Home & Auto Insurance Review Manual

Distinguish among the three types of hazards for both homeowner's and automobile insurance.

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 exists when an insured person wants a peril to occur so that he or she can collect on an insurance policy.

Why are high deductibles and high limits better than low deductibles and low limits?

High deductibles and high limits mean for better coverage at possibly a low premium, while low deductibles and low limits puts you at higher risk of being underinsured and/or paying high premiums.

Differentiate among the different avenues there are of purchasing insurance.

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.

What is the process of filing a claim?

1. Contact your insurance agent. 2. Document your loss. 3. File your claim. 4. Sign a release.

Why should you be careful when determining to sign a release?

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.

Identify four types of personal property for which the covered loss is limited to a specific dollar amount under standard homeowner's insurance policies.

1. House and any other attached buildings 2. Trees, shrubs, plants, etc. 3. Credit card, forgery, counterfeit money 4. Personal property

Give an example of an accident that would involve comprehensive and not collision and vice versa.

Involve comprehensive and not collision - hail damage Vice Versa - Rear-ending

Explain generally how the process of insurance is from start to finish.

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.

Why is the principle of indemnity so important to insurance sellers, companies, and policy holders?

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 which 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.

What are a few questions you should ask yourself when determining the policy limits for a homeowner's insurance policy?

1. How much coverage will you need to replace the dwelling itself? 2. How much coverage will you need on the contents and personal property? 3. How much protection will you need for items such as jewelry, money, guns, or antiques that have specific limits? 4. How much coverage will you need for liability protection?

Differentiate the four types of automobile insurance coverage.

1. Liability insurance covers the insured when he or she is held responsible for losses suffered by others. 2. Automobile medical payments insurance covers bodily injury losses suffered by the driver of the insured vehicle and any passengers regardless of who is at fault. 3. Uninsured motorist insurance protects the insured and the insured's passengers from bodily injury losses (and, in a few states, property damage losses) resulting from an automobile accident caused by an uninsured motorist. It provides protection above that extended under the automobile medical payments insurance. 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. 4. Automobile physical damage insurance provides protection against losses caused by damage to your car from collision, theft, and other perils.

Summarize how to use deductibles, coinsurance, hazard reduction, and loss reduction to lower the cost of insurance.

1. Pay the first few 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. You usually have a choice of deductible amounts, and the higher the deductible, the more you will save on your premium. This is because the insurance company will have fewer small losses to pay. 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, health insurance policies commonly 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. 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. Insurance companies often offer reduced premiums to insureds who practice hazard reduction—for example, to nonsmokers. 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. Many insurers offer reduced premiums to policyholders who practice loss reduction.

Identify at least four key points or areas to review when reading an insurance policy's declarations page.

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.

What are the differences among the six types of homeowner's insurance policies?

1. The basic form (HO-1) is a named-perils policy that covers 11 property-damage-causing perils and provides three areas of liability-related protection: personal liability, property damage liability, and medical payments. The most common perils that can cause property damage—fire and lightning, windstorm, theft, and smoke—are covered in the basic homeowner's policy. People who have finished basements (perhaps a TV room or spare bedroom) should purchase additional sewer backup coverage, as this possibility is not one of the 11 named perils. 2. The broad form (HO-2) is a named-perils policy that covers 18 property-damage-causing perils and provides protection from the three liability-related exposures. 3. The special form (HO-3) provides open-perils protection for four types of property losses: losses to the dwelling, losses to other structures, landscaping losses, and losses generating additional living expenses. Contents and personal property are covered on a named-perils basis for 17 of the 18 common homeowner's perils (the exception is glass breakage). In terms of liability protection and in all other respects, the coverage under HO-3 is the same as under HO-2. 4. 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 and provides liability protection. HO-4 is ideal for renters because it provides protection from losses to dwelling contents and personal property and provides for additional living expenses if the dwelling is rendered uninhabitable by one of the covered perils. Although insurance is relatively inexpensive, only one-fourth of all renters carry HO-4 protection. 5. 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.) Two additional coverages are included in the HO-6 policy as necessary to meet the specific needs of the condominium unit owner. The first is protection against losses to the structural alterations and additions that condominium owners sometimes make when they remodel their units. The second is supplemental coverage for the dwelling unit to protect the condominium owner if the building is not sufficiently insured. The replacement value of an older home may be much higher than its market or actual cash value. 6. The older home form (HO-8) is a named-perils policy that provides actual-cash-value protection on the dwelling. It does not provide that the dwelling be rebuilt to the same standards of style and quality, as those standards may be prohibitively expensive today. Instead, the policy provides that the dwelling be rebuilt to make it serviceable.

Who is protected by medical payments coverage and how is it different than PIP?

Automobile medical payments insurance covers bodily injury losses suffered by the driver of the insured vehicle and any passengers regardless of who is at fault. Medical losses occurring within one year and as a direct result of an accident will be reimbursed up to the limits of the policy. Automobile medical payments insurance also covers 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. Medical payments coverage is subject to a single policy limit, which is applied per person, per accident. In such states that have adopted some type of no-fault automobile insurance, insureds collect first (and possibly only) from their own insurance companies for bodily injury losses resulting from an automobile accident. In these states, the medical payments coverage, which 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. Under medical payments or PIP, 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.

Describe the types of losses covered under the property insurance portion of a homeowner's policy.

Section I 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. An important variable related to Section I of a policy involves the number of loss-causing perils that are covered. Named-perils policies cover only those losses caused by perils that are specifically mentioned in the policy. All-risk (or open-perils) 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 non-excluded event such as burst water pipes. Coverage for excluded perils can often be purchased for an additional premium if desired. In coastal states or those prone to earthquakes, your policy may require a higher deductible if you suffer a loss due to these perils.

Give three examples of liability protection under homeowner's insurance policies.

Section II deals with liability insurance. Whenever homeowners are negligent or otherwise fail to exercise due caution in protecting visitors, they may potentially suffer a liability loss. Homeowner's general liability protection applies when you are legally liable for the losses of another person. 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.