b. A homeowner’s policy covers the persons named in the policy and members of their families
who are residents of the household.
c. Most homeowner’s policies offer coverage worldwide. Consequently, an insured’s personal
property is fully covered even if it is lent to the next-door neighbor or kept in a hotel room in
Tibet. The only exception is property left at a second home (such as a beach house or resort
condominium), where coverage is reduced to 10 percent of the policy limit on personal property
unless the loss occurs while the insured is residing there at the time of the casualty.
10-8 Describe replacement-cost coverage and compare this to actual cash value coverage.
Which is preferable?
10-9 What are deductibles? Do they apply to either liability or medical payments coverage
under the homeowner’s policy?
10-10 Briefly explain the major types of coverage available under the personal auto policy
(PAP). Which persons are insured under (a) automobile medical payments coverage and
(b) uninsured motorist’s coverage?
10-11 Explain the nature of (a) automobile collision insurance and (b) automobile
comprehensive insurance.
Collision insurance is auto mobile insurance that pays for collision damage to an insured
automobile regardless of who is at fault. The amount of insurance payable is the actual cash
10-12 Define no-fault insurance and discuss its pros and cons.
10-13 Describe the important factors that influence the availability and cost of auto
insurance.
A number of factors influence the availability and cost of auto insurance. The factors that are
important include:
Rating Territory. Since accidents are more likely to occur in some geographic areas than
10-14 Discuss the role of financial responsibility laws and describe the two basic types
currently employed.
Financial responsibility laws attempt to force motorists to be financially responsible for the
damages they become legally obligated to pay as a result of automobile accidents. Two basic
10-15 Briefly describe the following supplemental property insurance coverage: (a)
earthquake insurance, (b) flood insurance, and (c) other forms of transportation insurance.
a. Earthquake Insurance is a type of homeowner’s insurance that provides financial
protection from earthquake damage. Although this form of insurance is fairly inexpensive to
purchase, policies typically carry a 15% deductible on the replacement-cost coverage of the
10-16 What is a personal liability umbrella policy? Under what circumstances might it be a
wise purchase?
10-17 Differentiate between captive and independent insurance agents. What characteristics
should you look for in an insurance agent and an insurance company when you’re buying
property or liability insurance?
A captive agent represents only one insurance company and is more or less an employee of that
10-18 Briefly describe key aspects of the claims settlement process, explaining what to do
after an accident, the steps in claim settlement, and the role of claims adjustors.
After an accident, you should record the names, addresses, and phone numbers of all witnesses,
drivers, occupants, and injured parties, along with the license numbers of the automobiles
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Critical Thinking Cases
10.1 The Perkins’ Homeowners’ Insurance Decision
Calvin and Danielle Perkins, ages 30 and 28, were recently married in Kansas City. Calvin
is an electrical engineer with Analytical Solutions, a computer component design firm.
Danielle has a master’s degree in education and teaches at a local middle school. After
living in an apartment for six months, the Perkins have negotiated the purchase of a new
home in a rapidly growing Kansas City suburb. Kansas City Savings and Loan Association
has approved their loan request for $270,000, which represents 90 percent of the $300,000
purchase price. Before closing the loan, the Perkins must obtain homeowner’s insurance
for the home. The Perkins currently have an HO-4 renter’s insurance policy, which they
purchased from Calvin’s bridge partner, Gene Patterson, who is an agent with the Roberts
Insurance Company. To learn about the types of available homeowner’s insurance, Calvin
has discussed their situation with Tim, who has offered them several homeowner’s policies
for their consideration. He has recommended that the Perkins purchase an HO-5 policy
because it would provide them with comprehensive overage.
Critical Thinking Questions
1. What forms of homeowner’s insurance are available? Which forms should the Perkins
consider?
