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.

Most small businesses have some idea about how organizing their business can reduce their liability. Many choose to either file their own corporate paperwork with the state or use one of the many pseudo-lawyer incorporation services available online or found in the “legal documents” section of an office store to save money. Granted, often the actual paperwork is not terribly complicated for a small business, but what these small business owners are missing out on is legal advice that they desperately need to ensure that their corporate identity survives an attack.

When properly filed and operated within certain parameters, corporations are considered to be separate entities. If a corporation does something that exposes it to liability, the corporation is the entity that takes the hit, the owner doesn’t have their personal assets on the line.

Consider this scenario: someone forms a corporation and goes out of town to present the business’s wares at a trade show. On route there is a car accident. Is the business liable for the accident or is the business owner personally liable? Similarly, consider what can happen if someone is harmed by a product the business sells; is the corporation he only entity liable or can the harmed product reach through to the owner’s personal property for compensation?

Generally, in either instance, the corporation is liable as a separate entity and the owners’ personal assets are unavailable to compensate a harmed party, however that isn’t always the case.

The act of setting aside the liability shield that a corporation provides is called “piercing the corporate veil,” and is more common than those selling incorporation kits care to mention. In fact, I’ve never encountered a corporation set up in such a manner that wasn’t at a high risk of losing its separate identity.

In Pennsylvania, there is a presumption against piercing the veil. In other words, it’s not an action a court takes lightly and, absent strong evidence to the contrary, the corporate shield will remain intact. That isn’t to say that it doesn’t happen. In fact, unless a harmed party is able to recover their damages entirely from the corporation one can be assured that an attempt to pierce the veil will be made.

The factors that a court will look at include: whether the corporation was sufficiently capitalized, whether corporate formalities were followed, whether there was a substantial intermingling of corporate and personal affairs, and whether the corporate structure was used to perpetuate a fraud. No single factor is normally going to be dispositive, although it can be.

The first two factors are usually tightly intertwined and many small corporations are under capitalized because there is such pervasive intermingling to personal and corporate affairs. In other words, many owners don’t treat the corporation like a truly separate entity. Some actions that can endanger the business owners along these lines include paying company debts out of a personal account, paying personal debts out of the corporate account, or keeping only a minimal amount in the corporation’s accounts. Also, it’s tempting to claim deductions for things purchased on a corporate account even when those things are destined for home use. All such actions are going to weaken the corporate shield.

Another common problem is that many small businesses, especially those with a single owner, completely ignoring corporate formalities such as holding meetings, keeping good records, having business plans, and conferring with tax or regulatory professionals as needed. It sounds silly that a corporation owned by a single person needs periodic meetings to discuss plans, but it should be done, even if there is only one person wearing all the hats, and detailed notes of these meeting should be retained. Lastly, some decide to form a corporation for nothing more than liability protection in the mistaken belief that doing so means that they can be save money on the appropriate insurances.

Those actions, alone or together, can lead a court to “pierce the corporate veil” and hold the owner personally liable for the debts of the corporation. If that happens, the initial money saved by foregoing appropriate legal advice and relying on an incorporate-yourself set of forms results in an anemic corporate form that gets brushed aside and the owners’ personal assets are available to compensate a harmed party. In such a case it’s probably better to have never formed a corporation since then the owner wouldn’t have the additional legal expenses from trying to defend an attack that the corporation won’t survive.

There are huge benefits to incorporating your business, make sure you take advantage of them.

Find other great blog articles for small businesses on Steve’s C3 Patent Law blog.

Picture via LancasterOnline (Dan Marschka/Staff)

According to LancasterOnline, this most recent Lancaster, PA storm had winds up to 70 mph and may have caused nearly $2 million in damage. Much of the damage was caused by fallen trees and many people are filing home insurance claims to pay for the damage and clean up. However, a standard home insurance policy does have coverage limitations for damage caused by trees and for trees themselves. Make sure to understand these coverages and limitations before submitting a home insurance claim to avoid any surprises.

