Question 1: You are given $1000 cash and have to choose one of the two options below, which would you choose?

Option 1 (Take a Risk) – Flip a coin. If its heads you get $1000 more and if its tails you get $0 more

Option 2 (Play it Safe) – You automatically get an extra $500

Question 2 – You are given $2000 cash and have to choose one of the two options below, which would you choose?

Option 1 (Take a Risk) – Flip a coin. If its heads you lose $1000 and if its tails you lose $0

Option 2 (Play it Safe) – You automatically lose $500

What option did you choose in each question? For Question 1 the majority of people chose Option 2 to play it safe and take the garanteed gain of $500. However, for Question 2 the majority of people chose Option 1 to take a risk of losing more in order to have of a chance of not losing anything.

The funny thing about the the study is that each question actually has the same possible outcome . Both questions give a 50/50 chance in Option 1 to end up with either $1000 or $2000 and Option 2 always guarantees $1500. So why did the majority of people switch their answer to take more risk in Questions 2 when the outcome is the same as Question 1?

It all has to do with how the question or situation is framed. When a situation is dealing with a potential gain (Question 1) people tend to ”Play it Safe”, however when a situation is dealing with potential loss (Question 2) people tend to “Take a Risk”.

This made me think how insurance is more like Question 2 because nothing can be gained by buying insurance. You either pay a premium and never use it (loss) or you use the insurance and it puts you back to the same position before the loss (no gain). The more important insurance implication is that people may be taking more risk without knowing it by either not buying insurance or not buying enough insurance. They look at insurance like Question 2 and tend to react using the Option 2 mindset of taking more risk in order to avoid an immediate financial loss (paying a premium).

Overall, I am not suggesting that you should handle risk by purchasing insurance for everything. However, when dealing with an insurance decision or any other loss situation,  beaware that loss aversion part of your brain could be influencing your decision.

So why did I reference monkey’s in the blog title? The study found that monkeys behave the same why as humans when they were presented with the same two questions but I’m not attempting to explain that one! View the entire presentation here “A Monkey Economy As Irrational As Ours” by Laure Santos.

This past week J.D. Power and Associates released a new report that rated the car insurance shopping experience for 21 insurance companies. The report gathered responses from over 14,500 shoppers who rated each insurance company based on policy offerings, local agents, call center representatives, insurance company website and price. Below is the summary of the 2010 J.D. Power and Associates report or click here to view the entire report.

The report summary above clearly shows that the car insurance buying experience is not the same for all companies and comparing car insurance quotes solely on price does not tell the whole story. So whether its protecting your family with a new car seat or car insurance, make sure other resources such as 3rd party reports are used to help make the right decision for your family.

What other factors do you consider when shopping for car insurance?

When Does a Home Improvement affect my Homeowner Insurance?

The amount of insurance on your homeowner policy is based on the Replacement Cost or the cost to rebuild the home. So when you make an improvement or renovation to your home that increases its Replacement Cost value, your homeowner insurance needs to be updated. However, not all improvements affect your home’s Replacement Cost value. Most minor improvements such as painting, new windows and doors do not affect the Replacement Cost value of the home because you would be replacing existing home features with those of similar kind and quality. However, any home improvement that adds a new feature or is an upgrade does affect your Replacement Cost value and your homeowner insurance policy. Here are just a few examples of improvements that do affect a home’s Replacement Cost:

- Adding a porch or deck

- Adding a new bathroom

- Adding central air conditioning

- Finishing a basement

- Building a garage

- Remodeling a standard kitchen to a customized kitchen

Why is it important to update your homeowner insurance?

1. The Home Impovement May Not be Covered – Most homeowner insurance policies require the value of the home on the policy to be maintained at 100% of its Replacement Cost value and any improvement affecting the Replacement Cost value must be reported to your insurance agent or company. Any improvement not reported most likely will not be covered in the event of a loss.

2. Some Losses May Not be Paid in Full - If the value of the home stated on the homeowner insurance policy falls below 80% of the Replacement cost value, all partial losses may not be fully covered. For example, if you have a covered $10,000 fire loss to any part of the home, you could end up receiving less than $10,000 if the home is insured to less than 80% of its Replacement Cost value.

Overall, it is important to understand that any home improvement may require insurance improvements too. Otherwise, those improvements may not be covered in a home insurance claim and any other home insurance losses may not be paid in full. Make sure to talk with your agent or insurance company to find out if your home improvments affect your specific homeowner insurance policy.

Have you made any home improvements that affect your insurance lately?