2. What are the perils against which the home and its contents should be insured?
Exhibit 10.2 A Guide to Homeowner’s Policies
The amount of insurance coverage you receive depends on the type of homeowner’s (HO) policy
you buy. You can also obtain coverage if you’re a renter or a condominium
Form
Coverages
Covered Perils
Basic Form
(HO-1)
A—$15,000 minimum;
B—10% of A; C—50% of A;
D—10% of A; E—$100,000;
F—$1,000 per person
Fire, smoke, lightning, windstorm, hail, volcanic eruption,
explosion, glass breakage, aircraft, vehicles,
riot or civil commotion, theft, vandalism or malicious
mischief
Broad Form
(HO-2)
Minimum varies; other
coverages in same percentages
or amounts except D—20% of A
Covers all basic-form risks plus weight of ice, snow, sleet;
freezing; accidental discharge of water or steam; falling
objects; accidental tearing, cracking, or burning of heating/
cooling/sprinkler system or appliance;
damage from electrical current
Special Form
(HO-3)
Minimum varies; other coverages
in same percentages or amounts
except D—20% of A
Dwelling and other structures covered against risks of direct
physical loss to property except losses specifically excluded;
personal property covered by same perils as HO-2 plus
damage by glass or safety glazing material, which is part of a
building, storm door, or storm window
Renter’s Form
(HO-4)
Coverages A and B—Not applicable
C—Minimum varies by company
D—20% of C
E—$100,000
F—$1,000 per person
Covers same perils covered by HO-2 for personal property
Comprehensive
Form (HO-5)
Coverages A and B—Not applicable
B—Not applicable
C—Minimum varies by company
D—40% of C
E—$100,000
F—$1,000 per person
Covers same perils as HO-4, but covered perils are dwelling,
other structures, and personal property covered against
risks of direct physical loss except losses that are excluded
specifically
Condominium
Form (HO-6)
Coverage A—Minimum $1,000
B—Not applicable
C—Minimum varies by company
D—40% of C
E—$100,000
F—$1,000 per person
Covers same perils covered by HO-2 for personal property
Modified
Coverage
Form
(HO-8)
Same as HO-1, except losses are
paid based on the amount required
to repair or replace the property
using common construction
materials and methods
Same perils as HO-1, except theft coverage applies only to
losses on the residence premises up to a maximum of
$1,000; certain other coverage restrictions also apply
* Coverages:
A. Dwelling
B. Other structures
C. Personal property
D. Loss of use
E. Personal liability
F. Medical payments to others
3. Discuss the types of loss protection provided by the homeowner’s policies under
consideration.
4. What advice would you give the Perkins regarding Gene’s suggestion? What coverage
should they buy?
10.2 Auto Insurance for Dwight Fox
Dwight Fox is a divorced 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 Dwight visits Unique Motors and buys a new car for $32,000. To
obtain insurance on the car, Dwight calls his agent, Carrie Dawson,, who represents
Brown’s Insurance Company, and explains his auto insurance needs. Carrie says that she’ll
investigate the various options for him. Three days later, Dwight and Carrie get together to
review his coverage options. Carrie offers several proposals, including various
combinations of the following coverages: (a) basic automobile liability insurance, (b)
uninsured motorist’s coverage, (c) automobile medical payments insurance, (d) automobile
collision insurance, and (e) comprehensive automobile insurance.
Critical Thinking Questions
1. Describe the key features of these insurance coverages.
2. Are there any limitations on these coverages? Explain.
3. Indicate the persons who would be protected under each type of coverage.
4. What kind of insurance coverages would you recommend that Dwight purchase?
Explain your recommendation.
Terms Found in the Chapter
actual cash value
A value assigned to an insured property that is determined by
subtracting the amount of physical depreciation from its replacement
cost.
bodily injury
liability losses
A PAP provision that protects the insured against claims made for
bodily injury.
captive agent
An insurance agent who represents only one insurance company and
who is, in effect, an employee of that company
claims adjustor
An insurance specialist who works for the insurance company, as an
independent adjustor or for
an adjustment bureau, to investigate claims.
collision insurance
Automobile insurance that pays for collision damage to an insured
automobile regardless of who is at fault.
comprehensive
automobile
insurance
Coverage that protects against loss to an insured automobile caused by
any peril (with a few exceptions) other than collision.
comprehensive
policy
Property and liability insurance policy covering all perils unless they
are specifically excluded.
co-insurance
In property insurance, a provision requiring a policyholder to buy
insurance in an amount equal to a specified percentage of the
replacement value of their property.