My neighbor’s tree fell on my house, whose insurance pays?

Generally, who owns the fallen tree is not the determining factor of whose insurance will respond. The person who submits the claim is actually the person who owns the home that was damaged by the fallen tree. So if your home or other covered property is damaged by anyone else’s tree, your home insurance policy will respond. Likewise, if your tree falls on anyone else’s home or other covered property, their home insurance will respond.

The only time a home insurance policy should be involved with damage to someone else’s property is if the tree owner was liable. This includes a homeowner neglecting a rotten or leaning tree that should have been removed or trimmed prior to the damage occurring.

Will my home insurance replace my damaged landscaping and trees?

Trees, shrubs and other plants (including lawns) are covered on a standard home insurance policy but only for losses due to fire, lightning, explosion, riot, non owned vehicles, vandalism and theft. On the surface, this sounds pretty good, but did you notice that wind or ice are not included. So if your 100 year oak tree fell over due to wind storm, the insurance company will not pay to replace it.

Will insurance pay to remove my tree?

The cost to remove a tree is only covered if the tree damaged a covered structure on the insurance policy, if it blocks a driveway or if it prohibits access to the home. However, most home insurance policies have $500 or $1000 limitation to remove trees if a loss is caused by wind, hail, weight of ice, snow or sleet.

If a tree falls into your yard and does not cause any damage or restrict access, there is generally no coverage to remove the tree. Tree removal coverage varies based on the insurance company and it is best to ask your agent what your specific coverage limits are for tree removal before submitting a claim.

If you have any other tree related home insurance questions, let us know by leaving a comment below.

What Does Renter Insurance Cover?

Coverage for your Personal Belongings

Whether the contents of your home – furniture, clothing and other items – are stolen or destroyed in an insured disaster, such as a fire, they are covered under this part of the policy. However, just like a homeowner insurance policy, most renters insurance policies have special limitations for certain types of property.

Buy the replacement cost option. This will help ensure you get what it costs to “replace” your belongings at claim time and it only costs a few extra dollars per year.

Liability Protection

When most people think of buying renters insurance they want to protect their belongings, but the most valuable part of a renters policy is the liability coverage. Liability protection covers you against claims or lawsuits for bodily injury or property damage that you or your family members negligently cause to other people or property. It also pays for injury or damage caused by pets.

So if your son, daughter or dog accidentally ruins your neighbor’s valuable rug, you’re covered. But if they destroy your rug, your liability coverage does not provide compensation.

Your policy also provides medical coverage up to a specified limit. In the event a friend or neighbor is injured in your home, he or she can submit the medical bills to your insurance company. Expenses are paid without the injured party filing a liability claim against you.

Coverage for Additional Living Expenses

If you lose the ability to live in your apartment because of a covered loss this coverage pays for additional living expenses you incur due to temporary relocation. Note that it does not pay for the total expense, just the expenses due to the vacating of your home.

How Much Does Renters Insurance Cost?

Renters insurance is one of the best insurance buys on the market. Most policies in the Lancaster, PA area range between $50-$250 per year depending on the amount of personal property and the deductible on the policy.

Sometimes renters insurance can even be free! When renters insurance is also placed with the same company as your auto insurance, you can get a new discount on your auto insurance that can completely offset the cost of the renter insurance.

Although renter’s insurance is usually not required, it is just as necessary to have. It is a great example of using the philosphy of getting a lot for a little.

What it is

Hydroplaning occurs when built-up water on roadways is not sufficiently pushed out of the way by your vehicle’s tires when going at a regular or high speed. The water then causes your vehicle to rise and slide on top of a thin layer of water between your tires and the road. All traction is lost in less than a second and you have very limited control of your vehicle. 

There is no precise equation to determine the speed at which a vehicle will hydroplane. In general, cars hydroplane at speeds above 45 MPH , where water ponds to a depth of at least 0.10 inches over a distance of 30 feet or more.

