed insurance premium, thereby reducing your risk. As the former baseball player Yogi Berra once said, “It is tough to make predictions, especially about the future.” But predictions are much easier for an insurance company than for an individual. This is because risk is reduced for the insurer through the law of large numbers : As the number of members in a group increases, predictions about the group's behavior become increasingly more accurate. This greater accuracy decreases uncertainty and, therefore, risk.
law of large numbers As the number of members in a group increases, predictions about the group's behavior become increasingly accurate.
How to Read an Insurance Policy
Insurance policies do not invite casual reading. Consequently, many people neglect to thoroughly examine their policies until a loss occurs, only to find that they had misunderstood the terms of the agreement. You can avoid such problems by systematically reading a policy before you purchase it, focusing on eight points:
1. Perils covered. Some policies list only the perils that are covered; others cover all perils except those listed. The definition of certain perils may differ from that used in everyday language.
2. Property covered. Like perils, the property covered under a policy may be listed individually, or only the excluded property may be listed. When the property is listed individually, any new acquisitions must be added to the policy.
3. Types of losses covered. Three types of property losses can occur: (a) the loss of the property itself, (b) extra expenses that may arise because the property is rendered unusable for a period of time, and (c) loss of income if the property was used in the insured's work.
4. People covered. Insurance policies may cover only certain individuals. This information usually appears on the first page of the policy but may be changed subsequently in later sections.
5. Locations covered. Where the loss occurs may have a bearing on whether it will be covered. It is especially important to know which locations are not covered.
6. Time period of coverage. Policies are generally written to cover specific time periods. Restrictions may exclude coverage during specific times of the day or certain days of the week or year.
7. Loss control requirements. Insurance policies often stipulate that certain loss control efforts must be maintained by the insured. For example, coverage for a vehicle may be denied if the owner knowingly allows it to be driven by an unlicensed person.
8. Amount of coverage. All insurance policies specify the maximum amount the insurer will pay for various types of losses.
The information on these eight points may be spread throughout a policy. In fact, coverage that appears to be provided in one location actually may be denied elsewhere. Carefully review the entire policy to determine the protection it provides. If necessary, telephone the salesperson or company to obtain clarification.
10.2f Each Insured Benefits Even if One Does Not Suffer a Loss
Individual insurance purchasers benefit regardless of whether they actually suffer a loss because of the reduction of risk. This is the essence of insurance. Reduced risk gives one the freedom to drive a car, own a home, start a business, and plan financially for the future with the knowledge that some unforeseen event will not result in financial disaster.
10.2g How Companies Select among Insurance Applicants
The purchase of insurance begins with an offer by the purchaser in the form of a written or oral policy application. The insurer typically issues a temporary insurance contract, called a binder, which is replaced at a later date with a written policy. The application then goes through a process of underwriting—that is, the insurer's procedure for deciding which insurance applicants to accept. To describe the process of underwriting, it is necessary to first understand how insurance rates are set.
An insurance rate is the price charged for each unit of insurance coverage. Rates represent the average cost of providing coverage to various classes of insureds. These classes consist of insureds who share similar characteristics. For example, automobile insurance policyholders may be classified by age, gender, marital status, and driving record, as well as by the make and model of vehicle that they drive.
When underwriters receive an application, they assign the applicant to the appropriate class. They then determine whether the rates established for that class are sufficient to provide coverage for that specific applicant. Underwriters divide insurance applicants into four groups:
1. Preferred applicants have lower-than-average loss expectancies and save money because they typically qualify for lower premiums.
2. Standard applicants have average loss expectancies for their class and pay the standard rates.
3. Substandard applicants have higher-than-average loss expectancies and may be charged higher premiums and have restrictions placed on the types or amounts of coverage they may purchase.
4. Unacceptable applicants have loss expectancies that are much too high and are rejected.
You might save money by confirming with your insurance agent that you have been placed in the proper class for premium-determination purposes.
Sellers of insurance, called insurance agents , represent one or more insurance companies. They have the power to enter into, change, and cancel insurance policies on behalf of these companies. Two types of insurance agents exist: independent agents and exclusive agents.
insurance agents Representative of an insurance company authorized to sell, modify, service, and terminate insurance contracts.
Independent insurance agents are independent businesspeople who act as third-party links between insurers and insureds. Such agents earn commissions from the companies they represent and will place each insurance customer with the company that they believe best meets that customer's particular needs.
Exclusive insurance agents represent only one insurance company for a specific type of insurance. They are employees of the insurance company they represent. Life insurance, for example, is often sold through exclusive insurance agents.
Direct sellers are companies that market their policies through salaried employees, mail-order promotions, newspapers, the Internet, and even vending machines. Any type of insurance can be sold directly.
direct sellers Companies that market insurance policies through salaried employees, mail-order promotions, newspapers, the Internet, and even vending machines.
Each type of seller presents both advantages and disadvantages. Independent agents may provide more personalized service and can select among several companies to meet a customer's needs. Exclusive agents can provide personalized service as well but are limited to the policies offered by the one company they represent but their sales commissions tend to be low. For people who know what coverage they need, the lowest-cost insurance premiums can be found with direct sellers.
CONCEPT CHECK 10.2
1. Define insurance.
2. Distinguish among the three types of hazards.
3. Why is the principle of indemnity so important to insurance sellers?
4. Identify four key points to review when reading an insurance policy.
5. Summarize how to use deductibles, coinsurance, hazard reduction, and loss reduction to lower the cost of insurance.
6. Differentiate among independent agents, exclusive agents, and direct sellers.
Whether you own or rent housing, you face the possibility of suffering property and liability losses.
LEARNING OBJECTIVE 3
Design a homeowner's or renter's insurance program to meet your needs.
Homeowner's insurance combines the liability and property insurance coverages needed by homeowners and renters into a single-package policy.
homeowner's insurance Combines liability and property insurance coverages that homeowners and renters typically need into single-package policies.
Property Coverage Homeowner's insurance provides protection for various types of property damage losses, including the following: (1) damage to the dwelling, (2) damage to other structures on the property—referred to as appurtenant structures, (3) damage to personal property and dwelling contents, and (4) expenses arising out of a loss of use of the dwelling (for example, food and lodging). Additional coverages are usually provided for such items as debris removal, trees and shrubs, and fire department service charges.
The property protection in a homeowner's policy is written on a named-perils or open-perils basis. Named-perils policies cover only those losses caused by perils that are specifically mentioned in the policy. Open-perils (or all-risk) policies cover losses caused by all perils other than those specifically excluded by the policy. All-risk policies provide broader coverage because hundreds of perils can cause property losses, but only a few would be excluded. Common exclusions are flood, earthquake, and mold unless caused by some nonexcluded event such as burst water pipes. Coverage for excluded perils can often be purchased for an additional premium if desired.
named-perils policies Cover only losses caused by perils that the policy specifically mentions.
all-risk (open-perils) policies Cover losses caused by all perils other than those that the policy specifically excludes.
Liability Coverage Whenever homeowners are negligent or otherwise fail to exercise due caution in protecting visitors, they may potentially suffer a liability loss. Liability insurers have three major duties: (1) the duty to indemnify, and (2) the duty to settle a reasonably claim, and when appropriate (3) the duty to defend. Homeowner's general liability protection applies when you are legally liable for the losses of another person and can include legal fees and damages assessed up to the limits of the policy.
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 your professional duties.
