Chapter 7 Auto insurance and risk management

The High Cost of Automobile Losses

- Of the total of $533 billion spent on property and liability insurance by individuals and usinesses,
$207 billion or 39% was spent on car insurance.
- Males have a hight proportion of losses than females until age 56

Auto loss frequency/severity, rates and the personal auto policy

Today even affordable cars come equipped with safety features such as:

- Automatic emergency braking

- Lane keep assist
- Advanced cameras
- Rear-seat reminder systems

Relative frequency and severity of claims

The Need for insurance:

- Only liability insurance is required

- Liability insurance won’t pay your medical bills and won’t repair your car
- Imagine if your car was destroyed and you had no insurance

Where does $100 of Auto Insurance Premium Go?

In 2016, $100 premium  $82.40 to claims-related costs and $23.40 to expenses

ADD $82.40 and $23.40 that’s $105.80

How do insurers profit? They invest the premium until they pay claims

The personal auto policy

Eligibility: a car must be owned or leased by an individual or jointly owned by a married couple. It’s
primarily designed for private passenger cars.

Personal auto policy Definition

Covered auto  any vehicle shown in the declarations, any private passenger auto pickup or van for 14
days, any trailer you own, any auto/trailer you don’t own used as a substitute

Trailer a vehicle designed to be pulled by any “covered auto”

Family member person related to you by blood, marriage or adoption. Also a resident of your household,
including a ward or foster child.

Occupying defined as “in, upon, getting in, on, out, or off”

Personal auto policy Components

Liability, Medical Payments, Uninsured Motorist, Physical Damage to Your Auto.

Liability Coverage under the PAP

1- Explanation of coverage

-Promises to pay bodily injury claims for which any insured becomes legally responsible due to an auto
accident

-Promises to pay property damage claims for which any insured becomes legally responsible due to an auto
accident

-Promises to either settle or defend, at its own discretion, any covered claim or suit.

-No duty to defend if policy excludes coverage

-No duty to defend once policy limits have been exceeded

2- Who is an insured? Insure party who’s liable, NOT the party to receive payment!!!!

-Owner of covered auto (named insured)

-Person using covered auto

-An employer who’s vicariously liable for an employee driving your covered auto

-An employer who’s is vicariously liable for you driving someone else’s auto

3- Supplementary payments

-Bail bonds up to $250 are covered for an accident resulting in bodily injury (BI) or property damage (PD).

* A bail bond posted for a speeding violation or DWI is not covered unless either Bl or PD occurs.

-Interest that accrues after a judgment and reasonable expenses incurred

-Up to $200 per day is available for loss of earnings resulting from attending trials or hearings

4- Limit of liability

-Generally stated as split limits

-Example Louisiana required liability:$15.000 per person bodily injured,$30.000 per accident bodily injured,
$25.000 per accident property damage.

EXAMPLE 1 Marcus causes an accident and is liable for the following:

$18.000 in medical bills to Susie

$12.000 in medical bills to Victor

$23.000 in damages for Susie’s car

Susie will get $15.000 from Marcus’s insurance for her injures (She can sue Marcus for the rest)

Victor will get $12.000 from Marcus’s insurance for his injuries

Susie will get the full $23.000 to repair her car

EXAMPLE 2 Abigail causes an accident and is liable for the following:

$14.000 in medical bills to Katlyn

$12.000 in medical bills for Bria

$10.000 in medical bills to DeAndre

$28.000 in damages for Katlyn’s car

Abigail’s policy will only pay out a total of $30.000 for the medical bills

Katlyn will only get $25.000 from Abigail’s insurer to repair her car.

5- Benefit of the PAP (as it relates to liability coverage)

-Automatic adjustment to another state’s requirement

If you’re driving in a state that has higher liability requirements, your limits automatically go up

-Example: you carry the minimum required by Louisiana but drive to Texas

-Your limits go up to $30.000/$60.000/$25.000 (the Texas minimum requirements)

6- Requirements by state

Liability Insurance Requirements VS Responsibility Laws

In some states, liability requirements can be met by purchasing insurance or a surety bond.

