Protecting Your Property
Chapter 10
How Will This Affect Me?
The chapter explains the key property insurance concepts of indemnity, subrogation, and co-
insurance. It then describes the common sources of property and liability risk exposures and the
insurance coverage available to address them. The main characteristics of homeowner’s and auto
insurance are covered, as well as how to choose the version of each policy type that’s best for
you. Supplemental insurance to protect against floods and earthquakes and personal liability
umbrella policies are also described. Especially practical tips can be found in the discussions of
how to choose an insurance agent and how to settle property and liability insurance claims.
When you finish this chapter, you should understand the best and most cost-effective ways to use
insurance to protect your property and associated liability exposures.
The chapter has a lot of terminology that the students need to understand. A useful approach
would be to select the major terms from the list of terms at the end of this material and create a
matching question. Distribute as a quiz at the beginning of the session, but do not take it up.
Then go around the room, asking students the definition of each term and what it means. You
can then take up the “quiz” at the end of class. If students paid attention, they all should get 100,
but you know that will not happen.
10 – 1 Discuss the importance and basic principles of property insurance, including types of
exposure, indemnity, and co-insurance.
10 – 2 Identify the types of coverage provided by homeowner’s insurance.
10 – 3 Select the right homeowner’s insurance policy for your needs.
10 – 4 Analyze the coverage in a personal automobile policy (PAP) and choose the most cost-
effective policy.
10 – 5 Describe other types of property and liability insurance.
10 – 6 Choose a property and liability insurance agent and company, then settle claims.
Financial Facts or Fantasies?
These may be used as “teasers” to get the students on the right page with you. Also, they may be
used as quizzes [see next page] after you covered the material or as “pre–test questions” to get
their attention.
• Homeowners insurance provides protection not only on the home itself but also most of its
contents.
• Uninsured motorists coverage is available as part of most automobile insurance policies.
• You must generally obtain an umbrella personal liability policy if you want liability coverage
of $1 million or more.
Financial Facts or Fantasies?
These may be used as a quiz or as a pre-test to get the students interested.
1. True False Homeowners insurance provides protection not only on the home
itself but also most of its contents.
2. True False If you rent an apartment, you don’t need to worry about property
insurance since your furniture and other personal belongings are
already covered by the landlord’s insurance policy.
3. True False Uninsured motorists coverage is available as part of most
automobile insurance policies.
4. True False The type of car you drive is a personal matter that has no bearing
on how much you will have to pay for automobile insurance.
5. True False You must generally obtain an umbrella personal liability policy if
you want liability coverage of $1 million or more.
6. True False Filing a property or liability claim is quick and easy to do. Just call
your agent, provide a few basic details, and look for your check in a
few days.
Answers:
YOU CAN DO IT NOW
The “You Can Do It Now” cases may be assigned to the students as short cases or problems.
They will help make the topic more real or relevant to the students. In most cases, it will only
take about ten minutes to do, that is, until the student starts looking around at the web site. But
they will learn by doing so.
YOU CAN DO IT NOW
Check Out the Best Homeowners Insurance Companies
Evaluate the Best Auto Insurance Companies
Financial Impact of Personal Choices
Read and think about the choices being made. Do you agree or not? Ask the students to discuss
the choices being made.
Wade Saves on His Car Insurance
Financial Planning Exercises
1. Co-insurance clauses. Maya Ward had a homeowner’s insurance policy with $175,000 of
coverage on the dwelling. Would a 90 percent co-insurance clause be better than an 80
percent clause in such a policy? Give reasons to support your answer.
2. Evaluating homeowner’s policy coverage. Last year, Thea and Rory Brown bought a
home with a dwelling replacement value of $350,000 and insured it (via an HO-5 policy) for
$310,000. The policy reimburses for actual cash value and has a $500 deductible, standard
limits for coverage C items, and no scheduled property. Recently, burglars broke into the
house and stole a two-year-old television set with a current replacement value of $600 and
an estimated useful life of eight years. They also took jewelry valued at $1,850 and silver
flatware valued at $3,000.
a. If the Brown’s policy has an 80 percent co-insurance clause, do they have enough
insurance?
b. Assuming a 50 percent coverage C limit, calculate how much the Browns would receive
if they filed a claim for the stolen items.
c. What advice would you give the Brown family about their homeowner’s coverage?
