Chapter 10

Property and Motor Vehicle

Insurance

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 Chapter 10
Learning Objectives
LO10-1 Develop a risk management plan using
insurance.
LO10-2 Discuss the importance of property and liability
insurance.
LO10-3 Explain the insurance coverage and policy
types available to homeowners and renters.
LO10-4 Analyze factors that influence the amount of
coverage and the cost of home insurance.
LO10-5 Identify the important types of automobile
insurance coverage.
LO10-6 Evaluate factors that affect the cost of
automobile insurance.

10-2
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 Insurance and Risk Management:
An Introduction
LO10-1:
Develop a risk management plan using insurance.
– WHAT IS INSURANCE?
• Insurance is protection against possible financial
loss; it gives you peace of mind
• An insurance company, or insurer, is a risk-sharing
firm that assumes financial responsibility for losses
from an insured risk
• People purchase a policy; the firm assumes the risk
for a fee called the premium, which the insured
policyholder pays periodically

10-3
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 Types of Risk (1 of 2)
– TYPES OF RISKS
• Risk is uncertainty or lack of predictability, such as
the loss that a person or property covered by
insurance faces
• Peril is the cause of a possible loss, such as fire,
windstorms, explosions, robbery, accidents, and
premature death
• Hazard increases the likelihood of a loss, such as
defective house wiring

10-4
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 Types of Risk (2 of 2)
– Pure Risk
• The most common risks are classified as
personal risks, property risks, and liability risks
• Insurable risk; chance of loss not gain
• Accidental and unintentional risks
• Nature and financial cost of the loss can be
predicted
– Speculative Risk
• Chance of either loss or gain, such as starting a
small business or gambling
• Uninsurable risk

10-5
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 Risk Management Methods
– Risk management is an organized strategy for protecting
assets and people
– Risk Management Techniques
1. Risk Avoidance
2. Risk Reduction
– Wear seat belt, install smoke alarms, eat a
balanced diet and exercise
3. Risk Assumption
– Self-insurance
4. Risk Shifting
– Transfer risk to insurance company
– A deductible is the set amount that the
policyholder must pay per loss on an insurance
policy
10-6
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 Planning an Insurance Program

10-7
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 Property and Liability Insurance
LO10-2:
Discuss the importance of property and liability
insurance.
• Major disasters have caused catastrophic amounts
of property loss in the United States. In recent
years, hurricanes, tornadoes, and floods in various
areas have caused billions of dollars of damage
• Main risks related to a home and an automobile are
property damage and your responsibility for injuries
to others and their property

10-8
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 Potential Property Losses
– Houses, automobiles, furniture, clothing, and other
personal belongings
– Risk: Physical damage
• Caused by hazards such as fire, wind, water and
smoke
• Destruction of property or temporary loss of use

– Risk: Loss of use

• Due to robbery, burglary, vandalism, or arson

10-9
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 Liability Protection
– Liability is legal responsibility for financial cost of
another person’s losses or injuries
– Negligence
• Failure to take ordinary or reasonable care, such as
failure to supervise children in a pool
– Strict Liability
• A person is held responsible for intentional or
unintentional actions
– Vicarious Liability
• When a person is held responsible for the actions of
another person
• Parent held responsible for child causing physical
harm to another
• Employer held responsible for an employee causing
damage
10-10
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 Home and Property Insurance
LO10-3:
Explain the insurance coverage and policy types
available to homeowners and renters.
– HOMEOWNER’S INSURANCE COVERAGES
• House and Other Structures
– Damage to or destruction of your house and garage,
tool shed, gazebo, trees, shrubs, and plants
• Additional living expenses
• Personal property at home or while traveling
– Personal property floater — high value items
– Household inventory with documentation

10-11
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 Personal Liability and Related Coverage (1
of 2)
– Medical payments coverage for minor accidental
injuries on your property and minor injuries caused by
you, family members, or pets
– Most homeowner’s policies provide Basic Personal
Liability coverage of $100,000 or more
• Umbrella policy, also called a personal catastrophe
policy, supplements basic personal liability coverage
– $1,000,000 or more in liability coverage

10-12
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 Personal Liability and Related Coverage (2
of 2)
– Specialized coverage
• Homeowner’s insurance usually does not cover
losses from floods and earthquakes
• National Flood Insurance Program makes flood
insurance available
• Earthquake insurance can be obtained as an
endorsement, addition of coverage to the
homeowner’s policy
– Anti-Concurrent Causation Clause
• Gives insurer the right to reject your claim if your
home is damaged by several factors at the same time,
such as wind and rain, because they are unable to
determine which factor came first and caused the
damage
10-13
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 Renter’s Insurance

– Protection against financial loss due to damage or loss

of personal property
– Additional living expenses
– Personal liability and related coverage
– A building owner’s insurance usually won’t cover
renter’s personal property
– Only 4 out of 10 renters have insurance

10-14
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 Home Insurance Policy Forms
– Special form (HO-3), All-risk

– Tenant’s form (HO-4)

– Comprehensive form (HO-5)

– Condominium form (HO-6)

– Country Home form (HO-7)

