HDFS Chapter 10: Managing Property and Liability Risk

Automobile insurance coverage A Coverage A: Liability insurance:

-Automobile Bodily Injury Liability: -Automobile Property Damage Liability:

Automobile insurance coverage B Coverage B: Medical payments insurance:

-Automobile medical payments insurance: -Personal injury protection (PIP): -Subrogation rights:

Automobile insurance coverage D Coverage D: Physical damage insurance

-Automobile physical damage insurance for the insured vehicle -Collision insurance -Comprehensive automobile insurance

types of policies for single-family homes:

-Basic Form (HO-1): covers named perils. -Broad Form (HO-2): covers named perils. -Special Form (HO-3): is all-risk. -Older Home Form (HO-8): covers named perils.

Distinguish between collision and comprehensive insurance.

-Collision insurance: reimburses an insured for losses resulting from a collision with another car or object or from a rollover. -Comprehensive automobile insurance: helps pay for damages that are not caused by a collision or rollover.

making an insurance claim:

-Contact your insurance agent as soon as possible. -Document your loss with notes, photographs and, where appropriate, a police report. -File your claim. ~A claims adjuster will assess the loss and make an estimate of the amount the insurance company will pay -Sign a release only once you are satisfied that the full magnitude of the loss has become evident.

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

-Damage to dwelling -Damage to other structures on the property, referred to as appurtenant structures -Damage to personal property and dwelling contents -Expenses arising out of loss of use of the dwelling

Liability insurance coverage:

-Homeowner's general liability protection: -Homeowner's no-fault medical payments protection: -Homeowner's no-fault property damage protection:

List the three questions we should ask ourselves when determining the policy limits for a homeowner's insurance policy.

-How much coverage is needed on your dwelling? -How much coverage is needed on your personal property? -How much coverage is needed for liability losses?

step 4: implement the risk-management program

-Large-Loss Principle: Insure the losses that you cannot afford and pay the small losses out of your own pocket.

Identify the four types of automobile insurance coverage.

-Liability insurance -Medical payments insurance -Protection against uninsured and underinsured motorists -Insurance for physical damage to the insured automobile

step 2: estimate risk and potential losses

-Loss frequency: is the likely number of times that a loss might occur over a period of time -Loss severity: describes the potential magnitude of a loss

Professional liability insurance:

-Many people work in professions that expose them to liability for losses suffered by their clients or patients -Professional liability insurance is designed for these situations

what is an example of how to use coinsurance lowers the cost of insurance?

-Pay a share of any loss yourself -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.

what is an example of how to use deductibles lower the cost of insurance?

-Pay the first few dollars of a loss yourself -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.

step 1: identify your risk exposure

-Peril: Any event that can cause a financial loss.

Distinguish among the three types of hazards.

-Physical hazard: is a particular characteristic of the insured person or property that increases the chance of loss. -Morale hazard: exists when a person is indifferent to a peril. -Moral hazard: relates to the possibility that the insured person will want or even cause a peril to occur in order to collect reimbursement from the insurance company.

Distinguish between pure risk and speculative risk.

-Pure risk exists when there is no potential for gain, only the possibility of loss. -Speculative risk is a situation in which there is an opportunity for gains or losses.

what is an example of how to use hazard reduction lowers the cost of insurance?

-Reduce the chances that a loss will occur -Insurance companies often offer reduced premiums to insureds who practice hazard reduction—for example, to nonsmokers.

what is an example of how to use loss reduction lowers the cost of insurance?

-Reduce the dollar amount of a loss -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.

types of policies for other situations:

-Renter's Contents Broad Form (HO-4): covers named perils. -Condominium Form (HO-6): covers named perils. -Older Home Form (HO-8): covers named perils.

how much coverage is needed on your dwelling?

-Replacement-cost requirement: must insure the dwelling for either 80 or 100 percent of its replacement value -Actual cash value (of personal property) -Contents replacement-cost protection -Liability losses are based on the harm potentially caused to others and not your own finances -High limits are recommended -The extra cost is low because the odds of such larger losses is low

step 3: choose how to handle risk

-Risk Avoidance: the simplest way to handle risk is to avoid it. -Risk Retention: accepting that some risks simply arise in the course of one's life and consciously retaining that risk -Loss Control: designing specific mechanisms to reduce loss frequency and loss severity -Risk Transfer: another way to handle risk is to transfer it to an insurance company -Risk Reduction: includes mechanisms, such as insurance, that reduce the overall uncertainty about the magnitude of loss

the essence of insurance:

-Sharing of losses through the workings of the law of large numbers -The larger the number of people in a group, the more accurate the prediction of losses suffered by the group -Accurate predictions reduce risk -You benefit from buying insurance even if you do not suffer a loss -The benefit is the reduction in risk

Give and describe an example of each of the five ways to handle risk of loss.

-Step 1: Identify your risk exposure-what you own and what you do. -Step 2: Estimate your risk and potential losses- how frequently you can have a loss and how severe it would be. -Step 3: Choose how to handle your risk of loss- choose which one of the five exposures you can handle. -Step 4: Implement your risk management program- what methods you will use to handle risk management. -Step 5: Evaluate and adjust your program- life changes so the risks on it, periodically evaluate and check if your methods are right for your current situation.

Automobile insurance coverage C Coverage C: Uninsured and underinsured motorist insurance:

-Uninsured motorist insurance -Underinsured motorist insurance

only certain losses are insurable:

-fortuitous losses: are unexpected in terms of both their timing and their magnitude -financial losses: is any decline in the value of income or assets in the present or future

factors that reduce the cost of insurance:

-higher deductibles -higher coinsurance -hazard reduction -loss reduction

what are the steps to identify and estimate risk?