Homeowners often wish to take responsibility for the losses of another person regardless of the legal liability. Consider, for example, a guest's child who suffers burns from touching a hot barbecue grill. Homeowner's no-fault medical payments protection will pay for bodily injury losses suffered by visitors regardless of who was at fault. In the preceding example, such coverage would help pay for the medical treatment of the visitor's burns. Homeowner's no-fault property damage protection will pay for property losses suffered by visitors to your home. An example of such a loss might be damage to a friend's leather coat that was chewed by your dog.
10.3b Types of Homeowner's Insurance Policies
Six distinct types of homeowner's insurance policies exist: HO-1 through HO-3 and HO-8, HO-4 and HO-6, as described in Table 10-1 . Each is a standardized package of protections designed to cover the perils that commonly affect homeowners and renters. The same terms and identifying numbers are generally used by most insurance companies.
Policies for Owners of Single-Family Dwellings The basic form (HO-1) is a named-perils policy that covers 11 property-damage-causing perils and liability-related exposures. The broad form (HO-2) is a named-perils policy that covers not 11 but 18 property-damage-causing perils and liability-related exposures. There are special limits on certain classes of personal property, such as loss of jewelry or money. The special form (HO-3) is the most common type purchased by homeowners. It provides all 18-perils protection (except for glass breakage) and protection from liability-related exposures. There are special limits on certain classes of personal property, such as loss of jewelry or money. The older home form (HO-8) is a named-perils policy that provides actual-cash-value protection on the dwelling; not replacement protection. The replacement value of older home may be much higher than its market or actual cash value. Thus, the policy only provides that the dwelling be rebuilt to make it serviceable; not rebuilt to the same standards of style and quality.
special (homeowner's insurance) form (HO-3) Provides open-perils protection (except for the commonly excluded perils of war, earthquake, and flood) for four types of property losses.
DO IT IN CLASS
Table 10-1 Summary of Homeowner's Insurance Policies Table 10-1 Summary of Homeowner's Insurance Policies (Continued )
Renter's Insurance Is Very Inexpensive
Renter's insurance can cost as little as $20 a month and discounts are available if you buy from the same company that provides your auto coverage.
Policies for Renters The renter's contents broad form (HO-4) is a named-perils policy that protects the insured from losses to the contents of a dwelling rather than the dwelling itself. It covers 17 perils (except for glass breakage) and provides some liability protection. HO-4 also provides for living expenses if the dwelling is rendered uninhabitable by one of the covered perils.
renter's contents broad form (HO-4) Named-perils policy that protects the insured from losses to the contents of a rented dwelling rather than to the dwelling itself.
Policies for Condominium Owners The condominium form (HO-6) is a named-perils policy protecting condominium owners from the three principal losses they face: losses to contents and personal property, losses due to the additional living expenses that may arise if one of the covered perils occurs, and liability losses. (The building itself is insured by the management of the condominium.)
10.3c Buying Homeowner's Insurance
In keeping with the large loss principle you need to select appropriate amounts of coverage on your dwelling and its contents as well as to protect you from liability losses.
How Much Coverage Is Really Needed on Your Dwelling? If you own your home, your first step is to determine the dwelling's replacement value. You could either use the services of a professional liability appraiser and/or consult with your insurance agent to determine replacement value. Note that over one-half of the homes in the United States are said to be underinsured.
Homeowner's insurance policies usually contain a replacement-cost requirement that stipulates that a home must be insured for a specified percentage of its replacement value (historically, 80 percent, and companies are increasingly requiring 100 percent). Thus, a home with a replacement value of $200,000 would need to be insured for $160,000 (or perhaps $200,000), and this amount would be the maximum that the insurance company would be obligated to pay for a total loss (after payment of the deductible by the policyholder). If you fail to meet your replacement-cost requirement, you will not be considered fully insured and must coinsure partial losses as well. The amount of reimbursement for partial losses will be calculated using the replacement-cost-requirement formula:
replacement-cost requirement Stipulates that a home must be insured for 80 percent of its replacement value (some companies require 100 percent) in order for any loss to be fully covered.
DO IT IN CLASS
where
Consider the example of Selena Torres from Las Cruces, New Mexico, who owns a home with a replacement value of $200,000 with a $500 deductible. Selena had insured her home for $144,000, even though the policy required coverage of 80 percent of the replacement cost. Last month a fire in her home caused damage amounting to $80,500. Applying Equation (10.2), Selena's calculations are as follows:
As this calculation shows, Selena will be reimbursed for only $72,000 of her loss. Her failure to insure her house for 80 percent of its replacement cost, or $160,000 ($200,000 × 0.80), means she will be covered for only 90 percent ($144,000/$160,000) of its value, and she must pay 10 percent of any partial loss—in this case, $8000.
Meeting an 80 percent replacement-cost requirement enables you to avoid coinsurance on small losses but might still result in inadequate coverage on large losses that, though rare, exceed the policy limit. Thus, it is wise to insure your dwelling for 100 percent of its replacement cost. You will also want to sign up for inflation guard protection to have your insurance company increase your coverage automatically each year to keep up with inflation.
A standard property insurance policy will replace a damaged property so that it is the same or similar as before. If a house was built a long time ago, building a similar structure as a replacement may not satisfy new building code regulations that will be required in the rebuild. This is especially true in areas that may have experienced natural disasters such as wildfires, windstorms, and flooding. Law and ordinance protection is a special insurance endorsement that pays for demolishment and/or repairs to meet modern building standards.
How to Insure High-Value Items
Some high-value items of personal property are subject to specific item limits in the homeowner's policy. For example, the typical policy provides maximum coverages of $200 for cash, $5000 for personal computers, and $1000 for jewelry. This is because most people do not have such items above these values and do not need higher levels of coverage. If your home inventory reveals a higher valuation on such items, you can simply ask your company for extra coverage and pay the higher premium required.
How Much Coverage Is Needed on Your Personal Property? Making a personal property inventory of, and placing a value on, all the contents of your home are time-consuming but important tasks. Table 10-2 shows the inventory and valuation for the contents of and personal property in a typical living room. You should conduct such an inventory for each room, the basement, garage, shed, and yard possessions. When totaled, these values will enable you to select proper policy coverage limits. Most homeowner's policies are designed to automatically cover contents and personal property for up to 50 percent of the coverage on the home. For example, if your home is insured for $240,000, you automatically would have $120,000 in personal property insurance. If you need more coverage, simply notify your agent.
Notice that Table 10-2 lists three estimates for the value of the contents of a room: the purchase price, the actual cash value, and the replacement cost. Historically, property insurance policies paid only the actual cash value of an item of personal property, which represents the purchase price of the property less depreciation. The actual-cash-value (ACV) formula is:
actual cash value (of personal property) Represents the purchase price of the property less depreciation.
where
Consider the case of Marianna Kinard, a music teacher from Joanna, South Carolina, whose nine-year-old heating/air-conditioning unit was struck by lightning. The unit cost $2400 when new and had a total life expectancy of 12 years. Its actual cash value when it was struck by lightning was:
Marianna could not replace the unit for $600. A more realistic replacement cost might be $3000. Contents replacement-cost protection is an option sometimes available in homeowner's insurance policies that pays the full replacement cost of any personal property. The standard limitation that applies to contents (50 percent of insured value of the dwelling) remains in effect if contents replacement-cost protection is purchased. The overall limit on contents may need to be raised, as it is easy to reach the 50 percent figure when replacement-cost valuation is used.
contents replacement-cost protection Option sometimes available in homeowner's insurance policies (including the renter's form) that pays the full replacement cost of any personal property.
