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Chapter 10
Property and Motor Vehicle Insurance

© 2023 McGraw Hill, LLC. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill, LLC.
Learning Objectives
LO10-1 Develop a risk management plan using insurance.
LO10-2 Discuss the importance of property and liability
insurance.
LO10-3 Explain the insurance coverage and policy types
available to homeowners and renters.
LO10-4 Analyze factors that influence the amount of
coverage and the cost of home insurance.
LO10-5 Identify the important types of automobile insurance
coverage.
LO10-6 Evaluate factors that affect the cost of automobile
insurance.

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Insurance and Risk Management: An Introduction

LO10-1:
Develop a risk management plan using insurance.
WHAT IS INSURANCE?
• Insurance is protection against possible financial loss; it
gives you peace of mind.
• An insurance company, or insurer, is a risk-sharing firm
that assumes financial responsibility for losses from an
insured risk.
• People purchase a policy; the firm assumes the risk for a fee
called the premium, which the insured policyholder pays
periodically.

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Types of Risk 1

TYPES OF RISKS.
Risk is uncertainty or lack of predictability, such as the loss
that a person or property covered by insurance faces.
Peril is the cause of a possible loss, such as fire,
windstorms, explosions, robbery, accidents, and premature
death.
Hazard increases the likelihood of a loss, such as defective
house wiring.
• Personal, property, and liability risks

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Types of Risk 2

Pure Risk.
• The most common risks are classified as personal risks,
property risks, and liability risks.
• Insurable risk; chance of loss not gain.
• Accidental and unintentional risks.
• Nature and financial cost of the loss can be predicted.
Speculative Risk.
• Chance of either loss or gain, such as starting a small
business or gambling.
• Uninsurable risk.

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Risk Management Methods
Risk Management is an organized strategy for protecting assets and
people.
1. Risk Avoidance.
2. Risk Reduction.
• Wear seat belt, install smoke alarms, eat a balanced diet and exercise.

3. Risk Assumption.
• Self-insurance is the process of establishing funds to cover the cost of
loss.

4. Risk Shifting.
• Transfer risk to insurance company.
• A deductible is the set amount that the policyholder must pay per loss on
an insurance policy.

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Examples of Risks and Risk Management
Strategies 1

RISKS Financial Impact POSSIBLE POSSIBLE POSSIBLE

Personal STRATEGIES FOR STRATEGIES STRATEGIES
Events REDUCING FOR REDUCING FOR REDUCING
FINANCIAL IMPACT FINANCIAL FINANCIAL
Of Personal IMPACT Of IMPACT Of
Resources Private Sector Public Sector
Disability Loss of one’s income Savings, Disability Disability
Loss of services investments insurance insurance
Increased expenses Family observing Social Security
safety precautions
Illness Loss of one’s income Health-enhancing Health insurance Military health
Catastrophic hospital behavior Health care
expenses maintenance Medicare,
organizations Medicaid
Death Loss of one’s income Estate planning Life insurance Veteran’s life
Loss of services Risk reduction insurance
Final expenses Social Security
survivor’s benefits
Retirement Decreased income Savings Retirement and/or Social Security
Unplanned living Investments pensions Pension plan for
expenses Hobbies, skills government
Part-time work employees

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Examples of Risks and Risk Management
Strategies 2

RISKS Financial Impact POSSIBLE POSSIBLE POSSIBLE

Personal STRATEGIES FOR STRATEGIES STRATEGIES
Events REDUCING FOR REDUCING FOR REDUCING
FINANCIAL IMPACT FINANCIAL FINANCIAL
Of Personal IMPACT Of IMPACT Of
Resources Private Sector Public Sector
Property Cost to repair Property repair and Automobile Flood insurance
loss damage to property upkeep insurance (joint program
Repair or Security plans Homeowner’s with business)
replacement insurance
cost of theft Flood insurance
(joint program
with government)
Liability Claims and Observing safety Homeowner’s State-operated
settlement costs precautions insurance insurance plans
Lawsuits and legal Maintaining property Automobile
expenses insurance
Loss of personal Malpractice
assets and income insurance

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Planning An Insurance Program
Step 1: Set insurance goals.
• Insurance goals should define what to do to cover the
basic risks present in your life.
Step 2: Develop a plan to reach your goals.
• Understand and use resources available.
Step 3: Put Your plan into action.
• Obtain financial and personal resources, budget them, and
use them to reach risk management goals.
Step 4: Check your results.
• Evaluate your insurance plan periodically (2-3 years)

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Creating A Personal Insurance Program

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Property and Liability Insurance
LO10-2:
Discuss the importance of property and liability
insurance.
• Major disasters have caused catastrophic amounts of
property loss in the United States. In recent years,
hurricanes, tornadoes, and floods in various areas have
caused billions of dollars of damage.
• Main risks related to a home and an automobile are
property damage and your responsibility for injuries to
others and their property.

