>> Today we're going to be talking about
insurance, certainly an incredibly fun and
exciting thing to talk
about, right, insurance?
But insurance certainly is very, very
important in our life, if for nothing else
than to give us complete peace of mind.
I couldn't imagine how worried I would be
knowing that if my 14-year-old son that loves
to cook, if he caught the house on fire
and it would burn down I'd lose everything,
if my son catches the house on fire hopefully
everybody gets out safely, it burns down,
and then it is one big hassle in the
rebuilding phase and getting it built again,
but I know my insurance carrier is
going to come in, rebuild the house, I'll
probably be in a hotel paid
by my insurance carrier for awhile.
Or a car, if I'm driving home from school
today
and I'm looking down at something, changing
a CD or whatever, and I hit somebody, maybe
I hit a
person and that person ends up in the hospital
and it's $80,000, $90,000, $200,000 of medical
bills I know that I don't have to come up
with that $200,000, that that's going to
be come up by my insurance carrier.
So the biggest thing we get in insurance
is peace of mind knowing that one mistake
or misstep isn't going to destroy
everything that we've worked for.
So what is insurance?
Basically, insurance is protection
against a possible loss, and when we look
at an insurance company,
basically what the insurance company is in
business to make money, and
the product that they're going to sell you
is basically risk sharing.
You give them some of your risk, so now they
have the risk of your house burning down,
and why the heck are they going to shoulder
the risk of your house burning down?
Because you're going to send them a premium,
you're going to send them $800 or $600 or
whatever that is and they are going
to take on that risk for you, all right?
So what are some of the procedures?
First off, we're going to go out and we're
going to write a policy or we're going to
get a policy, and within that policy
it's going to delineate all my coverages.
So I need to be able to read that, you know,
how
much is it going to pay if the house burns
down, if someone breaks in and steals all
your
stuff how much are they going to pay, are
there limitations on things
that they're going to pay?
Like, typically, within a policy they say
we'll cover your contents of your house for
20% of the value of your house, so if your
house
is worth $400,000 they'll cover only $80,000
of merchandise within your house.
And there tends to be further limitations
where they say we will only spend up to $1,500
on your quote, unquote collections
of whatever it is.
So if you've got a $100,000 stamp collection
or an $80,000 coin collection you have to
get what's called a rider and buy more
coverage if you want insurance on those items.
And so you want to look at
what all those exclusions are.
And certainly they will write an
exclusion or what's also called a rider where
they will give you $100,000
worth of coverage on collections, but they'll
obviously charge you a
premium because they're taking that risk,
and that might be something that
works out very well for you.
So let's talk about a couple
of the common terms.
One is a risk, right, the chance of loss or
injury, so basically you dying is a risk.
We then have what's called a peril, a peril
is anything that causes that thing to happen,
right, wind, storm, robbery,
getting shot, right?
The peril is getting shot, the risk is me
dying.
And then we have the hazard, a hazard is
anything that increases the likelihood of
the peril to happen in which
then the risk occurs of you dying.
So one of the hazards that I don't face an
awful lot of times, especially on drunk drivers,
I'm not out on the road at two a.m. very often,
so therefore I try not to face that hazard,
and if I don't face that hazard then
I am not put in peril nearly as often as other
people are, although certainly there's
drunks driving around at two in the afternoon,
we all know that, which then
really reduces my risk of dying or getting
hurt severely within an accident.
So what are the most common types of risk?
Well, certainly loss of income or life,
I die -- loss of income is I get hurt, I get
hurt in a car accident, I can't
work, I no longer get a paycheck.
And so something needs to come in to pay
for that, whether that's state disability,
federal disability or a private
disability policy I have through my employer
or someone else.
We have property risks, right, property risk
is
basically my property is destroyed or stolen.
And we also have here what
are called liability risks.
Liability risks mean I did something stupid
and because I did something
stupid someone else got hurt or someone else's
property got destroyed, and
when you're negligent you have to pay for
that.
So if we look at a couple things,
I'll give you a story of negligence and then
also how negligence can grow.
If you're a volunteer typically you're
shielded from basic negligence, not always
but typically, so what could that mean?
That could mean you're playing baseball and
you've got a whole bunch of nine year olds,
and the bases are loaded and up
steps the biggest, heaviest hitter, bottom
of the ninth inning, although nine
year olds don't play nine innings but bottom
of the ninth inning, and so you take your
third
baseman and you move him five steps forward
so that this big hitter, he can field the
ball and throw the person out at home plate.