Table 10-2 Personal Property Checklist: Living Room
What's Covered while You Are Away at College
College students and their parents sometimes wonder about the student's insurance coverage while attending school away from home. Students who have moved into their own residence to live year-round need to buy their own renter's and automobile insurance policies. This is because the family's homeowner's and auto coverages will only apply if the student (1) lives in a dorm or fraternity/sorority house or (2) lives in off-campus housing in what is clearly a temporary arrangement (that is, the student returns home during semester breaks and over the summer).
If you are covered by your family's policies, here are some guidelines to remember:
1. Property stored away from home is often only covered for up to 10 percent of the coverage on the home. If the family home is insured for $150,000, for example, then $15,000 of total coverage applies regardless of how many students are in the family.
2. Expensive items such as jewelry or computers are subject to specific limits in the homeowner's insurance policy. Auto insurance rates are based on where the vehicle is garaged (or parked) at night. The insurance agent should be notified if a covered vehicle is used while away at school. It is better to pay a slightly higher rate than to face denial of coverage for a loss because of misinformation. A discount is common for a college student listed on a parent's policy if the student does not have a car at school and the school is at least 100 miles from the parent's home.
Stay out of the Doghouse
One-third of homeowner's insurance liability claims are associated with dog bites. Notify your insurance company that you have a dog, because they might not renew your policy if you make a claim and did not tell them about the animal. And raise your liability limits for better protection.
How Much Coverage Is Needed for Liability Losses? Newly written standard homeowner's policies provide $300,000 ($100,000 for older policies unless amended) of personal liability coverage, $1000 of no-fault medical expense coverage, and $500 of no-fault property damage coverage. It is smart to apply the large-loss principle here and increase the policy limits for all three of these coverages (or consider an umbrella liability policy discussed later). The extra cost is small because the odds of such larger losses are low.
CONCEPT CHECK 10.3
1. Describe the types of losses covered under the property insurance portion of a homeowner's policy.
2. Give three examples of liability protection under homeowner's insurance policies.
3. Name the three types of homeowner's insurance policies for most residences; HO-3, HO-4, and HO-6.
4. Identify four types of personal property for which the covered loss is limited to a specific dollar amount under standard homeowner's insurance policies (see Table 10-1 ).
5. List the three questions you should ask yourself when determining the policy limits for a homeowner's insurance policy.
Driving a car is the largest single exposure to catastrophic losses for most Americans. A split-second error in driving judgment or bad luck can result in many tens of thousands of dollars of automobile-related property damage and personal injury losses. Automobile insurance combines the liability and property insurance coverages needed by automobile owners and drivers into a single-package policy. It is illegal to operate a motor vehicle without assuming financial responsibility for any losses you might cause; therefore, most states require automobile owners to purchase automobile insurance to meet this responsibility (although because of lack of enforcement there are millions of illegally uninsured drivers on the roads).
LEARNING OBJECTIVE 4
Design an automobile insurance program to meet your needs.
Automobile insurance combines four distinct types of coverage: (1) liability insurance, (2) medical payments insurance, (3) protection against uninsured and underinsured motorists, and (4) insurance for physical damage to the insured automobile. Each coverage has its own policy limits, conditions, and exclusions. Table 10-3 summarizes the coverage provided by automobile insurance policies for people not specifically excluded in the policy.
automobile insurance Combines the liability and property insurance coverages that most car owners and drivers need into a single-package policy.
Coverage A—Liability Insurance Liability insurance covers the insured when he or she is held responsible for losses suffered by others. Two types of liability can arise out of the ownership and operation of an automobile. Automobile bodily injury liability occurs when a driver or car owner is held legally responsible for bodily injury losses suffered by other people, including pedestrians. Automobile property damage liability occurs when a driver or car owner is held legally responsible for damage to the property of others. Such damage can include damage to another vehicle, a building, or roadside signs and utility poles.
automobile bodily injury liability Occurs when a driver or car owner is held legally responsible for bodily injury losses that other people, including pedestrians, suffer.
automobile property damage liability Occurs when a driver or car owner is held legally responsible for damage to others' property.
Table 10-3 Summary of Automobile Insurance Coverages
Bodily Injury Liability Losses Can Be Very High
A one-day stay in a hospital intensive care unit can cost more than $50,000. An accident with multiple injuries can result in liability losses in excess of $300,000. When buying auto insurance policy, always select very high liability limits.
The most common type of automobile insurance policy is the family auto policy (FAP). The policy limits for FAPs are quoted as split liability limits, usually three numbers such as 100/300/50, with each number representing a multiple of $1000 ( Figure 10-2 ). The first number gives the maximum that will be paid for liability claims for one person's bodily injury losses resulting from an automobile accident ($100,000 in our example). The second number indicates the overall maximum that will be paid for bodily injury liability losses to any number of people resulting from an automobile accident ($300,000 in our example). The third number specifies the maximum that will be paid for property damage liability losses resulting from an accident ($50,000 in our example).
In some auto insurance policies, the liability limits are stated as a single liability limit such as $250,000. Under such policies, all property and bodily injury liability losses resulting from an accident would be paid until the limit is reached. Liability insurance covers only the insured for losses suffered by others. It does not pay for bodily injury losses suffered by the insured or for property damage to the insured's car. Injured passengers of an at-fault driver may collect under the driver's liability coverage, but only after exhausting the coverage provided under medical payments (discussed below) and only after reimbursement is made to people injured in other vehicles or as pedestrians.
Driving a rental car exposes you to the same potential liabilities as driving your own vehicle. If you have automobile liability insurance, such liabilities will usually be covered while you drive a rented car. Check your coverage before you rent a car so you can avoid buying overpriced insurance from the rental agency.
Figure 10-2 Automobile Liability Insurance Policy LimitsDrivers need to make sure they have sufficient liability coverage in the event of an accident—the person at fault is typically responsible for all damages.
Coverage B—Medical Payments Insurance Automobile medical payments insurance can help pay medical expenses no matter who's at fault. It covers you, your passengers, and any family members driving or riding in the insured vehicle at the time of the accident.
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.
Medical payments coverage is subject to a single policy limit, which is applied per person, per accident. Medical payments also protect insured family members who are injured while passengers in any car or who are injured by a car when on foot or riding a bicycle.
Under medical payments, drivers and their injured passengers collect directly from the driver's insurance. If the driver was not at fault, then the driver's insurer pays the claims and subsequently may choose to exercise subrogation rights against the at-fault party. Subrogation rights allow an insurer to take action against a negligent third party (and that party's insurance company) to obtain reimbursement for payments made to an insured.
subrogation rights Allow an insurer to take action against a negligent third party (and that party's insurance company) to obtain reimbursement for payments made to an insured.
Some states have adopted a version of no-fault automobile insurance where insureds collect first (and possibly only) from their own insurance companies for bodily injury losses. In these states, the medical payments coverage is often referred to as personal injury protection (PIP) covers the driver and any passengers for bodily injury losses as well as possibly lost wages and rehabilitation expenses. Subrogation rights are limited in no-fault states.
Coverage C—Uninsured and Underinsured Motorist Insurance What if you are injured in an accident caused by a driver who has no or insufficient auto liability insurance? You would first be covered by your own medical payments auto insurance but that almost surely will not cover all of the losses. Uninsured motorist insurance protects you and your passengers from bodily injury losses (and, in a few states, property damage losses) resulting from an automobile accident caused by an uninsured motorist. Underinsured motorist insurance protects the insured and his or her passengers from bodily injury losses (and, in some cases, property damage losses) when the at-fault driver has insurance but that coverage is insufficient to reimburse the losses. This insurance is a smart risk-management choice and carries a very low premium—often less than $75 per year.
uninsured and underinsured motorist insurance Coverage that an insured can purchase as part of automobile insurance that covers the insured in an accident when an uninsured or underinsured driver is at fault.
