Insurance 101

Claims/Deductibles and Costs

Insurance policies are contracts. They are governed by the law of contracts as well as a specific body of law covering insurance policies. As such the contract, the written document you receive upon paying your premium (money) controls the insured (you) and the insurance company. Because it is a contract, there are no exceptions outside of the written contract and any oral statements or promises do not apply to the contract.

Deductibles were introduced to eliminate small claims. A claim for $200 cost the insurance company $1000 whether the claim is paid or not. The insurance company must open a file and keep that file for a long time. The insurance company must investigate the claim, which may include sending out an adjuster out to look at the issues or to interview people. Every claim, large or small, costs the insurance company money. As such, to save money, the insurance companies introduced deductibles. You pay out $200 for your claim, and we will lower your premium by $X dollars and save us $XXX dollars.

Deductibles also eliminate questionable claims. The insurance company does not have to worry about paying a claim they don’t want to because it is lower than your deductible.

To understand this, call your insurance agent and ask for quotes on your homeowner’s insurance (easiest because it is a yearly premium) for Zero deductible, $250 $500 $1000 and $5000 deductibles. Take the savings between the zero deductible policy and the $1000 deductible policy cost and multiple it by 7. That number should be more than the higher deductible. That is because the average homeowners have a claim 1 every seven years (at least that was the average a few years ago. It might have changed because the number of years someone owns a house has dropped over the last 20 years.)

Example. Your premium for a zero deductible policy is $1000 a year. Your premium for a $1000 deductible policy is $800.00 per year. The difference: $200.00 times 7 is $1400.00. If you only have a claim 1 every 7 years you will have saved $400.00 by having a higher deductible. If you have a $2000 claim you pay $1000 and the insurance company pays $1000.00. You saved $400.00 and it cost the insurance company more than $1000.00.

Automobile insurance does not work quite the same way mathematically because the liability part of your insurance premium is the larger portion.

Why the lesson. Because whether your insurance premiums go up are not controlled by large claims. They are controlled by claims. Large claims are actuarially calculated and known to cost and time by the insurance company. Small claims are a pain in the butt for the insurance company. If you have too many small claims, the insurance company will not renew you, or they will increase your deductible and not change your premium. Insurance companies look at small claims made by policy holders as those people they do not want to do business with. They are a pain in the neck; they want to nickel and dime the insurance company.

Large claims only affect cost or renewal if they were totally the fault of the insured and should have been prevented. The insurance company looks at claims that were responsible as much as why the claim occurred. A large claim is usually one where no one had much control, whereas small claims are usually controllable. A small claim or a large claim that should have been controlled/prevented is the insured’s responsibility and something insurance companies do not stick around to deal with after they learn. As such, when the insured is at fault polices are not renewed or premiums go up.

Do the math. Ten $200 small claims can cost more that are not paid cost more than one $1500 claim that is paid? Paid claims cost less because they are easily determined and paid. “Yup we owe, write a check, done.” So now you understand insurance, claims and deductibles for your insurance policies.