But the big kid, who is the best
hitter in the league, smashes the ball, hits
the nine year old in the head.
Every single coach is probably going
to get called for negligence on that, that's
just incredibly negligent,
dealing with a nine year old.
When we determine negligence we have
what's called a reasonable man theory.
What would a reasonable person
in that position do?
And it changes, and this is why there's
lots of lawsuits, and there's -- and different
people can come to
different reasonable conclusions.
Some people would say, yes, no problem
moving that kid up to cut-off the run.
Most people would probably say the
kid is nine, what are you doing?
It's just a double A little
league game, what's going on?
Much different than if it's the CIF
championships, high school varsity baseball
and it's the bottom of the
ninth, bases are loaded, this basically is
for the entire
southern California championships.
You move that third baseman forward,
who is a 17-year-old kid, still a minor, but
17 years old, six foot two, and a phenomenal
athlete, and your starting third baseman,
and he gets hit in the head, probably
not going to be considered negligence.
Some other places of negligence that you
need to be aware of, if you have a friend
over at your house and you
serve that person alcohol, and that person
gets drunk you are negligent in
serving alcohol until that person gets drunk,
if they fall down the stairs
outside that's your fault.
If they run into a tree with
their car that's their fault -- I'm sorry,
that's your fault,
and it's their fault, also.
If they get a DUI and someone gets killed,
and they want to trace it back to the fact
that you gave them five drinks
and then handed them their keys, you could
be potentially looking at
manslaughter, let alone being sued or anything
like that back for your negligence.
So there's negligence, basic negligence, especially
in a volunteer situation
you tend to be shielded from.
Basic negligence would be
back to that baseball analogy.
You've got a kid that comes up who is the
last
batter, who is not very good, and he strikes
-- and you move your third baseman in
five or six steps, they strike out.
Up comes the next batter, who is the
lead-off batter and one of the best batters
in the league, and you forget to
move that kid back five or six steps, odds
are that's just going
to be basic negligence, you should have moved
him back,
easy to make that mistake.
If you're a volunteer in that
situation you're probably shielded.
If you're a coach on a travel team
and that coach is getting paid and they're
a paid professional
odds are, no, you know, they're going to get
hit and
they are going to be liable.
Even if you're a volunteer you are
responsible for what's called gross negligence,
and I'll give you a story where I actually
had to quit as a coach of a baseball team
that my kids were on, that really bothered
me.
We had one kid on the team that was just a
problem player, and he had attitude problems
and everything else, and we
had benched him a few times.
And his mom was upset because now he
wasn't getting his league mandated innings
because he was such a problem, and we
would put this kid in and sometimes he'd be
out in center field and he would take his
glove and he'd put his glove up
over his head and pout.
And so we would look out there
and go, whatever, you know?
Kid wants to stand out there, that's his issue.
Well, then it came time for -- because
he only wanted to play in the infield.
So then it came time for his infield innings.
He picked up a groundball, threw it
to third base when he was supposed to throw
it to second, wrong base.
Small kid, nine years old, people
make mistakes, no big deal -- he gets so upset
that now standing at
shortstop he sticks his glove over his face.
Now comes the next kid up to bat, and we can't
get this kid to not take his glove off his
face.
The manager refused to pull the kid
out of the game, and I looked at him and said
you cannot leave a defenseless kid with
his glove over his face, standing at shortstop
with these baseball players, we were playing
a really good team, who are just going to
tee off, that kid is going to get hurt.
And so at the second pitch I
actually quit because I felt at that point
we were committing gross
negligence, which meant I am opened up for
a lawsuit and I would lose
even though I was a volunteer.
There's no way in my opinion anybody
could justify leaving that kid in, and if
that kid got hurt that's totally on us.
So you've got to keep that in mind, if you're
volunteering for an organization you'll want
to find out what their insurance coverages
are, and be mindful of what they're
expecting you to do.
And certainly when you do stuff with
kids, kids always get hurt, they do.
You play T ball and kids get hurt.
You play football and kids get hurt.
But would a reasonable person think that
what you're doing is reasonable, all right?
It might be very reasonable to take a
whole bunch of kids down some rapids that
are mild rapids during the summertime,
you know, during late in the summer when there's
not a lot of snow melt,
when they've never done it before.
