The Insurance Scene
“My husband and I both work. I pay for a Family Health Plan at my work because my company will carry us on our plan when we retire. My husband belongs to Blue Cross, but his company drops his plan when he retires. Now here’s my question. I have no trouble getting duplicate bills for the drugs, but why can’t I collect from both plans – they take our money and I know quite a few people who do collect twice. What are the regulations concerning medical plans?”
This is a complicated question, and it is one which I am sure concerns many policyholders – not just under Health policies, but Homeowners and others as well. I will try to keep the answer as simple as possible.
The insurance business is based on a number of legal principles. These principles are part of the common law of the land and have been recognised for hundreds of years by the courts of law in most, if not all, countries. They are not part of the policy wording. It would be impossible to set down all the legal principles governing the law of insurance in the policy, and it is not necessary to do so. However, some policy wordings may vary under the common law and, in that case, it is necessary to include the changes in the policy wording.
One of the most important of these principles is known as the Principle of Indemnity, and this says that, if you suffer a loss under an insurance policy, you are entitled to recover the actual amount of your loss – no more and no less – up to the amount insured by the policy and subject to any deductible or depreciation, if applicable.
Another legal principle is the Principle of Contribution, which says that, if you have two or more policies covering the same subject matter against the same perils, then each insurer pays its proportion of the total loss.
Thus, in the case of fire insurance, if you insure your house with two companies, each policy covering the full value, then, in the event of a loss, total or partial, each insurance company would pay you one-half of the loss. In other words, the law does not permit you to make a profit as the result of the loss. Notice, however, that it is not the insurance company that doesn’t want to pay you; it is the law which says the company is not allowed to pay you.
If you insured your house twice over, intending to set fire to it and make a handsome profit, you would not be entitled to any return of premium because of the duplication, but if it was an innocent mistake, then I expect you would receive some return of premium for the current term of the policy.
The subject gets more complicated with health insurance policies or plans because the Principle of Indemnity does not apply as a general rule. The reason for this is that, when a policyholder is injured or suffers a disease, it is impossible to say exactly in dollars and cents what is his actual loss. For example, a businessman could continue his job after the loss of an arm much more easily than, say, a pianist or a manual worker, and therefore the loss of income would be different in each case. The result is that, if an insurance company wishes to apply the Principle of Indemnity in an Accident or Health policy, it must be included in the wording of the policy. Life policies, similarly, are not subject to the Principle of Indemnity, and therefore, you can hold as many life policies as you can afford and all of them will pay the sum insured at the specified time.
So it is not quite true to say that you have been paying twice for the same coverage, and secondly, the reason you get duplicate drug receipts is for income-tax purposes if you are claiming a reduction in tax because of medical expenses, not so that you can claim twice over for the same loss!
The best advice I can give you is to look at the wording of the two plans to see exactly what they provide. If there is duplicate coverage, you may be able to discontinue the overlapping coverage and pay a lower premium. If you have trouble understanding the wording, write to your insurance company or ask your local insurance broker to help you.
Take a tip — before buying your insurance
No one looks forward to buying or renewing their insurance, but here are some tips that will make the process a little easier.
Ask your insurance provider what the policy doesn’t cover. The perils that are not covered are called “exclusions,” and every policy has them. Find out what they are now, rather than at claims time. They are listed on your insurance policy (but how many of us bother to read that ?) Therefore, ask your insurance provider to explain the exclusions before you buy the policy. That’s what he or she is paid to do. In the case of life insurance, ask about guaranteed highest and lowest premiums, history of price increases, and interest rate assumptions.
Generally, you get what you pay for. If you’re shopping around, make sure you’re always comparing apples with apples — not all insurance policies are alike. And, while minor price variation among companies offering similar kinds of coverage is likely, if one insurer is charging substantially less, beware. It may not be the ideal company to deal with at claims time.
Don’t cancel your policy by not paying your premium. You will be considered a “bad risk” for default of payment, and charged a higher rate. If you decide not to renew your insurance, notify the insurer in writing.
Don’t switch insurance providers before your policy comes up for renewal, as you will likely have to pay a penalty for cancelling your coverage prematurely. The amount of the penalty will vary, depending on how many months are left on your policy when you cancel it. The more time remaining, the higher the penalty.The worst thing you could do is buy insurance from one company, and then change your mind and buy from another. The penalty in that case would be very high, since the policy has been in place such a short time.