Medical Payments under the PAP

1- Explanation of coverage

-Reasonable and necessary medical expenses caused by an accident and sustained by the insured

-"No-fault" coverage – pays without regard to whether it was the driver's fault

-Expenses must occur within three years of the accident

2- Who is an insured?

-You or any family member when occupying a motor vehicle designed for use on mainly public roads or by a
trailer of any type

-You or any family member as a pedestrian when struck by a motor vehicle designed for use mainly on
public roads or by a trailer of any type

-Any other person while occupying your covered auto

3- Limits

-$2.000 per person injured

-If 10 people are injured, technically, the policy will pay $20.000 ( up to $2.000 per person)

-Remember, covers “any family member”

-Family of 4 with 4 insureds can’t use each $2.000 for the same person for the same accident

-Can’t “stack limits”

Uninsured Motorists Coverage Under the PAP

1- Explanation of coverage

Pays for bodily injures that result from an accident with another vehicle.

Pays only if the other driver is negligent and does not have any insurance, and is a hit-and- run.

-Acts like the uninsured vehicle’s bodily injury liability

-Usually just bodily injury coverage but in some states, it also covers property damage.

-The insurance does not cover punitive damages

2- Who’s insured?

The named insured, named insured’s family members, any person occupying the covered auto.

Unlike liability coverage, the insured is the one reimbursed with uninsured motorist. More like “medical
payments” coverage in that way. Covers more than medical payments; coverage lost wages for example.

3- Percentage of uninsured motorists by state

In 2015, Louisiana ranked 20th with 13%

4- What is an uninsured motor vehicle?

Not covered by liability insurance. Covered by insurance but under required limits. One that’s a hit-and-run
vehicle whose operator or owner cannot be defined. Covered by liability insurance or bond from a
company that denies coverage or has become insolvent.

5- Conditions

Uses split limits similar to liability/ not medical payments

Coverage is excess on non-owned vehicles means that the car’s uninsured motorist applies first.

Some insurers offer an underinsured motorist endorsement pays even if at-fault driver carried legal
limits. Applies when at-fault driver’s coverage was not sufficient to cover losses.

Physical Damage to Your Auto Coverage Under the PAP

 1- Explanation of coverages

Covers damage for accidental loss to a the “covered auto” or a nonowned auto. Separated into two
sections: collision and other-than collision.

Physical damage: collision coverage

Collision is defined as “upset of your covered auto or nonowned auto or its impact with another vehicle or
object”. Clarifies what some thought was awkward in the old definition, which used the word “collide” to
define the term collsion.

Physical damage: other than collision coverage

Covered perils are losses caused by:

Losses caused missiles, falling object, fire, theft or larceny, explosion, earthquake, windstorm, hail, water,
flood, malicious mischief or vandalism, riot or civil commotion, contact with a bird or other animal,
breakage of glass.

2- What is an insured auto?

-Covered auto

-Insured, nonowned auto any vehicle not owned or furnished to you while in the custody of or being
operated by you or any family member. Any auto or trailer while used as a temporary substitute for your
covered auto while it is out of normal use.

Physical damage includes transportation and towing

3- Limits/provisions

Actual cash value of the loss or the amount necessary to repair or replace the property, whichever is less.

If cost of repair or replacement is greater than the value of the property, the insurer may declare the loss a
total loss and pay the ACV of the vehicle.

Insurer right to pay for the loss in money, repair, or replacement of the damaged or stolen property.

Coverage is excess for a non -owned auto.

Actual cash value (ACV) includes an adjustment for depreciation and the physical condition of the auto.

It will cost $4,000 to repair a vehicle worth $2,500, the insurer will generally consider the vehicle a total
loss and pay only $2, 500 (less the deductible, if any).

Personal Auto Policy: Overall Policy Provisions/conditions

1- Duties after an accident

-NOTIFY. Promptly notify the insurance company of how, when, and where the accident or loss

occurred (can be to agent)

-COOPERATE. Cooperate with the company in the investigation, settlement, or defense of any claim or suit

-SEND. Promptly send the company copies of any notices or legal papers received in connection with the
accident or loss

-SUBMIT. Submit, at the company's expense, to physical examinations by physicians selected by the
company and to examination under oath
-AUTHORIZE. Authorize the company to obtain medical reports and other pertinent records.

