In response to our blog about the cryptic language of insurance, many of you have asked for a sequel. Insurance is full of confusing terms, so we are all too happy to oblige. Hopefully we can shed a bit of light into the darkness with the following clarifications.
Deductible and Self-Insured Retention
A deductible is the amount a policyholder is required to pay out of pocket before the insurer will cover the remaining claim costs. You can pick your deductible based on your comfort level and, depending on your insurance company, there can be significant savings by increasing your deductible. Most companies will offer deductibles down to $100 and up into the thousands of dollars. Your agent or broker can help you determine the best deductible for you based on your financial tolerance.
A self-insured retention is a fancier term for deductible typically found in personal excess or umbrella policies. These are normally set at $250.
Related: Cryptic Insurance Words
Co-insurance might be the most confusing term in insurance and is found in many insurance policies. (Here, we are defining the term as refers to property insurance, such as homeowners or commercial property, as opposed to healthcare co-pays.) Homeowners aren’t the only ones confused by co-insurance. Many underwriters and claims adjusters struggle to explain it adequately. Property co-insurance is a percentage that is set by the insurance company to determine what percentage of the value of your property must be insured so you can be fully reimbursed for a covered loss.
Confused yet? Let’s simplify with an example. Your homeowners policy has an 80 percent co-insurance clause and your home value is $400,000. That means you are required to insure the home for at least 80 percent, or $320,000, per the co-insurance clause. If, at the time of loss, you have 80 percent of the home value insured, your claim is paid in full minus the deductible. However, if you have $160,000 in coverage at the time of the claim, which is only 50 percent of the required $320,000, your claim payment is reduced by 50 percent minus the deductible.
Co-insurance isn’t for everyone, and it’s important to know how your policy works. For example, home and commercial property values change over time, and some—but not all—policies account for that. Talk with your agent or broker to fully understand and make the right choice for you.
Betterment is one of the foundations of insurance. The purpose of insuring property or a vehicle is to financially restore you to the same position you were in before the loss or damage to the property or vehicle. Theoretically, you should not end up in a better position than you were before the loss or damage. In other words, an insurer should not compensate you for more than the value of the insured property or vehicle, because insurance is there to make you whole.
Related to betterment is the concept of diminished value. The best way to describe it is by using vehicle valuations as an example. If you are in a major accident, there is a direct impact on the value of the post-accident car. Vehicles that have been in major accidents are worth less than those that have never been in such an accident, even with quality repairs and with original equipment manufacturer (OEM) parts (non-aftermarket parts).
More and more often today, car owners are making claims for the difference between the pre-accident and post-accident value, which makes sense because insurance should restore you to where you were before the loss. Whether the insurance company is willing to pay for diminished value depends on a number of factors, including policy language, who is to blame for the accident and the age of the vehicle. Usually, the policyholder is responsible for proving there is diminished value by getting a value assessment completed.
So far, diminished value claims are most commonly made on cars, but a case can also be made for property-related diminished value claims, depending on the type of claim. Time will tell if this starts to occur.
If you have other terms that confuse you, or that you know confuse your customers, please let us know. We are glad to continue to shine light on the insurance industry!