Seeking Security

Chapter 10

Protecting Assets

 

 

 

  Once assets have been accumulated, it is wise to protect them from losses.  Assets can be in the form of many different things.  Whatever form they take, a lawsuit can take everything we have earned.

 

  Many lawsuits result each year from automobile accidents.  Anyone who has moved from one state to another knows that rules and regulations are not the same from place to place.  Not only do rules and regulations change, but the costs of insuring an automobile change also.

 

  Any person driving a car should carry insurance.  To do otherwise is foolish.  We have the general impression that only those people who have nothing lack insurance.  That is not necessarily true.  People with bad driving records may carry no insurance or too little insurance.  Most people need a comprehensive personal auto policy.  It will include six different types of coverage:

1.      Bodily injury liability

2.      Property damage liability

3.      Medical payments

4.      Uninsured motorists’ protection

5.      Collision

6.      Comprehensive physical damage.

 

 

Bodily Injury Liability

 

  When the driver is found to be at fault for an accident, this type of insurance protects the insured from a lawsuit. The coverage protects the policyholder when someone else is injured or dies as a result of an accident that is found to be the insured's fault. This would include a driver found at fault that was a member of the insured's family or people who were driving his or her car with their permission.

 

  Bodily injury liability covers damages. It pays the bills caused by the insured to others. Besides medical bills, it will also pay to cover the cost of defending the driver if the other person sues. If the suing party wins, bodily injury liability will pay the damages assessed up to the limits of the policy. If the injured party dies, the policy may pay a lump sum to the survivor, but again, only up to the limits of the insurance policy.  Anything above those limits must come from the insured personally. 

 

  Bodily injury liability is not generally considered to be an expensive type of insurance.  Therefore, no less than $100,000 of coverage per person and $300,000 per accident is recommended.  Anything less is too little coverage.

 

 

Property Damage Liability

 

  As the name implies, this part of the automobile policy covers property damage that is caused by the insured, his covered family members, or people he has given permission to drive his car.  This type of coverage is sometimes combined with bodily injury liability protection.  It might read something like 100/300/50.  This particular example would mean $100,000 of bodily injury liability coverage per person/$300,000 of coverage per accident/$50,000 of property damage liability protection.  Generally, the ratio of bodily injury liability coverage to property liability coverage is two to one.  On a per accident basis, it is generally six to one, although requirements vary from state to state.

 

 

Medical Payments Coverage

 

  Medical payments coverage pays for medical bills that result from an automobile accident.  This would include the drivers, passengers, or pedestrians.  Unlike bodily injury liability, this part of the policy will cover without fault being shown.  Often, it takes time for fault to be proven.  Without this portion of the auto policy, bills could go unpaid for a length of time.  With medical payments coverage, medical bills are covered immediately.  The insurance carrier will recoup its costs from the other person if that other person is later judged to be at fault.

 

  The amount of medical coverage in an automobile policy can be quite small or relatively large.  Although it can be as little as $500, it is better to have amounts reaching at least $10,000.  Medical treatment is expensive.  Too little coverage could leave the insured paying for treatments out of pocket.  Once the maximum is reached, the driver should have a medical policy in place that will begin to pay for the medical bills.  It should be realized, however, that a person's personal medical coverage will pay only for their own treatments; not anyone else's.  Therefore, if the insured is found to be at fault, they cannot plan to have their personal medical policy pay for any other party's costs.  That would include other drivers, passengers, or pedestrians.

 

 

 

Uninsured Motorists

 

  As we stated previously, there are drivers on the road without any insurance.  Some have insurance, but so little that it can barely be counted on.  Uninsured motorist protection pays when the driver at fault has no insurance, or in some cases, too little.  This coverage protects the driver and anyone riding with him or her as a passenger.  It will also cover the insured and members of his or her family if they are injured while riding in someone else's car.  It will even cover the insured while walking or riding a bicycle.

 

  Some states mandate this coverage and others do not.  Even if the consumer lives in a state that does not require it, most professionals recommend that it be purchased.  Unfortunately for the injured parties, if the other person has no insurance, they may be forced to sue to get their injuries or property damages covered.  If the person at fault has nothing to take, winning the lawsuit will do very little to recoup expenses.