Don’t switch insurance companies too frequently. For all its sophisticated technology, insurance remains a matter of trust and good faith. Therefore, insurers are not inclined to give the benefit of the doubt to those they do not know. If, on the other hand, you have established a good record with one company, it should stand you in good stead at claims time, or at least put you on firmer ground.
Don’t sweat the small stuff. In the case of home and automobile insurance, that means don’t make too many small claims, because each one goes on your record, regardless of the size. Too many claims, even if they weren’t all your fault, could result in non-renewal of your coverage.
Review your insurance needs on a yearly basis. Your circumstances may have changed during the year, and some of these changes should be reflected in your insurance coverage. Don’t wait for your insurance provider to ask – most don’t.
Don’t intentionally, or even unintentionally, “omit” any details on your insurance application. For instance, if you tell your life insurer that you’re a non-smoker, even smoking a few cigarettes a month could result in cancellation of your policy or, worse, denial of a claim. The same holds true if you don’t come clean about a pre-existing condition on your travel insurance application. Likewise for automobile or property insurance. Insurers have access to several databases that they can use to check up on your driving and claims history, even if you move to another province, so honesty is the best policy.
Take steps to prevent losses from occurring in the first place. This is called “risk management.” It could be something as simple as installling deadbolt locks on your door to prevent burglaries, in the case of home insurance; or purchasing a car equipped with the latest safety and anti-theft devices. The more measures you take to protect yourself and your property, the less you will have to rely on your insurance, and the less it will cost you in the long run.
Pricing your policy
How do insurers decide what to charge for insurance? It’s all based on something called “risk factors.” The more risk involved in insuring you, the more you will pay for your insurance. That’s where underwriters come in. They decide on what terms to accept a risk, and then price it accordingly. For example, why might you pay more for life insurance than your next-door neighbor does, even though you have purchased the same kind of policy?
There could be several reasons: perhaps you are a smoker and your neighbor is not; maybe your occupation is considered more dangerous than your neighbor’s (you’re a stunt pilot, for example); maybe you like to indulge in what is considered a risky hobby, like skydiving; or perhaps you are much older than your neighbor, or your health is not as good. All of these are risk factors.
The same principle applies to your property. You may discover you’re paying more for your home insurance than your neighbor is, even though you have the same kind of policy from the same company. Again, there’s a logical explanation.
Perhaps you rent out the basement of your house, while your neighbor does not; maybe your house is larger in square footage than your neighbor’s; or you have some valuable jewellery listed on your policy that your neighbor does not. And so on.
When it comes to home insurance, underwriters price a house according to several risk factors: whether it’s occupied by the owner or by tenants; whether it’s a single-family dwelling or has multiple tenants; the size and style of your house; and its location (how far it is from a hydrant and fire hall, for example). That’s why your country retreat might cost more to insure than your suburban bungalow. Generally, insurance is cheaper on an owner-occupied single-family dwelling, because it is considered a better risk.
In underwriting personal insurance, like property and automobile, the company has already decided what rules it will use to determine if an applicant is eligible for insurance. A risk either fits the company’s criteria or it doesn’t. If your particular risk doesn’t qualify, you will have to modify it to meet the insurer’s standards, or shop elsewhere for your insurance, and probably pay a bundle for it.
Life insurance works in a similar way. You will be asked a number of questions on your application to determine your risk status. Risk factors for life insurance include: your age, whether you smoke, your medical history, and your occupation (just how risky is it?). If the company decides you are an acceptable risk, it will agree to insure you. If not, it will refuse the risk, or will charge more to insure you.
There are certain risks that no insurer will agree to cover, because the odds are too great that a loss will occur; for example, a river overflowing and flooding your home, or a volcano erupting and destroying property. Likewise, you may not be able to buy certain types of travel medical or health insurance if you have what is called a “pre-existing condition” – an existing or previous illness that the insurer believes is likely to worsen or recur.
BEFORE YOU BUY YOUR INSURANCE . . .
Before you purchase your insurance, consider whether you want to buy through a “direct” insurer, an agent, a broker, or a group plan.
What’s the difference?