Coverage D—Physical Damage Insurance Automobile physical damage insurance provides protection against losses caused by damage to your vehicle.
Collision insurance reimburses an insured for losses resulting from a collision with another car or object or from a rollover. The insurer pays the cost of repairing or replacing the insured's car, regardless of who is at fault. When the other driver is at fault, subrogation rights may allow the insurer to obtain reimbursement through that driver's property damage liability protection. Collision insurance is written with a deductible that usually ranges from $100 to $1000. If you carry collision insurance coverage on your own car, you are generally covered when you drive someone else's car with that person's permission. Most automobile insurance policies provide for collision coverage on rental cars if such coverage applies to your owned vehicle. Check with your agent before you rent a car.
collision insurance Reimburses insureds for losses to their vehicles resulting from a collision with another car or object or from a rollover.
Turn Bad Habits into Good Ones
Do You Do This?
Assume your parents' homeowner's policy covers you at school
Base your potential auto liability losses on your own financial status
Base your insurance decisions on how much coverage will cost
Buy low limits on your liability coverages
Buy policies with the lowest possible deductibles
Do This Instead!
Confirm that you are correct and, if not, buy your own renter's policy
Estimate the maximum loss others could suffer if you caused an accident
Base your decisions on the potential losses you could suffer
Buy higher limits and or an umbrella liability policy
Raise the deductibles on your policies and apply the savings toward higher limits
Quick and Easy Steps Can Cut Your Auto and Homeowner's Insurance Bill
There is no point in paying more for insurance than necessary. Here are some suggestions for achieving this goal.
Select Appropriate Coverages and Limits. Buy only needed coverages but be certain to select policy limits appropriate for the largest potential losses. Choosing low limits is unwise, as you will be personally liable if an accident exceeds those limits. Elimination of some coverages, such as comprehensive or uninsured/underinsured motorist insurance, would yield little savings while sharply reducing protection.
Take Advantage of Discounts. Most insurance companies offer discounted premiums for policyholders who insure multiple vehicles or buy multiple policies (for example, both automobile and homeowner's insurance) from them.
Engage in Loss Control. Many companies charge lower premiums to policyholders who take steps to reduce the probability or severity of loss. For example, discounts are available if you install dead-bolt door locks or a fire extinguisher in your home. Ask your agent what you need to do to qualify.
Raise Your Deductible. Raising your deductible can save you hundreds of dollars per year. You may even wish to eliminate this coverage altogether for cars having a book value of less than $2000.
Shop Around for the Lowest-Cost Coverage. Insurance premiums from one company can be two or three times as much as those charged by another company for essentially the same coverage, so considerable savings can be realized by seeking quotes from multiple agents and direct sellers. To obtain a quote, go on the Internet and provide some companies your information. You can also telephone an agent or a direct seller. Also see a quote service such as www.insure.com or www.insweb.com . Make sure you provide sufficient accurate information in your request to obtain the best quote possible.
Become Insurance Wise. The insurance regulatory agency in your state (to find yours, visit www.naic.org/state_web_map.htm ) may publish helpful insurance buyer's guides that discuss how to buy specific types of insurance, compare premiums, and rate the companies providing such insurance. In addition, Consumer Reports magazine periodically publishes feature articles that discuss insurance.
Comprehensive automobile insurance helps pay for damages that are not caused by a collision or rollover. Covered perils include fire, theft, vandalism, hail, and wind, among many others, and it typically carries a deductible ranging from $100 to $1000.
comprehensive automobile insurance Protects against property damage losses to an insured vehicle caused by perils other than collision and rollover.
When you have a loss that qualifies under collision or comprehensive insurance, an estimate of the repair cost will be made. If this estimate exceeds the value that the insurance company puts on the vehicle, the lower of the two figures is paid, less any deductible. Insurance companies set vehicle values based on the average current selling price of vehicles of the same make, model, and age. Insurance companies will not give you more money because your wrecked vehicle had very low mileage and was in near-perfect condition.
Other Valuable Protections Two other low- or no-cost, but helpful, coverages are available to automobile insurance buyers. Towing coverage pays the cost of having a disabled vehicle transported for repairs. It usually pays only the first $25 or $50 per occurrence but will cover any towing need—not just assistance needed due to an accident. Rental reimbursement coverage provides a rental car when the insured's vehicle is being repaired after an accident or has been stolen. It often has a daily payout limit of $20 to $30 and, therefore, may provide only part of the funds needed to obtain replacement transportation.
You Can Change Insurers at Any Time
You do not have to wait until renewal time to change insurance companies. If shopping around reveals that you can save money and/or improve your coverage with a new company, consider doing so right away. Contact the new company first to ensure that you have been accepted and then contact the old company. You will receive a refund of the unused premium less a minor processing charge when you cancel.
Money Websites for Managing Property and Liability Risk
Informative websites for managing property and liability risk, including sites that compare policies and prices are:
Insure.com ( www.insure.com/home-insurance / and www.insure.com/car-insurance// )
Insurance Institute for Highway Safety ( www.iihs.org/ratings/default.aspx )
Insweb ( www.insweb.com )
Kiplinger's Personal Finance ( www.kiplinger.com/fronts/channels/insurance/ )
National Association of Insurance Commissioners ( www.naic.org/store_home.htm )
National Flood Insurance Program ( www.FloodSmart.gov )
New York Times ( www.topics.nytimes.com/your-money/insurance/home-insurance/index.xhtml )
MSN Money ( www.money.msn.com/insurance/ )
The Best Way to Title Vehicles
Couples may be tempted to put major assets in both their names, and sometimes this is the best way to go. For automobiles, however, the decision is different because the owner of a vehicle is legally liable for accidents caused by the driver. If both partners own an automobile, both could be sued. Thus, it is smart to title an automobile in only one name. For couples with two vehicles, each could be owned separately.
CONCEPT CHECK 10.4
1. Identify the four types of automobile insurance coverage.
2. Explain the meaning of the numbers 100/200/75.
3. Identify who is protected by medical payments coverage.
4. Distinguish between collision and comprehensive insurance.
5. Explain why selecting a policy with a high deductible and high liability limits is better than one with a low deductible and low liability limits.
10.5 BUY SPECIALIZED PROTECTION FOR OTHER LOSS EXPOSURES
Some people need protection against property and liability losses that are not covered by or exceed the limits of the standard homeowner's or automobile insurance policies.
LEARNING OBJECTIVE 5
Describe other types of property and liability insurance.
10.5a Umbrella Liability Insurance
Umbrella liability insurance is a catastrophic liability policy that covers liability losses over and above those covered by any underlying homeowner's, automobile, or professional liability policy. Such policies provide two benefits. First, the types of losses covered are broader than those recognized by comprehensive personal liability insurance. Second, umbrella policies provide for high dollar amounts of coverage over and above the basic policies. To be covered for these higher limits, you must carry the basic coverages as well.
umbrella (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.
Figure 10-3 shows how umbrella policies work. In this example, the insured has an automobile insurance policy with total liability limits of $600,000 (the total liability coverage for one accident is $500,000 per accident plus $100,000 for property damage), a homeowner's insurance policy with liability protection of $200,000, and a $500,000 professional liability insurance policy. If the insured bought an umbrella policy with a $1 million limit and then experienced a $750,000 professional liability loss, the umbrella policy would provide protection of $250,000 after the professional liability policy limits were exceeded. Umbrella policies are relatively low in cost when purchased to supplement basic policies (perhaps $150 to $200 per year for an additional $1 million of protection) and protect against virtually all liability exposures that a person might face.