 

  If the consumer's state does mandate uninsured motorist protection, he or she should not consider their state's minimum standards as the level of protection to buy.  Rather than go by state mandates, they should consider what actual damages could amount to and purchase insurance accordingly.  Increasing the amount purchased is often only a difference of a few dollars.

 

  Uninsured motorist protection will not necessarily protect against the underinsured motorist.  Many people buy too little automobile insurance.  If an accident is judged to be the fault of someone who has bought too little insurance, the injured party may find themselves trying to sue someone who has nothing to take.  Because of this, many professionals recommend that the consumer also buy underinsured motorist protection.

 

 

Collision

 

  As the name implies, collision insurance repairs the damage done to property when a collision occurs.  If the policyowner is to blame, collision insurance repairs his or her car.  If the other driver is found to be at fault, they will seek reimbursement from that person's insurance company.  In states where no-fault laws exist, each driver's insurance pays for their own costs of repair.  No reimbursement is sought from the other insurance company.

 

  Insurance companies will not willingly repair every little scratch and rock ding.  In fact, it is not prudent for the insured to request that they do so.  Most policies have deductible amounts which the insured must first pay before the insurance company pays anything.  Usually, the deductible is at least $100, but it is often much higher.  Since collision insurance can be very costly, it is common for drivers to select high deductibles to keep their premium costs down. 

 

 

 

  Vehicles that are expensive to repair will cost more to insure than models that are less expensive.  Some older models of cars would cost more to fully insure than the vehicle is even worth.  Therefore, the make, model and age of a vehicle will partially affect the cost of the insurance protection.  Besides the vehicle itself, other things also affect the cost of collision insurance.  The driver's driving record certainly affects the cost of automobile insurance.  The insured's age, gender, and domicile (place of residence) will also affect the costs. 

 

 

Comprehensive Physical Damage

 

  Comprehensive physical damage insurance pays for property damage resulting from causes other than automobile accidents.  This would include things like fire, vandalism, and theft.  The costs of this type of insurance can vary greatly from state to state and even from neighborhood to neighborhood.  Insurance companies often use zip code areas to distinguish costs.  That is not really discrimination.  Insurance companies are excellent score keepers.  They know where their greatest losses are and where the least are.  If the insured lives in an area that experiences great losses, those insured will partially pay the cost of the overall losses for that neighborhood.  Since car theft and vandalism tend to be higher in cities than in rural areas, city dwellers generally pay higher premiums than those who live in the country.

 

  Comprehensive protection insurance covers the car itself and also the insured's possessions inside the car.  Special equipment, however, may need a special rider to be protected.  This might include such things as special audio equipment, telephones, or CB radios.  The higher the deductible, the lower premium costs will be. 

 

 

No-Fault Laws

 

  Some states have sought to reduce costs of litigation and court costs (as well as court time) by enacting no-fault auto laws.  More than twenty states have now done so, although some states have reversed them.  Where no-fault laws exist, there is no need to determine who was at fault in an accident.  Each insurance company pays for their own policyholder's expenses.  This would include property damage and personal injuries to the driver and the driver's passengers.

 

  No-fault laws do not totally eliminate lawsuits.  Injured parties may still sue those they feel were at fault.  State laws will indicate when the injured party may sue the other person.  Usually, death allows a lawsuit.  So does permanent injury.

 

  As we stated, some states have reversed no-fault laws.  This usually happens because the laws were not well thought out before being passed.  Some states found that the mandatory coverages were not high enough to pay the actual costs of an accident.  Although drivers could have purchased higher amounts, they tended to purchase only what was mandated by the state laws.

 

  In some states, attorneys have bitterly fought no-fault laws because they felt the people's right to sue those parties at fault were threatened.  Large amounts of money have been spent to advertise these views and persuade the voters to keep no-fault laws out.

 

 

To Tell or Not To Tell

 

  Unfortunately, it is not unusual for consumers to lie to their agents.  Perhaps "lie" is too strong; they simply fail to give full information.  For example, a car that is used to drive to and from work is listed as a personal use only car.  A young driver is said to drive only one specific car when, in fact, he or she drives all the cars regularly.  This is done to keep premium costs down, of course, but it is not a wise move (as every agent knows).  The insuring companies will probably pay the cost of the first accident if it is relatively minor, but anything that is major will probably be denied.  As in all insurance policies, honesty is mandatory.