Submit a proof of loss when required by the company. Notify the police promptly if your covered auto is
stolen. If loss is APD, take reasonable steps after a loss to protect your covered auto and its equipment
from further damage; and, Permit the company to inspect and appraise the damaged property before its
repair or disposal.

2- Territory

The policy states that its territorial limits are the United States, its territories or possessions, and Canada.

Transportation of the auto between any of these points is also covered. Technically, Puerto Rico, a
commonwealth, is also within the territorial limits. Mexico is not a covered territory

3- Policy Cancellation

During the first 60 days of the policy, the insurer may cancel for any reason, and it may cancel for
nonpayment of premium at any time.

The insurer has 60 days to investigate the insured and make its underwriting decision. During the first 60
days, the insurer must give 10 days' notice before cancelling.

After the policy has been in effect for 60 days, the insurer can cancel only:

1.For non payment of premium

2.If the insured or a resident of the household, or someone who regularly uses the auto, has his or her
license suspended or revoked.

3.If the policy was obtained through material misrepresentation

When cancellation is made after the first 60 days, 20 days' notice must be given. If the insurer, decides not
to renew the policy at the end of the policy period, it must give 20 days' notice.

Loss control and prevention

Reducing frequency of accidents

Accidents can be reduced by building better highways and safer cars and perhaps by lowering speed limits,
to name a few options.

Expanding the interstate highway system is one way to make highways safer, as are breakaway light posts
and guardrails and impact barriers.

Insurers can lobby for road improvements but cannot require them or pay for them.

There are still frequent debates over the proper balance of spending between highways and mass transit.

*With growing concerns over pollution and congestion, mass transit may get

a larger slice of the pie in the years ahead*

Safety Features

Numerous safety features available in vehicles today- examples:

Collison warnings, automatic emergency braking, lane departure warnings, blind spot monitoring, camera

Benefit should help reduce accidents, assuming their impact is not offset by drivers who become more
careless bc they assume the technology will protect them.
Telematics

Telematics systems record driving behaviors:

• How much you drive

• When and where you drive

• Your speed, hard stops and rapid accelerations

Users of telematics can improve driver safety

• Parents can use apps to track the driving of their teens

• Companies use telematics to monitor driving behaviors of employees who drive for work

• Insurers use data to set auto premiums based on actual driver behavior rather than simply relying on
traditional demographic characteristics

Auto Insurance Rating

Rating factors

Male or female, marital status, territory is also a major rating factor. This is obvious by looking at variation
of auto insurance premiums across states, type of auto, driving record, credit history.

Why do young male drivers pay so much more?

On average, they have more and higher claims, rate of accident is about 25% higher for males than females.

The rate of fatal accidents is nearly 3 times higher for males than for females. Males drive more miles on
average but also have more accidents per mile driven than females.

Chapter 8 Homeowners insurance

General Characteristics of Homeowners Insurance

- A traditionally stable branch of the insurance industry

- Premiums tend to increase each year at moderate rate; not like auto
- Less sensitive than personal auto: homeowners don’t face substantial annual rate increases or
suddenly being thrown into the nonstandard market
- Occasionally, however, an event occurs that dramatically impact homeowners’ insurance

10 Costliest Catastrophes

Except 9/11 terrorist attacks, catastrophic losses paid mostly by homeowners’ insurance.

Alarming to note: eight of the top 10 occurred in the twenty first century.

Stronger storms and the dramatic increase in insured property values in recent decades in catastrophe
prone areas.

Events that impact the cost of homeowners insurance

The costliest insured catastrophe in U.S history was Hurricane Katrina in 2005, caused about $52 billion in
insured property losses.

Standard Homeowners Policies

 - "The most comprehensive protection for owner-Occupied, one-to-four- family residences"
- Like the Personal Auto Policy, these set of policies were developed by the Insurance Services Office,
now "Verisk"
- Verisk is a private company that provides standard insurance policies and many other services to
insurance companies

Verisk Owns ISO

They are the industry leader in developing insurance policy forms.

