Well, it’s that time of year again.  Time to renew my homeowner’s and auto insurance policies.  And since the boyfriend and I live together, our insurance policies have to take each other into account.  Starting a couple years back, we synchronized our policy renewal dates, so once a year, we now get to shop for policies together.  It’s a real party.  Anyway, in this post, we’ll cover the ugly truth about insurance, and how to avoid some of the traps that insurance companies and even well-meaning insurance agents unintentionally lay for you.

The Ugly Truth About Insurance Companies

Insurance companies exist for the purpose of helping individuals minimize their risks and protect their major assets in the face of unexpected events.  Right?  Wrong.  The ugly truth about insurance companies is that they exist for profit.

If the insurance company doesn’t make money, it goes out of business.  That means that it has to collect more money in insurance premiums than it pays out in insurance benefits.  By definition, then, insurance is a losing proposition for most people.  Statistically speaking, you will pay more in insurance premiums than you will ever get in benefits over the course of your lifetime.

Does that mean that you shouldn’t buy insurance?  No.  Because if a catastrophic accident happens to you, you want to make sure your home, car, family, and life savings are protected.  Everybody needs one form of insurance or another.  But the for-profit nature of insurance companies means you’ve got to watch your own back when you’re buying insurance, because your interests and the insurance companies’ interests are directly opposed.

The Ugly Truth About Insurance Agents

Insurance agents are supposed to be there to help you select the right policy.  They’re also supposed to be knowledgeable pros who can answer all of your questions about what’s covered and what isn’t.  Here’s the problem, though: the vast majority of agents have zero experience with the claims process.  So they know what they’re told in training, and they know what they’ve learned from other insurance agents along the way.  But they don’t usually know what happens on the back end, when the policy needs to be enforced.

Your insurance agent may have learned the wrong thing from his trainer.  He may have been taught the right thing, but it didn’t sink in.  Or he may have heard the wrong information from another agent, and believed the other agent.  Either way, it’s fairly typical for an insurance agent to get some information wrong.  And the more years they’ve been doing their job, the more “sure” they may be that they’re giving out the right information.

Sometimes They Get it Wrong.  It’s Still Your Fault.

Who bears the risk of the insurance agent getting it wrong?  In most cases, YOU.  If your insurance agent tells you something is covered and it’s not, you’re hosed.  The language of the policy itself is the contract between you and the insurance company.  You might have a lawsuit against the insurance agent, but that’s not going to “fix” the fact that you don’t have coverage.  You’ll have to hire lawyers, file a lawsuit, and wait for the outcome before you get any money.  And that’s assuming you can afford to fight that fight.  If a disaster strikes and you need money to rebuild your home, are you going to have money for attorneys, too?

So let’s say your insurance agent issues you a policy that provides $150,000 of replacement cost coverage.  You have a massive fire, and your home burns to the ground.  The loss is covered, but it’s going to cost $250,000 to rebuild your home.  Your insurance agent grossly underestimated the replacement cost.  Whose fault is that?  Yours.  You are responsible for figuring out how much coverage you need.  And guess what?  By some estimates, approximately 70% of homeowners are underinsured on their property.  70%!!!

“But I’m not an insurance pro or a contractor.  How am I supposed to know what the replacement cost of my house will be?”  Good question.  Some insurance companies have online estimators.  You can plug in details about your house to get a (theoretically) reliable estimate.  Alternatively, you can research average costs per square foot to build in your area, or ask a trusted contractor what a reasonable estimate would be.  Whatever you do, don’t blindly assume that your insurance agent is getting the right amount of coverage.  Your agent might think they’re doing you a favor by rounding the number down and getting you a low insurance premium.  But when the shit hits the fan, you’re going to want to have enough coverage to actually protect you.

Sometimes They Lie to Try to “Help” You

Another huge problem with insurance agents is that sometimes they want to fudge the truth a little to save you a few bucks.  With our insurance policies last year, we told the agent our full scenario.  We disclosed that we live together, but are not married.  We were given a quote, we paid over the phone, and then we received our policies in the mail.  Guess what they said?  Married.  I called the insurance agent and asked what was up.  He said “oh, we always put that for couples who live together, even if they’re not married.  It saves you money.”  That’s great, except that if the time comes and we have to file a claim, the last thing I want is for the insurance company to deny a claim because we lied about our marital status.

If you make a material misstatement on your insurance application, the insurance company may refuse to cover any claim you make later.  What counts as material?  That’s a question for the courts in your jurisdiction to resolve.  In the absence of a court ruling, the insurance company might find any excuse it can to deny coverage.  If it finds a misstatement that it can argue is material, it might cancel your policy and return your insurance premium, leaving you financially responsible for the loss.  If you think the insurance company is wrong, you can always sue to enforce your rights.  But again, that will take time and money, and if you’re trying to scrape your life back together after an emergency, that’s the last thing you need.

The Ugly Truth About Insurance Policies

Insurance policies are confusing.  I’m an attorney, which means I’ve spent a significant chunk of my life wading through volumes of dense, barely comprehensible text.  But insurance policies are nearly impenetrable.  One of the partners at my firm specializes in insurance coverage law, and he’s the only person I know who can read an insurance policy in one shot and understand what it says.  Most people, including myself, have to read it multiple times and sometimes even outline it before it makes sense.

The first section of your insurance policy is probably called “Coverage.”  Unsurprisingly, it lists what is covered under the policy.  Don’t stop reading there.  The next section should be “Exclusions.”  This is where the insurance company takes away a lot of what you thought was covered by the “coverage” section.  Toward the very end of the policy, there’s a section called “Endorsements.”  These might add or eliminate coverage for something specific.

Anyway, my point is that it’s confusing.  You may think you know what’s covered by reading one section, but the exclusions section might eliminate that coverage.  Once you think you know that the coverage is eliminated, you might discover that certain things are included again because of an endorsement.

Conclusion

Insurance is a necessary evil.  The policies themselves are confusing and incomprehensible even to most lawyers.  To make matters worse, the burden is generally placed on the policyholder (you) to know what type of coverage you have, and to order the correct amount of coverage.

If you haven’t taken a close look at your major insurance policies in the past several years, you should.  Go dig them out of your filing cabinet and read them a half-dozen times to see what they cover.  Don’t just look at the declarations page at the amount covered and skip over the rest.  A $10 million policy limit is useless if you’re not covered for the types of losses you need coverage for.

If you’ve read your policy half a dozen times and still can’t make sense of it, or if have any sort of unusual situation, or if you have a home business (including a blog!), or if you rent some or all of your property out to others, or if you’re cohabiting with someone you’re not married to, you might want to get a lawyer to review your policy.  If you don’t know a good insurance lawyer, find somebody else who is very experienced with insurance, like a claims adjuster.

Whatever you do, make sure you have enough coverage.  Paying for too much coverage is a bummer and a waste of money.  But paying for too little coverage or fudging the truth to try to get a lower premium defeats the entire purpose.  Don’t leave yourself hanging.

Later, I’ll tell you about the unique situation that cohabitating couples find themselves in when it comes to insurance coverage.

What has your experience been with insurance?  Has your insurance agent ever lied to you or misrepresented something on your application?  Have you read your whole policy, and do you know what it covers and what it doesn’t?