 

 

  This chapter has generalized automobile insurance to a large degree.  Since this type of insurance varies so much from state to state, every agent and consumer will want to know the particular rules and regulations in their states.

 

 

Insuring Our Greatest Investment: Home Sweet Home

 

  For most consumers, buying their home is their greatest investment.  Not only is it the most expensive asset, but it is also the one that gives them the most pleasure.  It is surprising how few consumers read the policies they buy.

 

  Even those who rent need to purchase insurance.  The contents in the home add up to more than most of us would realize.  The landlord's policy would cover only the structure; not the tenant's possessions.  In addition, some lawsuits would be directed at the tenant and not the property owner.  Therefore, the tenant would also need liability protection.

 

  Homeowner policies are offered in six different forms.  These policies are usually called homeowner policies whether a home buyer is the insured or a tenant is the insured.  The first four types are for people who are in the process of buying a home; the remaining two are for those who rent their houses or apartments or live in condominiums or co-ops.  These policies cover the loss of the house itself if the insured is buying (or already owns) it and also the contents inside it.  The forms for home owners are called Forms One, Two, Three, and Five (four is listed as renter's insurance).

 

Form 1

  This form may also be called HO-1.  It stands for Homeowner's 1.  It is the least expensive homeowner's policy and, because of this, gives the least coverage.  If the peril (cause of loss) is not specifically stated, the homeowner is not covered for it.  Usually Form 1 covers ten perils:

                            1.  fire and lightning

                            2.  windstorms and hail

                            3.  explosions

                            4.  riots and civil commotion

                            5.  vehicles

                            6.  aircraft

                            7.  smoke damage

                            8.  vandalism and malicious mischief

                            9.  breakage of glass

                        10.  theft

 

  Again, if the damage results from something that is not specifically listed, then the insured is not covered for the loss.

 

Form 2

  Also called HO-2, this form covers everything listed in HO-1 plus seven additional perils (causes of loss).  These additional seven perils are:

                            1.  falling objects

                            2.  the weight of ice, snow, or sleet

                            3.  the collapse of buildings

                            4.  accidental discharge or overflow of water or steam

                            5.  explosion of steam or hot-water systems

                            6.  frozen plumbing, heating units, air-conditioning systems, and domestic appliances

                            7.  power surges

 

  Again, if the peril or cause of loss is not specifically stated in the homeowner's policy, the loss will not be covered by the insurance company.  This seems like repetition, but it is important repetition.

 

Form 3

  Also known as HO-3, this is the most popular of the four forms offered.  Form 3 is called an "all-risk" policy for the insured's home and other property structures because it covers everything except what is specifically excluded.  This is an important point to understand.  Forms 1 and 2 covered only what was specifically listed, whereas Form 3 covers everything except what is specifically excluded.  The exclusions are:

                            1.  earthquakes

                            2.  floods

                            3.  termites

                            4.  landslides

                            5.  wars

                            6.  tidal waves

                            7.  nuclear accidents

 

  Floods are prevalent in some areas.  Therefore, that exclusion can be very important for the homeowner to be aware of.  Homes that are built on mountain sides would also want clarification of the landslide exclusion.  Personal belongings are covered, but only under Form 2's seventeen named conditions.

 

Form 5

  Also called HO-5, this is another all-risk policy (like HO-3).  Besides Form 5 and HO-5, it might also be called the Comprehensive form.  It covers like Form 3 with the same exceptions to coverage.  The difference lies in how personal belongings are insured.  Under Form 3, they were covered only under the 17 perils, as in Form 2.  Under Form 5, personal belongings receive all-risk coverage.  That means they are covered in the same manner as the home structure is, with the same exclusions.

 

  Some insurance companies do not offer Form 5 coverage.  Rather, they offer Form 3 with a rider to boost coverage of personal belongings.  The insured will need to understand this so that problems do not arise for the agent later on in the contract.