Figure 10-3 How Umbrella Liability Policies Work
How Automobile Insurance Would Apply to an Accident
Just how the many provisions in an automobile insurance policy apply to a specific accident mystifies many people. As a result, the claims process may generate considerable dissatisfaction after an accident. The example given here and outlined in the following chart is intended to clarify the application of the multiple coverages and limits.
DO IT IN CLASS
In September of last year, Olivia Redman, a college student from Itta Benna, Mississippi, caused a serious accident when she failed to yield to an approaching vehicle while attempting to make a left turn. Olivia suffered a broken arm and facial cuts, resulting in medical costs of $5254. Her passenger, Philip Windsor, was seriously injured with head and neck wounds requiring surgery, a two-week hospital stay, and rehabilitation. Philip's injuries generated medical costs of $137,650. The driver of the other car, Patrick Monk, suffered serious back and internal injuries and facial burns that resulted in some disfigurement. His medical care costs totaled $122,948. His passenger, Annette Monk, suffered cuts and bruises requiring minor medical care at a cost of $1423.
Both cars were completely destroyed in the accident. Olivia's 10-year-old Buick was valued at $2150. Patrick's Mazda Miata was valued at $19,350. The force of the impact spun Patrick's car around, causing it to destroy a traffic-signal control box (valued at $3650).
Both Olivia and Patrick were covered by family automobile policies with liability limits of $50,000/$10,000/$25,000 and medical payment limits of $10,000 per person and $100 collision coverage deductibles. In total, Olivia had to pay $11,048 out of her own pocket, as the policy limits were exceeded by Patrick's and Phillip's medical costs.
An additional point needs to be raised concerning situations in which an accident victim suffers serious, permanent injuries that are not fully reimbursed by the insurance policy protecting the driver at fault. In our example, Patrick suffered very painful injuries resulting in permanent disfigurement. He may wish to sue Olivia for his pain and suffering and for his unpaid medical expenses. If he were to file such a suit, Olivia would be provided with legal assistance by her insurance company. Any judgment that exceeds the policy limits (remember that Olivia's per-person policy limit has already been reached) will be Olivia's responsibility, however. Both Olivia and Patrick were terribly underinsured.
Olivia Redman's Accident: Who Pays What?
|
Coverage |
Olivia's Policy |
Patrick's Policy |
|
Liability (limits) |
(50/100/25) |
(50/100/25) |
|
Bodily injury: |
|
|
|
Patrick Monk |
$50,000 |
|
|
Annette Monk |
1,423 |
|
|
Philip Windsor |
43,577** |
|
|
Property damage: |
|
|
|
Patrick Monk's car |
19,350 |
|
|
Traffic-signal control box |
3,650 |
|
|
Medical payments (limits): |
($10,000) |
($10,000) |
|
Patrick Monk |
|
10,000 * |
|
Annette Monk |
|
1,423 |
|
Olivia Redman |
5,254 |
|
|
Philip Windsor |
10,000 |
|
|
Collision coverage (limits): |
(ACV, $100 deductible) |
(ACV, $100 deductible) |
|
Olivia's car |
2,050 |
|
|
Patrick's car |
|
19,250 * |
|
Olivia's out-of-pocket expenses: |
|
|
|
Patrick Monk's bodily injury |
72,948 |
|
|
Phillip Windsor's bodily injury |
84,073 |
|
|
Olivia's collision insurance deductible |
100 |
|
|
TOTAL |
$157,121 |
|
* Also, included in Olivia's column because Patrick's company filed a claim against Olivia by exercising its subrogation rights.
**Olivia's liability policy paid a total of $55,423 to the passengers in the other car leaving only $43,577 of the $100,000 per accident limit remaining to reimburse Phillip for his medical care that exceeded the medical payments limit of $10,000.
10.5b Flood and Earthquake Insurance
Standard homeowner's insurance policies exclude losses caused by flood, sinkholes, and earthquakes. This is because these types of losses are subject to adverse selection. This occurs when people who are most likely to suffer such losses will know that. And those that are least likely to suffer a loss will know that, too. As a result, those people with high probabilities of loss will want to buy the coverage and those will extremely low probabilities will not, thereby violating the law of large numbers. But if you live in a flood-prone area or earthquake zone, your risk of loss should be addressed. The National Flood Insurance Program is a federal government program that makes flood insurance available in counties where flood is common (see www.FloodSmart.gov ).
Earthquake insurance can be purchased only from a private insurance company either as a separate policy or as an endorsement (an addition to a standard policy) to an existing homeowner's or renter's insurance policy. Sinkhole insurance covers damage to your home due to ground collapse. Coverage and availability varies by state but is especially important consideration in Florida, Tennessee, and other states where sinkholes are possible.
endorsement An addition to a standard insurance policy designed to expand coverage for a special area of need.
10.5c Professional Liability Insurance
Professional liability insurance (sometimes called malpractice insurance or errors and omissions insurance) protects individuals and organizations that provide professional services (physician, lawyers, psychologists, etc.) when they are held liable for the financial losses suffered by their clients due to professional mistakes or omissions. Policy limits, deductibles, premiums, and other characteristics of such policies vary widely depending on the profession involved. A $1 million professional liability policy written for a family therapist may cost as little as $500 per year; in contrast, some surgeons pay $60,000 or more per year for professional liability insurance. In some state and for certain professions, professional liability insurance may be required by law.
professional liability insurance/malpractice insurance Protects individuals and organizations that provide professional services when they are held liable for their clients' losses.
Buying Automobile Insurance
Even though automobile insurance premiums can vary by hundreds of dollars annually among companies, only 40 percent of consumers shop around when they buy or renew coverage. It is especially important to re-shop for automobile insurance after you have had an accident or major ticket or before purchasing a vehicle. Insurance companies differ in how they handle these changes and a new company might be a better option for you.
You can use Worksheet 45 available in the My Personal Financial Planner workbook accompanying this text to record automobile insurance premium quotations obtained from insurers.
Sean's Success Story
Sean's success as a personal financial manager is reflected in his tangible assets. He owns a two-year-old luxury vehicle and a motorcycle. He has all the latest home entertainment equipment in his condo in an upscale neighborhood. He also has substantial coin and stamp collections as both hobbies and investments. He recently undertook a thorough risk-management process to assess his exposures to risk and assess the ways to best address the risks he faces. As a result, he bought additional insurance to cover his personal property and stamps and coins. He also raised his automobile insurance deductible to $1000 and used the savings to raise his liability limits to 250/500/100. He also purchased a $2 million umbrella liability policy. Sean feels more secure now and plans to reassess his risk-management efforts every year.
About Wedding Insurance
The cost of a large wedding can be $30,000 or more. Much of that amount must be paid up front. If either party backs out, there is nothing you can do. Except you can consider sending a bill to the bad person for the charges!
Wedding insurance generally pay whens: (1) a member of the immediate families dies or becomes ill (pre-existing illness is excluded); (2) a guest is injured; (3) caterers fail to provide a service; (4) clothing providers and photographers do not deliver their services; and (5) gifts are stolen or damaged.
Floater policies provide all-risk protection for accident and theft losses to movable property (such as cameras, sporting equipment, MP3 players, and clothing) regardless of where the loss occurs. Limited floater protection for personal property is part of the standard homeowner's insurance policy. Automobile insurance policies only cover portable personal property that is permanently installed in the vehicle. Property owned for business purposes is excluded from both types of insurance. This means that a mechanic's tools, a lawyer's books, and a karaoke DJ's equipment, for example, would not be covered. A separate floater policy would be required if you have extensive portable property whether for personal or business use.
floater policies Provide all-risk protection for accident and theft losses to movable property regardless of where the loss occurs.
