Chapter 10

Home and
Automobile
Insurance

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
 Insurance and Risk Management
• 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 and the firm
assumes a risk for a fee called the
premium, which the insured policyholder
pays periodically.
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 Types of Risk
• Risk: Uncertainty or lack of predictability,
such as to loss that a person or property,
covered by insurance, faces.
• Peril is the cause of a possible loss, such
as fire, windstorm, robbery, disease, or
death.
• Hazard increases the likelihood of a loss,
such as driving drunk, or defective house
wiring.
• Risk management: Organized, planned
strategy to protect your assets and family.

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 Coverage and Type of Risk
• Pure Risk.
 Personal risks, property risks, and liability risks
are types of pure risk.
 Insurable, chance of loss, not gain.
 Accidental, unintentional.
 Nature and financial loss of the risk can be
predicted.
• Speculative Risk.
 Chance of loss or gain, such as starting a
business.
 Uninsurable.
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 Risk
Avoidance

Risk Risk
Shifting Ways to
Reduction
Manage
Risk

Risk
Assumption

10-5
 Planning an Insurance Program
To put your risk management plan to work ask
yourself…
 What should be insured?
 For how much?
 What kind of insurance?
 From whom?
 Set your insurance goals and prioritize them.
 Develop a plan to reach your goals.
 Put plan into action.
 Review results.
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 Property and Liability Insurance
• In recent years there have been major
losses from things such as fires in the
west, floods and tornadoes in the
midwest, and hurricanes in Florida
and Hawaii.
• Potential physical damage and loss
of use.
 Home, automobiles, furniture, clothing,
and personal belongings.

10-7
 Property and Liability Insurance
(continued)

• Liability: legal responsibility for cost of

another person’s losses or injuries.
• Liability due to negligence.
 Failure to take ordinary, reasonable care,
such as failure to supervise children in a
pool.
• Vicarious Liability.
 When you are held responsible for the
actions of another person, such as your
child throwing a ball through a neighbor’s
window.
10-8
 Homeowner’s Insurance Coverages
• Homeowners insurance is coverage for a
place of residence & associated financial
risks.
 Damage to or destruction of your house and
other structures, plus trees, shrubs and plants,
 Additional living expenses.
 Personal property in or away from home.
 Personal property floater - high value items.
 Household inventory with documentation.
 Endorsements add coverage for things such
as earthquake damage, or damage from
floods.
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Homeowner’s Insurance Coverages
(continued)

• Medical coverage payments for

minor injuries caused by you, your
family members, or pets, occurring
on your property or away from home.
• Personal liability- $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.

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Items Covered by Renter’s Insurance
• Personal property loss or damage.
• Additional living
expenses.
• Personal liability.
• A building owner’s insurance usually won’t
cover renter’s personal property.
• Many renters do not have insurance.

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 Home Insurance Policy Forms

• Basic form (HO-1)

• Broad form (HO-2)
• Special form (HO-3), All-risk
• Tenant’s form (HO-4)
• Condominium owner (HO-6)
• Modified coverage form (HO-8), Older homes.
• Other items covered: Credit card fraud, check
forgery, temporary repairs and fire department
charges in areas with such fees.

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 Home Insurance Cost Factors
• Two-thirds of homes in the United States
are either not insured or are underinsured.
• Billions of dollars of damage occur each
year from fire, theft, wind and other risks.
• Determine the amount of coverage you
need by considering…
 Replacement value of your home.
 Value of your home’s contents.
 Protection for specific items like jewelry.
 Liability coverage you need.
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 Policy Provisions

• Look for a policy with full coverage rather

than a coinsurance clause, where you have
to pay for part of a loss.
• Which type of claim settlement method is
used?
 Actual cash value - cost less depreciation.
 Replacement cost - cost to repair or replace the
damaged or lost item, without considering
depreciation of the item. May limit replacement
cost to 400% of actual cash value of item.
Costs 10-20% more than actual cash value
coverage.
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 Factors That Affect
Home Insurance Costs
• Location of residence.
• Type and age of the structure.
• Amount of coverage, policy type, and
deductibles.
• Discounts - alarm system, smoke detector, if
you insure your car with the same company.
• Company differences.
 Compare costs and coverages at sites such as
www.insuremarket.com
 Customer satisfaction index information is available
at www.ConsumerReports.org

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Automobile Insurance Coverages
• Financial responsibility law.
 State legislation. Forty-five states have
compulsory automobile liability insurance laws
as of 2003.
 see Exhibit 10-8 to see the minimum limits for
financial responsibility (liability) in your state.
• Requires drivers to prove their ability to
cover the cost of damage or injury caused
by them in
an automobile accident.

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 Motor Vehicle Liability Coverages

1 0 0 /3 0 0 /5 0

$ 1 0 0 ,0 0 0 lim it th a t $ 3 0 0 ,0 0 0 lim it th a t $ 5 0 ,0 0 0 lim it fo r

w ill b e p a id to o n e w ill b e p a id to a ll p a y m e n t fo r d a m a g e
p e r s o n in a n a c c id e n t p e r s o n s in a n a c c id e n t to p ro p e rty o f o th e rs

bodily injury liability property damage

liability

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Motor Vehicle Insurance Coverages
• Bodily injury
 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 accident for which you
were responsible.
 Medical payments covers the cost of health
care for persons injured in your automobile,
including yourself.

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 Motor Vehicle Insurance Coverages

• Property damage liability covers damage to

others person’s car when you are at fault. It
also includes damage to such things as
street signs and buildings.
 Covers you when driving another person’s
with permission.

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 Auto Insurance Coverages
• Uninsured motorist.
 Pays for 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 damages.
• Underinsured motorist
 Pays costs if your car is hit by a person who
doesn’t have enough insurance to cover the
damage they did to you and your car.

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 No-Fault Insurance
• Each driver collects from their own insurance
company for medical expenses, lost wages,
and related injury costs.
• Thirty states have some variation of the system.
• Intended to provide fast and smooth methods of
paying for damages without taking the legal
action frequently necessary to determine fault.
• Time and cost is not always reduced since
problems arise because systems vary among
states. 10-21
 Collision Coverage
• When your car is in an accident, collision
coverage pays for damage to your
automobile, regardless of who is at fault.
However, if you are not at fault, your
insurer will try and collect from the other
driver’s property damage liability first.
Coverage is limited to the retail value of
your vehicle.

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Comprehensive Physical Damage
• Covers damage to your vehicle that is not
caused by a collision, such as...
 Fire, theft or vandalism.
 Glass breakage.
 Hail, sand, or wind storm.
 Falling objects or hitting an animal.
 Some things in your car, like some radios and
stereo equipment are not covered.

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 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.
• Property values of vehicles have
gone up.
 $50,000-$100,000
is usually suggested for
property damage liability.

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Auto Insurance Premium Factors
• Automobile type.
 Year, make, model, and theft rate.
• Rating territory.
 Accident, auto theft, and vandalism rates in the
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.
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 Reducing Automobile Insurance
Premiums
• Find out how much it will cost to insure a car
before you buy it.
• Compare companies - www.insuremarket.com
.
• Have larger deductibles.
• Look for discounts.
 Establish and maintain a good driving record.
 Non-smoker.
 Install security devices such as a car alarm.
 If you have more than one vehicle, insure them
both with the same company.
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 Class Activity
• Bring your automobile insurance policy
to class.
• Pair off with another student and
compare your policies.
• Discuss the similarities and differences
of your policies.

10-27