It might be incredibly unreasonable at the
start of summer with lots of water flow and
horrifically big rapids, you might
look at that and say this is unreasonable
to take these kids down this
river, it is just too dangerous.
And in that point you've got to
speak up to keep yourself protected.
All right, so that's liability.
All right, there's a couple
different types of risks, also.
One is called pure risk.
Pure risk means that is a risk I take and
there
is no benefit to it, like my car being stolen,
there's no benefit to me if my car gets stolen.
There's no benefit to me if I break my leg.
Now some people may say, hey, if my
car gets stolen I get a new car, right?
Well, your car gets stolen, worth $5,000,
they hand you $5,000, you're
in the same place, right?
There's no up side.
Speculative risk has up side.
I go to Vegas, I put $5,000 on black, we
spin the wheel, if it lands on red I lost,
if it lands on black I just doubled up my
money,
if it lands on green the house takes everything.
So as long as there is upward potential
then it is an uninsurable risk, I can't -- I
am unable to insure my bets in Vegas, I
cannot insure my bets at the sport book, I
also cannot insure bets that I make in
the stock market, where I put $100,000 on
General Electric and now it's gone down and
I want someone to cover those losses, right?
There's upward potential,
instead of losing $10,000, $20,000 I might
have made
$10,000, $20,000, $30,000, okay?
All right, this is kind of all the
different ways that we can deal with risk.
The worst thing we can really do is to take
a
risk and not even realize we took that risk.
There's some great danger out
there that we're blind to, and so we want
to be able
to look at all our risks.
And so what are some ways to manage risk?
Well, one thing we could do is risk avoidance,
you know, the odds of me being killed jumping
out of an airplane are incredibly small because
I really don't plan
on jumping out of an airplane.
I could avoid risk of drowning by not swimming,
but certainly we cannot avoid our risks.
And so we engage in a lot of times
in what's called risk reduction.
And, I mentioned this before, I am not
on the road very much after two o'clock because
I remember how much I drank and
was on the road when I was 20, 22, 23, and
I don't want to be out there when all
of you guys are out there driving around.
So to make myself safer driving I
don't drive late at night like that.
I always wear my seatbelt.
I buy a car that has a five star crash rating.
I tend not to weave in and out of traffic.
So a lot of things, I try to keep my eye open
for other people who are going to run into
me, so I do a lot of things to
try to reduce that risk.
And then there's some risks
that we just have to assume.
So there's a lot of things that I love to
do.
I like rock climbing, I work out, you know,
rock climbing is a very dangerous sport.
There's certain things that I try
to do there to mitigate that risk, but I just
know that that's a
risk that I'm going to take, and I get a lot
more benefit
emotionally, physically out of doing that
than I would out of avoiding it.
And then we get into what's
called risk shifting, okay?
Risk shifting basically says here's this
huge risk, I don't want to take it but yet
I still want to engage in that
activity so I'm going to shift that risk onto
another person, i.e. an insurance carrier,
and get them to cover in
a case bad things happen.
And they accept that risk for a premium,
and within that premium there tends to be
what's called a deductible.
Deductibles are part of you
assuming some of that risk.
So like on your car, most people
have either a $500 or $2,000 or $2,500 deductible
on their car.
Mine happens to be $5,000.
So what I say is if I get in a car
wreck I will cover the first $5,000.
The insurance company will
pick-up everything after $5,000.
I get a pretty good discount by me
assuming the first $5,000 worth of risk.
Other people assume only $500.
We couldn't have a zero deductible
on everything, including door dings.
Can you imagine how expensive auto insurance
would be if every time you got a door ding
in a student parking lot or at a mall you
looked at it and go, hey, I'm going to take
this down to the insurance carrier and
have this door ding pulled out and have that
whole door repainted?
And that'd probably happen twice a year,
you'd probably see your insurance go up $1,000
just to cover door dings.
And we don't want to pay
$1,000 for door dings, right?
So I'm going to assume that risk.
There are some things where I might take a
decision and assume all of the risk of a peril
because I think it's in my financial best
interest to do so, especially within a business.
So what I'm going to do is I'm going
to slide over to the board right now and give
you one of those examples.
We're going to cover risk assumption.
Insurance companies are willing to assume
risk because you're going to pay
them to take that risk.
The insurance company has to pay off
whatever the risk is and the peril, they've
also got to cover their overhead
and they also have to make profits.
So if you can set-up a system to
assume the risk in a logical manner without
hurting yourself too much
then more likely than not you're going to
come out way ahead of the game.