 

Form 4

  Forms 4 and 6 are for renters.  Under Form 4, possessions are protected only from the perils (causes) specifically listed in the policy.  Usually these are the same as listed in Form 3.  Form 4 may be known by multiple names, including Tenants Form, Contents Form, Homeowner's 4, and HO-4.

 

Form 6

  Like Form 4, Form 6 may be known by multiple names.  These include HO-6, Condominium Unit Owner's Form, and Homeowner's 6.  This form was originated specifically for those who live in condominiums or co-op apartments.  Only the insured's belongings are covered, and they are covered the same way they are in Form 4.  The condominium association usually has a policy which covers the buildings themselves.  Therefore, even if the condominium is owned by the insured, they usually do not need to buy a policy which would insure the building.  Homeowners who own their own apartment should be aware of the master building policy, however.  If it is not adequately covered, it will be their loss if the building burns down or is otherwise destroyed.

 

 

 

Form 14

  The Insurance Services Office (ISO) introduced HO-14 (Contents Comprehensive Form) which is a new form for renters. Coverage is not available with the traditional HO-4 form (Contents Broad Form) and the new HO-14 (Contents Comprehensive Form). There are two major differences between the HO-4 and HO-14 form: The HO-4 form provides property coverage on a named peril basis while the HO-14 form extends coverage on an open peril basis and HO-4 form provides coverage on an actual cash value basis while the HO-14 form extends coverage at replacement cost. The HO-4 form can be endorsed to provide replacement cost coverage.

 

  The HO-14 form also offers coverages unique to itself. Including, Automatic coverage for hom-sharing house activities, additional coverage for bed bug remediation and hard drive data recovery.

 

  The HO-14 form extends 10 percent of the Coverage C limit to the listed property types unlike other HO forms which list a specific dollar amounts for certain property, the HO-14 will be a better choice for some policyholders and for other, sticking with the HO-4 form will still be better. It all depends on what the policyholder wants protected. 

 

  No matter what kind of policy is purchased, the insurance company is liable for no more than the policy limits.  That means a policy that will only pay up to $100,000 will not cover losses that amount to $125,000.  The additional $25,000 in losses must come from the insureds themselves.  Therefore, like all insurance, the policyholder must use thought and judgment when deciding how much insurance to purchase.  The agent must also use thought and judgment when recommending insurance amounts to his policyholders.  Most agents recommend policy amounts which will pay benefits of 80 to 100 percent of the replacement value of the house and its belongings.

 

  It should be noted that policies may pay replacement value or actual value.  If a refrigerator is 10 years old, there is a big difference between replacement value and actual cash value.  The actual value takes into account the depreciation of the furniture and appliances, whereas replacement value will replace the refrigerator without depreciation.  Actual cash value policies do cost less because the insurance company will be paying the replacement value minus depreciation.  Replacement policies cost more because, should a claim arise, the insurance company will be replacing the item at today's costs.  This principle applies to every item in the insured's house including furniture, clothing, and personal belongings.

 

  It is important for the agent to be aware of and fully explain any exclusions or limitations in a homeowner's policy.  Many plans have them.  Many types of possessions need special insurance riders to be insured.  Riders exist which will cover just about anything the consumer wishes to protect.

 

  When a claim does occur, the insurance company usually issues a check to the policyholder.  In some cases, however, the insurance company may wish to repair the damage or replace the property themselves.  Some companies deal with contractors or warehouses that save them money.  They do so to prevent unreasonable claim amounts.  The policyholder can appeal this, however, if they have good reason for doing so.

 

  In the past few years, it seems like there have been severe damages caused by Mother Nature.  In California, for example, there have been numerous earthquakes.  Few people have earthquake insurance.  They are specifically excluded from most homeowner's insurance policies unless an extra premium is paid for such coverage.  Generally, earthquake insurance must be in a separate policy.  It is likely that California property & casualty agents mention this to their policyholders just because of the area they live in, but other states may not be so aware of the danger.  Earthquakes can happen anyplace.  Of course, the risk is not as high in some areas as it is in others.

 

  Many states, such as Washington and Oregon, have seen lots of flooding.  Unlike earthquake insurance, flood insurance cannot be purchased (even for extra premium) from insurance companies.  They simply do not provide it because it is viewed as too risky.  Some areas flood every few years and the companies know the losses would be great.  In addition, many neighborhoods are built in flood plains.  Perhaps in years to come, county and state ordinances will forbid building in these areas, but for now, they are allowing it.