CONCEPT CHECK 10.5
1. Explain how purchasing an umbrella liability insurance policy applies the large-loss principle.
2. Are you preparing for a professional career that might expose you to liability losses? How might you protect yourself from such losses?
3. Give two examples of someone who might want to purchase a floater insurance policy.
10.6 HOW TO COLLECT ON YOUR PROPERTY AND LIABILITY LOSSES
The direct benefit of owning insurance becomes evident when a loss occurs and it is time to file a claim. Even when you have a legitimate claim, however, you may want to consider whether you should do so. A small claim might be best ignored as it may increase your rates, as one claim increases premiums, on average, 9 percent the following year. Of course, if you have a large claim, you would want to file for its recovery. Here are the four steps that you should take when you have a loss.
10.6a 1. Contact Your Insurance Agent about Your Loss
If you decide to file a claim, the first step—contacting your agent— should be taken as soon as possible. Follow the agent's instructions regarding who to contact next (including filing a written police report) and what to do to minimize the loss. Then keep the company informed of everything relevant to the loss in a timely manner until the claim is settled. The tenacious claimant is more likely to collect fully on a loss.
LEARNING OBJECTIVE 6
Summarize how to make an insurance claim.
Check Your Home's Claims History because It Affects Your Rates
Much like an individual's credit history, a home has a history, too, of its insurance claims. Claims that have occurred in the last seven years are included. You can check your home's claims history at www.personalreports.lexisnexis.com /homesellers_disclosure_report/landing.jsp.
Applying the Large-Loss Principle to Property and Liability Insurance
You should always select insurance coverage limits for the highest possible loss. Although rare, such losses can destroy your financial future. That thinking underlies the large-loss principle discussed earlier. Here is how to apply the principle to property and liability insurance.
For your personal property insurance, you should select limits that equal the value of the property involved. A $240,000 home should be insured for $240,000. Better yet, you can add extended-replacement coverage, which covers the difference if the price to rebuild exceeds your dwelling limit. Select all-risk policies rather than named-peril policies. Yes, the cost may be higher, but the loss of your property could be much worse.
The purchase of an umbrella liability policy is the best way to apply the large-loss principle to liability insurance. Never buy the legal minimums for auto insurance. Causing an accident that destroys one newer-model vehicle can exceed most state minimum limits.
You can afford to apply the large-loss principle through the use of higher deductibles. Ask yourself: “What is the largest loss I can afford to cover myself?” Then choose the highest deductible that does not exceed what you can afford to cover. The money saved by selecting a higher deductible can be used to pay for higher policy limits. For example, on a 100/300/50 auto policy with a $100 deductible, you can save as much as $300 per year by simply raising the deductibles to $1000! Then you can apply some of those savings to buy a $1,000,000 umbrella policy to protect yourself from a catastrophe.
Gerard J. Mellnick
Schoolcraft College, Livonia, Michigan
Your Worst Financial Blunders in Managing Property and Liability Risk
Based on others' financial woes, you will make mistakes in personal finance when you:
1. Buy only the legally required minimum liability coverage on your vehicle.
2. Pay high premiums because you select low deductibles on property insurance for your home and car.
3. Fail to keep good records (e.g., lists, photos, videos, receipts) that could serve to document insured property losses.
Use Your Company's Claims Phone App
Many insurance companies have developed mobile device apps for the reporting of losses covered by their policies. Contact your agent to see if such an app is available. A similar app is available from the National Association of Insurance Commissioners at www.insureuonline.org/auto_page.htm .
You carry the burden of proof whenever a property or liability loss occurs. Adequate documentation of the circumstances and the amount of the loss is essential. In the absence of such documentation, the insurance company will generally interpret the situation in the manner most favorable to its interests, not yours.
The best way to document a theft, fire, or other personal property loss is with a visual inventory. Photographs or videotapes of all valuable property including a written record of the date of purchase, price paid, description, model name and number, and serial number (if any) is very helpful. Keep such records in a safe-deposit box, in a file cabinet at work, or with a relative. If a loss occurs, present a copy of your documentation to the agent or insurance company.
You should always file a police report if you become involved in an automobile accident. Make a written record of the accident giving the time and place of the accident, the direction of travel and estimated speed of the cars involved, the road and weather conditions, the behavior of all parties involved and a diagram of the accident scene. Also, obtain the names, driver's license numbers and contact information for witnesses. Police reports are also advisable (and often required) when filing a theft claim of any type.
An insurance claim is a formal request to the insurance company for reimbursement for a covered loss. All of the documentation and information will be requested by the insurance agent or a claims adjuster (the person designated by the insurance company to assess whether the loss is covered and to determine the dollar amount that the company will pay). Insurance companies require that claims be made in writing, although the adjuster may assist you in completing the necessary forms.
insurance claim Formal request to the insurance company for reimbursement for a covered loss.
claims adjuster Person designated by the insurance company to assess whether the loss is covered and to determine the dollar amount that the company will pay.
Part of the final step in the claims-settlement process is to sign the release which is an insurance document affirming that the dollar amount of the loss settlement is accepted as full and complete reimbursement and that the insured will make no additional claims for the loss against the insurance company. Signing the release absolves the insurance company of any further responsibility for the loss. Resist the temptation to sign a release until you are sure that the full magnitude of the loss has become evident.
release Insurance document affirming that the dollar amount of the loss settlement is accepted as full and complete reimbursement.
DO IT NOW!
You know more about personal finance after reading this chapter, so get started right now by:
1. Identifying your exposures to risk and the magnitude of the losses that could occur.
2. Assessing your automobile insurance coverage and making changes as necessary.
3. Buying renter's insurance if you rent your housing.
CONCEPT CHECK 10.6
1. What is the best way to establish documentation for potential losses to your personal property?
2. Describe what you should do to file a claim most effectively when involved in an automobile accident.
3. Describe the term release and explain why signing a release too soon might work to your disadvantage.
WHAT DO YOU RECOMMEND NOW?
Now that you have read the chapter on risk management and property liability insurance, what would you recommend to Nick and Amber in the case at the beginning of the chapter regarding:
1. The risk-management steps they should take to update their insurance coverages?
2. The relationship between severity and frequency of loss when deciding whether to buy insurance?
3. Adequately insuring their home?
4. The use of deductibles and policy limits to keep their automobile insurance premiums at a manageable level while still maintaining vital coverage?
BIG PICTURE SUMMARY OF LEARNING OBJECTIYES
LO1 Apply the risk-management process to address the risks to your property and income.
Personal financial managers practice risk management to protect their present and future assets and income. Risk management entails identifying the sources of risk, evaluating risk and potential losses, selecting the appropriate risk-handling mechanism, implementing and administering the risk-management plan, and evaluating and adjusting the plan periodically.
LO2 Explain how insurance works to reduce risk.
Insurance is a mechanism for reducing pure risk by having a larger number of individuals share in the financial losses suffered by all members of the group. It is used to protect against pure risk but cannot be used to protect against speculative risk, which carries the potential for gain as well as loss. Likewise, insurance cannot be used to provide payment in excess of the actual financial loss suffered. Insurance consists of two elements: the reduction of pure risk through application of the law of large numbers, and the sharing of losses.
LO3 Design a homeowner's or renter's insurance program to meet your needs.
Homeowner's insurance is designed to protect homeowners and renters from property and liability losses. Six types of homeowner's insurance are available, including one geared toward renters. Homeowner's policies can be purchased on a named-perils or an open-perils basis.