3. Need for renter’s insurance. Charles and Layla Moore, both graduate students, moved
into an apartment near the university. Layla wants to buy renter’s insurance, but Charles
thinks that they don’t need it because their furniture isn’t worth much. Layla points out
that, among other things, they have some expensive computer and stereo equipment. To
help the Moores resolve their dilemma, suggest a plan for deciding how much insurance to
buy and give them some ideas for finding a policy.
4. Collecting on a homeowner’s insurance claim. Isabelle Howard’s home in Seattle was
recently gutted in a fire. Her living and dining rooms were completely destroyed, and the
damaged personal property had a replacement value of $25,000. The average age of the
damaged personal property was 5 years, and its useful life was estimated to be 15 years.
What is the maximum amount the insurance company would pay Isabelle assuming that it
reimburses losses on an actual cash-value basis?
5. Evaluating personal automobile policy features. Riley Bell of Atlanta, Georgia is a single,
40-year-old loan officer at a large regional bank; he has a 16-year-old son. He has decided
to use his annual bonus as a down payment on a new car. One Saturday afternoon in late
September, Riley visits Carlisle Motors and buys a new car for $32,000. To obtain
a. Describe the key features of these insurance coverages.
i. Basic automobile liability insurance — As part of the liability provisions of a PAP, the
insurer agrees to:
b. Are there any limitations on these coverages? Explain.
c. Indicate the persons who would be protected under each type of coverage.
Essentially, an insured person includes you (the named insured) and any family member, any
person using a covered auto, and any person or organization that may be held responsible for
d. What kind of insurance coverages would you recommend that Riley purchase?
Explain your recommendation.
6. Personal automobile policy coverage. Zachary Lee has a personal automobile policy
[PAP] with coverage of $25,000/$50,000 for bodily injury liability, $25,000 for property
damage liability, $5,000 for medical payments, and a $500 deductible for collision
insurance. How much will his insurance cover in each of the following situations? Will he
have any out-of-pocket costs?
a. Zachary loses control and skids on ice, running into a parked car and causing $3,785
damage to the unoccupied vehicle and $2,350 damage to his own car.
b. Zachary runs a stop sign and causes a serious auto accident, badly injuring two people.
The injured parties win lawsuits against him for $30,000 each.
c. Zachary’s 18-year old son borrows his car. He backs into a telephone pole and causes
$450 damage to the car.
7. Supplemental property insurance. Eva and Blake Lewis are a high-net-worth couple. They
have appropriate auto and homeowner’s insurance, but are concerned that they could be
sued by someone visiting or working at their home. What type of supplemental insurance
might be appropriate for the Lewis family in light of their expressed concern? Explain your
answer.
8. Auto insurance claims. Martin and Luna Perez recently went out for dinner on a
rainy night. When the traffic unexpectedly slowed down, they were rear-ended by an
inexperienced driver. Describe what steps the Perez family should have taken after the
accident to assure that their auto insurance claim would be settled properly.
Test Yourself
10-1 Briefly explain the fundamental concepts related to property and liability insurance.
10-2 Explain the principle of indemnity. Are any limits imposed on the amount that an
insured may collect under this principle?
10-3 Explain the right of subrogation. How does this feature help lower insurance costs?
10-4 Describe how the co-insurance feature works.
Co-insurance, a provision commonly found in property insurance contracts, requires
10-5 What are the perils that most properties are insured for under various types of
homeowner’s policies?
10-6 What types of property are covered under a homeowner’s policy? When should you
consider adding a PPF to your policy? Indicate which of the following are included in a
standard policy’s coverage: (a) an African parrot, (b) a motorbike, (c) Avon cosmetics held
for sale, (d) Tupperware® for home use.
10-7 Describe (a) types of losses, (b) persons, and (c) locations that are covered under a
homeowner’s policy.
a. There are three types of property-related losses when misfortune occurs:
1. Direct loss of property
2. Indirect loss occurring due to loss of damaged property
3. Additional expenses resulting from direct and indirect losses
Homeowner’s insurance contracts offer compensation for each type of loss.