10-15
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 Home Insurance Cost Factors
LO10-4:
Analyze factors that influence the amount of
coverage and the cost of home insurance.
– Look for a policy with full coverage rather than a
coinsurance clause, where you have to pay for part
of a loss
– Claim Settlement Method
• Actual cash value
– Payment you receive is based on the current
replacement cost of the damaged or lost item less
depreciation

10-16
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 Claim Settlement Method
– Replacement value
• You receive the full cost to repair or replace the
damaged or lost item; depreciation is not
considered
• May limit replacement cost to 400% of actual
cash value of item
• Costs 10-20% more than Actual Cash Value
coverage

10-17
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 Exhibit 6-7
Determining How Much Coverage You Need

10-18
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 Factors
– FACTORS THAT AFFECT HOME INSURANCE
COSTS
• Location Of Home
• Type Of Structure
– Brick house cost less to insure than wood
house
• Coverage Amount And Policy Type
– Deductible affects cost of your insurance;
increase deductible to lower premium;
common deductibles are $500 or $1,000

10-19
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 Reducing Home Insurance Costs
– Home Insurance Discounts
• Alarm system, smoke detector, fire extinguisher,
nonsmokers, if you insure your car with the
same company
– Company Differences
• Compare costs, coverage, and service
• Consider how claims are settled
• Check customer satisfaction index at
Consumer Reports

10-20
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 Automobile Insurance Coverages

LO10-5:
Identify the important types of automobile
insurance coverage.
– Financial responsibility law
• State legislation: Nearly all states have compulsory
automobile insurance laws
• Requires drivers to prove their ability to cover the
cost of damage or injury caused by them in an
automobile accident
• Automobile insurance coverage falls into two
categories: bodily injury coverage and property
damage coverage
10-21
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Exhibit 10-9
Automobile Liability Insurance Coverage

10-22
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 Motor Vehicle Bodily Injury Coverages
(1 of 2)
– Bodily Injury Liability
• Covers the risk of financial loss due to legal
expenses, medical expenses, lost wages and other
expenses associated with injuries caused by an
automobile accident for which you were responsible
– Medical Payments Coverage
• Covers the cost of health care for persons injured in
your automobile, including yourself; also covers if
you are injured while riding in another person’s
automobile or struck by an automobile

10-23
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 Motor Vehicle Bodily Injury Coverages
(2 of 2)
– Uninsured Motorist Protection
• Covers the cost of injuries to you and your family if
your vehicle is hit by a person without insurance.
However, it does not cover property damage
– No-Fault Insurance
• System is intended to provide fast, smooth methods
of paying for damages without taking the legal
action frequently necessary to determine fault;
drivers collect from their own insurance companies

10-24
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 Motor Vehicle Property Damage
Coverages (1 of 2)
– Property Damage Liability
• Covers damage to other person’s car when you are at
fault. It also includes damage to such things as street
signs and buildings
– Collision
• When your car is in an accident, collision coverage pays
for damage to your automobile regardless of who is at
fault
• If you are not at fault, your insurer will try and collect
from the other driver’s property damage liability first —
called subrogation
• Coverage is limited to the actual cash value of your
vehicle from an appraisal service (
National Automobile Dealers Association)

10-25
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 Motor Vehicle Property Damage
Coverages (2 of 2)
– Comprehensive Physical Damage
• Covers damage to your vehicle that is not caused
by a collision, such as...
 Fire, theft, or vandalism
 Glass breakage
 Wind, hail, flood, tornado, etc.
 Falling objects or hitting an animal
 Some things in your car, like some radios and
stereo equipment, are not covered

10-26
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 Deductible

– Example: Deductible
If a broken windshield costs $250 to replace and
you have a $100 deductible on your comprehensive
coverage, the insurance company will pay $150 of
the damages.

10-27
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 Other Automobile Insurance Coverages
– Wage Loss Insurance
• Reimburse you for any salary or income lost due to
injury in an automobile accident
– Towing and Emergency Road Service
• Pays for the cost of breakdowns and mechanical
assistance

10-28
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 Automobile Insurance Costs
LO10-6:
Evaluate factors that affect the cost of automobile
insurance.
– AMOUNT OF COVERAGE
• Legal Concerns include having enough
coverage if you were sued
• $100,000/$300,000 is recommended for bodily
injury liability, with an additional $1,000,000 or
more umbrella liability policy recommended

10-29
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 Amount of Coverage
– Legal Concerns
• Every state has laws that require or encourage
automobile liability insurance coverage
• Most can’t afford to pay an expensive court
settlement with personal assets, so drivers buy
automobile liability insurance
– Property Values
• Cost of vehicles has gone up
• $50,000-$100,000 is usually suggested for property
damage liability

10-30
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 Automobile Insurance Premium Factors
– Automobile Type
• Year, make, model, and theft rate

– Rating Territory
• Different costs due to number of claims made in
the geographic area where you live
– Driver Classification
• Age, sex, marital status, credit history, driving
record, and driving habits
• Assigned risk pool for people who are unable to
obtain insurance

10-31
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 Reducing Automobile Insurance
Premiums
– Comparing Companies
• Rates may be compared online at NetQuote
– Premium Discounts
• Establish and maintain a safe driving record
• Avoid accidents and traffic violations
• Install security devices such as a car alarm
• Increase deductibles
• Non-smoker
• Insure two or more vehicles with the same company

10-32
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