Intro to Insurance: Property and Casualty Insurance
Property insurance protects the things you own. Casualty insurance protects you financially in the event that someone sues you. The two are often referred to collectively as property and casualty insurance because the things you own have the potential to harm people in ways that could cause them to sue you. In this chapter, we’ll review the main kinds of property and casualty insurance: auto insurance, homeowners insurance, renter’s insurance and umbrella insurance. (For background reading, see Do You Need Casualty Insurance?)
Almost every state requires drivers to carry a minimum amount of auto insurance. Even if it weren’t legally required, you would want to carry auto insurance because the losses from an accident can be substantial. If you totaled someone’s car, would you have the cash to pay them to replace it? The average used car cost more than $18,000 in 2015, according to Edmunds. What about $50,000 to cover medical bills and lost work time? Not only should you want to carry car insurance, you should probably carry more than the legal minimum. (For related reading, see How Auto Insurance by the Mile Works.)
Car insurance covers damage caused to other vehicles and property in an accident as well as injuries caused to people. It also covers damage caused to your car by a storm or a collision with an animal. (For more insight, read Shopping for Car Insurance.)
Your deductible is the amount you will pay when you file a claim that the insurance company approves and agrees to pay its share of. If you have a $250 deductible and file an approved claim for $2,000, your insurance company will cut you a check for $1,750.
Besides the type and amount of coverage and the deductible you choose, your auto insurance rates are determined by your driving record, your annual mileage, where you live, how old you are, your gender, the type of car you drive and your credit score. The better your driving record, the more driving experience you have and the higher your credit score, the better your rates will be. On the other hand, a car that is less safe, more expensive to repair or popular with thieves will cost more to insure. (For tips on reducing your rates, see 12 Car Insurance Cost Cutters.)
If you are in a car accident, having your auto insurance company’s app on your phone can come in handy. It can guide you through the process of what to do next, take accident photos, record incident details and help you file a claim. Insurance apps also make it easy to pull up your proof of insurance, track a claim, message an agent and contact roadside assistance.
As we explained in section 3, mortgage lenders require borrowers to carry enough homeowners insurance to cover the full replacement cost of the home’s structure. As with auto insurance, you’d want homeowners insurance even if it wasn’t required because the potential loss will likely be more than you could afford. For a home, it could reach into the hundreds of thousands of dollars (or millions, for some houses). If you make substantial improvements to your home that significantly increase its value, you’ll want to increase your homeowners insurance coverage so that you can rebuild your home in its updated form if it is totally destroyed. Homeowners insurance also covers your possessions whether they’re in your home, with you on a trip or in your car. (For background reading, see Beginners' Guide to Homeowners Insurance.)
Homeowners insurance comes as a standardized contract depending on which type of coverage you need. Each contract is called a form, and there are eight of them, numbered HO-1 to HO-8. HO-1 is the simplest and covers damage from 10 things, which the insurance industry calls “named perils.” These are fire or smoke; explosions; lightning strikes; hail and windstorms; theft; vandalism; damage from vehicles; damage from aircraft; riots and civil commotion; and – wait for it – volcanic eruption.
To get more coverage, you’ll want HO-2 or “broad form” coverage, which insures against everything in HO-1 plus damage caused by falling objects; the weight of ice, snow, or sleet; the freezing of household systems; the sudden and accidental tearing apart, cracking, burning, or bulging of pipes and other household systems; accidental discharge or overflow of water or steam; and sudden and accidental damage from artificially generated electrical current.
Still better is form HO-3, the most common type of homeowners insurance, which covers everything that could possibly go wrong with your house except for perils that are specifically excluded (and there are plenty of exclusions, which we’ll discuss in a moment). HO-4 is for renters, and HO-5 offers the most inclusive homeowners coverage of all the forms. HO-6 insures condo units, while HO-7 covers mobile homes and HO-8 covers older homes that have unique insurance requirements. Older homes designated as historic landmarks, for example, can have unique repair requirements to maintain their special appearance and status. Samples of these forms are available through the Insurance Information Institute’s website. (For more insight, see Have the Right Condo Insurance? and 9 Things You Need To Know About Homeowners Insurance.)