1. The Savings Data Is National- One of the most important pricing factors for car insurance is location. For example, car insurance prices in Lancaster, PA are significantly cheaper than New York, NY. In addition, some car insurance companies tend to have more competitive prices in specific states and even counties. However, most insurance companies use National data to promote their average savings on television and it may not be an accurate picture of how competitive they are on a local level. Car insurance prices are very similar to real estate, it is all about location, location, location.

2. The Savings Data May Not Be Current – I understand that it takes time to compile National savings data for these commercials, however, one car insurance commercial I saw had fine print on the bottom of the screen saying the data was from 2007. Nearly every car insurance company has increased prices since 2007 and some insurance companies have taken double digit prices increases in 2010. Depending on when the last time a car insurance company increased rates, a car insurance commercial even with data from a year ago may be completely out dated.

3. The Savings Data Is Not The Whole Story – My biggest pet peeve with any marketing claim about saving money is that the savings amount is not only part of the story. The other half, and more important part, of the story is how often the savings occurs. A company with just 1 customer who saved $400 per year can make the same claim as another company who saved 10,000 customers an average of $400 per year. However, the only thing talked about in car insurance commercials is the savings amount. If you are shopping car insurance, wouldn’t you want to talk with the company who saves customers money and does it often?

Someone once told me that you can crunch data to make it say anything you want. Keep this mind the next time you see a car insurance commercial and how much you could save if you switch.

Misconception 1: I Don’t Need Insurance because My Business is Too Small

Most people do not consider their hobby or part-time work from home as a business since it is not their main source of income. Thus, they do not even realize that they need insurance for a home based business. If you answer yes to the following 3 questions, you probably have a home based business along with all the risks and rewards associated with owning a business

- Is it a trade, profession, occupation or hobby

- Is it full-time, part-time or occasional

- Is the activity engaged in for money or any other type of compensation

Misconception 2: Doesn’t My Homeowners Insurance Cover My Home Based Business

Homeowners insurance policies were never intended to cover business exposures. The purpose of the homeowners policy is to protect insureds during personal activities. Neither the coverage nor the premium charged is intended to cover a business activity exposure. Thus, most homeowners insurance policies have very limited coverage for most home-based businesses. Below are the common business coverages and exclusions offered on most PA homeowners insurance policies

- No business liability coverage of any kind –no on-premises liability, no-off premises liability, no products liability, no professional liability, Workers Compensation liability, etc.

- No coverage on any detached structure, for example a shed or garage, if used even partly for to conduct business

- Minimal coverage on business property such as computers, fax machines, filing cabinets, tools and inventory – typically $2,500 in your home and only 10% or $250 away from home

What are My Insurance Options for a Home Based Business?

The insurance solution for a home based business is unique for each situation but most can be protected by using one of the following.

- Incidental Business Endorsement – Depending on the type of business and insurance company, you may be able to add an endorsement to your homeowners insurance to extend liability insurance for your home based business. This coverage usually costs around $30-$50 per year but it only covers on-premises business liability only.

- Businessowners Policy (BOP) – A BOP is a package policy that is designed to provide property and liability coverage for some small businesses. Generally, small businesses whose activities or operations involve processing and/or service are eligible for a BOP. Manufacturers, especially with complex liability issues, are not suited for a BOP. A BOP policy can cost as little as a few hundred dollars and it has several optional coverages that can be tailored to fit an individual business.

- In-Home Business Owner Policy – Some insurance companies offer a policy that combines a homeowner and BOP into a single policy and are designed specifically for home based businesses. The policies eliminate gaps and duplications in coverage and the rates reflect the in-home status of a business.

Don’t Risk A lot For A Little

Millions of Americans are operating a home based business without knowledge that they have little or no insurance protection. In the event of a loss, they could be underinsured or uninsured leaving them personally liable. The solution to reduce or eliminate this potentially devastating risk is simple and can cost as little as $30 per year. Don’t risk a lot for a little!

Are you sure if you are covered by home based business insurance?

Chad’s question on what is covered and more importantly not covered is one of the most important questions to ask when purchasing home insurance. Some people believe everything is covered for all reasons but home insurance policies have exclusions and coverage limitations. One example of those limitations are the 11 Special Limits for insuring your belongings (Coverage C). Note that the list below is based on a standard HO-3 home insurance policy and the Special Limits may be different for your specific insurance company. Make sure to check your policy or talk to your agent for the details of your policy.

