BASIC PRINCIPLES OF PROPERTY INSURANCE
by
Charles Lamson
Suppose that a severe storm destroyed your home. Could you afford to replace it? Most people could not. To protect yourself from this and other similar types of property loss, you need property insurance. In addition, every day you face some type of risk of negligence. For example, you might be distraught over a personal problem and unintentionally run a red light, seriously injuring a pedestrian. Could you pay for medical costs? Because consequences like this and other potentially negligent acts could cause financial ruin, appropriate liability insurance is essential. |
Accordingly, property and liability insurance should be as much a part of your personal financial plans as life and health insurance. Such coverage protects the assets you have already acquired and safeguards your progress towards your financial goals. Property insurance guards against catastrophic losses of real and personal property caused by such perils as fire, theft, vandalism, windstorms, and other calamities. Liability insurance offers protection against the financial consequences that may arise from the insured's responsibility for property loss or injuries to others.
People spend a lot of money for insurance coverage, but few really understand what they are getting for their premium dollars. Even worse, the vast majority of people are totally unaware of any gaps, overinsurance, or underinsurance in their property and liability insurance policies. Inefficient or inadequate insurance protection is at odds with the objectives of personal financial planning, so it is important to become familiar with the principles of property and liability insurance.
The basic principles of property and liability insurance pertain to types of exposure, the principle of indemnity, and coinsurance. Each of these principles is discussed in the following sections.
Types of Exposure
Most individuals face two basic types of exposure: physical loss of property and loss through liability.
Exposure to Property Loss
The vast majority of property insurance contracts define the property covered and name the perils---the causes of loss---for which the insured will be compensated in the event of a claim against their policy. As a rule, most property insurance contracts impose two obligations on the property owner: (1) developing a complete inventory of the property being insured and (2) identifying the perils against which protection is desired. Some property contracts limit coverage by excluding certain types of property and perils, while others offer protection on a more comprehensive basis.
Property Inventory
 Do you know the value of all the property you own? If you are like most people, you do not, nor do you have an itemized property list for insurance purposes. This is especially important in the case of a total loss---if your home is burned by fire, for example. All property insurance companies require you to show proof of loss when making a claim, and your personal property inventory, along with corresponding values at the time of inventory, can serve as evidence to satisfy the company. A comprehensive property inventory will not only help you settle a claim when a loss occurs, but it also serves as a useful guide for selecting the most appropriate coverage for your particular needs.
Most families have a home, household furnishings, clothing and personal belongings, lawn and garden equipment, and motor vehicles, all of which need to be insured. Fortunately, most homeowners and automobile insurance policies provide coverage for these types of belongings. But many families also own such items as motorboats and trailers, various types of off-road vehicles, business property and inventories, jewelry, stamp or coin collections, furs, musical instruments, antiques, paintings, bonds, securities, and other items of special value, such as cameras, golf clubs, electronic equipment, and personal computers. Coverage for these belongings (and those that accompany you when you travel) often require special types of insurance.
To help policyholders prepare inventories, many insurance companies have easy-to-complete personal property inventory forms available. These inventory forms can be supplemeted with photographs or videos of household contents and belongings. For insurance purposes, a picture may truly be worth a thousand words. Regardless of whether inventory forms are supplemented with photographs or videotapes, every effort should be made to keep those docements in a safe place, where they cannot be destroyed---such as a bank safe-deposit box. You might also consider keeping a duplicate copy with a parent or trusted relative. Remember, you may need these photographs and inventories if something serious does happen and you have to come up with an authenticated list of property losses.
Identifying Perils
Many people feel a false sense of security after buying insurance because they believe they are safeguarded against all contingencies. The fact is, however, that certain perils cannot be reasonably insured. For example, most homeowners or automobile insurance policies limit or exclude damage or loss caused by flood, earthquake, mudslides, mysterious disappearance, war, nuclear radiation, and wear and tear. In addition, property insurance contracts routinely limit coverage on the basis of location of the property, time of loss, persons involved, and the types of hazards to which the property is exposed.
Liability Exposures
We all encounter a variety of liability exposures daily. Driving a car, entertaining guests at home, or being careless in performing professional duties are some of the more common liability risks. Loss exposures that result from these activities are examples of negligence---the failure to act in a reasonable manner or take necessary steps to protect others from harm. However, even if you are never negligent and always prudent, someone might think you are the cause of a loss and bring a costly lawsuit against you. The judgment could cost you thousands---or even millions---of dollars. A debt that size could force you into bankruptcy or financial ruin.
Fortunately, liability insurance coverage will protect you against losses resulting from these risks, including the high legal fees required to defend yourself against suits that may, or may not, have merit. It is important to include adequate liability insurance in your overall insurance program, either through your homeowner's and automobile policies or through a separate umbrella policy.
*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 396-397*
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