Chapter 10

Insurance

Protection against possible financial loss

Pooling Risks

Principle on which insurance is based
=policyholders pay a small premium into a central pool that eventually helps to cover the small policyholders that actually need it

Insurer/Company

Agrees to assume financial responsibility for losses that may result from an insured risk

Policy

Contract between the insurer and the consumer
Insurer agrees to assume the risk for a fee

Premium

The fee the policyholder pays to place the risk upon the insurer

Risk

Uncertainty or lack of predictability
Property or insured person

Peril

Cause of a possible loss
Causes someone to take out insurance
Ex: robbery, accidents, premature death, fire

Hazard

Increases the likelihood of loss through some peril
Ex: defective house wiring is a hazard that increases the likelihood of the peril fire

Personal Risk

Uncertainties surrounding loss of income or life due to premature death, illness, disability, old age, unemployment

Property Risk

Uncertainties of losses to personal or real property due to fire, accidents, theft, other hazards

Liability Risk

Possible losses due to negligence

Pure Risk

Personal, Property, and Liability
=Insurable risk
Accidental risks for which the nature and financial cost of the loss can be predicted

Speculative risk

Carries a chance of either loss or gain
Not insurable (opposite of pure)

Insurance is not the only way to...

Deal with risk

Risk Avoidance

Avoid risk by not doing the risky action
You can avoid car accidents by not driving or riding in a car
Not possible to avoid all risks

Risk Reduction

Taking precautions to reduce risk
Ex: wearing a seat belt

Risk Assumption

Taking on responsibility for the loss or injury that may result from a risk

Self-insurance

Establishing a monetary fund to cover the cost of a loss
Risk Assumption

Risk Shifting

Shift = transfer to an insurance company

Personal insurance program

1. Set insurance goals
2. Develop a plan to reach goals
3. Put plan into action
4. Check results

Step 1

Cover basic risks: illness, premature death, accident, unemployment, fire

Step 4

Needs of individual are different than needs of family/group

Insurance can be viewed as...

An investment

Two types of property risk

Physical damage: fire, wind, water
Loss of use: robbery, vandalism

Liability

Legal responsibility for the financial cost of another person's losses or injuries

Liability is caused by...

negligence

Strict liability

when a person is held responsible for intentional or uninentional actions

Vicarious liability

when a person is held responsible for the actions of another person

Homeowner's insurance

Coverage for your residential property of hazards

Additional living expense coverage

Pays for the cost of living in a temporary location (max 6-9 months)

Personal property coverage

Insurance that covers belongings (up to 75% of the cost)
Some items have limits

Personal property floater

covers the damage or loss of a specific item of high value...covers it also while it is away from home

Household inventory

A list of personal belongings with purchase dates and cost information

Liability insurance

Also covers legal fees
Not all who enter your property are covered

Umbrella policy

#NAME?

Extended liability

With large net worth, worth $1 million or more

Medical payments coverage

Pays the cost of minor accidental injuries on your property...does not cover the people living inside the home

Homeowner's insurance does not cover...

floods and earthquakes...need own policy/endorsement

Renter's insurance

Important insurance for college students
Renters are not covered by the owner's property insurance

Home insurance policy forms

-Special form (HO3) covers lots of perils
-Tenants form (HO4) covers personal belongings
-Comprehensive form (HO5) HO3 + endorsements
-Condominium form (HO6) personal belongings and additions to living unit
-Country home form (HO7) non-farm business rural

Mobile homes

More prone to fire and wind damage

How much coverage do you need?

Protection should be based on the amount needed to rebuild or repair your house (it should rise with inflation)

Coinsurance clause

Past policy that said the building could be insured for at least 80% of the replacement value
The homeowner would have to pay for part of the losses if the property was not insured for the specified percentage

Actual Cash Value method

One of the ways insurance companies base claim settlements
The payment your receive is based on the current replacement cost of a damaged or lost item
Take the current cost of the item, subtract depreciation from it (480 - 5yrs = 300. =60/yr)

Replacement value method

One of the ways insurance companies base claim settlements
You receive the full cost of repairing or replacing a damaged or lost item (depreciation not considered)
Costs about 10-20% more than ACV coverage

Factors that affect home insurance costs

Location of home: more claims filed = more expensive
Type of structure: sturdy = less expensive, but more expensive for earthquake
Increased premium = decreased deductible

How to reduce home insurance costs

Put in safety features (smoke alarm, fire extinguisher, "claim free")

Financial responsibility law

state legislation that requires drivers to prove their ability to cover the cost of damage or injury caused by a car accident

Two categories of main auto coverages

Bodily injury and Property damage
(others include wage loss, towing, death, car rental)

Bodily injury liability

Covers risk of financial loss due to legal expenses, medical expenses, lost wages, and others, when YOU are responsible for the accident
Split limit (50/100/50): 1st number = limit for claims that can be paid to one person. 2nd number = limit for each acc

Bodily injury medical payments

Covers the health care for people who were injured in YOUR vehicle

Bodily injury uninsured motorist protection

Covers the cost of injuries to your and your family if the accident was caused by someone without insurance

Bodily injury no-fault insurance

Drivers collect compensation from their own insurance companies
No legal action required
Difficult because they vary from state to state

Property damage liability

Protects against financial loss (other vehicles and other property outside the vehicle)
Last number in the 1/2/3 coverage numbers

Property damage collision

-Pays for damage regardless of who's at fault
(if it was not your fault, your company might try to get charges from the person at fault's company first)
-Subrogation = the insurance company's right to recover the amount it pays for the loss from the perso

Property damage comprehensive

Covers risks such as natural disasters and vandalism
Only applies to your car and claims are paid without considering whose fault it was

Other auto insurance coverages

wage loss, towing and emergency road service

Amount of auto coverage

increased cost of vehicle, legal fees

Auto premium factors

Type of car: expensive parts = expensive rates
Rating territory = place of residence used to determine premium (bigger city = bigger premium)
Driver classification: based on age, sex, marital status, driving record (very young and very old = higher rates)

Premium discounts

Establish and maintain a safe driving record
Good grades in school
Installing safety features
Increase deductible = decreased premium
Carpool to and from work