1. $200 on money, bank notes, coins, precious metals, stored value cards and smart cards

2. $1500 on securities, accounts, deeds, evidences of debt, letters of credit, notes, manuscripts, personal records, passports, tickets and stamps (limit includes cost to research , replace or restore the information from the lost or damaged material)

3. $1500 on watercraft of all types, including trailers, furnishings, equipment and outboard engines or motors

4. $1500 on trailers or semitrailers not used with watercraft of all types

5. $1500 for loss by theft of jewelry, watches, furs, precious and semiprecious stones

6. $2500 for loss by theft of silverware, silver-plated ware, goldware, gold-plated ware, platinum ware, platinum-plated water and pewterware

7. $2500 for loss by theft of firearms and related equipment

8. $2500 on property, on “residence premises”, used primarily for “business” purposes

9. $500 on property, away from the “residence premises”, used primarily for “business” purposes.

10. $1500 on electronic apparatus and accessories, while in or upon a “motor vehicle”. Accessories include antennas, tapes, wires, records, discs or other media

11. $1500 on electronic apparatus and accessories used primarily for “business” while away from the “residence premises” and not in or upon a “motor vehicle”. Accessories include antennas, tapes, wires, records, discs or other media that can be used with any appartus described above.

Now you can see that these “Special Limits” might not be so special if you have an expensive engagement ring or a large amount of business property at home. Fortunately most of the these limitations can be resolved by either using non-insurance risk reduction methods outlined in our prior blog post or by purchasing the right insurance for an extra premium. The key is to be aware that these Special Limits exist so as your belongings change or increase, your insurance provides the coverage you expect. Also look for our future blog post dealing with the business property limitation listed above and other exposures that home-based businesses face.

Leave a comment below and let me know if you were surprised by any of the 11 “Special Limits”.

Who Must Purchase Workers Compensation Insurance?

The Workers Compensation section of the PA Department Labor & Industries’s (DL&I) website says, “If you employ workers in Pennsylvania, you must have worker’s compensation insurance - Its the law.”

That seems clear enough but how do you know if the person you are employing is actually an employee or a subcontractor?

Before I answer that question, I must point out that the PA DL&I website goes on to further describe who does and does not need coverage, as well as provides examples of the penalities incurred for employers who fail to provide coverage even though they should have. Also the PA Insurance Department website has a nice piece of information titled “Your Guide to Workers Compensation Insurance.” If you’re in business in Pennsylvania, I suggest you check it out.

The IRS Test

The best way to answer the question as to whether you have an employee or a subcontractor is by using the “IRS Test“. Basically, a subcontractor is defined by the IRS as a person whom you have the “right to control or direct only the result of the work and not the means and methods of accomplishing the results.” Whereas a worker is an employee if you “can control what will be done and how it will be done.”

The IRS test consists of three main catagories to review regarding how to classify your worker: behavior control, financial control and relationship of the parties.

Behavioral Control – This section deals with whether you demonstrate a “right to direct or control how the worker does the work.” Examples are type of or level of instruction and/or training afforded to your worker

Financial Control – This section deals with “whether there is a right to direct or control the business part of the work.” Examples are whether there is significant investment in the work or who is responsible for a majority of the expenses incurred.

Relationship of the Parties – This section deals with “how the business and the worker perceive their relationship.” Examples are employee beneftis and written contracts.

In many cases, the control you demonstrate over a worker, along with your relationship with that worker, can determine how to classify them. Take a look at Publication 1779, “Independent Contractor or Employee”. The document details the three catagories, as well as lays out several questions you can answer to help you better understand how to classify your workers. How you answer the questions in this publication can go a long way in determining whether you need to purchase a workers compensation policy.

In conclusion, determining whether a worker is a subcontractor or an employee can be difficult task. Each situation is unique and a local insurance agent is always a good source to answer questions or help with navigating any of the aforementioned websites. Are you sure if your business has contractors or employees?

NAIC Complaint Data for Erie Insurance Exchange

Insurance is an intangible service. It cannot be sampled, tested, touched or recycled. Thus, most people purchase personal and business insurance on the only tangible factor they can measure…PRICE. Although price is a major factor when purchasing insurance there are other factors that need to be considered when choosing the right insurance company.

One major factor to consider is if people are happy or satisfied with an insurance company. The last thing any customer wants, is to pay an insurance company for months or years and be disappointed when they have a problem or a claim. Thus, the National Association of Insurance Commissions (NAIC) compiles complaint data on nearly every insurance company and the information is available to the public!

