Insurance has been defined in many ways, including “spreading the risk from the few to the many”. This working definition contains two concepts that we need to discuss. First we need to look at the concept of risk.
RISK is:
A combination of hazards with an uncertainty of loss measured by probability. If we know that an event will occur, there is no uncertainty, which is why one cannot insure the risk of loss from people with pre-existing medical conditions for the treatment of those medical conditions. What we can do is absorb the known and foreseeable losses by charging everyone else in the insurance pool for the upcoming and foreseeable losses. This has been common for large groups of employees where the one or two workers with cancer have their anticipated medical treatment spread over the other workers premiums before the “unforeseen” risk of the healthy worker’s potential for cancer is calculated. Property insurance is not normally sold as a “group” risk so there is no reasonable way of insuring a house that is already on fire and spread it to other homes that are not.
One should understand that the concept of a “pooled” risk is considerably different because the pool is made of a large number of insured, sharing the same geographical, climatic or political impact such as being in a flood plain, In a high crime city or an area where repairs and replacements are more or less expensive than national norms. All have equal risks of loss but as a group have higher or lower incidents because of their location.
An insurance policy is not a gamble as in, will the Chicago Cubs win the World Series next year (or ever). One can compute odds, but not actuarially compute risk as the event will happen, not randomly, but as a result of specific activities such as selection of players, coaches and strategies. Lightening hitting Wrigley field can be calculated and many feel a more likely catastrophe than the aforementioned team winning the World Series.
It is said that for most of us, our single largest economic asset is our homes. Almost all of us would suffer a devastating loss if our home and its contents were destroyed by any means. We own both the asset and the risk of losing all or part of the asset. The destruction of just the roof, can result in many thousands of dollars in cost and the additional loss or damage to contents if the roof is partially or totally destroyed. A roof, like everything else including the house itself, has an expected life and somewhere in the future, repairs, maintenance and replacement of part or all must be made to attain and extend that life. If a roof shingle has a 20-year rating, the manufacturer suggests that it should be replace within twenty years. One can plan and save for this event by saving 5% of the replacement cost, each year. Nobody does, but we could. In fact, a roof seems to go bad or a storm damages it when least expected and most devastating to personal finances. This is the risk that insurance was invented to cover.
Insurance does not and will not cover manufacturing defects or builder/contractor incompetence or malfeasance. Builders cut corners and use shoddy materials to contain costs. Building codes changed, often requiring more expensive and better work and materials than when the building was first constructed. Insurance has no choice but to pay for current costs of compliance but NEVER pay to correct structural insufficiencies from the builder or previous contractors. Insurance pays for what contractually insurance policies limit the risk on the insurance company to pay.
As an example, ALL homeowner’s policies pay for the damage wind and hail visit upon roof shingles but not the underlying damage that the same hail stone might have done to the wood decking under the shingle. The policy will pay for shingle and felt replacement but not for insulation that was or should be between the roof and the interior ceiling as that insulation should have been installed prior to the installation of the roof.
The second concept is “spreading” the risk. As previously stated, we own both the asset of our house and the risk of damage or destruction of that asset. As stated, it can be an economically catastrophic event if and when, unexpectedly and prematurely, a roof and interior damages must be borne by us. Insurance limits the damage to each of us from a catastrophe to the annual cost of our insurance premiums by spreading the risk to our neighbors who are paying premiums to the same insurance company. The formulation of an insurance premium is based on the calculable risk evaluation, adding of operating and marketing costs, administrative costs and profits and the combining of thousands of other policy holder’s premiums to pay for the damages when they occur. This is why insurance is described and defined as “spreading the risk” from one or a few to the many (all other insured in the same pool of risk).
Contracts of insurance are aleatory and contracts of adhesion. An aleatory contract is a contract in which the performance of one or both parties is contingent upon the occurrence of a particular event, death, sickness, accident, fire, flood, etc.
An adhesion contract is a standardized contract form that offers goods or services to consumers on essentially a “take it or leave it” basis without giving consumers the ability to negotiate terms. When this occurs, the consumer cannot obtain the desired product or service unless he or she acquiesces to the form and terms of the contract.
By law and rules and regulations, we can’t even negotiate price as the state insurance commissioner would consider a discount as an illegal kickback or rebate or discriminating against other policyholders.
Bob Michaels, JD – Managing Member – Git Er Dun Roofing LLC
