Property And Casualty Insurance Basics
Sam Friedman (Editor-in-Chief, National Underwriter, Property & Casualty Edition) gives expert video advice on: Do I need insurance?; How much insurance do I need? and more...
What is "casualty insurance"?
Casualty insurance is a component of the homeowner's policy. Essentially it protects you if someone is injured in your home or you hurt somebody. For example, if someone trips on your stairs, falls on the ice that isn't swept away in front of your house, if you back out of your driveway and hit them, things like this. It also covers some personal property. For instance, if you're burglarized, that would be considered a casualty loss.
What is "property insurance"?
Property insurance, for our context in a homeowner's policy, essentially is the loss of your home, whether there's a fire, whether there is hurricane damage to it, things of that nature. There are also personal property losses. For instance, if you have jewelry, if you have furs, televisions, furniture, satellite dishes, things of this nature, those are all considered personal property.
Do I need insurance?
You certainly do need insurance because if you go bare (the industry phrase for going without insurance) essentially what happens is you are on your own. If anything happens to your home or your property, or you happen to injure somebody else, your assets are at risk. It's out of your own bank account, out of your own pocket. People do need to buy insurance.
How much insurance do I need?
How much insurance you need depends on how much you own. That's a conversation that you should be having with your insurance agent when you sit down to buy coverage. It involves that value of your home and how much property you have: if you're living in a one bedroom apartment you'll need a very different amount of insurance than if you have a three story home filled with furniture, clothing, fine art, etc. The more you have the more insurance you need. You do need to go over this very carefully with your insurance agent to make sure if you do have a loss, everything you did lose will be replaced.
What are the pros and cons of buying insurance directly from an insurance company?
The popular myth is that it's cheaper to buy directly from an insurance company. That seems to make sense: if you cut out the middleman, that cuts out a cost, therefore you're going to get a cheaper product. That's not always the case unfortunately, because if you don't know exactly what kind of coverage you need, you actually might be buying more than you need and paying more for it, so whatever savings you may have achieved by cutting out the insurance agent may have been lost by the fact that you're buying more insurance than you actually require. Another situation is that if you buy directly from the insurance company, you won't have that intermediary there on your behalf to help you through the process if you do have a claim. Thirdly, and most importantly I think, is if you buy directly from the insurance company, you're only hearing that company's point of view. If you deal with an independent insurance agent, these individuals are licensed to represent a variety of insurance companies and they can put you with the best company at the best price. If you deal directly with a company, you're going to be limited to getting quote, and whatever coverages are offered from that specific insurance company. They will always talk a good game and tell you, "We're always the best, we're the cheapest" etc., but you'll never really know that for sure unless you shop around. I personally think the best way to do that is through an independent insurance agent.
What's the difference between a "captive" and an "independent" insurance agent?
Well it's pretty simple. A "captive" is exactly what it sounds like. They are a captive of the insurance company they work for; they represent solely that one company. So, and it's very easy to pick out these types of agents. If you're walking down your main street wherever you happen to live, if you see the name of the insurance company on the storefront, whether it's Statefarm, Allstate, Prudential, MetLife you will see the, that you know is a captive agent, that is a representative of that company. If, on the other hand, you're walking down the street and you see the John Smith Insurance Agency you know that this individual is an independent agent, he's free to do business with whatever carriers he signs on with, and by definition they're going to have a stable of carriers that can meet a number of your needs, as opposed to just offering you, you know, the offerings of one company, and that's the big difference dealing with an independent agent.
What's the difference between an "insurance agent" and an "insurance broker"?
An insurance agent is someone who is licensed by a carrier to represent them. So technically, they are the insurance company's representative in the market. An "independent agent" can be licensed by a variety of companies while a "captive agent" is usually only licensed by one company. An insurance broker, on the other hand, is legally the representative of the client and is free to place business wherever they can find a market. In reality, however, when you're dealing with personal insurance issues, like auto and homeowner's coverage, ninety-nine percent of the time you're dealing with agents. It's usually the bigger commercial companies that are dealing with the major national insurance brokerages in placing coverage not only here in the United States but overseas. So, for the most part, people are dealing with agents who are legally representatives of the companies that appointed them.
