Denied: Do Insurance Companies Avoid Paying Claims?
November 1, 2018So, you probably read the title and thought, “Of course an insurance company doesn’t want to pay me; they just want my money and they’ll do anything to get out of a claim!” Do insurance companies avoid paying claims? It may seem that way, but here’s what’s going on behind-the-scenes when claims are denied:
Independent Insurance Agents vs Insurance Companies
Not to get off track, but the following information is coming from an independent agent, not an insurance company. While the difference may be lost on a lot of insurance buyers, the distinction, for the purposes of this conversation, is important.
Independent insurance agents aren’t responsible for paying your claims. We are just representatives of the insurance company and receive compensation for selling policies and managing the relationships with their insureds (you!). A client submitting a claim typically has a very little impact on an agent’s bottom line. So, if your agent is advising you in regard to claims submissions or helping you navigate through an adjusting process, it’s unlikely that the information you receive is laced with any ulterior motives.
Do Insurance Companies Avoid Paying Claims?
All that being said, the sentiment about insurance companies, and their desire to avoid paying claims, isn’t totally wrong. Why? Because insurance companies are for-profit companies. Insurance companies have costs-of-doing-business (CODB) in addition to being contractually liable to pay claims on their insured’s behalf. Sometimes insurance companies run combined ratios (Claims + CODB) of over 100% of their total annual written premiums!
You Have to Have Insurance Coverage for the Cause of the Loss
From a solvency standpoint, insurers cannot afford to pay claims from causes of loss for which they did not receive premium consideration. Simply put, if the coverage was not purchased, an insurance company is not legally obligated to provide compensation to the insured and they may deny a claim. Many insureds wrongly believe that the purchase of any policy means they are covered for any, and all, causes of loss that life may throw at them. We see this misconception most frequently after certain natural disasters, especially when it comes to flood vs water damage.
Flood Insurance
People who live in areas that typically do not see flooding usually forego the purchase of a flood insurance policy. Why? Because flood insurance is expensive, sometimes several thousand dollars per year for a single-family home. If the odds are good that you will never need it, the insurance premium is probably just money down the drain – until that unlikely flood happens.
Homeowners Insurance Does Not Cover Losses Caused by Flooding
One of the flood insurance basics to know is that a homeowners insurance policy explicitly excludes losses caused by flooding, and “flooding” is specifically defined within the policy definitions. Homeowners insurance companies do not offer the flood peril on a homeowners insurance policy and they do not pay flood claims. This is because the amount of premium they received as compensation for insuring your dwelling was not calculated based on the insurance company providing coverage for flood damages. If it was, the annual premium, instead of being around $500-$1,000 a year for an average home, could be several multiples of that amount.
Homeowners who live in areas very unlikely to incur flood damage would be very unhappy that they had to buy a coverage they didn’t need. Many will also be unhappy to discover that the type of insurance they purchased did not include flood coverage when a 100-year flood occurs. Still, the homeowners with flood damage after a flood event did have the opportunity to purchase a flood policy through the National Flood Insurance Program (NFIP), which is actually the only flood insurance provider in the country.
The insurance companies providing those same residents with homeowners insurance will be swift in denying flood claims. This isn’t because they are bad people, or that the greedy corporate executives don’t care about their customers in times of need; it is simply not economically viable. They never entered a contract where they agreed to pay for this type of loss, and as such, they did not collect premiums from the insured in consideration for that type of coverage.
Even so, it’s been far more frequent that I have personally seen an insurance company step up and pay for a loss that they may have been legally able to deny than times where I have seen a company deny a claim in bad faith or based on loopholes and technicalities. In fact, most insurance professionals enjoy the opportunity to help people and appreciate the chance to make a bad day a little better. It’s one of the best and most rewarding parts about the job. The ability to keep promises to insureds in their time of need, and remain economically viable while doing so in order to continue to be able to do it in the future, is an exciting thing. It’s a good, but an admittedly imperfect, system.
Reducing the Monthly Premium Often Reduces Options and Coverages
As with any industry, insurance has multiple products available for purchase and sometimes different coverages or packages within one type of product. This allows insurance to tailor the product to each individual insured. Just as you might choose the stripped-down “S Series” sedan to save money, instead of springing for the more luxurious “LS Series” version of the same model, you can choose to save on your monthly premium by buying a stripped-down insurance policy – i.e., one with fewer options and reduced coverages.
How to Understand Your Insurance Company and Coverages
Because insurance is an intangible product, and the only thing you receive after purchase is a stack of boring looking paper, many consumers do not take the time to fully review what they purchased. It’s plenty easy to see that you chose a car with cloth interior vs. leather, so you wouldn’t go home and complain that the salesman sold you a car without leather seats. No one would assume that just by the act of buying a car, one would receive a car with all the package options and upgrades. So why does that assumption prevail with insurance? That is, perhaps, a bit of a rhetorical question, but if an answer exists, it is almost certainly multifaceted.
Not All Insurance Companies are Big Business
One reason might be because of the way that we have, culturally, begun to view larger corporations. But, insurance consumers might be surprised to discover that many small regional mutual companies are the quintessential American small businesses, sometimes run by less than ten people!
Review Your Policy and Ask Questions
Another reason is that no one actually reads their insurance policies, and oftentimes, the verbiage within the coverage forms of an insurance policy is difficult, at best, to follow. As painful as it can sometimes be to go through it all, make sure you review your insurance policy and follow up with your insurance agent to ask questions about what coverage you actually have purchased and how much of it you have.
Although Insurance Isn’t Usually Fun, Slow Down and Take Your Time
Another contributing factor might be that, most times, the purchase of insurance policies isn’t voluntary. Auto insurance is mandatory if you wish to operate your vehicle on public thoroughfares. If a bank holds a mortgage on your home, you will be required to maintain property insurance to secure the loan collateral (i.e., your house). Perhaps it is the natural human emotion to want to get through something that we feel coerced in doing as painlessly as possible.
For most, when it comes to insurance, this usually means a minimal amount of conversation or explanation and a policy for the cheapest price possible. Sometimes that works; until it doesn’t. If you never have a claim on your house, you will likely never know if you are improperly insured or not because you never had to call on your insurance policy to help mitigate your financial loss. But, when a loss occurs and the slim coverage you elected to purchase in order to save a few dollars a year isn’t enough, it can be a very, very painful time.
Work With Your Agent to Ensure You’re Covered
All of the above is why an agent that is looking out for your best interest will want to make sure that you understand the coverage you selected and will take the time to discover what your insurance needs are, determine your ability, or lack thereof, to self-insure against some losses and discuss the options with you.
Good agents and smart insurance buyers will develop plans that leave the customer neither “insurance poor” nor unnecessarily exposed to risks of devastating financial losses. This takes dialogue and an understanding of the product and the process. Insurance companies will be happy to sell you the “LS Series” of insurance policies, and they are then prepared to pay for additional claims in exchange for more money from your pocket.
But, if all you need is the “S Series” to protect yourself from loss, paying an extra $500/year for the LS over 20 years is basically paying $10,000 for something you will never use! Just remember, each policy is unique and customized to its buyer and the coverages you buy are ultimately up to you!
If you have questions about your insurance coverage or need to acquire coverage, contact a Ruhl Insurance agent at 717-665-2283 or 1-800-537-6880 today!
Disclaimer: Information and claims presented in this content are meant for informative, illustrative purposes and should not be considered legally binding.