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Potential Property Losses
Houses, automobiles, furniture, clothing, and other personal
belongings.
Risk: Physical damage.
• Caused by hazards such as fire, wind, water and smoke.
• Destruction of property or temporary loss of use.
Risk: Loss of use.
• Due to robbery, burglary, vandalism, or arson.

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Liability Protection
Liability is legal responsibility for financial cost of another person’s
losses or injuries.
Negligence.
• Failure to take ordinary or reasonable care, such as failure to
supervise children in a pool.
Strict Liability.
• A person is held responsible for intentional or unintentional
actions.
Vicarious Liability.
• When a person is held responsible for the actions of another person.
• Parent held responsible for child causing physical harm to another.
• Employer held responsible for an employee causing damage.

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Home Insurance Coverage

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Home and Property Insurance
LO10-3:
Explain the insurance coverage and policy types
available to homeowners and renters.
HOMEOWNER’S INSURANCE COVERAGES.
House and Other Structures.
• Damage to or destruction of your house and garage, tool
shed, gazebo, trees, shrubs, and plants.
Additional living expenses.
Personal property.
• Personal property floater — high value items.
• Household inventory with documentation.
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Household Inventory Contents

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Personal Liability and Related Coverage 1

Medical payments coverage for minor accidental injuries on

your property and minor injuries caused by you, family
members, or pets.
Most homeowner’s policies provide Basic Personal Liability
coverage of $100,000 or more.
Umbrella policy, also called a personal catastrophe
policy, supplements basic personal liability coverage.
• $1,000,000 or more in liability coverage.

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Personal Liability and Related Coverage 2

Specialized coverage.
• Homeowner’s insurance usually does not cover losses from
floods and earthquakes.
• National Flood Insurance Program makes flood insurance
available.
• Earthquake insurance can be obtained as an endorsement,
addition of coverage to the homeowner’s policy.
Anti-Concurrent Causation Clause.
• Gives insurer the right to reject your claim if your home is
damaged by several factors at the same time, such as
wind and rain, because they are unable to determine which
factor came first and caused the damage.
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Renter’s Insurance
• Only 4 out of 10 renters have insurance.
• Protection against financial loss due to damage or loss of
personal property.
• Additional living expenses.
• Personal liability and related coverage.
• A building owner’s insurance usually won’t cover renter’s
personal property.

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Home Insurance Policy Forms
• Special form (HO-3), All-risk.
• Tenant’s form (HO-4).
• Comprehensive form (HO-5).
• Condominium form (HO-6).
• Country Home form (HO-7).

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Types of Home Insurance Policies 1

EACH OF THE POLICIES BELOW COVERS THESE PERILS, IN ADDITION TO

THE ITEMS NOTED.

• Fire, lightning. • Smoke.

• Windstorm, hail. • Vandalism or malicious mischief.
• Explosion. • Theft.
• Riot or civil commotion. • Glass breakage.
• Aircraft. • Volcanic eruption.
• Vehicles. • Falling objects.
• Discharge of water. • Tearing apart of heating system or
appliance.
• Freezing.
• Weight of ice, snow, or sleet.
• Accidental damage from steam or
electrical current.

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Types of Home Insurance Policies 2

EACH OF THE POLICIES BELOW COVERS THESE PERILS, IN ADDITION TO

THE ITEMS NOTED.
Special Form (All Covers all above perils, plus any other perils except those
risk) (HO-3) specifically excluded from the policy, such as
• Flood
• Earthquake
• War
• Nuclear accidents
Tenants Form (HO-4) Covers personal belongings against the perils in the top
section.
Comprehensive Form Expands coverage of HO-3 to include endorsements for items
(HO-5) such as replacement cost coverage on contents and
guaranteed replacement cost coverage on buildings.
Condominium Form Covers personal belongings and additions to the living unit.
(HO-6)

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Types of Home Insurance Policies 3

EACH OF THE POLICIES BELOW COVERS THESE PERILS, IN ADDITION TO

THE ITEMS NOTED.
Country Home Form For nonfarm business rural residents with coverage on
(HO-7) agricultural buildings and equipment.
The other major coverages of each policy are
• Personal liability
• Medical payments for guests on the property
• Additional living expenses

Note: HO-1 (Basic Form), HO-2 (Broad Form), and HO-8 (Modified Coverage Form for older homes with a high
replacement value) are no longer being offered by most companies.

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Home Insurance Cost Factors
LO10-4:
Analyze factors that influence the amount of coverage
and the cost of home insurance.
How Much Coverage Do you Need?
Look for a policy with full coverage rather than a
coinsurance clause, where you have to pay for part of a
loss.
Claim Settlement Method.
Actual cash value (ACV).
• Payment you receive is based on the current replacement
cost of the damaged or lost item less depreciation.

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Determining How Much Coverage You Need

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How Much Coverage Do You Need?
Replacement value.
• You receive the full cost to repair or replace the damaged
or lost item; depreciation is not considered.
• May limit replacement cost to 400% of actual cash value of
item.
• Costs 10%-20% more than Actual Cash Value coverage.