Agents and direct insurers represent one insurance company and offer only the products of that company. If that company has a range of products, then your needs will likely be met. It does, however, require that you have some knowledge of the products available in the marketplace, so you can compare.
A broker contracts with a limited number of insurance companies and can offer their various products, but generally, only the products of those companies with whom he or she has a contract.
A group plan may function either through an agent or a broker system. In some cases, while the plan may be serviced by a broker (and sometimes, just one broker provides access to the group plan), that broker may use one insurance company almost exclusively for that plan. In this sense, the broker is really functioning more as an agent than as a broker who is providing the products of a range of insurance companies. Group plans may be offered through work, alumni, or other group affiliations.
If continuity of supplier is important to you and you want to speak with the same agent or broker staff member each time you contact the insurance company, then this is something you will want to establish before you decide which system best suits your needs. A group plan may mean that you deal with a different staff person each time you contact the insurance company.
Who’s who – and what do they do?
It helps to know the main players, so here’s a brief primer to help you understand who does what in an insurance company and brokerage.
Actuary – an employee of the insurance company who prices future risks by applying mathematical models to problems of insurance and finance; in other words, develops models to evaluate the financial implications of uncertain future events.
Adjuster – a person who investigates and settles claims on behalf of the insurance company. The adjuster may be either an employee of the company or an independent contractor hired by the company. Less common are public adjusters, who represent the interests of the homeowner or business owner following a property loss, and are paid a percentage of the insurance settlement by the consumer.
Claims handler/examiner – an employee of the insurance company who looks after your claim. This person is supervised by a claims manager.
Customer service representative (CSR) – an employee of the insurance brokerage or company who assists in handling requests from clients and other duties that must be performed. This person is not the same as an insurance broker, who must be licensed (although many CSRs are also licensed).
Underwriter – an employee of the insurance company who decides whether or not the company should accept a particular risk; for example, your house or your life insurance application. The term “underwriter” can also refer to the company. For example: “Company XYZ is the underwriter of that insurance policy.”
(Also see “How insurance is sold,” to find out the four main channels through which insurance is sold, and the difference between an agent and a broker.)
Speaking of insurance – Learning the lingo
“Insurance speak” is a language unto itself, so it’s no wonder consumers get confused trying to decipher their insurance policy. As a first step, get comfortable with the following basic terms, and refer to the Glossary for additional definitions.
Claim – a person’s request for payment by an insurer of a loss covered by a policy. Claims to your own insurance company are called “first-party claims”; claims made by one person against another person’s company are known as “third-party claims.”
Deductible – Nothing to do with income tax, this is the portion of the loss that you agree to pay out of your own pocket, before the insurance company pays the amount that it is obligated to cover. The deductible is subtracted from the total amount paid by your insurer. Therefore, if your claim is for $2,000 and your deductible is $500, you will pay $500 and the insurer will pay $1,500.
Exclusion – specific conditions or circumstances listed in the policy that are not covered by the policy. For example, damage caused by rodents is excluded from your homeowners policy, meaning it is not covered and the insurer will not pay if a squirrel wreaks havoc in your house.
Liability – a legally enforceable financial obligation. Liability insurance pays the losses of other people when you are legally responsible for an accident in which you have injured another person or damaged that individual’s property.
Occurrence – an accident that results in bodily injury or property damage during the period of an insurance policy.
Peril – the cause of loss or damage. Your homeowners policy, for example, insures you against perils like windstorms, fire, and theft, among others.
Personal-lines insurance – insurance (like homeowners or automobile) for individuals, as opposed to commercial-lines insurance, for businesses.
Policy – the legal document issued by the insurance company that outlines the terms and conditions of the insurance.
Policyholder – the person who buys the insurance; also called the “insured.”
Premium – the payment required to keep your insurance policy in force.
Risk – the chance of a loss. You insure your house, for example, against the risk of fire.
Underwriting – the process of selecting risks for insurance, and determining how much to charge to insure these risks and which coverage to provide.
How insurance is sold
It may seem that everywhere you turn these days, someone, somewhere, is hawking some kind of insurance, whether it be through television, over the Internet, on the phone, through the mail, or plastered on billboards. However, there are actually only four main channels through which insurance is sold. While any of the following could meet your needs, you should choose the one that is convenient for you and with which you are most comfortable. Throughout this Web site, we use the general term “insurance provider,” so as not to favor any one of these channels over another.
