In Defense of Insurance

Now that cleanup is underway, there are the predictable rumblings against the insurance companies. A lot of the editorials seem rooted in the assumption that insurance companies are going to try to screw over their insurees to deny every claim.

Here's the thing. Insurance companies are not social programs. Insurance companies are businesses that exist to turn a profit for their owners or stockholders. Profit is not a dirty word; everyone lives on profit. Furthermore, insurance is not charity. Insurance is a contract by which a person agrees to pay premiums to so that someone else will pay for damages if A, B or C happens. The contract only requires the insurance company to pay for A, B or C. If D happens, it may be unfortunate, but it is not part of the contract and the insurance company is under no obligation to pay. Since their ultimate obligation is to owners or shareholders, they are beholden not to pay claims for losses not covered in the contract.

The thorny issue arises when B and D happen concurrently. Even thornier, the issue of what to do when a reasonable argument can be made that B was a contributing factor to D. In the current situation, the fact that flooding occurred should not absolve the insurance companies of their responsibility to pay for damage caused by the hurricane. By the same token, the presence of a hurricane should not require the companies to pay for flood damages someone was not insured against.

Given that the president has generously offered that the federal government will pay for the rebuilding, minus whatever insurers pay, the suggestion has been raised that we should make sure insurers pay as much as possible. Bad idea. The more insurance companies have to pay out, particularly on questionable claims of damage for which they may not have collected premiums, the more they have to raise premiums across the board to make up the bottom line. In effect, requiring a bigger payout from insurance companies will penalize the responsible people who purchase all the appropriate coverage and who are least likely to require federal disaster assistance. On the other hand, having the federal government pick up the slack (or god forbid anyone actually incur a loss) spreads the financial burden across the entire tax base, including to people who do not purchase adequate insurance coverage for their homes and property.

Most insurance is a gamble between the policyholder and the insurance company. Uninsured or underinsured people are effectively betting that they will not incur losses greater than the amount of premiums they would have paid. Sometimes people lose that wager. Let's not assume the insurance companies are the only ones welshing on a bet here.