Insurance is generally defined as a form of risk management, where risk is transferred from oneentity to another in exchange for a premium. Casualty insurance, like property insurance, insures against loss and/or damage of property. The difference is that casualty insurance covers loss that is a result of direct accident, while property insurance covers events, such as theft or burglary. (For related reading, be sure to check out Insurance Tips For Homeowners.)
This article will focus on three major types of casualty insurance:
- Vehicle insurance
- Flood insurance
- Liability insurance
Vehicle or auto insurance is designed to protect a driver's car, truck, motorcycle and other vehicles against losses sustained from events like traffic accidents. You agree to pay the premium, and in the event of an accident, the insurance company agrees to pay your losses as defined in your policy. In most states, except Wisconsin and New Hampshire, having auto insurance is compulsory. (To help you understand the different types of coverage available, read Shopping For Car Insurance.)
Vehicle insurance has the following six types of coverage:
Flood coverage is a service provided by the National Flood Insurance Program (NFIP) and other private insurers. A standard home insurance policy is designed to protect a homeowner against loss of personal property inside the home or even damages to the home itself. Personal property is often described as "movable items", or property that can be moved from one location to another. It includes furniture, clothes, art, writing, household goods, boats, vehicles, etc. The problem with most home insurance policies is that they exclude natural disasters or "acts of God." Homeowners have come to realize that they have to buy additional insurance to protect themselves from damages that occur due to theft, wind or flood. (Read Preparing For Nature's Worst to find out if your finances can withstand a natural disaster.)
With flood insurance, claim amounts can either be actual cash value or replacement cost of the damaged property or item. Replacement cost is simply the cost to replace the damaged item. For a damaged house or property to be eligible for replacement cost, three criteria must be met:
- The building has to be a single family dwelling.
- It must have been occupied for at least 80% of the year.
- Building coverage must be at least 80% of the full replacement cost of the building.
Flood insurance has two types of policies:
Liability insurance is designed to protect the insured from various risks, including being sued for negligence and unintentionally causing harm to someone in the course of an accident. This type of insurance is beneficial to people in high-risk professions like construction, manufacturing and medicine. Liability insurance comes in handy when the policyholder engages in unintentional behavior during the course of work that causes damage or harm to someone else. For example, if you are a construction worker and a structure you work on hurts someone, if you did not intentionally cause harm, the insurance company will cover the cost of damages to the injured party.
There are three types of liability insurance:
When purchasing liability insurance, you can choose an occurrence or claims-made policy. An occurrence policy covers incidents months and years after they have occurred. If the incident occurred during the coverage period, the insurance company is obligated to investigate the matter and make any necessary compensation, even if it was reported at a later date. You might find yourself in a situation where you have recently changed insurers and you are being sued by a third party. In that case, the issue might be determining which insurer to file the claim with: the insurer during the time when the event happened or your current insurer.
For example, if you were with insurer X in 2007 and in 2008 you switched to insurer Y, when somebody files suit against you claiming that you caused them harm in 2007, the insurer you file the claim with is insurer X. If the suit claims that the injury occurred in 2008, you cannot file with insurer X because you had already switched to insurer Y. So, if the injury reportedly occurred in 2008, insurer Y is the insurance company that will pay out the claim. (Read Will Filing An Insurance Claim Raise Your Rates? to learn about the financial implications of claiming damages.)
On the other hand, a claims-made policy covers incidents if they occur and are reported during the coverage period. In other words, if an event that occurs during the coverage period is reported after the period has ended, the insurance company is not obligated to investigate or even compensate you for the incident. (Every business is susceptible to legal action. Find out how to protect yours in our article Cover Your Company With Liability Insurance.)
Before you get any type of insurance, make sure you do your research and are absolutely certain that you are getting the exact type of insurance policy you need. Insurance policies usually cover different events and loss/damage. For example, bodily injury coverage under vehicle insurance covers injury to the other party, while personal injury covers injury you sustain. Another example is the two types of coverage under liability insurance: claims-made and occurrence coverage.
Enough emphasis cannot be placed on the importance of conducting thorough research before buying an insurance policy. Many states require you to have different types of coverage on a vehicle or property, so make sure you know your state rules and try to abide by them. Always make sure to carefully read an insurance contract before you sign on the dotted line. To learn more about the different types of insurance, you can access your state's insurance website through the National Association of Insurance Commissioners (NAIC).
For related reading, see Understand Your Insurance Contract to protect yourself when purchasing insurance.