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The contract of Insurance in a nutshell
In insurance a contract exists between you the insured and the insurance company or the insurer.
The insured tells the insurer what and how much they want to insure (in a Proposal). They also need to tell the insurer everything that may affect the insurer’s decision to accept the risk (full Disclosure).
The insurer will give the insured a contract (The Policy) describing how the risk is covered and any limitations and exclusions which apply to all those who purchase this insurance plus a supplementary document (The Schedule) detailing the sum insured, limits and exclusions, etc in particular to your cover.
When the insured suffers a loss, they launch a claim. The insurer will pay the insured according to the Policy, the Schedule and the Proposal.
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How are you protected by Insurance?
Insurance is NOT a bet between yourself and the insurance company to see if a loss may or may not happen to you.
It is a cooperative effort in which a large number of people like yourself agree to share losses.
This sharing of loss is done by the gathering of a pool of funds (by way of premiums) from the large number of people to pay for the claims/liabilities that befall the few of them.
Statistically, something is bound to happen to someone and so this pool is used all the time.
Insurance companies manage the pool and distributes funds (settlements of claims) to those who have genuinely suffered a loss. For this effort they get to keep any profit. Insurance companies must have adequate reserve and authorised insurers are monitored by government agencies.
A point to bear in mind: No one will be better off after an insurance claim. Each of us must do our best to prevent or avoid claims, rather than to rely solely on insurance.
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Why is my premium so expensive?
The premium pool must have sufficient funds to meet claims that arise and also the insurer’s operational expenses and profit requirements. Premiums are calculated according to the number of claims and their quantum amount. When claims increase in the market, premiums also increase.
Premium also depends on the number of policyholders sharing that particular risk. The more “popular” a type of insurance, the “cheaper” its premium will be. Needless to say, if there is a higher probablity of a claim occurring, the premium will be higher.
What most people do not realise is that a large percentage (>40%) of the premium paid on some insurance are actually tax, duties and levies paid to State and Federal government.
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The Importance of “Disclosure” - Should I tell the insurer about....
The insurance contract between you the insured and the insurance company is built on the information given by you to the insurer. You the insured have the responsibility to disclose to the insurance company all the information that you are aware of or are expected to be aware of that may affect the insurance company’s decision to accept your risk or not.
Matters like previous claims, criminal conviction, absence of fire prevention, etc may increase the likelihood of another claim and should be disclosed to the insurer.
Some businesses asked us what type of information they should disclose. When the information is likely to lead to a reduction in premium, you will have no hesitation disclosing it. On the same token, when you think the information will lead to an increase in premium, you better disclose it too.
Failure to fully disclose may lead to the insurer rejecting a claim which, ultimately, is what you buy the insurance for.
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The Futility of Under-Insurance
When there is a claim, nobody would think that they should have insured for less i.e under-insured. Yet too many businesses look at insurance premium as a low priority nuisance - until they have a claim.
Worse still, for many types of insurance, if you have under-insured, the insurer will reduce the amount of claim payable by as much as you have under-insured.
e.g. If you have insured only $50,000 on $200,000 worth of stock and a quarter of it was lost in fire, you would not get 100% of the loss - although it is about $50,000. Instead you’ll get $12,500 - a quarter of the $50,000 you have insured.
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The Importance of Regulation over Premium
As insurance is a “promised” merchandise, (i.e. you are buying something you may need in the future) it is important to buy it from someone you think will be able to deliver in the future. The best criteria is those who are regulated and approved by the government.
Non-regulated insurers (such as some offshore insurers) and non-regulated products (such as the infamous Credit Default Swaps) must be avoided at all costs. With non-regulated entities and products, you will be literally gambling not only with your premium, but also with your business assets. Worse still, you will be left alone to face all the liabilities and claims.
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When is insurance adequate?
All insurance have a limit (Limit of Liability) and defined scope of cover. No insurance will cover everything.
How much insurance is required depends on how much you, the business owner, think the loss will be should an accident or claim occur (Sum Insured). So when interest insured is specifically covered and the Limit of Liability is equal to or more than the Sum Insured required, then the insurance is regarded as ‘adequate’.
And of course the level of cover should always be considered in the context of premium, likelihood of occurrence, the level of self-insurance ‘tolerable’, any exclusions, conditions the insurance company might have include in the policy, etc.
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