Insurance exclusions aren't merely profits for companies; they serve a purpose. Here's a breakdown.
Every year, students enrolled in risk management and insurance courses express skepticism and critique toward insurance practices. Terms like "scam" and "legalized extortion" are not uncommon in their vocabulary when discussing insurance policies. However, these derogatory labels overlook the essential functions served by policy exclusions.
Chantal M. Roberts, a seasoned insurance expert, author, and educator, has spent over 25 years in the industry, working as a multi-lined claims adjuster, litigation consultant, and insurance trainer. At present, she serves as a professor, helping students understand the crucial role of insurance exclusions.
Exclusions exist for several reasons, as explained by Roberts:
- Keeping Policies Affordable: Insurance rates are determined by pooling risks among numerous policyholders, rather than selling a guarantee of immunity. Consequently, premiums cover only a portion of the potential total cost of claims. Excluding common, costly, and complex risks keeps policies financially accessible to the majority of consumers.
- Managing Complex and Uninsurable Risks: Certain risks are either too high or unpredictable for insurers to price reasonably, such as damage caused by war, terrorism, or catastrophic events. Exclusions help contain these risks, ensuring the solvency of insurance companies.
- Preventing Coverage of Avoidable Losses: Policy exclusions encourage policyholders to maintain their properties by covering only sudden, accidental losses, rather than predictable, preventable damage.
- Preventing Overlapping Coverage: Excluding coverage from one policy ensures that risks are handled by the appropriate policy, avoiding duplication of coverage and, by extension, policy mismanagement.
- Reducing Moral Hazard and Fraud: Insurance policies typically do not cover losses resulting from intentional actions or fraudulent behavior. Exclusions protect the insurance pool from abuse.
Policyholders can take several steps to effectively manage their policy's exclusions:
- Careful Reading: Carefully peruse the declarations and endorsements of their policies to understand what is covered.
- Consulting with Agents: Discuss optional add-ons with their agent to determine if the potential out-of-pocket cost of an excluded peril outweighs the additional cost of added coverage.
- Assessing Risk Exposure: Consider investing in coverage for risks like flood, earthquake, or sewer backup to minimize the financial impact of major losses.
- Reviewing Denials: If a claim is denied, examine the denial carefully to determine if the exclusion applied justly or if the denied loss should have been covered. If so, the policyholder can consider filing an appeal or seeking outside help, such as a public adjuster or the state's department of insurance.
Through a better understanding of insurance policy exclusions, policyholders can make informed decisions about their coverage and avoid unnecessary expenses. Insurance exclusions benefit both consumers and insurance companies by maintaining affordable policies, clear risk allocation, preventing fraud, and establishing incentives for responsible behavior among policyholders.
- Chantal M. Roberts, an expert in the insurance industry, highlights that insurance policy exclusions play a significant role in maintaining affordable policies for consumers by covering only a portion of potential claims costs, thus making insurance accessible to many.
- In addition, Roberts explains that exclusions help manage complex and uninsurable risks, such as those arising from war, terrorism, or catastrophic events, ensuring the solvency of insurance companies and preventing overlapping coverage.
