Just this week I got asked a question I am asked several times every year. I was speaking with a woman who had recently had a water loss at her home, and she was considering whether or not she needed our assistance with her homeowners’ insurance claim. Along the way, as it tends to happen, we talked about her insurance policy, what it generally covers, and what it generally doesn’t.
While homeowners insurance policies vary from company to company, there are many similarities when it comes to coverages and exclusions. Most policies cover by one of two methods – “all risk”, which certainly sounds like it covers the insured for just that, all risks, or anything that happens. Does anyone really believe an insurance company will pay for anything that happens to your property? Of course not. What they really mean, and what you should hear (in your head) when they say “all risk”, is that the insurance company will cover you for all risks that are not later excluded in the policy.
|Image courtesy of commins.wikimedia.com|
If the policy is not an all risk policy, it is what is called a “named peril” policy. With a named peril policy, you are given a list of perils that are covered, and also a list of exclusions. Generally, there are exceptions to the perils, and also to the exclusions. If the event that damaged your property is a named peril, you still need to review the exclusions, but if the event is not one of the named perils, it doesn’t matter what the exclusions are – it’s just not covered.
It might surprise you then to hear both policies appear to cover similar things, such as fire, windstorms, accidental pipe leaks, and theft, to name a few. Both types of policies tend to exclude similar things, such as wear and tear, mechanical breakdown, flood, pollution, rust, mold, repeated leakage, and more.
So what ‘s the difference?. There are two main differences. First, the all risk policy covers more items, simply because it covers the limited number of events listed in a named peril policy (and for that reason, it is both more expensive, and it is easier to market as a better insurance product). The other difference, at least as how it has been explained to me, is that with the all risk policy, the legal burden to prove a claim is not covered is on the insurance company; whereas with a named peril policy, the burden prove a loss is covered is on the insured.
After we talked about her policy and the coverage and exclusions contained, that’s when she asked the obvious question: “Why do I even have insurance anyway?”
|Image courtesy of en.wikimedia.org|
There are a few answers to this question (even though it’s almost always said halfheartedly). If there is a mortgage on the property, as is usually the case, the mortgage company requires the homeowner to purchase insurance to protect the mortgage company’s financial interest in the property. In that case, the homeowner has no choice, but it may be for the best. If there is no mortgage on the property, the homeowner does have a choice, and a decision to make. They could purchase insurance, or not.
Most people in this situation decide to purchase insurance rather than saving the money they would otherwise be spending on insurance premiums to use that money to pay for any unexpected events that the crop up. They know it would take several, if not many, years to save enough money to cover the expense of even a relatively minor loss. And they also know a major loss, at almost any time, would leave them wholly unable to rebuild or replace everything lost. This could mean financial ruin for them.
Ultimately, people buy insurance because they can’t afford to suffer a major loss without it. They prefer to transfer the risk of paying for such a loss to a company that is financially able to pay a large loss, or even a total loss. They can afford manageable monthly payments, and they can usually afford their deductible, but just as people tend to buy homes using a mortgage instead of paying cash, they use insurance to pay for repairs to the home instead of paying for those repairs themselves.
Even those who could afford to pay cash for their home, or who could pay cash to repair or replace their home in the event of a catastrophic loss, tend to use insurance to spread and share the cost, as well as avoiding liquidation of assets or conversion of investments in order to generate the needed cash.
Fill out the form below for a free copy.
You see, when people ask the question “Why do I even have insurance anyway?” it’s more of a rhetorical question. They know why they have insurance, they are merely complaining about paying higher and higher amounts of premiums for lower and lower benefits. It should also be noted this question invariably comes when a claim is not being covered, or not being paid completely. No one ever asks this question after collecting $200,000 for a large loss just months into their first year of insurance when they have paid less than $1,000 in premiums. No, it usually comes after 10 years of paying premiums faithfully and then having a relatively small claim declined.
It just goes to show, whether or not we have a mortgage, and whether or not we’ve been paying premiums for a long or short time, we buy insurance just in case, for peace of mind, to hedge our bets, to leverage another financial tool at our disposal, and for any number of other reasons based on our personalities, our risk tolerance, and our desire for stability. In other words, why ask why?
Mark Goldwich is president of Gold Star Adjusters, a group of public insurance adjusters dedicated to helping citizens get the maximum settlement for any insurance claim.