When Bottom Line Isn't The Bottom Line

Three years ago, in our current home (which is 110-years-old), there was a damage claim to living and dining room ceilings when the sewer drainpipe collapsed out in the yard. It cost the insurer $800 to replaster and repaintand although I know there is a coverage argument for it, I did not go after the $3,000 cost to excavate and replace the sewer line to the street. There seemed to be something non-fortuitous about that–100-year-old pipes will collapse, and its not the insurance companys responsibility, in my mind.

Last year, a lightning strike to the house knocked out the line to the garage and fried the electrical box (costing about $1,400 to repair). I didnt report the older computer printer, clock radios, and speaker power units that also got ruined–it seemed picky. Ive always had the attitude that insurance is there for the big losses; the little stuff is just life–get on with it.

So I always thought of myself as the conscientious homeowner that insurers wanted for their book of business.

But the game has changed. We saw it coming and National Underwriter has been reporting on it–the soaring loss ratios and pricing mess in personal lines. Were reading about droves of non-renewals–two losses in three years and youre out, stories on the local TV news about insurance crises, that type of story. It is a peculiar thing; insurance is just about the only product that, if you use it, your provider may cut you off.

Heres some more of my story. I called my agent to make a change on an auto policy and was told that the carrier has decided not to renew my homeowners coverage when the policy next expires, which will be in November. The reason given is two losses in three years.

Makes me kind of wish I had gone after coverage for the excavation and small appliances. Id be better off, and it wouldnt make a tinkers difference on the ability to continue doing business with this company. (See how it changes my attitude toward this insurer–and maybe the next?)

Well, that brings me to my point. The insurance company has created a morale hazard. And multiply me by thousands of accounts. (CE refresher: a morale hazard is a hazard arising out of an insureds indifference to loss because of the existence of insurance.) Ive been non-renewed, but coverage extends for some months more. Why should I care about "using" my coverage?

And it looks like I have a chance to.

In the May 27 edition of NU, I devoted "The FC&S Answer" to a question about independent contractors canvassing neighborhoods and letting homeowners know that hail damage is covered and new roofs are available at insurance company expense. It seemed like a sharp practice and, perhaps, a bit on the shady side, but contractually legitimate. Fraud, or just business, I posed?

Last week, my wife called in a locally reputable roofing contractor to repair some leaks in the attic and a bedroom. Im not thinking insurance coverage. And, I assume I have a fairly old roof. Guess what?

Lo and behold, this licensed, bonded, insured roofer found HAIL DAMAGE to the roof. He informed my wife that hail damage is covered and that hed be pleased to verify that damage to my insurance agent. I told my wife that I didnt feel right about it; that I know the difference between an older roof that has some evidence of hail damage and a roof that needs to be replaced because of hail. (I also told her that Id expect this investigation would be conducted by the insurers SIU; I wasnt too happy about that.)

My wife asked where I got my contractor license and what do I know about roofs? She also asked why, if this insurance company has already decided to non-renew our account, did I care about protecting its loss ratio? In her view, we paid for coverage, there is coverage under the contract, and there is no longer an incentive to be careful about reporting a loss.

There is a point to be made here in regard to one of the very bases of insurance. There is a social aspect to the insurance business that does not exist in other fields. Its somewhat intangible, but each party has a responsibility to act in utmost good faith. It can only work where that good faith is preserved.

If insurance becomes simply a commodity to be measured by premium taken in by insurers and payouts to insureds, something of this social aspect is lost–and thats not good for insureds or insurers. The bottom line is not always the bottom line.

Im pretty sure what thousands of disillusioned insureds might do. What Im not sure about is what Ill do. Im not sure what I should do. I know that when insureds and insurers are partners, it works; when they lose that aspect of the transaction, the system fails.

What would you do?

Bruce Hillman, JD, is Editorial Director of Risk and Insurance Markets for the Professional Publishing Group of The National Underwriter Company, in Erlanger, Ky. Questions and comment are invited at fcs@nuco.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 26, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.