Chapter 10 Flashcards
What is insurance? (2)
Protection against possible financial loss; it gives you peace of mind
What is an insurance company?
risk-sharing firm that assumes financial responsibility for losses from an insured risk
You purchase a policy. The insurer assumes a risk for a free called
the premium, which the insured policyholder pays periodically
What is risk?
Uncertainty or lack of predictability as to loss that faces a person or property covered by insurance
What is peril?
The cause of a possible loss or risk, such as fire, windstorm, robbery, disease, or death
What is hazard?
Increases the likelihood of a loss through some peril (e.g., driving drunk, defective house wiring)
What is risk management?
Organized, planned strategy to protect your assets and family
What are the three types of pure risk?
personal risks; property risks; liability risks
Give four examples of personal risks.
death; health; LTC; disability
Give two examples of property risks.
auto; home
Give an example of liability risks.
negligence
(T/F) Nature and financial loss of pure risk cannot be predicted.
False, it can be predicted.
(T/F) You cannot insure every type of pure risk.
False, you can insure any pure risk.
What is pure risk?
a chance of loss, not gain, that is accidental or unintentional
What is speculative risk?
chance of loss or gain, such as starting a business or gambling
Is speculative risk insurable?
No, it is uninsurable
What is risk avoidance? Give an example.
eliminate risk by not participating (don’t sky dive)
What is risk reduction? Give an example.
take measures to reduce risk (wear a seat belt)
What is risk assumption? Give an example.
assume the risk because the financial loss is small (don’t insure the $1,500 farm truck)
What is risk shifting? Give an example.
transfer the risk to another party, like an insurer (accident and illness insurance)
What are the four risk management techniques?
risk avoidance; risk shifting; risk assumption; risk reduction
What is a deductible?
amount the insured pays before the insurance company pays
Higher deductibles have what effect on premiums?
the higher the deductible, the lower your premiums
What is the biggest factor in deciding coverage?
premiums
What are the four steps to developing a personal insurance program?
set insurance goals; develop a plan to reach your goals; put your plan into action; check your results
What are the two basic types of risk?
acts of God; acts of man
What are the two types of property and liability risk?
physical damage; loss of use
Define liability.
legal responsibility for cost of another person’s losses or injuries
Define negligence.
failure to take ordinary or reasonable care, such as failure to supervise children in a pool
What is strict liability?
you are held responsible for your own intentional or unintentional actions
What is vicarious liability?
you are held responsible for the actions of another person, such as your child breaking a neighbor’s window
Define personal property floater.
“schedule” high value items, like wedding rings or musical instruments
What is the medical payments coverage in the context of personal liability?
medical payments coverage for minor injuries to others caused by you, family members, or pets, occurring on your property or away from home
How much is personal liability?
$1 million or more
What is an umbrella policy? (2)
also called a personal catastrophe policy; supplements basic personal liability coverage
What are endorsements?
add coverage to a standard policy, for things such as earthquake damage
Do you pay extra for endorsements?
Yes, you pay an additional premium
(T/F) Renter’s insurance is widespread and common among renters.
False, many renters do not have insurance.
HO-1
Basic form
HO-2
Broad form
HO-1 and HO-2 are called
Named Perils policies (usually no longer offered)
HO-3
Special form — all risk, except those excluded (war, flood, earthquake, nuclear)
HO-4
Renter’s form
What are the alternates for HO-4 in Texas?
HO-BT or HO-CT
HO-5
Comprehensive form — replacement cost coverage of HO-3 form
HO-6
condominium owner
HO-7
country home — covers agricultural buildings and equipment
Should you look for a policy with full coverage or a coinsurance clause? Why is a coinsurance clause bad?
look for a policy with full coverage, because with a coinsurance clause, you have to pay for part of a loss if underinsured
What is the formula to calculate coinsurance payment?
(insurance coverage)/(coinsurance% * replacement cost) * loss
What does ACV stand for?
actual cash value
What is ACV?
replacement cost less depreciation
What is replacement value?
cost to repair or replace the damaged or lost item, without considering depreciation (HO-5 comprehensive form)
What are the two rules for replacement value?
may limit replacement cost to 400% of actual cash value of item; premium 10-20% more than ACV coverage
What is financial responsibility law?
state legislation in nearly all states, which require automobile liability insurance laws
What is the minimum split-limit for financial responsibility in texas?
30/60/25
What do the financial responsibility laws do?
require drivers to prove their ability to cover the cost of damage or injury caused by them in an automobile accident
What does bodily injury liability cover?
the risk of financial loss due to legal expenses, medical expenses, lost wages and other expenses associated with injuries caused by an accident for which you were responsible
What does medical payments coverage cover?
the cost of health care for persons injured in your automobile, including yourself
What is another name for medical payments coverage?
personal injury protection (PIP)
What amount is typically covered in medical payments coverage?
small amount, usually $2,500 to $5,000
What does uninsured/underinsured motorist’s protection pay for?
cost of injuries to you and your family if your vehicle is hit by a person without adequate insurance -or- hit and run
Does uninsured/underinsured motorist’s protection pay for property damage?
no, you would need to add this to cover property
What is no-fault insurance?
system intended to provide fast, smooth methods of paying for damages without taking the legal action frequently necessary to determine fault
What does property damage liability cover?
covers damage to other person’s auto when you are at fault and also includes damage to such things as street signs and buildings
What does collision coverage pay for?
pays for damage to your automobile when it is involved in an accident, regardless of who is at fault
If you are not at fault for a collision, what happens?
your insurer will subrogate against the other driver’s property damage liability first for reimbursement
Collision coverage is limited to
the retail value of your vehicle
What does comprehensive (other than collision) physical damage coverage cover?
damage to your vehicle not caused by a collision, like vandalism or weather
What does wage loss insurance do?
reimburses you for any salary or income lost due to injury in an automobile accident
What does towing and emergency road service do?
pays for the breakdowns and mechanical assistance
How much is recommended for bodily injury liability?
$100,000/$300,000
How much is recommended for additional umbrella liability protection?
$1,000,000
How much is recommended for property damage liability?
$100,000
(T/F) Credit history can have an impact on automobile insurance premiums.
True
What are some examples of factors that can lead to premium discounts? (3)
good driving record; non-smoker; having car security devices