Brokers – An insurance broker sells the products of several different insurance companies, and can therefore offer a variety of choices. However, no one broker represents all the companies, so if you want a wide range of quotations, you should consult more than one broker, and ask which companies each one represents. Some brokers are licensed to sell both property/casualty and life/health insurance products, while others sell only one of these two main types of insurance.
Agents – An agent represents only the products of one insurance company. Companies that use their own “captive” agents to sell their products are called “direct insurers.” While an agent may not be able to provide you with access to as many products as a broker could, most direct insurers offer a wide enough range to meet the needs of most consumers, at a competitive price.
Direct sellers – Also called “direct-response insurers,” these are the newest kids on the block. Like direct insurers who operate through local agents, direct sellers generally sell only the products of their particular company. However, what distinguishes them from direct insurers is that their products are sold via telephone from a central location known as a “call centre,” rather than through local agents.
Group plans – Although any of the above channels may supply group insurance, consumers buy it through their workplace, alumni association, professional association, or other group affiliations. Group insurance is generally less expensive for both the insurer and the consumer, because it is sold in quantity to a relatively homogeneous group.
Many brokers, direct insurers, and direct sellers are now promoting insurance over the Internet, offering quotations and, in some cases, even selling insurance online. While this is a convenient service that will no doubt continue to increase in popularity, the watchword for consumers should be “buyer beware.” As you will see from the articles posted on Insurance Canada ConsumerInfo, there are many options when it comes to buying insurance. The key is to get the right coverage at the best price. When shopping for insurance over the Internet, make sure you’re comparing apples with apples. All policies are not alike, and the lowest price may not be the best coverage for you. It’s important to ask the right questions before you buy your insurance, or you could be left high and dry at claims time.
What’s your line – of insurance?
Nowadays, there are some 300 insurance companies operating in Canada selling many different kinds, or “lines,” of insurance. Generally, most companies sell either “property and casualty” insurance (also referred to as “general” insurance) or “life and health” insurance, but seldom both.
Property and casualty insurance includes automobile insurance, property insurance (insurance for homeowners, condominium owners, and tenants), as well as a variety of commercial and business insurance. An important component of all of the property and casualty lines is liability insurance, which provides protection for an insured person who accidentally injures someone or damages someone else’s property and is legally bound to pay for the damage.
Life and health insurance is primarily the bailiwick of the more than 100 life insurance companies operating in Canada, both domestic and foreign-owned. Life insurance provides funds to a designated beneficiary in the event of the policyholder’s death. Some of the more common life insurance products include term, universal, and whole life insurance. Health insurance protects against financial loss due to illness, injury, or medical bills, and extends coverage, through a variety of products, beyond that offered by government medicare plans. In fact, medicare itself is a form of insurance, paid for by our tax dollars. Another aspect of health insurance, disability insurance, pays for income lost due to a disabling injury or illness. Often, life, health, travel medical, and disability insurance is provided through employers, but it can also be purchased by individuals. Without health insurance, we’d probably be afraid to set food outside our homes, let alone play sports or participate in any other activities. Even one broken leg could eat a big chunk out of our savings.
Spreading the risk – how insurance works
While it sometimes seems that insurance companies work in mysterious ways, the idea behind insurance is simple: it uses the payments of many to cover the losses of a few. The money you pay for your insurance – your premiums – goes into one large pool at the insurance company. Those of us who suffer a loss that is insured can then draw from that pool. Because only a few of us need to draw from the pool in any given year, there is enough money in it to pay major losses like those incurred as a result of fire or a serious automobile accident. This concept is called spreading the risk, or risk sharing.
However, the pool must be replenished, or refilled, each year, so it will hold enough money to cover the coming year’s losses. You can imagine how quickly it can be drained by one major disaster. The 1998 Quebec ice storm alone resulted in an estimated 700,000 claims for damage totalling $1.14 billion, according to the Insurance Bureau of Canada. That’s enough to suck the pool, if not dry, at least to ankle depth. In fact, many insurance companies do not even make a profit on the premiums they receive as compared with the money they pay out in claims and spend to operate the business. Rather, their profit derives from their investments.