 

  Because of all the flooding that has occurred, the federal government has gotten into the insurance business.  In certain areas of our country, flood insurance is available from the U.S. Department of Housing and Urban Development.  Anyone living in a flood area should certainly check out this coverage through their insurance agent and purchase it.

 

  If a homeowner experiences damage, such as fire, to their home, their policy will pay for them to live elsewhere while it is being repaired or rebuilt.  Seldom will it pay if the policyowner lives with a friend or relative even if the friend or relative wants to be paid.  The insurance company will also pay for the difference between normal food costs and the cost of eating out.  Basically, the policy is designed to pay actual out-of-pocket expenses resulting from living outside of the home.  There will be dollar limits depending upon the amount of insurance purchased.  Once those dollar limits are reached, the policy will cease to pay benefits.

 

 

  Homeowner policies cover more than the actual structures (home, garage, and outbuildings).  They automatically include some liability coverage, too.  This liability protection covers all members of the household including family pets.  That is why applications for coverage routinely ask for a listing of pets, including the breed of the applicant's dogs.  Some breeds are considered risky and may prevent coverage from being issued.  Should the family Pit Bull bite the post man, for example, the insurance company will have to pay the costs he incurs and may even have to pay damages if he sues in court.

 

  The homeowner's policy will cover medical payments to others and damages that are caused to the property of others by members of the insured family, including the family pets.  Renter's insurance does not cover liability.  Renters must purchase an additional policy called Special Form Liability for Renters.  It is considered inexpensive and is a wise buy.  If the delivery man slips on the renter's skate board that was left on the sidewalk, it will be the renter that is sued for damages; not the property owner.  If the homeowner or renter employs domestic help, additional protection should be bought to cover liability claims from them.

 

  No insurance policy covers everything.  This cannot be stressed enough.  The agent absolutely must be aware of this and make it a routine practice to state it to his or her policyholders.  Some types of property will only be protected to a certain degree (not fully).  This, too, must be stressed to the policyholders.  What items would this include?  One example is cash, which is only covered to a certain extent (often $250).  Bank notes, coins, medals, securities, manuscripts, collectibles, antiques, silver and furs are further examples of items that are either not protected at all or only to a limited dollar amount.

 

  Floaters can be purchased to add additional coverage for items not covered adequately or not covered at all.  Proof must be given as to the items value; a sales receipt is usually acceptable.  A professional appraisal will be needed for some items, although this should be updated every few years.  A typical floater will cover all risks except those specifically excluded in the policy.  Wear and tear, war and nuclear accidents are often listed as exclusions.  The floater is so named because it goes wherever the policyholder goes.  It may also be called a personal articles floater. 

 

  Not all floaters are the same.  The selling agent must certainly be aware of the coverage and limitations of those he or she sells.  These facts must then be fully relayed to the buying party.  Floaters tend to have maximums on the amounts they will pay.  As a result, what the company pays could be less that the actual value of the item stolen, lost, or destroyed.  Again, there will be a difference between replacement value and actual cash value.  It will depend upon the language of the floater which one is covered.  As always, it is best to have replacement value rather than actual cash value.  As previously stated, actual cash value deducts depreciation from the benefit payment.

 

 

 

  Many people are now purchasing umbrella policies.  Since liability claims have grown so large, it is hard to be sure that there is adequate coverage.  Umbrella policies typically provide $1 million or more in liability coverage.  They often go up to $5 million.  Such coverage is especially important these days when people commonly own a home, several vehicles, and other personal items.  Some possessions could be considered dangerous (such as sports vehicles).  Since the birth of umbrella policies in the 1970s, all property and casualty business is typically given to one company who covers the home, vehicles, and umbrella liability policy.  Should a problem arise, one company will not be fighting with another over who should cover the loss.

 

  The best protection for any homeowner is a well-educated and caring insurance agent.  Homeowners tend to lose track of how they are protected even though they may have known when the policy was purchased.  A professional agent will review their policies periodically and alert the homeowner or renter when an update is necessary.

 

 

 

 

End of Chapter 10