True or false: the sole purpose of an insurance company is to provide you with financial protection against losses that could impair your future. False; the purpose of an insurance company is to provide profits to its shareholders, and it does so by taking a portion of the premiums policyholders pay and investing it. In
True or false: the sole purpose of an insurance company is to provide you with financial protection against losses that could impair your future.
False; the purpose of an insurance company is to provide profits to its shareholders, and it does so by taking a portion of the premiums policyholders pay and investing it. In addition to administrative costs, any claims paid out to policyholders decrease the profit available, and insurance companies are motivated to keep their payouts at a minimum in order to have the greatest amount available to invest.
Insurance is a fact of modern life. We are required by various state and national laws to have insurance on our homes, our cars, and our health. Beyond those requirements, we can also have life insurance, business insurance, disability insurance, and other coverages that make sense for our personal situation.
An insurance policy is a contract between the insurer and the insured which determines the claims which the insurer is legally required to pay. As policyholders, we enter into these contracts with insurers in good faith, expecting that when we need to use the insurance policy we have paid for, the insurer doesn't take unfair advantage of us or our situation. Unfortunately, this isn't always the case.
Profits vs. Payouts
In order to create profit for their shareholders, insurance companies take policyholder premiums and use a portion of these monies for investments, including stocks, bonds, and real estate. But in order to have the maximum funds available to make investments, insurance companies sometimes engage in tactics designed to delay or minimize the amount of money paid out in claims.
Tactics Used To Minimize Payouts
When you're talking about hundreds of millions of dollars in investment funds, having to give up a certain percentage toward paying out claims can mean a significant decrease in the amount of monies available for investment. Insurance companies seeking to preserve as much investable money as possible will often engage in tactics designed to reduce claims paid. These tactics include:
- Delay of claims - many times just delaying a claim for a period of time will lead a policyholder to accept a lower payout, mainly out of fear of ever receiving a claims payment at all.
- Complex language used to deny claims - what you thought you were insured for may not be what the insurance company says you are insured for, and the difference is in the language used to define your eligibility for a claim.
- Underpayment of claims - terms such as "depreciation" and "fair market value" indicate that an insurance company might be lowballing a policyholder's claim.
Remember, maximizing the amount of money available for investments is the name of the insurance companies' game. Fortunately, there are principles that insurance companies must adhere to in order to maintain their good standing.
Principles of Insurance Law
If you've never had a large claim against your insurance policy, then you may not know just how difficult it can be to get your insurer to hold up their end of the contract. In order to combat bad faith practices, judges and legislators have created a set of principles for the insurance industry, designed to protect policyholders. Among these principles are the following:
- An insurance company must operate under a code of good faith for the interpretation of their policies, as well as the investigation and payment of claims. They must deal fairly with each of their policyholders in their sales tactics as well as in the handling of claims.
- If an insurance company violates the industry standard of good faith or unreasonably denies a claim, and you sue them to recover your policy benefits, the insurance company must pay your legal costs and attorney's fees.
- The insurance company must honor the coverage representations made by their agents, even if the agents misrepresent the coverage they sell you.
- If your insurance agent recommends that you insure for less than what your replacement cost would be, the insurance company may be responsible for paying for your entire loss instead of only the amount of policy benefits.
- Unclear and vague language in your policy must be interpreted in your favor.
- The insurance company has the burden of proving that an exclusion or limitation in your policy is clear, distinct, and relevant to your claim.
- Your insurance company's duty to defend you is greater than its duty to guard against anticipated loss.
- If your insurance company attempts to cancel your policy once you have made a claim, alleging that you obtained coverage without fully disclosing all pertinent information, they may be in violation of the law.
- If your insurance company engages in oppressive, fraudulent, or malicious conduct toward you, you may be able to seek punitive damages against them.
- Insurance law experts will provide you with free legal advice before you talk to your insurance company; attorneys who have experience in these types of cases will examine your case carefully and offer guidance on how to proceed.
The vast majority of us will never have to make a large claim against an insurance policy, but for those who do, knowing your rights can go a long way toward making sure you are treated fairly by an insurer. Seeking the advice of an attorney with experience in working with insurance claims on a client's behalf is a good first step to protecting your rights.
Remember, the insurance company's jingle may claim that they are "on your side," but unless you're a stockholder that may not be the case. Contact Gerling Law for a free consultation.