ISO is an industry policy forms

Homeowners insurance policies are Package Policies

Combine more than one type of coverage and more than one peril covered. Fewer gaps in coverage.
Lowers costs.

Outline of Homeowners insurance form designation:

- HO1Basic Form – covers only 8 perils

- HO2 Broad Form- covered 16 perils
- HO3 Special Form- opens perils for real property (most common)
Coverage Amount
A- Dwelling minimum varies by insurer
B- Other structures n 10% of A
C- Unscheduled personal property 50-70% of A
D- Additional living expense 30% of A
E- Comprehensive personal liability $100.000
F- Medical payment to others $1.000 per person

Layout of a Standard HO policy

Section I

Coverage A: Dwelling (open perils)

The “residence premises”. Residence premises is defined as the one-to four-family dwelling where you
reside, other structures and grounds of that location. Also covers structures attached to the dwelling.

Examples of a structure attached to the dwelling include a patio roof, a carport, or even an attached
greenhouse. If a structure is connected to the dwelling by only a fence or utility line, it is protected by
Coverage B.

Coverage B: other structures

Structures separated from the dwelling by clear space or connected by only a fence or utility line. An
attached garage, a poolhouse, a greenhouse, and a toolshed are possible examples. If both home and
structure are damaged, usually better to have a building considered other structure. $200.000 of coverage
becomes $220.000 of coverage. $200.000 for coverage A and $20.000 for coverage B.

Coverage C: unscheduled personal property

Typically 50% of Coverage A. covers personal property owned or used by an insured while anywhere in the
world. Examples: jewelry, clothes, furniture, guns, bikes, kitchen appliances.
Property usually located at an insured's residence other than, the residence premise (eg, vacation home,
away at college) is covered for $1,000 or 10 percent of the amount pf Coverage C, whichever is greater.

If children of the insured live separately at college, each child's property would be covered for 10 percent of
the Coverage C amount.

If multiple children of the insured all room together, only one limit, 10 percent of C, would apply to the
property of all the children living there.

HO3 is open perils for real property. Is 16 “named” perils for contents.

16 named perils for coverage C:

Fire and lightening, theft, windstorm and hail, freezing, explosion, riot or civil commotion, vandalism and
malicious mischief, aircraft, vehicles, accidental discharge or overflow of water or steam, sudden and
accidental tearing, cracking, burning, or bulging, volcanic eruption.

Examples of EXCLUDED Property:

- Articles separately described and specially insured in this or any other insurance (e.g expensive
camera, a watch, or a diamond ring).
- Animals, including birds and fish.
- Motorized land vehicles, except those not licensed for road use that are used to service an
insured's residence or assist the handicapped.
- Aircraft and hovercraft and their parts. Model airplanes are covered.
- Property of roomers, boarders, and other tenants, except those related to an insured.
- Property contained in an apartment regularly rented or held for rental to others by any insured
- Business data, including such data stored in paper records or electronic records.

- HO4Renters Form- contents only

- HO5 Condo-Owners Form- contents, appliances, fixtures, and assessments
- HO6 Modified Form-
Developed to meet a special situation in urban areas.
Many people move into older neighborhoods and renovating the homes there.
HO-8 was developed to meet the needs of the insured and to reduce the moral
hazard involved with other forms
Under the HO-8 form can collect on a "cost-to-repair basis, which is different
from actual cash value in two ways.
There is no deduction for depreciation.
Repairs may not be made with like labor and material.

HO3 Contents: examples of special dollar limits

$200 limit on money, bank notes, bullion, gold other than goldware, silver other than silverware, platinum,
coins, and medals.

$1500 on watercraft, including their trailer furnishings, equipment, and outboard motors.

$1500 on trailers not used with aircraft.

$1500 for loss by theft of jewelry, watches, furs, and precious and semiprecious stones.
 - $2500 for loss by theft guns.
- $2500 on property on the residence premises, used primarily for business purposes.
- $1500 on property away from the residence premises, used primarily for business purposes
- $1500 for loss to electronic apparatus, while in or upon a motor vehicle.