LO4 Design an automobile insurance program to meet your needs.
Automobile insurance is designed to protect the insured against property and liability losses arising from use of a motor vehicle. These policies typically provide liability insurance (both bodily injury and property damage liability), medical payments or personal injury protection insurance, property insurance on your car, and underinsured and uninsured motorist insurance. The most commonly purchased type of automobile insurance is the family automobile policy. The premium for automobile insurance is based on the characteristics of the insured driver, including age, gender, marital status, and driving record.
LO5 Describe other types of property and liability insurance.
Other important types of property and liability insurance include floater policies (to protect personal property regardless of its location), professional liability insurance, and umbrella liability insurance.
LO6 Summarize how to make an insurance claim.
The insured is responsible for documenting and verifying a loss. Photographs or videotapes of the insured property are ideal for documenting claims made under a homeowner's insurance policy. A police report provides the best documentation for claims made under an automobile insurance policy.
LET'S TALK ABOUT IT
1. Insurance Underwriting. How do you feel about being grouped into classes in the insurance underwriting process? Do you feel that insurance companies should treat all such groups of people alike?
2. Actual Cash Value. Many people complain that property insurance policies should pay more than what the insurance companies say is the actual cash value of the property, such as for a used motor vehicle with low mileage that is in near-perfect condition. How do you feel about this issue, and what would happen if insurance companies were more generous in their reimbursements?
3. Auto Liability Limits. Do you know the liability limits on the automobile insurance policy under which you are covered? Are the limits appropriate?
4. Personal Property Protection. Is your personal property, such as furniture and computer, covered under a homeowner's or renter's insurance policy? If not, why not? If so, what are the policy limits?
5. Auto Insurance Claims. What experiences have you or a family member had with the automobile insurance claims process? What if anything might have been done differently or better?
DO THE MATH
1. How Much of Fire Loss Will Be Covered? Toula and Ian Miller of Lincoln, Nebraska, recently suffered a fire in their home. The fire, which began in a crawl space at the back of the house, caused $24,000 of damage to the dwelling. The garage, valued at $18,400, was totally destroyed but did not contain a car at the time of the fire. Replacement of the Millers' personal property damaged in the home and garage amounted to $18,500. In addition, $350 in cash and a stamp collection valued at $3215 were destroyed. While the damage was being repaired, the Millers stayed in a motel for one week and spent $1350 on food and lodging. The house had a value of $195,000 and was insured for $150,000 under an HO-3 policy with a $250 deductible. Use Table 10-1 on page 298 to answer the following questions. (Hint: You must first determine whether the Millers have adequate dwelling replacement coverage and, if not, what percentage of the necessary 80 percent coverage they do have. The resulting answer will determine the percentage of the loss to the dwelling covered, and consequently the amount to be reimbursed by the insurance company.)
DO IT IN CLASS PAGE 297-300
(a) Assuming that the deductible was applied to the damage to the dwelling, calculate the amount covered by insurance and the amount that the Millers must pay for each loss listed: the dwelling, the garage, the cash and stamp collection, and the extra living expenses.
(b) How much of the amount of the personal property loss would be covered by the insurance policy? Paid for by the Millers?
(c) Assuming that they have contents replacement-cost protection on the personal property, what amount and percentage of the total loss must be paid by the Millers?
2. Sufficient Dwelling Coverage? Colton Gentry of Atlanta, Georgia, has owned his home for ten years. When he purchased it for $178,000, Colton bought a $160,000 homeowner's insurance policy. He still owns that policy, even though the replacement cost of the home is now $300,000.
DO IT IN CLASS PAGE 300
(a) If Colton suffered a $20,000 fire loss to the home, what percentage and dollar amount of the loss would be covered by his policy?
(b) How much insurance on the home should Colton carry now to be fully reimbursed for a fire loss?
3. Coverage on a One-Vehicle Accident. Bill Converse of Birmingham, Alabama, recently had his truck slide off a gravel road and strike a tree. Bill's vehicle suffered $17,500 in damage. The truck has a book value of $40,000. Bill carried collision insurance with a $500 deductible. How much will Bill be reimbursed by his policy?
4. How Much of a Major Auto Accident Loss Will Be Covered? Ashley Diamond of Griffin, Georgia, drives an eight-year-old Toyota valued at $5600. She has a $75,000 personal automobile policy with $10,000 per-person medical payments coverage and both collision ($200 deductible) and comprehensive coverage. David Smith of Bristol Virginia, drives a four-year-old Chevrolet Malibu valued at $9500. He has a 25/50/15 family automobile policy with $20,000 in medical payments coverage and both collision ($100 deductible) and comprehensive insurance. Late one evening, while he was driving back from Rocky Mountain National Park, David's car crossed the centerline of the road, striking Ashley's car and forcing it into a ditch. David's car also left the road and did extensive damage to the front of a roadside store. The following table indicates the damages and their dollar amounts.
DO IT IN CLASS PAGE 309
|
Item |
Amount |
|
Bodily injuries suffered by Ashley |
$ 6,800 |
|
Bodily injuries suffered by Fran, a passenger in Ashley's car |
28,634 |
|
Ashley's car |
9,600 |
|
Bodily injuries suffered by David |
2,700 |
|
Bodily injuries suffered by Cecilia, a passenger in David's car |
12,845 |
|
David's car |
9,500 |
|
Damage to the roadside store |
14,123 |
Complete the following chart and use the information to answer these questions:
(a) How much will Ashley's policy pay Ashley and Fran?
(b) Will subrogation rights come into play? In what way?
(c) How much will David's bodily injury liability protection pay?
(d) To whom and how much will David's property damage liability protection pay?
(e) To whom and how much will David's medical protection pay?
(f) How much reimbursement will David receive for his car?
(g) How much will David be required to pay out of his own pocket?
|
David Smith's Accident: Who Pays What? |
|
|
|
COVERAGE |
David's Policy |
Ashley's Policy |
|
Liability (limits) |
__ |
__ |
|
Bodily injury |
__ |
__ |
|
Ashley |
__ |
__ |
|
Fran |
__ |
__ |
|
Cecilia |
__ |
__ |
|
Medical payments (limits) |
__ |
__ |
|
David |
__ |
__ |
|
Ashley |
__ |
__ |
|
Fran |
__ |
__ |
|
Cecilia |
__ |
__ |
|
Collision coverage (limits) |
__ |
__ |
|
David's car |
__ |
__ |
|
Ashley's car |
__ |
__ |
|
David's out-of-pocket expenses |
__ |
__ |
|
Fran's bodily injury |
__ |
__ |
|
Excess property damage losses |
__ |
__ |
|
Collision insurance deductible |
__ |
__ |
|
TOTAL |
__ |
__ |
FINANCIAL PLANNING CASES
CASE 1
The Johnsons Decide How to Manage Their Risks
Six years have passed since the Johnsons were married, and their financial affairs have become much more complicated. Both Harry and Belinda are earning about 30 percent more at work. They have purchased a $140,000 condominium that has added about $400 per month to their housing expense. And they have purchased a second car for $3200. As a result of these changes, Harry and Belinda realize that they now face greater risks in their financial affairs. They have decided to review their situation with an eye toward managing their risks more effectively. Use the steps in the risk-management process (pp. 290–292), their net worth and income and expense statements at the end of Chapter 3 (on pages 99–100), and other information in this chapter to answer the following questions:
(a) What are Harry and Belinda's major sources of risk from home and automobile ownership, and what is the potential magnitude of loss from each?