5 Simple Steps to Get the Complaint Data

1. Paste the link https://eapps.naic.org/cis/ into your browser

2. Under the Company Search for Complaint and Financial Information section on the top right side of the page, enter your insurance company’s name. Then select PA as the Consumer’s Resident State and click the “Find a Company Button”

3. Click on “Closed Complaints Link”

4. Click on “Closed Complaint Ratio Report”

5. Select the insurance type (Ex-private passenger auto) and click the “Create Report” button

At this point you should have a report similar to the one shown in the picture above. The report shows an insurance company’s complaint ratio compared to a national median of 1.00. Any complaint ratio below 1.00 means the company is better than the median company and any company with a ratio above 1.00 means that they are worse than the median company.

Take advantage of this consumer data and find out what customers are saying about your personal or business insurance company…you may be surprised!

Your credit score is extremely important these days. Like your social security number, your credit score follows you wherever you go, whether it’s to get a mortgage, apply for a car loan, purchase insurance or even to get a job. So naturally, if you know how to check your credit and if you’re armed with tips on how to improve your credit score, you will be in better shape than someone who isn’t.

Main Factors That Affect Your Credit Score

- Your payment history. The most important factor to a potential lender is whether or not you will pay your bills in full and on time. The more recent your good (or bad) payment history, the more important it will be for your credit score.

- Your outstanding debt. The more credit cards you have that are maxed out, the lower your score will be. Try to keep your credit card balances at 25 percent or less of your limits.

- The length of time you’ve been building credit. The longer your credit history, the higher your credit rating.

- The number of inquiries on your credit report. The more times you’ve applied for credit cards or loans, the more credit report inquiries will show up on your credit report. A higher number of credit report inquiries may indicate that you’re struggling financially. However, there is also a myth about inquiries. All inquiries received with a 14 day period are seen as a single inquiry; shopping for credit several times throughout the year can raise a red flag. So, for example, it does not hurt when you have an auto dealer have several banks check your credit when you buy a new car.

- Steady employment. People who are steadily employed are viewed as being better able to pay their bills on time.

- Late or missed payments

- Using more than 80 percent of your total amount of available credit

- Bankruptcy, liens or foreclosures

9 Ways to Improve Your Credit Score

1. Review your credit report for any errors and correct glitches that may not be accurate (but are still hurting your current score). You can obtain a free copy of your credit report by visiting www.CreditReport.com.

2. Refrain from opening a lot of new accounts over a short period of time, especially if your credit history is on the shorter side to begin with.

3. Pay your bills on time.

4. Don’t open any credit lines you probably won’t use. For example, don’t open a lot of store credit cards just to get the initial 10 percent discount.

5. Instead of moving credit card balances to lower rate cards, try to pay them off. Transferring balances can change the ratio of your total credit card balances to your total available credit lines, hurting your credit score.

6. Open a few new credit accounts, use them responsibly, and make your payments on time.

7. Try to use your credit cards less. Even better, pay them off every month. The bigger the space between your total credit limits and the balance you carry, the better.

8. Contrary to what you may have heard, don’t close old, paid-off accounts. Credit companies used to advise people to close old credit cards they were no longer using. But closing these cards shortens your credit report and makes you seem less credit-worthy.

9. Avoid bankruptcy. Declaring bankruptcy is one of the worst things you can do for your credit score. It may seem like the easy way out in the short term, but over time it will cost you tons in the way of high interest rates.

Overall, keep in mind that negative items on your credit report are a lot more powerful than positive items. A late payment can affect your score in a month or two, while making payments on time can take six to 12 months to improve your credit rating. Also remember that having too much credit can be as bad as not having enough, if your credit has been mismanaged.

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Many property insurance policies provide coverage on your computers if they burn in a fire or get stolen.  However, that policy probably does not provide coverage against computer viruses, or the coverage might be limited.

Some insurance companies offer a special kind of coverage designed specifically for risks inherent with computers.  It is often called “Electronic Data Processing (EDP).”  This coverage usually provides insurance against computer viruses.  But it also provides much more!

Computers can be susceptible to breaking down, either mechanically or electrically.  This could include malfunction, short circuit, blow-out, electrical or magnetic injury, or even accidental erasure of data caused by electrical or magnetic injury.  An EDP policy would normally provide coverage for these types of losses.  (Typically not covered is electrical damage which originates more than 1500 feet from your property.)

Also provided in a typical EDP form would be coverage on your portable computers, such as laptops, notebooks or handheld computers while away from your property.  This equipment may have limited coverage on your standard business insurance policy.

So, if your business depends on computers you may want to consider looking into whether your business insurance company can offer you this type of protection.

Think of it as a handkerchief for your PC.