Additional living expense

Covers the increased cost of living from damage to insured home by insured perils

- Pays for a hotel room Allows the insured to maintain his or her normal standard of living
- Increased cost of living is covered example, increased cost of food
- Pays for loss of rental income less rental expense

Perils covered in homeowners’ insurance

- Fire means “hostile fire” outside its normal confines. Covered losses include damage from efforts to
extinguish the fire.
- Windstorm and hail, include tornado and hurricanes. Rian driven by wind trough an open window
that damages furniture is not covered. If window is blown out or roof blown away, damage by
wind- driven rain is covered.
- Theft, includes attempted and loss of property when it’s likely it has been stolen. Police must be
notified. No coverage exists if “an insured” steals the property. Sons, daughter and spouse are
insureds.
- Freezing, covers freezing of a plumbing, heating, or air-conditioning, system or a household
appliance. No coverage exists when the dwelling is unoccupied, unless the insured takes reasonable
care to maintain heat.

Other named perils in HO Insurance:

Riot and civil commotion, Vandalism or malicious mischief , Aircraft, Vehicles, Explosion, Smoke, Falling
Objects, Weight of ice, snow or sleet, Accidental discharge or overflow of water or steam., sudden and
accidental tearing, burning or bulging… of hot water heater or airconditioning, Volcanic Eruption.

OPEN PERILS EXCLUSION: wear and tear,inherent vice, latent defect, mechanical breakdown, reust, mold,
and wet or dry rot, contamination.

EXCLUSION APPLY TO BOTH NAMED AND OPEN PERILS: must pay particular attention to exclusions in open
perils (named perils only covers losses caused by the named perils)

General EXCLUSION to all property: earth movement, flood and several others type of water damage, war,
intentional loss, neglect by the insured to protecr the insured property from loss at and after the time of
loss, spoilage.

Optional property ENDORSEMENTS: earthquake, inflation guard, guaranteed replacement cost, personal
property replacement cost.

Personal Articles Floaters: open-perils contract designed to give broad coverage to valuable personal
possessions: personal jewelry, furs, fine golfer’s equipment, musical instrument, silverware and stamp and
coin collection.

Coverage D: loss of use

Additional coverages

Section II

Coverage E: personal liability

Provides liability coverage for bodily injury and property damage claims against an insured.

Defense costs in addition to the policy limits.

Up to $250 per day for actual loss of for assisting the insurer in the suit.

Who is an insured? You (the named insured), your resident relatives, any other person under the age of 21
who’s is in the care of any person named above. Any person legally responsible for animals or watercraft
that are owned by an insured on the previous slide. Person employed to maintain the home’s yard.

EXCLSUIONS: intentional losses, loss arising out of business activities, loss arising out of professional
services, loss arising out of any premises owned by or rented to any insured. Exclusions regarding motor
vehicle, watercraft, aircraft, and hovercraft liability. War, covered under worker’s compensation,
transmission of communicable disease, sexual molestation, corporal punishment. Use, sale, manufacture,
delivery, transfer or possession of controlled substance.

Coverage F: medical payments to others

Pays medical payments to a person on the insured location with the permission of the insured. To a person
off the insured location if the bodily injury:

- Arises out of a condition on the insured location

- Is caused by the activities of the insured
- Is caused by a residence employee in the course of the residence employee’s employment by an
insured or is caused by an animal owned by or in the care of an insured.
- Medical expenses within three years from the date of the accident. The named insured and regular
residents of the insured household are not covered for medical expenses. Coverage is no fault
basis, not like liability insurance, where legal liability must exist.

Example:

- A person falls down in the insured’s stairs

- An insured’s elbow accidentally hits another player’s eye while playing basketball.
- A resident employee hits and damages someone’s mailbox while strolling insured’s baby
- An insured’s dog bites the neighbor

Shopping tips for homeowners

BUY: buy adequate limits (at least 80 percent of the RC)

MAKE: make a complete written inventory of personal property on a room by room basis

DETERMINE: determine the value of personal property, increase limit coverage C if needed

PURCHASE: purchase replacement cost coverage on personal, property

IDENTIFY AND INSURE: identify and insure valuable property with a personal article floater.