(b) Given the choices listed in Step 3 of the risk-management process, how should the Johnsons handle the sources of risk listed in part a?
CASE 2
The Hernandezes Consider Additional Liability Insurance
Victor and Maria's next-door neighbor, Jasmine Saunders, was recently sued over an automobile accident and eventually was held liable for $437,000 in damages. Jasmine's automobile policy limits were 100/300/50. Because of the shortfall, she had to sell her house and move into an apartment. Victor and Maria are now concerned that a similar tragedy might potentially befall them. They have a homeowner's policy with $100,000 in comprehensive personal liability coverage and an automobile policy with 50/100/25 limits, and Maria has a small ($100,000) professional liability policy for her work as a medical records assistant.
(a) How might Victor and Maria more fully protect themselves through their homeowner's and automobile insurance policies?
(b) What additional benefits would they receive in buying an umbrella liability policy?
CASE 3
Julia Price Thinks About Managing Her Property and Liability Risk
Julia has always tried to keep her insurance spending under control by purchasing low limits on her policies. Now that her assets and income have grown, she is beginning to reconsider the wisdom of this approach when buying insurance. Julia knows she has a lot more to lose in terms both of property and liability exposures. Last week, she called her insurance agent to discuss raising her policy limits on her homeowner's and automobile insurance policies. The agent suggested she consider an umbrella liability policy. Julia still wants to be frugal and is considering simply raising the limits on the policies she already has rather than obtaining another policy. Offer your opinions about her thinking.
CASE 4
The Princes' Auto Insurance Is Not Renewed
Mark and Kelly Prince of Hattiesburg, Mississippi, face a crisis. Their automobile insurance company has notified them that their current coverage expires in 30 days and will not be renewed. Mark and the Princes' younger son each had a minor, at-fault accident during the past year. Their children are otherwise good drivers, as are both parents. The Princes are confused because they know families whose members have much worse driving records but still have insurance.
(a) Explain to Mark and Kelly why their policy might have been canceled.
(b) Use the box on page 306 to give Mark and Kelly some pointers on how to save money when shopping for a new auto insurance policy.
CASE 5
A Student Buys Insurance for a Used Car
Makiko Iwanami, a student from Osaka, Japan, is in one of your classes. She is considering the purchase of a used car and has been told that she must buy automobile insurance to register the car and obtain license plates. Makiko has come to you for advice, and you have decided to focus on three aspects of automobile insurance.
(a) Explain how liability insurance works in the United States. Advise Makiko about which liability insurance limits she should select.
(b) Makiko is especially impressed that automobile insurance includes medical payments coverage because she has no health insurance. Explain why the medical payments coverage does not actually solve her health insurance problem, and describe the type of coverage it provides.
(c) Makiko plans to pay cash for the car and doesn't want to spend more than $5000. Outline the coverage provided by collision insurance and factors that might make such coverage optional for Makiko.
CASE 6
An Argument About the Value of Insurance
You have been talking at a party to some friends about insurance. One young married couple in the group believes that insurance is almost always a real waste of money. They argue, “The odds of most bad events occurring are so low that you don't need to worry.” Furthermore, they say, “Buying insurance is like pouring money down a hole; you rarely have anything to show for it in the end.” Based on what you have learned from this chapter, how might you argue against this couple's point of view?
CASE 7
Enlai Contemplates a New Homeowner's Insurance Policy
Enlai Li Zhang of Lancaster, California recently bought a home for $700,000. The previous owner had a $600,000 HO-1 policy on the property, and Enlai can simply pay the premiums to keep the same coverage in effect. Her insurance agent called her and cautioned that she would be better off to upgrade the policy to an HO-2 or HO-3 policy. Enlai has turned to you for advice. Use the information in Table 10-1 to advise her.
DO IT IN CLASS PAGE 297-300
(a) What additional property protection would Enlai have if she purchased an HO-2 policy?
(b) What additional property protection would Enlai have if she purchased an HO-3 policy?
(c) What property protection would remain largely the same whether Enlai had an HO-1, HO-2, or HO-3 policy?
(d) Advise Enlai on what differences in liability protection, if any, exist among the three policies.
BE YOUR OWN PERSONAL FINANCIAL PLANNER
1. Property Loss Exposures. Use Worksheet 43: My Home Inventory from “My Personal Financial Planner” to develop a list of your personal property items, including items you keep at school and those at other locations such as the home of a family member. Use Table 10-2 on page 301 as guides for the types of information to include. Assess the appropriateness of insurance to protect these items from loss.
2. The Risk-Management Process. Build upon your list of property loss exposures to develop a complete risk-management assessment. Use the risk-management information on pages 290–292 as a guide and use Worksheet 44: My Insurance Inventory from “My Personal Financial Planner” to record the results of your efforts.
3. Evaluate Your Need for Homeowner's or Renter's Insurance. Determine whether or not you are currently covered by a homeowner's or renter's insurance policy. If you are, determine whether the policy is adequate for your needs. If you are not, decide what coverage levels you will need.
4. Evaluate Your Automobile Insurance. If you drive a vehicle owned by a family member or yourself, you are covered by the insurance policy on that vehicle. Use Table 10-3 on page 303 as a guide to assess the coverage under that policy. Determine whether the policy adequately protects you from loss, and if not, identify what changes you want to make in the policy.
5. Shop for Automobile Insurance. Use Worksheet 45: My Comparison of Auto Insurance Providers from “My Personal Financial Planner” to shop for vehicle insurance based on your analysis in item 4 above. Use your current policy for Company A in the worksheet. Then contact two additional companies to obtain quotes on similar coverage to determine whether you are receiving a good value for your current policy or would benefit from switching companies.
ON THE NET
Go to the Web pages indicated to complete these exercises.
1. Minimum Liability Limits. Visit the website for the National Association of Insurance Commissioners at www.naic.org/state_web_map.htm , where you will find a map where you can link to the Insurance Commission in your state. Determine the minimum automobile insurance liability limits in your state. How well-insured do you feel someone would be if he or she carried only these minimums?
2. Insurance Buyer's Guides. Visit the website for the National Association of Insurance Commissioners, where you will find a map at www.naic.org/state_web_map.htm through which you can link to your state insurance regulator's website. If available in your state, obtain an insurance buyer's guide for automobile and homeowner's insurance that describes policy provisions and compares insurance rates. Use these rate comparisons to select two automobile insurance companies that would be appropriate for your needs. E-mail or telephone the companies to obtain specific premium quotations for the desired insurance protection. Do the same for single-family dwelling, condominium, or renter's insurance, depending on your circumstances.
3. Safe Cars Save Money. Visit the website for the Insurance Institute for Highway Safety at www.iihs.org/ratings/default.aspx . For your own vehicle and one or two you would like to own, check how the vehicles stack up against the competition in terms of injury protection.
ACTION INVOLVEMENT PROJECTS
1. The Benefits of Renter's Insurance. Identify three to five of your friends who currently live in rental housing. Ask them if they are covered by a renter's insurance policy. If not, ask them why they have not decided to buy such coverage. If they are covered, ask them to give their assessment of the costs and benefits of having a policy.
2. Independent Versus Exclusive Insurance Agents. Interview two insurance agents, one who is an independent agent and one who is an exclusive agent. Ask each to describe the benefits to a customer who buys insurance from that type of agent.
3. Automobile Insurance Claims. Interview three or four people who have been involved as an insured party in an automobile accident. Ask them to summarize the claims process as they experienced it and how they now view the process compared to what they expected.
Visit the Garman/Forgue companion website at www.cengagebrain.com .
