Chapter 10
Property and Liability Insurance
Professor Payne, Finance 4100
Learning Objectives
1.
Understand, buy, and maintain homeowner’s insurance in a cost-effective
way.
2.
Recover on a liability or a loss to your property.
3.
Buy the automobile insurance policy that’s right for you.
4.
File a claim on your automobile insurance.
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Introduction

Need to prepare for unlikely, unlucky events.

Property insurance allows individuals to pool the financial risks associated
with property losses—a fire, burglary, or auto accident—to eliminate
catastrophic losses.

Deciding how much and exactly what kind of insurance to buy is a challenge.
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Protecting Your Home

The first type of homeowner’s insurance, fire insurance.

The first modern homeowner’s policy was sold in 1958.


Before, separate policies were needed for every peril.
Peril—an event or happening, whether natural or man-made, that causes a
financial loss.
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Packaged Policies: HO’s

HO’s—Home Owners

Cover more than the home, also liability insurance and renters

HO-1, HO-2, HO-3—basic policies for homeowners

HO-4—renter’s insurance

HO-6—condominium owners

HO-8—older homes
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Packaged Policies: HO’s

Names perils—a type of insurance that covers a specific set of perils. Perils
not named are not covered.

Open perils—a type of insurance that covers all perils except those
specifically noted as excluded.

Section I—Property Insurance

Section II—Personal liability insurance
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Section I: Property Coverage

Coverage A: Dwelling

Coverage B: Other structures

Coverage C: Personal property

Coverage D: Loss of use
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Section II: Personal Liability Coverage

Protects policyholder and family from financial loss if someone is injured on
their property or as a result of their actions

Protects against liability suits

Also covers medical expenses of anyone hurt by policyholder, their family, or
pet
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Supplemental Coverage

Endorsement—written attachment to an insurance policy to add or delete
coverage

Personal articles floaters

Earthquake coverage

Flood protection
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Supplemental Coverage

Inflation Guard

Personal Property Replacement Cost Coverage

Added Liability Insurance—personal umbrella policy
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Your Insurance Needs

How much insurance do you need?

Need for inflation guard coverage and need for replacement cost coverage on
possessions

Need enough insurance for full replacement in the event of a total loss
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Coinsurance and the
“80-Percent Rule”

Coinsurance provision—requirement of homeowner’s insurance that the
insured pay a portion of the claim if he or she purchased an inadequate
amount of insurance (less than 80% of replacement cost).

80-percent rule—homeowner’s insurance rule that the replacement cost
coverage is in effect only if the home is insured for at least 80% of its
replacement cost.
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The Bottom Line

How much homeowner’s insurance do you need?

Needs some thought and foresight

Assets and possessions are always changing and so are your insurance needs

Revisit your insurance needs from time to time
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Keeping Your Costs Down –
Insurance Credit Scoring

Insurance credit score—based on the same information as your traditional
credit score, used in determining what your home and auto insurance rates
will be.

The lower your insurance credit score, the higher your rates will be.

Manage your insurance credit score to keep your costs of insurance down.
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Keeping Your Costs Down – Discounts and
Savings

Location of your home

Type of structure

Level of coverage and policy type

Keep costs down by selecting a financially sound insurer with low comparative
rates
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Keeping Your Costs Down – Discounts and
Savings

High deductible discounts

Security system/smoke detector discounts

Multiple policy discounts

Pay your insurance premiums annually

Other discounts

Consider a direct writer

Shop around

Double-check your policy
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Making Your Coverage Work

Establish proof of ownership and value assets in detailed inventory or
videotape.

Insurance companies have inventory worksheets.

Include date of purchase, cost, model, brand, and serial number for each
item.

Follow basic steps to collect on a loss.
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Automobile Insurance

Personal Automobile Policy (PAP)—standardized policy for an individual or
family

Part A: Liability Coverage

Part B: Medical Expenses Coverage

Part C: Uninsured Motorist’s Protection Coverage

Part D: Damage to Your Automobile Coverage
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Personal Automobile Policy (PAP)

PAP Part A: Liability Coverage

Combined single limit

Split-limit coverage

PAP Part B: Medical Expenses Coverage

PAP Part C: Uninsured Motorist’s Protection Coverage

PAP Part D: Damage to Your Automobile Coverage

Collision loss

Other than collision loss or comprehensive physical damage coverage
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Personal Automobile Policy (PAP)
Standard exclusions—not covered:

intentional injury or damage

using a vehicle without owner’s consent

using vehicle with fewer than four wheels

using another person’s vehicle regularly

using own vehicle but not listed on policy

carrying passengers for a fee

driving in a race or speed contest
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No-Fault Insurance

Type of auto insurance in which your insurance company protects you in the
case of an accident regardless of who is at fault.

Over half the states have no-fault system.

Imposes limits on medical expenses and other claims which may not be
enough to cover all medical expenses.
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Determinants of the Cost of Automobile
Insurance

Type of automobile

Use of automobile

Driver’s personal characteristics

Driver’s driving record

Where you live

Discounts that you qualify for

Insurance credit score
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Keeping Your Costs Down

Shop comparatively

Consider only high quality insurers

Take advantage of discounts

Buy a car that is relatively inexpensive to insure

Improve your driving record

Raise your deductibles

Keep adequate liability insurance
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Filing a Claim
1.
Get help for the injured.
2.
Move car to a safe place.
3.
Get identification of witnesses.
4.
Cooperate with police.
5.
Take a test for alcohol if you believe the other driver is under the influence.
6.
Write down your recollection of accident.
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Filing a Claim
7.
Don’t sign anything or admit guilt.
8.
Get a copy of the police report and make sure it is accurate.
9.
Call your insurance agent as soon as possible.
10.
Cooperate with your insurer.
11.
Keep records of all expenditures associated with the accident.
12.
If a serious accident, then meet with a lawyer to know your rights.
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Summary

There are six standardized HO’s with different types and level of insurance
for homeowners and renters

HO’s have property insurance (Section I) and liability coverage (Section II)

Have enough homeowner’s insurance for full replacement in complete loss
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Summary

Have an detailed asset inventory to provide effective protection

With an automobile insurance policy, there’s protection against bodily injury
and against property damage all divided up in four parts

Age, sex, driving record, and the insurance credit score affect the cost of
automobile insurance as do deductibles and discounts
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End of Chapter 10 Slides
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