Insurance Policies and Warranties
Protection From Risk Is Different From a Guarantee
The problem many people have with insurers comes from a misunderstanding of what insurance is for. What they expect is a warranty; what they get is an insurance policy.
Anyone who has owned a new car (or almost any other manufactured item) is familiar with a warranty. Websters Dictionary defines such a warranty as, “a usually written guarantee of the integrity of a product and of the maker's responsibility for the repair or replacement of defective parts.”
The manufacturer promises that if anything goes wrong with the product due to faulty design or manufacture, or the item otherwise does not live up to its expected performance, the manufacturer will replace it or make it perform as intended.
On the other hand, an insurance contract is an agreement that the insurance company will indemnify the policyholder against loss caused by a covered peril. An insurance policy does not “guarantee the integrity of a product,” such as a home, car, or boat, etc. It also does not guarantee that if something bad happens to that item (or to the insured), it will be covered.
An insurance policy sets out specific categories of what is and is not covered. No insurance policy covers everything you own or everything that could possibly go wrong.
Many insurers advertise themselves as providing security and peace of mind, which sounds nice and may be effective advertising, but can leave some people feeling they are buying more than what they are getting. This is especially the case when they file a claim and find it is not covered.
After Hurricanes Katrina and Rita, many policyholders felt betrayed that they were not covered for losses caused by flooding. The fact is, almost all homeowner policies exclude coverage for damage caused by flood. The standard ISO (Insurance Services Office) Homeowners 3 Policy excludes, “Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind.”
Private insurance companies have a responsibility to stay in business so they can keep their obligations to all of their customers, not just the ones affected by a specific disaster. In order to properly insure such perils without exposing insurers to insolvency, they have to be insured through other methods. In the case of flood, such coverage is primarily provided through government programs.
As with all purchases, consumers should abide by the adage, caveat emptor, or “buyer beware.” Make sure you understand what you are buying and that it will cover you according to your needs.
Reference:
Homeowners 3 -- Special Form, The CPCU Handbook of Insurance Policies, Third Ed., 1998; American Institute for CPCU, Malvern, PA p. 9 of 18.