So let me give you an example, when I was
working at an antique store we did a lot of
wholesale, we brought in
containers from England, from Germany, and
some stuff from South
America, but primarily Europe.
And we had a container come in
pretty much every other week.
We got about 24 containers every single
year, right, a 40-foot container.
So we got about 24 containers a year,
and each of these containers had about $45,000
worth of merchandise, okay?
So let's just make it easy and say
it had $40,000 worth of merchandise.
To get an insurance policy to cover this $40,000
cost us $1,500, now it covered this container
in case this container got lost at
sea, got stolen on the way to the port, got
stolen after it got dropped off
to our place, before we were able to get this
thing unloaded and in.
And so these containers, if you've seen
them they've got wheels on the back.
A lot of times they're also called piggybacks
on the water, but they'll load them up and
ship them, and they'll
bring them to our place.
We basically bought everything online or we
went over and we would send buyers over there,
they'd send us photos, and we would
purchase these items, all right?
Well, $1,500 is a lot of money
to insure a $40,000 container, and the way
the insurance was set-up it
was $1,500 for $100,000 worth of coverage.
And then each next $100,000
cost you $500, all right?
So it was just kind of the basic
type of insurance you bought.
You want to insure your container
for $100,000 you paid $1,500.
The pure loss ratio of these was around $400,
but they got their salespeople, overhead,
profit, so they have to make the money.
And so the question comes about
in this first one was do we want to buy insurance
for these containers?
Are we better off not buying
insurance for these containers?
And so we went back and looked
and tried to figure out how many containers
were losing every
single year or every single three years?
So the first thing that we're going to
do is take $1,500, divide it into $40,000
to see how many containers we
have to go to actually break even.
So let me take $40,000 divided
by $1,500 and that gets us 26.6, so we were
getting two a month, we were
getting about 24 containers a year, and so
if we lost one container a year
we would lose a little bit of money.
If we went, say, 18 months between losing
containers we would make more money.
And so I talked to our boss
and just saying, hey, you know what we should
do, we
need to open up another fund.
And so we actually opened up a bank account,
and every time we brought a container in we
stopped buying insurance, and we
dropped the $1,500 into a savings fund.
This is also called self-insurance,
when you start doing self-insurance.
When you're doing this, a couple things,
business wise you have to make sure, A, what
happens if I lose the first container?
Am I out of business?
What if I lose the first two containers?
How much trouble am I in?
And so we came up with three basic
policies that we felt to protect ourselves.
One is we did not have more than one container
on any ship, and the reason we didn't want
more than one container on any ship
is so that if the ship goes down we don't
lose two containers
that are uninsured.
The other thing that we did is we trained
our employees very, very highly, and said,
you know what, when these things get
delivered you need to unload them that day,
nothing stays in the container.
Because all the merchandise that
was in this container is uninsured.
Once the container was unloaded and the
merchandise, whatever that merchandise might
be, was placed into our warehouse we
were then covered by theft insurance.
The third thing that we did is we told all
the
delivery companies we will not take delivery
after three o'clock and we will not take
delivery on the weekends because we need to
get the container early enough in the
day that we can unload everything and get
it into the warehouse because there's lots
and
lots of rings that go around and steal trailers,
and that worked very well, all right?
We also brought in containers which
in the industry we call them smalls, it's
a 40-foot container, but what you do
is you have all the small stuff on it -- figurines,
silver, little rocking chairs,
china, silver tea servings, cups, saucers,
serving platters, all that type of stuff,
and all that little stuff adds up really fast
when you're looking at space versus, say,
putting in beds, armoires, nightstands, those
take up a lot more room and are
a lot less valuable per square foot.
These small containers that we had coming
in
typically had $750,000 of merchandise on them,
and so when we looked at these
containers we tried to say if we lost that
container would it significantly
impact our business?
And the answer to that was yes.
We typically don't have $750,000 within
that business that we could absorb.
We could absorb $40,000, we wouldn't
like it but we certainly could absorb it.
We would really struggle at absorbing $750,000,
plus how much does it cost
us to insure $750,000?
Well, $1,500 for the first
$100,000, and then the next $700,000 at $500
per $100,000 costs us $3,500, so that's
$3,500 plus $1,500 for the first $100,000,
gets us $5,000 to insure a container that's
worth $750,000, plus we're only bringing in
two of these typically a year,
sometimes three, rarely four, but typically
we were brining in two.
