Property and Casualty insurance, also referred to as P&C insurance, covers damage to, and liability associated with, a home, auto, boat, plane, or motorcycle. Personal policies generally don’t cover business exposures so you’ll need separate policies for your personal household and business. In this book our focus is on personal household insurance. The second book of the Pillars of Wealth series, Finance and Business Essentials for Medical Practices, addresses business policies.
Property insurance protects against damage or loss to property such as a home, vehicle, or business. Coverage usually extends to instances of theft, collision, fire, and some weather damage. Protection against floods and earthquakes must often be purchased separately.
Casualty or liability insurance covers an individual in cases where negligence or an act of omission causes injury to another person or another person’s property. For example, automobile insurance provides liability coverage in the event a driver is deemed to have been responsible for an accident. Coverage may extend to the medical expenses of victims, repair of their property, as well as their lost wages and potentially any other loss or damage they can establish.
Standard homeowner and automobile policies may limit liability coverage to an amount in the range of $200,000 to $300,000, but a serious accident can lead to much higher liability. The upshot is that you may be personally liable for any excess above the covered limit.
I strongly recommend you extend liability coverage through the use of a Personal Umbrella or Personal Catastrophe Liability (PCL) insurance policy. These policies tend to be relatively affordable. Consider purchasing at least $2 million of such coverage. Consult with your insurance specialist in order to determine the coverage level that is appropriate for your circumstances.
Given the litigious nature of American society, you should avoid publicly discussing your liability limits, as this could affect the likelihood that someone will sue you, and the size of any lawsuit.
As noted earlier, the deductible is the dollar amount that must be paid by you, the insured, before the insurer begins to pay benefit(s). Deductibles are used by insurers to reduce their risk exposure but also to reduce the logistical nightmare of processing millions of small claims. It’s not economically sensible for an insurer to process vast numbers of such claims because the cost of processing may be higher than the size of a typical small claim. For example, it may cost the insurer $100 to process a $50 claim. Accepting such claims in large numbers would force insurers to charge much higher premiums. Thus, it’s logical for both the insurer and the insured to accept a deductible paid by the insured out of pocket.
In addition, a deductible thwarts moral hazard, in which an insured may file false claims. This is because the fraudster still has to pay something out of pocket, which makes false claims less appealing (but doesn’t thwart them altogether).
The deductible also addresses morale hazard, where the insured takes a nonchalant, uncaring attitude about losses, because he has no skin in the game. Imposing a deductible makes the insured care about avoiding those first losses.
A P&C deductible is different than a healthcare deductible. The latter are based on an aggregate of expenses over a calendar-year, while auto-insurance deductibles apply to each separate loss event, such as a fender bender.
As a reminder, consider selecting higher deductibles to lower annual premiums. This can be a cost-effective approach when you have sufficient cash on hand to cover the cost of minor mishaps.
In the event you have to file a claim on your homeowners or renters insurance it’s useful to have documentation of the contents of your home. Such records help to establish the value of your belongings in the event of a claim. Special items such as valuable jewelry or musical equipment can be added explicitly to your homeowner policy. Get in the habit of periodically taking video or photographs of furniture and other belongings. Retain original receipts to the more valuable items to support claims.
Basis of Claims Settlement
The basis of claims settlement is an important consideration in your property insurance policies. There are two standards: actual cash value and replacement cost. Actual cash value indicates the insurer will compensate you for the actual market value of an item of property at the time that it is damaged or lost. Replacement cost means your compensation will match the item’s original price. Clearly, the latter is more favorable as it helps to restore you to the position you were in prior to the loss. For example, let’s say you recently had an accident that totally destroyed a car you purchased five years ago for $35,000. Just prior to the accident the value of your used vehicle was $19,000. Under actual cash value the insurer would compensate you for the value of that vehicle at the time of the accident, which is only $19,000. Under replacement cost you would expect the insurer to provide you with compensation of $35,000.
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