Understanding risk when it comes to insurance - The Daily Advertiser

The typical definition of risk is that it is the uncertainty of injury or loss. Since risk is uncertain, many people insure against it. That is the reason for life and property insurance. However, people often believe an event is covered by their insurance when, in truth, it is not. Getting angry with the insurance company is not helpful. It is better to read the policy before a catastrophe happens than to find out after.

With insurable risk, the loss must be predictable. Is it possible for a hurricane to blow down the house? Is there a chance of theft? Could someone get injured by a homeowner's negligence? Although a single homeowner may never have to worry about any of these events occurring, it is reasonable that some homeowner in the vicinity could sustain a loss as a result of the unexpected happening. Insurance companies determine the statistical possibility of one of these events happening and then determine, actuarially, the cost of providing compensation to offset the loss. The premium paid reflects the percentage chance of an event happening in a particular area and the predictability of the outcome.

Insurable interest must be present. A person cannot insure property that he/she does not own. If a person will not suffer a loss should the property be destroyed or damaged, then no insurable loss exists and the insurance company will not issue a policy for protection.

The loss must be unexpected. If it is known with certainty that a person's property is going to be underwater due to flooding and the flooding is imminent, then the loss is not unexpected. If a person sets fire to his/her home, the loss is not unexpected. Insurance companies only issue policies as protection against the unknown. It is one reason that homeowner's insurance does not cover hurricane damage if the hurricane is within a certain distance of the shore. Any loss incurred would not be unexpected. Homeowner's insurance must be obtained while the hurricane is far away from dry land.

Any loss incurred must be definite in scope. Policies are written to replace what was damaged. Sentimental attachment, though real, does not carry a dollar amount for replacement. All an insurance company can do is provide the value of the item in today's dollars. Although it is often difficult to determine a dollar value on family heirlooms, the insurance company will do its best to provide a value. There are guidelines that insurance companies adhere to when factoring replacement costs.

In examining which items should be insured, it is best to visit with the insurance agent and understand all of the aspects of the policy being purchased. Arguing with the agent after the fact serves no purpose. One other word of caution is to read the policy right after it is received. Should there be any questions or items that need clarification, it is best to get that done right away. Finding out what is covered after a catastrophe may mean not getting compensated for the loss.

Mary Fox Luquette, MBA, CLU, ChFC is a faculty member in the BI Moody III College of Business at the University of Louisiana. Her column appears in The Daily Advertiser weekly. Have questions about this article or personal finance? Email news@theadvertiser.com.