financial
responsibility laws
Laws requiring motorists to buy a specified minimum amount of
automobile liability insurance or to provide other proof of comparable
financial responsibility.
independent agent
An insurance agent who may place coverage with any company with
which he or she has an agency relationship, as long as the insured
meets that company’s underwriting standards.
liability insurance
Insurance that protects against the financial consequences that may
arise from the insured’s responsibility for property loss or injuries to
others
named peril policy
Property and liability insurance policy that individually names the
perils covered.
negligence
Failing to act in a reasonable manner or to take necessary steps to
protect others from harm.
no-fault automobile
insurance
Automobile insurance that reimburses the parties involved in an
accident without regard to negligence.
peril
A cause of loss.
personal
automobile
policy (PAP)
A comprehensive automobile insurance policy designed to be easily
understood by the “typical” insurance purchaser.
personal liability
umbrella policy
An insurance policy providing excess liability coverage for
homeowner’s and automobile insurance as well as additional coverage
not provided by either policy.
personal property
floater (PPF)
An insurance endorsement or policy providing either blanket or
scheduled coverage of expensive personal property not adequately
covered in a standard homeowner’s policy.
principle of
indemnity
An insurance principle stating that an insured may not be compensated
by the insurance company in an amount exceeding the insured’s
economic loss.
property damage
liability losses
A PAP provision that protects the insured against claims made for
damage to property.
property insurance
Insurance coverage that protects real and personal property from
catastrophic losses caused by a variety of perils, such as fire, theft,
vandalism, and windstorms
replacement cost
The amount necessary to repair, rebuild, or replace an asset at today’s
prices.
right of
subrogation
The right of an insurer, who has paid an insured’s claim, to request
reimbursement from either the person who caused the loss or that
person’s insurer.
underinsured
motorists coverage
.
Optional automobile insurance coverage, available in some states, that
protects the insured against damages caused by being in an accident
with an underinsured motorist who is found liable.
uninsured
motorists
coverage
Automobile insurance designed to meet the needs of “innocent”
victims of accidents who are negligently injured by uninsured,
underinsured, or hit-and-run motorists.
Protecting Your Property
Chapter Outline
Learning Goals
I. Basic Principles of Property Insurance
A. Types of Exposure
1. Exposure to Property Loss
a. Property Inventory
b. Identifying Perils
2. Liability Exposures
B. Principle of Indemnity
1. Actual Cash Value versus Replacement Cost
2. Subrogation
3. Other Insurance
C. Co-insurance
II. Homeowner’s Insurance
A. Perils Covered
1. Section I Perils
2. Section II Perils
B. Factors Affecting Home Insurance Costs
C. Property Covered
D. Personal Property Floater (PPF)
E. Renter’s Insurance: Don’t Move In Without It
F. Coverage: What Type, Who, and Where?
1. Types of Losses Covered
a. Section I Coverage
b. Section II Coverage
2. Persons Covered
3. Locations Covered
G. Limitations on Payment
1. Replacement Cost
2. Policy Limits
3. Deductibles
H. Homeowner’s Insurance Premiums
III. Automobile Insurance
A. Types of Auto Insurance Coverage
1. Part A: Liability Coverage
a. Policy Limits
b. Persons Insured
2. Part B: Medical Payments Coverage
a. Policy Limits
b. Persons Insured
3. Part C: Uninsured Motorists Coverage
a. Policy Limits
b. Persons Insured
c. Underinsured Motorists Coverage
4. Part D: Coverage for Physical Damage to a Vehicle
a. Collision Insurance
b. Comprehensive Automobile Insurance
B. No-Fault Automobile Insurance
C. Automobile Insurance Premiums
1. Factors Affecting Premiums
2. Driving Down the Cost of Car Insurance
D. Financial Responsibility Laws
IV. Other Property and Liability Insurance
A. Supplemental Property Insurance Coverage
B. Personal Liability Umbrella Policy
V. Buying Insurance and Settling Claims
A. Property and Liability Insurance Agents
B. Property and Liability Insurance Companies
C. Settling Property and Liability Claims
1. First Steps Following an Accident
2. Steps in Claims Settlement
3. Claims Adjustment