1. Losses caused by ordinance or law, meaning, for example, that a local ordinance requires you to repair your property in a way that is more expensive than anticipated.
2. Earth movements, such as earthquakes, landslides and sinkholes. (You can, however, buy earthquake insurance in high-risk areas such as California.)
3. Water damage such as flooding and sewage backup. You can buy a separate flood insurance policy, and your mortgage lender will require you to if your home is located in a high-risk flood zone. You may want this insurance even if your lender doesn’t require it. (Learn more in Understanding Lender-Required Flood Insurance and Flood Insurance: Myths and Misconceptions.)
4. Power failure: Certain losses due to the power company’s failure are not covered.
5. Neglect: If you don’t attempt to preserve and protect your property at the time of a loss and afterward, the insurance company won’t cover the loss. In other words, make sure to call the fire department if your home catches on fire.
6. War: If your home is damaged by an act of war or seized for a military purpose, you’re out of luck.
7. Nuclear hazard: If a nuclear reaction, radiation or radioactive contamination damage your home, your insurance company won’t pay.
8. Intentional losses are not covered. So if you want a remodeled kitchen, don’t start a grease fire and then try to file an insurance claim. That would be insurance fraud. (Learn more in How Insurance Companies Detect Insurance Scams.)
9. Governmental action: If the government seizes, confiscates or destroys your home, your insurance won’t cover it. (See What to Do When the Government Wants Your Land.)
In addition, homeowners in hurricane- or tornado-prone areas may have to pay an additional hurricane or windstorm deductible or buy a rider or separate policy to protect against damage caused by these storms. (For more information, see our Hurricane Insurance Deductible Fact Sheet.)
Homeowners insurance deductibles work like automobile insurance deductibles. Your deductible is the amount you will pay when you file a claim that the insurance company approves and agrees to pay its share of. If you have a $2,000 deductible and file an approved claim for $10,000, your insurance company will cut you a check for $8,000. Homeowners deductibles sometimes come in percentages, such as 0.5% of the value of your home, which would translate to $1,000 on a $200,000 home. (Learn about factors besides your deductible that affect your premiums in How Are Home Insurance Rates Determined? and Highest Homeowners Insurance States.)
Renters insurance covers the value your personal possessions in the event of loss, theft or damage when they are in the apartment, house, townhome or condo you rent. Like homeowners insurance, it also covers your possessions while traveling or when they’re in your car. In addition, it provides personal liability coverage to protect you if someone is injured while visiting you. Many landlords require proof of renters insurance as a condition of being able to rent from them (sometimes this requirement trickles down from their own insurers, and sometimes it’s the landlord’s choice). The landlord’s insurance covers the structure and the grounds of the property you rent. The HO-4 form describes the 16 perils a renter’s policy covers. (Learn more in Insurance 101 for Renters and What Does Renter’s Insurance Cover?)
For both homeowners insurance and renters insurance, you should create a video or photo inventory of your home and its possessions to help you substantiate a claim, should you need to make one. The Insurance Information Institute’s free Know Your Stuff app can help you create a comprehensive inventory organized by room.
Umbrella insurance provides additional liability coverage beyond what your auto and homeowners or renters insurance provide. It protects you in the event that someone sues you for a large amount of money and wins. If you have significant assets or many earning years ahead of you – a lawsuit could mean a claim against not just your existing assets but also your future wages – umbrella insurance may be a wise purchase.
The policy itself tends to be inexpensive for the amount of coverage it offers, but you may need to increase your underlying policies to provide the maximum available liability coverage, which will cost more. Umbrella insurance also provides the legal defense you need in the event of such a suit and protects you against certain liabilities associated with having household help. (Learn more in Is Umbrella Insurance Only for the Wealthy? and It’s Raining Lawsuits: Do You Need an Umbrella Policy?)
In the next section, we’ll go over the basics of health insurance.Intro to Insurance: Health Insurance