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FACTORS THAT AFFECT HOME INSURANCE
COSTS
Location of Home.
• If more claims are filed in an area, home insurance rates
will be here in that location.
Type of Structure.
• Brick house cost less to insure than wood house.
Coverage Amount and Policy Type.
• Deductible affects cost of your insurance; increase
deductible to lower premium; common deductibles are
$500 or $1,000.

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Reducing Home Insurance Costs
Home Insurance Discounts.
• Alarm system, dead-bolt locks, smoke detector, fire
extinguisher, nonsmokers, if you insure your car with the
same company.
Company Differences.
• Compare costs, coverage, and service.
• Consider how claims are settled, not just on price.
• Check customer satisfaction index at Consumer Reports.

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Automobile Insurance Coverages
LO10-5:
Identify the important types of automobile insurance
coverage.
Financial responsibility law.
• State legislation: Nearly all states have compulsory
automobile insurance laws.
• Requires drivers to prove their ability to cover the cost of
damage or injury caused by them in an automobile
accident.
• Automobile insurance coverage falls into two categories:
bodily injury coverage and property damage coverage.

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Two Major Categories of Automobile Insurance

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Motor Vehicle Bodily Injury Coverages 1

Bodily Injury Liability.

• Covers the risk of financial loss due to legal expenses,
medical expenses, lost wages and other expenses
associated with injuries caused by an automobile accident
for which you were responsible.

Medical Payments Coverage.

• Covers the cost of health care for persons injured in your
automobile, including yourself; also covers if you are
injured while riding in another person’s automobile or
struck by an automobile.

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Motor Vehicle Bodily Injury Coverages 2

Uninsured Motorist Protection.

• Covers the cost of injuries to you and your family if your
vehicle is hit by a person without insurance. However, it
does not cover property damage.
No-Fault Insurance.
• System is intended to provide fast, smooth methods of
paying for damages without taking the legal action
frequently necessary to determine fault; drivers collect
from their own insurance companies.

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Automobile Liability Insurance Coverage

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Motor Vehicle Property Damage Coverages 1

Property Damage Liability.

• Covers damage to another person’s car when you are at fault.
• It also includes damage to such things as street signs and
buildings.

Collision.
• When your car is in an accident, collision coverage pays for
damage to your automobile regardless of who is at fault.
• If you are not at fault, your insurer will try and collect from the
other driver’s property damage liability first — called
subrogation.
• Coverage is limited to the actual cash value of your vehicle from
an appraisal service (National Automobile Dealers Association).

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Motor Vehicle Property Damage Coverages 2

Comprehensive Physical Damage.

Covers damage to your vehicle that is not caused by a
collision, such as...
• Fire, theft, or vandalism.
• Glass breakage.
• Wind, hail, flood, tornado, etc.
• Falling objects or hitting an animal.
• Some things in your car, like some radios and stereo
equipment, are not covered.

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Deductible
Example:
If a broken windshield costs $750 to replace and you have a
$200 deductible on your comprehensive coverage, the
insurance company will pay $550 of the damages.

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Other Automobile Insurance Coverages

Wage Loss Insurance.

• Reimburse you for any salary or income lost due to injury
in an automobile accident.
Towing and Emergency Road Service.
• Pays for the cost of breakdowns and mechanical
assistance.
• Rental reimbursement coverage pays for a rental car if
your vehicle is stole or in the shop.

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Automobile Insurance Costs
LO10-6:
Evaluate factors that affect the cost of automobile
insurance.
AMOUNT OF COVERAGE.
• Legal Concerns include having enough coverage if you
were sued.
• $100,000/$300,000 is recommended for bodily injury
liability, with an additional $1,000,000 or more umbrella
liability policy recommended.

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Amount of Coverage
Legal Concerns.
Every state has laws that require or encourage automobile
liability insurance coverage.
• Minimum limits 10/20 required for most states.
Most can’t afford to pay an expensive court settlement with
personal assets, so drivers buy automobile liability insurance.
Property Values.
Cost of vehicles has gone up.
$50,000-$100,000 is usually suggested for property damage
liability.

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Automobile Insurance Premium Factors

Automobile Type.
• Year, make, model, and theft rate.
Rating Territory.
• Different costs due to number of claims made in the
geographic area where you live.
Driver Classification.
• Age, sex, marital status, credit history, driving record, and
driving habits.
• Assigned risk pool for people who are unable to obtain
insurance.

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Reducing Automobile Insurance Premiums

Comparing Companies.
• Rates may be compared online at NetQuote.
• Consumer Reports or state insurance department.

Premium Discounts.
• Establish and maintain a safe driving record.
• Avoid accidents and traffic violations.
• Install security devices such as a car alarm.
• Increase deductibles.
• Non-smoker.
• Insure two or more vehicles with the same company.

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© 2023 McGraw Hill, LLC. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill, LLC.