BUSI 687 Week 8 DB Forum 6 Example

Discussion Board Forum 6: Thread and Replies

BUSI 687 Insurance & Risk Management, Discussion Board Forum 6 (thread and two replies)

Thread by [Student Name]

The forum topic, the family, its vehicles and the classmates are composites standing in for the course's own; the textbook and research cited are real, and the requirements follow Liberty's public course guide for BUSI 687.

Thread

The topic describes a composite family that has just added a 16-year-old driver and traded a sedan for a full-size pickup. They carry 50/100/50 liability limits, $500 collision deductibles on both vehicles and no umbrella policy, and they own a house with $220,000 of equity plus $150,000 in investments. They ask what to change.

Dalton et al. (2018) divide the personal auto policy into coverage for the insured's own losses, such as collision, comprehensive and medical payments, and liability coverage, which pays others for injuries and property damage the insured causes. The family's attention has been on the first group, but their most severe exposure lies in the second. Their 50/100/50 limits mean the insurer pays at most $50,000 for any one person's injuries. A serious injury claim can exceed that many times over, and the excess becomes the family's own debt, reaching their equity and investments. Together those assets total $370,000, more than seven times the per-person limit, and a judgment can also reach future wages. The family is insuring its vehicles against a $35,000 loss while leaving a loss ten times larger mostly uninsured.

Both recent changes raise that exposure, and they compound each other when the teenager drives the truck. Williams (2003), reviewing patterns of risk among teenage drivers, reported that new drivers crash most often soon after they are licensed, and more often at night or with other teenagers in the car. White (2004) found that light trucks, including pickups, sharply increase the danger to occupants of smaller cars and to pedestrians, estimating that for each fatal crash that occupants of large vehicles avoid, at least 4.3 additional fatal crashes involving others occur. A heavier vehicle protects the family inside it while making any crash it causes more likely to produce a large claim. The pickup made the family safer in a crash and their savings less safe after one.

My cousin learned this after a crash in which the other driver was badly hurt. His policy paid its $100,000 limit, and he spent years paying the rest under a settlement. He had chosen low limits to save about $20 a month.

I would recommend raising the limits to 250/500/100, which most umbrella insurers require underneath, adding a $1 million personal umbrella and raising uninsured motorist coverage to match. To offset part of the cost, they could raise collision deductibles to $1,000 and ask about a good-student discount.

Reply to Kayla

Kayla, your thread recommended keeping the state minimum liability limits for your family's third car, which your son drives to his job, because the premium increase for adding a teen was already painful. I understand the budget concern, and you are right that teen drivers raise premiums substantially, sometimes doubling a family's bill in the first year. But the state minimum leaves the largest exposure almost entirely retained. Dalton et al. (2018) explain that liability limits cap what the insurer pays, and anything beyond them is owed by the insured, which in your family's case would include your son and, as owners of the car, you. Your son is in the stretch Williams (2003) identified as the most dangerous for new drivers, the months right after getting a license. The cost of moving from state minimum limits to 100/300/100 is usually much smaller than the cost of adding the teen in the first place, because insurers price most of the risk into the base coverage. You might find the savings elsewhere instead: dropping collision coverage on the older car, if its value is low enough that you would replace it from savings, retains a small loss rather than a large one. White (2004) also suggests checking what your son drives, since a larger vehicle raises the harm to others in a crash. Small, frequent losses are the ones a family can afford to keep; large, rare ones are the ones to insure. Would you be willing to compare the two quotes side by side, the liability increase against dropping collision on the older car, before deciding?

Reply to Owen

Owen, I agreed with your recommendation of a $1 million umbrella for your household, which owns a rental property and has two drivers under 25. Your experience as a landlord gave your thread a practical edge, especially your point that a tenant's injury claim could reach your personal assets if the rental is not held in a separate entity. Your thread also made the point, which I had not considered, that an umbrella can cover some claims the underlying policies exclude, such as certain libel or slander claims. I would add two details a planner should check. First, Dalton et al. (2018) note that umbrella insurers usually require minimum underlying limits on the auto and homeowners policies, often 250/500 for auto and $300,000 for personal liability, so your underlying policies may need to be raised before the umbrella takes effect, and that cost belongs in the comparison. Second, umbrella policies typically extend over rental properties only if the underlying landlord policy is scheduled on them, so the rental's liability coverage should be listed. Williams (2003) shows why your young drivers make the umbrella valuable: their crash risk is highest early in their driving, when a single serious claim could exceed even improved auto limits. White (2004) adds that the size of the vehicles they drive matters, since larger vehicles increase the harm to others. If either of your young drivers drives a pickup or large SUV, the case for the umbrella is even stronger. Missing either detail could leave a gap exactly where the umbrella was meant to help. Have you confirmed with your agent which underlying limits your umbrella carrier requires and whether the rental is scheduled?

References

Dalton, M. A., Dalton, J. F., & Langdon, T. P. (2018). Insurance planning. Money Education.

White, M. J. (2004). The "arms race" on American roads: The effect of sport utility vehicles and pickup trucks on traffic safety. The Journal of Law and Economics, 47(2), 333-355. https://doi.org/10.1086/422979

Williams, A. F. (2003). Teenage drivers: Patterns of risk. Journal of Safety Research, 34(1), 5-15. https://doi.org/10.1016/S0022-4375(02)00075-0