What to do if it happens

If you find yourself hydroplaning, stay calm. Don’t brake or turn suddenly. Ease your foot off the gas, and hold the wheel firmly. Do not steer in any direction other than straight. If you do need to brake — and don’t have anti-lock brakes — do so gently with a pumping action.

How to prevent it

Drive slowly and carefully: When it’s raining or there is water on the road take your time around curves and steer and brake with smooth, light touches. Most of America’s roads are crowned, meaning water will run to the sides and puddles will accumulate. So, keep towards the middle of the road and drive in the tire tracks left by cars in front of you.

Be extra cautious at intersections: This is a common location where engine oil and water mix, creating extremely slick spots.

Check your tires: Worn tires will hydroplane more easily for lack of tread depth. Underinflation can cause a tire to deflect inward, raising the tire center and preventing the tread from clearing water. Tires that present the greatest risk are small in diameter and wide.

Add weight: More weight on a properly inflated tire lengthens the contact patch, improving its aspect ratio. This is more important for vehicles hauling unloaded trailers and empty pickup trucks with uneven weight distribution. Caution - weight can actually have the opposite effect if the tire is underinflated.

Avoid using cruise control: There is a chance that your car will accelerate if you hydroplane, and your reaction time will be slower if using cruise control.

Let us know if you have any questions, comments or experiences about hydroplaning below.

What is Term Life Insurance?

The “term” in term life insurance signifies the number of years the life insurance coverage will last, generally 10, 15, 20 or 30 years.  If you are just starting out with a new mortgage and a new family, you may want to consider a 20 or 30 year term, which will protect your family until your mortgage is paid off, your children are grown and you become financially independent.

Life insurance rates are based on your age, health (including whether you smoke) and your medical history. The younger and healthier you are when you purchase life insurance, the more likely you will be to receive the best rate, which remains unchanged for the entire term of the policy.

However, if you are a smoker or have a temporary medical condition which causes you to get a higher rate, you may be able to request a re-evaluation to lower your rate if you are able to quit smoking or fully recover from your condition after the policy starts.

How Much Do I Need?

The biggest question is how much life insurance should you purchase.  A quick and simple way to get an idea of the amount your family will need is to use the D.I.M.E. method.

Debt – Mortgage + Credit Cards + Auto + Other = ___________

Income – Annual Salary x Number of Years = ___________

Mortality – Funeral Expenses + Medical Expenses = ___________

Education – Annual Tuition x Years x Number of Children = ___________

Total Life Insurance Need = ___________

Current Life Insurance (-) = ___________

Current Life Insurance Need = ___________

Many home and auto insurance carriers also offer life insurance and will discount your home and auto insurance policies if you also place your life insurance with their company.

Contact a trusted insurance advisor to help you determine the best life insurance for you and the amount your loved ones would need to live after you are gone.

When Do I Need to Get Car Insurance for My Teen?

The simple answer is to check with your insurance agent. Each car insurance company has different requirements for adding new drivers. Some require that new drivers are added to a car insurance policy when they first get their permit and others wait until they are licensed.

Should My Teen Have Their Own Car Insurance Policy?

From a risk perspective, teen drivers should have their own car insurance policy. A separate policy for a teen is more likely to keep a teen’s accidents or violations from affecting the parent’s policy. This helps to protect mom and dad’s car insurance price from going up or being cancelled/non-renewed because of a teen driver. Note that for a teen driver to have a separate policy, most car insurance companies require that the teen’s car is solely titled or co-titled in the teen’s name. Also remember that car insurance follows the car. So if a teen gets into an accident while driving the parent’s car, the accident would be on the parent’s policy, not the teen’s.

From a price perspective it is usually cheaper to put a new teen driver on the parent’s car insurance policy. The parents normally qualify for more discounts and have a better insurance score that leads to lower insurance prices. Regardless, have an insurance agent quote a teen driver on their own policy and on the parent’s policy. The price difference may be small and worth separating the risk.

How Can I Keep the Price Low?

