4. What advice would you give the Scotts regarding Henry’s suggestion? What coverage
should they buy?
HO-5 Comprehensive coverage is the normal homeowner’s policy and that is what I would
suggest. The value of their home is $410,000. Typical co-insurance is 80%, thus, they should
10.2 Auto Insurance for Javier Perez
Javier Perez is a 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 Javier visits Unique Motors and buys a new car for $32,000. To obtain insurance
Critical Thinking Questions
1. Describe the key features of these insurance coverages.
a. Basic automobile liability insurance — As part of the liability provisions of a PAP, the
insurer agrees to:
1. Pay damages for bodily injury and/or property damage for which you are legally responsible
as a result of an automobile accident
2. Settle or defend any claim or suit asking for such damages
2. Are there any limitations on these coverages? Explain.
3. 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
4. What kind of insurance coverages would you recommend that Javier purchase? Explain
your recommendation.
I suggest a basic policy with limits high enough to cover the property (I suggest $25,000 at
Test Yourself
10-1 Briefly explain the fundamental concepts related to property and liability insurance.
Property and liability insurance should be as much a part of your personal financial plans as life
and health insurance. Such coverage protects the assets you’ve already acquired and safeguards
10-2 Explain the principle of indemnity. Are any limits imposed on the amount that an
insured may collect under this principle?
The principle of indemnity states that the insured may not be compensated by the insurance
company in an amount exceeding the insured’s economic loss. Most property and liability
10-3 Explain the right of subrogation. How does this feature help lower insurance costs?
After an insurance company pays a claim, its right of subrogation allows it to request
reimbursement from either the person who caused the loss or that person’s insurance company.
10-4 Describe how the co-insurance feature works.
Co-insurance, a provision commonly found in property insurance contracts, requires
policyholders to buy insurance in an amount equal to a specified percentage of the replacement
10-5 What are the perils that most properties are insured for under various types of
homeowner’s policies?
Property and liability insurance agreements, called comprehensive policies, cover all perils
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.
The homeowner’s policy offers property protection under Section I for the dwelling unit,
accompanying structures, and personal property of homeowners and their families. Coverage for
certain types of loss also applies to lawns, trees, plants, and shrubs. However, the policy excludes
structures on the premises used for business purposes (except incidentally), animals (pets or
otherwise), and motorized vehicles not used in maintaining the premises (such as autos,
motorcycles, golf carts, or snowmobiles).
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:
10-8 Describe replacement-cost coverage and compare this to actual cash value coverage.
Which is preferable?
The amount necessary to repair, rebuild, or replace an asset at today’s prices is the replacement
cost. When replacement-cost coverage is in effect, a homeowner’s reimbursement for damage to
a house or accompanying structures is based on the cost of repairing or replacing those
10-9 What are deductibles? Do they apply to either liability or medical payments coverage
under the homeowner’s policy?
Deductibles, which limit what a company must pay for small losses, help reduce insurance
premiums by doing away with the frequent small loss claims that are proportionately more
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 motorists coverage?
The personal automobile policy (PAP) is a comprehensive, six-part automobile insurance
policy designed to be easily understood by the “typical” insurance purchaser. The policy’s first
four parts identify the coverage provided.
Uninsured Motorists coverage is available to meet the needs of “innocent” victims of accidents
who are negligently injured by uninsured, underinsured, or hit-and-run motorists. Nearly all
states require uninsured motorists insurance to be included in each liability insurance policy
issued.
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.
No-fault automobile insurance is a system under which each insured party is compensated by
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
others, higher rates are applied where the probability of claims is greatest.
Discounts. Some auto insurers give discounts to individuals for special reasons, such as
demonstrated safe driving, driver’s education, etc. Discounts can knock 5 to 50% off annual
premiums.
Deductibles. As a rule, the greater the deductible, the less costly the insurance
coverage—using a high ($1,000) deductible on your comprehensive and collision insurance can
result in premium savings of as much as 45–50%.
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
home, meaning homeowners will have to bear significant out-of-pocket costs before they are
able to collect on the policy.
10-16 What is a personal liability umbrella policy? Under what circumstances might it be a
wise purchase?
A personal liability umbrella policy might be a wise purchase for persons with moderate to high
levels of income and net worth who are viable targets for liability claims. An umbrella policy
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
company. Independent agents, however, typically represent between two and 10 different
property insurance companies. You should find an agent who is knowledgeable and willing to
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
1. Giving notice to the company that a loss (or potential for loss) has occurred. Timely
notice is extremely important.
2. Investigation of the claim. To properly investigate a claim, insurance company personnel
may have to talk with witnesses or law enforcement officers, gather physical evidence to tell
whether the claimed loss is covered by the policy, and check to make sure the date of the loss fell
within the policy period.
The claims adjustor may work for the insurance company, work as an independent adjustor, or
work for an adjustment bureau. Primarily, the adjustor is looking out for the interests of the
company. He or she must diligently question and investigate, and at the same time offer service
to minimize settlement delays and financial hardship. In the situation where an individual must
file a claim against another’s insurance company, a question of fault arises, and the adjustor will
Key Terms
actual cash value
A value assigned to an insured property that is determined by
subtracting the amount of physical depreciation from its replacement
cost.
Automobile
insurance plan
An arrangement providing automobile insurance to drivers who have
been refused regular coverage under normal procedures.
bodily injury
liability losses
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
In property insurance, a provision requiring a policyholder to buy
insurance of an amount equal to a specified percentage of the
replacement value of their property.
A PAP provision that protects the insured against claims made for
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
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
liability insurance
Insurance that protects against the financial consequences that may
others
Property and liability insurance policy covering all perils unless they
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.
insurance
Automobile insurance that reimburses the parties involved in an
accident without regard to negligence.
peril
A cause of loss.
personal
automobile
personal liability
umbrella policy
An insurance policy providing excess liability coverage for
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
principle of
indemnity
An insurance principle stating that an insured may not be compensated
economic loss.
A comprehensive automobile insurance policy designed to be easily
understood by the “typical” insurance purchaser.
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
underinsured
Optional automobile insurance coverage, available in some states, that
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.
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
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
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
III. Automobile Insurance
A. Types of Auto Insurance Coverage
1. Part A: Liability Coverage
a. Policy Limits
b. Persons Insured
B. No-Fault Automobile Insurance
C. Automobile Insurance Premiums
1. Factors Affecting Premiums
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