-identify your risk exposure -estimate risk and potential losses -choose how to handle risk -implement the risk-management program -evaluate and adjust the program

property insurance coverage:

-named-perils policies: -all-risk (open-perils) policies:

the principle of indemnity limits insurance payouts:

-principle of indemnity: insurance will pay no more than the actual financial loss suffered -policy limits: specify the maximum dollar amounts that will be paid under the policy

what is the nature of risk?

-risk is the uncertainty about the outcome of a situation or event -risk is not the same as "odds"

Step 5: Evaluate and adjust the program.

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deductibles:

A deductible: is an initial portion of any loss that must be paid before the insurance company will provide coverage

Explain why selecting a policy with a high deductible and high liability limits is better than one with a low deductible and low liability limits.

A high deductible and liability is better because when in an accident, the person at fault is responsible for all the damages to property and bodily injuries to those involved.

Differentiate among independent agents and exclusive agents.

Independent agents can sell the policies of many different companies while exclusive agents are contracted to sell policies for a single insurance company.

insurance:

Insurance is a 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.

Identify who is protected by medical payments coverage.

It covers you, your passengers, and any family members driving or riding in the insured vehicle at the time of the accident. Medical payments coverage is subject to a single policy limit, which is applied per person, per accident. Medical payments also protect insured family members who areinjured while passengers in any car or who are injured by a car when on foot or riding a bicycle.

When considering the likelihood of loss and severity of loss, explain which one of these two concepts is more important when deciding whether to buy insurance and why.

Loss severity is most important because if a person is involved in an accident, the amount he has to pay could be enormous because liability is more expensive.

Who should consider buying flood and earthquake insurance?

People with high probabilities of loss will want to buy the coverage and those with extremely low probabilities will not. If you live in a flood-prone area, where sinkholes exist, or in an earthquake zone, your risk of loss should be addressed.

what is an example of the meaning of the numbers 100/200/75?

The first number is the limit the insurance will cover for the bodily injury losses of one person, in this example 100,000 dollars. The second number represents the maximum the insurance will payout due to total losses from the automobile accident, in this example it is 200,000. The final number represents the limit the insurance is willing to pay for property losses from the accident, 75,000 dollars in this example.

Why is the principle of indemnity so important to insurance sellers?

The principle of indemnity states that insurance will not pay for more than the actual value of a loss. This prevents the insured from using insurance as a means to make profit.

Summarize how companies select among insurance applicants.

The purchase of insurance begins with an offer by the purchaser in the form of a written or oral policy application. The insurer typically issues a temporary insurance contract, called a binder, which is replaced at a later date with a written policy. The application then goes through a process of underwriting. This is the insurer's procedure for decid- ing which insurance applicants to accept. To describe the process of underwriting, it is necessary to first understand how insurance rates are set.

Explain how purchasing an umbrella liability insurance policy applies the large-loss principle.

The umbrella insurance will pay the difference after the regular maximum amount of a policy has been used, comprehensive policy, and the amount still owed for losses during an accident.

Explain the meaning of the numbers 100/200/75.

These numbers represent the split liability limits covered by a family auto policy. Each number represents how many thousands of dollars the limit is for different facets of the protection.

What is the best way to establish documentation for potential losses to your personal property?

You need to have a visual inventory through video or photos of all valuable property including a written record of the date of purchase, price paid, description, model name and number, and serial number.

Are you preparing for a professional career that might expose you to liability losses, and, if so, how might you protect yourself from such losses?

You should get professional liability insurance which protects individuals and organizations that provide professional services (physician, lawyers, psychologists, etc.) when they are held liable for the financial losses suffered by the clients due to professional mistakes or omissions. You should also have floaters which are additional pieces of insurance coverage designed to cover your valuables with limits above and beyond what your homeowner's policy can deliver. They can provide all-risk protection for accident and theft losses to movable property regardless of where the loss occurs. This includes cameras, sporting equipment, Microsoft's Movies & Tv players, and jewelry.

Describe what you should do to file a claim most effectively when involved in an automobile accident.

You should make a file claim in writing, providing all the information related to it. like the police report, time and place of accident, direction of travel when it happened, speed of the cars involved, driver licenses numbers of those involved, contact information of witnesses.

hazard:

any condition that increases the probability that a peril will occur

umbrella liability insurance:

extends the basic liability coverage limits provided by currently held homeowners, automobile, and professional liability policies.

insurance is typically sold through?

insurance agents:

coinsurance:

is a method by which the insured and the insurer share proportionately in the payment for a loss.

loss reduction:

is action taken by the insured to lessen the severity of loss if a peril occurs.

hazard reduction:

is action taken by the insured to reduce the probability of a loss occurring.

premium:

is the fee paid for insurance protection

insurance policy:

is the insurance contract between the insured and the insurer

floater:

policies provide protection for moveable assets with limits above and beyond what a homeowner's insurance policy might cover.

property insurance:

protects you from financial losses resulting from damage to or destruction of your property or possessions

liability insurance:

protects you from financial losses suffered when you are held liable for others' losses

Earthquake insurance:

purchased separately or as an endorsement to homeowner's insurance.

insurance:

reduces risk

exclusive insurance agents:

represent one company

independent insurance agents:

represent several insurance companies

flood insurance:

through the National Flood Insurance Protection

True or false: insurance is applied for, not "bought," and insurance companies decide through underwriting which applicants to accept.

true -preferred applicants pay lower rates -standard applicant pay standard rates -substandard applicant pay higher rates -unacceptable applicants are denied coverage

what provides both property and liability protection in one policy?

two coverages