Stay Accident and Violation Free – Accidents and violations are the quickest way for a car insurance policy to skyrocket in price. One way to help prevent accidents and violations is communicating about driving tips and setting driving guidelines. Go to Pennsylvania Department of Transportation to share driver safety tips with your teen and learn how parents can effectively teach a teen to drive.

Shop Around – According to the PA Insurance Dept “A good rule of thumb is to get quotes from at least 3 different insurance companies”. Different car insurance carriers rate teen drivers differently and shopping a few different car insurance companies helps ensure the best car insurance solution for your family’s situation. Remember that the lowest price is not always the best solution and make sure to compare “apples to apples” when getting quotes.

Good Grades Matter – Most car insurance companies offer good grade discounts of 5-10% for students with a GPA of 3.0 or higher. Edmunds.com suggests finding out how much you can save if your teenager gets the discount and giving all or a portion of that money back to your teen. This not only provides a reward for academic performance but it motivates the teen to continue to get good grades.

Driver Training Pays – Most car insurance companies offer a driver training discount if a young driver completes a combination of classroom instruction and behind the wheel training from an accredited driver training course. Click here to find a driver training school near Lancaster, PA.

Don’t Finance a Car – Normally the biggest cost for a teen’s car insurance policy is the comprehensive and collision coverage, which covers damage to their car. Financed cars are required to carry both comprehensive and collision coverage because the financing organization wants to ensure that they get their money back if the car is damaged or totaled. The best advice is to buy a used and reliable car with safety features (airbags, ABS brakes, keyless entry) that does not require financing. That way you can choose to add comprehensive or collision coverage and keep the car insurance price reasonable.

If you have any other teen related car insurance questions, please leave them in the comment box below.

To help determine if raising your car insurance deductible is a good financial decision, you need to analyze the payback period.  The payback period is how long it would take to buy back your deductible from insurance premium savings. It can be calculated in 4 simple steps and is best explained by using an example.

Assume that our friend Mr. Fancypants is paying $1000 per year for car insurance and he currently has a $250 collision deductible on his car. To save money, Mr. Fancypants wants to increases his collision deductible to $500 making his auto insurance drop to $900 per year. Is raising Mr. Fancypants collision deductible the most economical decision using the payback period method?

Step 1: Calculate Retained Risk – When you raise your deductible that means you will pay more out of your own pocket before the insurance policy starts to pay.  Originally Mr. Fancypants would pay the first $250 for a collision claim but raising his deductible means he would now pay the first $500. Thus, Mr. Fancypants is retaining $250 of additional risk by increasing his deductible. (Learn more about retained risk in our prior blog article)

New Deductible – Original Deductible = Additional Retained Risk
$500 – $250 = $250 (Additional Retained Risk)

Step 2: Calculate the Savings – Since Mr. Fancypants is retaining more risk, the car insurance policy goes down to $900 per year and he saves $100 per year.

Original Premium – New Premium = Savings per Year
$1000 – $900 = $100 (Savings per Year)

Step 3: Calculate Payback Period – The payback period in this example is how long Mr. Fancypants would have to drive without having a covered collision claim to make his money back. It is calculated by dividing his additional retained risk (Step 1) by the additional savings (Step 2) for raising his collision deductible.  For Mr. Fancypants, he would have to drive 2.5 years without a covered collision accident claim before he would make his money back from the savings on his policy.

Additional Retained Risk / Savings per Year = Payback Period (yrs)
$250/$100 = 2.5 years

Step 4: Compare Payback Period – Since Mr. Fancypants does not actually know how long he will drive without having a collision accident, he needs a guideline to help make a decision. A general rule of thumb is if the payback period is less than 4 or 5 years, it usually makes financial sense to increase your car insurance deductible. Since the payback period for Mr. Fancypants is 2.5 years, the payback period method suggests that he should raise his deductible.

Remember that the payback period is just one guideline for making the decision to raise your insurance deductibles. Other factors to consider would include your likelihood to submit a car insurance claim, if you have the cash to pay the higher deductible and your prior driving record just to name a few.

Have you used the payback period to determine if your car insurance deductible are the most economical? Leave a comment below.