Your insurance policy represents a promise to protect you against certain “perils” – or causes of loss – for a given period of time, usually a year. This promise is renewed on a year-by-year basis; your premiums do not “build up” for you to draw upon when needed (except in the case of certain life insurance products – whole life, for example – that are designed with an investment component). In fact, this is one of the most common misconceptions about insurance. Consumers complain that they faithfully pay their premiums year after year. Yet, when they finally need their insurance to cover a small loss, they can’t make a claim, because the cost of the deductible (the portion of the claim that you have to pay) may be as high as, or even higher than, the amount of the claim itself. Then there’s always the risk – there’s that word again! – of premiums going up as a result of a claim, even a small one. It’s a familiar, and understandable, litany.
Another common misconception is that insurance covers every misfortune that might befall you. If that were the case, no one could afford the premiums. Neither is insurance intended to be a maintenance policy, so don’t even think of contacting your insurer if your aging roof leaks and damages your broadloom, or your sofa gets ratty from wear and tear. Nor is it intended to cover minor losses that consumers could afford to pay for themselves. Rather, insurance is intended primarily to protect you against serious, and unforeseen, loss or injury that you could not pay for otherwise – for example, a major car accident, a fire that destroys your home, the theft of your precious jewellery, the death of a spouse and the consequent loss of that individual’s income. It is not designed to replace your $200 lost sweater, as inconvenient and annoying as that loss may be. If insurers were to pay all of these smaller claims, there would not be enough money left in the pool to pay the large ones. If you ever suffer a major loss, you will soon realize that that’s when insurance really pays its way.
Many consumer complaints stem from a lack of understanding of how insurance works and what it is designed to cover. The insurance industry, for the most part, has failed to communicate this information to consumers, although a number of initiatives are now in place to rectify this shortcoming.
Insurance: who needs it – and when?
When it comes to your list of interesting subjects, insurance probably ranks right up there with “101 creative uses for polyester.” But the truth is, we all rely on insurance–just as we do polyester!–throughout our lives. Whether you’ve just passed your driver’s test, moved into your own apartment, left home to attend college, bought a house, started a family, launched your own business from home, or made plans to travel outside Canada, you need insurance. Insurance protects you and your family, as well as your home and belongings. Without insurance, the economy would practically come to a standstill, because starting and operating any kind of business would be too risky–one fire and your livelihood would go up in smoke. In fact, you couldn’t even drive a car, because a serious accident would wipe out all your savings. Nor could you borrow money to buy a house, as no lending institution would allow you to mortgage a property that wasn’t insured.
Canadians spend almost $50 billion on insurance annually, according to combined statistics from the Insurance Bureau of Canada and the Canadian Life and Health Insurance Association. Many of us fork out thousands of dollars each year on insurance–it’s the fifth-largest expenditure a family makes, according to Statistics Canada figures–but the strange thing is, few of us know what we’ve bought until we need it. Then we sometimes get a nasty surprise when we find out our insurance doesn’t cover a particular loss. Perhaps our agent or broker didn’t explain what our policy did and didn’t cover when we bought it; likely we didn’t read the policy ourselves–who does? But now it’s too late–it’s all water under the bridge–or in your basement!–and you simply have to grit your teeth and foot the repair bill.
Imagine spending the same amount on a new high-tech sound system as you do on insurance. You’d certainly want to make sure you were getting good value for your hard-earned cash, and you’d probably spend a lot more time shopping around for the sound equipment than for your insurance. Let’s face it–it’s pretty hard to get excited about buying a new insurance policy!
You’d also want to replace your sound system when it became old or outdated (which doesn’t take long these days). Similarly, your insurance needs will change through various stages of life, as well as with changes in job status. For example, a single person starting a career probably will not need life insurance just yet, since he or she doesn’t have a family to protect; empty nesters moving into a condominium will need different insurance than a homeowner; self-employed people may need health coverage that others usually get through their workplace, and so on.
Many factors affect an individual’s insurance–age, marital and familial status, employment status, the purchase of a new car or new home, and the acquisition of valuables, like jewellery, a state-of-the-art computer, or even a rare comic book.
Insurance Canada ConsumerInfo wants to help prevent that nasty surprise at claims time, by telling you what isn’t covered in most policies, and how to get the right coverage at the best price.