So then what we need to do is take
$5,000, divide $5,000 into $750,000, and then
divide by two as far as those
are the number coming in every year, and pretty
soon you see to break
even we can't lose one of these for, I think
I calculated it out, about 75 years.
And so it's going to hurt too
much, the payoff is not there, and so we made
the decision these high-value
containers we were going to insure.
And so these we insured.
In a 10-year period we took in 24 containers
per year, times 10, was 240 containers.
Of those 240 containers we lost three
on the -- in the entire 10 years.
One of the containers we lost when a ship
went
down, certainly nothing we could do about
that.
Another container we lost when a
ship started to list to the side and the captain
made the decision that he
was going to unhook a bunch of containers
and using their cranes just started
tossing containers off into the ocean.
He tossed a couple hundred containers to
re-right his ship, and our container was one
of the few hundred that got tossed off.
And so a lot of people then would think,
well, hey, can't you sue and get that back?
No, that's why you're supposed
to have insurance.
The captain of a ship that's in trouble is
trying to save the lives and souls on the
ship, they can pretty do much anything.
The right move for that captain was to toss
everything over the side, as much as he could.
And he did save the ship and save
the crew, so that was the good move.
Our third container that we
lost was purely our screw-up.
We had a trailer that came in real late on
a Wednesday night, right before closing, we
closed at eight, came in at
seven-thirty to drop-off a container.
We said, hey, we don't take deliveries
late at night, we just don't do it.
And it happened to be the
Wednesday before Thanksgiving, and the next
thing you know the driver
is crying, the driver is showing photos of
his family and everything, and our guy feels
horrible because he was going to deadhead
back to Salt Lake City so he could see his
family
for Thanksgiving, but if we didn't take it
and we're closed Thanksgiving then he misses
Thanksgiving and he delivers on Friday.
And so our guy said, okay, signed, took
the trailer, set the trailer there.
Six hours later the trailer was
stolen, part of I'm sure a ring.
That guy got back into his cab, odds are he
called somebody, who called somebody, who
said, hey, I dropped off a trailer
in front of an antique store, probably a lot
of high value items.
And so we didn't even follow our own policy.
Very upsetting, I wasn't
really happy with the employee, but that employee
was an incredibly good
employee, he was a family person, also, feeling
very empathetic for this guy who
wants to see his family on Thanksgiving, and
so we just really reiterated to
everybody you cannot take these deliveries,
and we didn't fire the person or anything.
I mean we all make mistakes,
that's what happens.
And so we lost in three containers at about
$40,000 each, $120,000 in a 10-year period.
We also then took 240 containers times
$1,500, and we ended up with $360,000.
So we had about $360,000 in this fund.
We subtract out our losses, and we're not
doing too bad here, we're to the good $240,000
over a 10-year period, we saved by not paying
this extra money in insurance premiums.
If you're not going to buy insurance for something
this is the type
of thinking that you need to do.
Sit down with the numbers, run the
numbers, and does it make sense?
Occasionally I don't have theft on my car,
sometimes my cars aren't worth all that much,
they're worth a couple thousand bucks,
theft and comprehensive maybe it's going to
cost me $150, $200 for the year.
And I say, you know what, for $500 I'm going
to keep this car for maybe three years, if
it gets stolen I'm not that much more ahead
of the game, I am going to take that risk
because I think it's the
right financial decision.
The worst type of thing to do is say, you
know what, these $40,000 containers we are
so broke we cannot afford to buy insurance.
Once you get into a position where
you cannot afford to buy insurance and you're
taking risks you
really don't want to, that's a totally different
animal,
and you're probably in trouble.
The more money you have,
the more risk you can take, and so while I'm
in a pretty decent financial
position, I have $5,000 deductibles on my
car and $5,000 deductible on my house.
The reason I do that is my premiums are
really low, but I can sustain a car accident
and a house problem, maybe if I drive my car
into the house, right, I'll lose $10,000.
I can afford to sustain that, so therefore
I save a little over $1,000 a year on my insurance,
as long as I can go
five years without an auto accident, five
years without a house
claim I am ahead of the game.
And currently so far, knocking on
wood, I'm still ahead of the game.
All right, so this would be risk
assumption, and this type of thing works,
whether it's a business, whether
it's yourself, or anything else.
So I would like to thank you, and
that's going to be the end of insurance.
Have a great day.