What are the advantages and disadvantages of buying insurance through an agent?
The advantage is of dealing with an agent is the fact that you'll have somebody that can be an expert advisor to you and that can have access, if they're an independent agent, to a multitude of markets, so they'll make sure that you get the right coverage at the best price possible. The disadvantages of working with an agent might be that there's an extra cost involved because you have an intermediary. That's at least the mythology that's out there--that if you cut out the middleman you save money. That's not always the case, because you may save money on premium but you may not be getting the right coverage, which could harm you down the road when it comes time to make a claim. My advice to people is always try to deal with an agent when buying insurance.
What should I consider when choosing an insurance broker or agent?
I think the best advice I can give people when choosing an insurance agent is to deal with a referral if at all possible. Ask your friends: Who is their insurance agent or broker? Are they happy with them? If they are happy with them, what do they like about them? Make your friends articulate the advantages of dealing with this insurance agent because at least in that case, you get some sense that people that you trust have had a good experience with this person in getting price, coverage, and even a claim handled properly, which is really when the money is on the line. My best advice is to do that. Otherwise, just sit down with the insurance agent, talk to them in as much depth as possible, make sure you're comfortable, that you understand their explanations, that they're being patient with you, and giving you full disclosure about what's covered in the policy. Shop around. See more than one insurance agent before you make your decision. You might be comfortable with insurance agent A but when you get to B and C, you find out you and C really hit it off and you're prepared to place your business there.
What kind of support can I expect from my insurance broker or agent?
First and foremost, you want your agent or broker to get you the best coverage at the best price. You want them to listen to you as to what your liabilities are, how much property you own, what types of exposures you're worried about, and let them get you an insurance policy that will cover you when the chips are down and you have a loss. And, when you do have a loss, you'd like to have a broker or agent who will help you through that process, because that can be a traumatic time especially if there's any question about whether the loss might or might not be covered. So you'd like to have an agent and broker who's an advocate for you with the insurance company, make sure that you're treated fairly, because the agent and broker's reputation depends to a large extent on how good the experience is with the carrier they place you with. So they have a lot of incentive to try to make sure that you're well taken care of. So you want them to be your advocate.
Who oversees or governs insurance brokers and agents?
Insurance agents, brokers and insurance companies for that matter are actually state regulated. Each state has it's own insurance department. At the head of that department is a commissioner of insurance, or a superintendent of insurance; the titles differ. Some states such as California you elect the insurance commissioner. In New York and in other states the insurance commissioner is elected by the governor. These people watch over rates to make sure people aren't being overcharged. They have market conduct exams to make sure people aren't being cheated in terms of claims and other matters. And if you ever have a complaint about your agent or broker or your insurance company for that matter, you should file it with your state insurance department.
How does an insurance broker or agent get paid?
An insurance agent or broker is normally paid on commission. The commission is paid by the insurance company where they place the business and it is billed into the premium. In other words, the buyer doesn't see any sort of a surcharge and it's not like a restaurant where we have to add 15% for tip or anything like that. An insurance agents commission usually will range from anywhere between 8 to 15% depending on what their relationship is with the carrier. Occasionally there are some bonus commissions that are paid to the insurance agents and brokers, which are usually based on the profitability of the agent's book of business so it's in the agent's interests to try to help you limit the losses as much as possible so that they benefit as well.
Is price all that matters when I'm buying insurance?
Price is very important when buying insurance. Everybody always wants to get something as cheaply as they can. But price is certainly not the only consideration in buying insurance. You'll want to make sure that the company's going to be there to pay the claim when you have one, so it's important to ask your agent about the financial stability of the carriers that they're placing you with. You also want to make sure that it's a service-friendly company. You can ask around with friends and neighbors if they've had experience with that insurer--whether their claim was paid on time; did they respond to any inquiries you have about your coverage in a timely fashion? Etc. All that goes into part of the insurance package, as well as price. It's great to have the cheapest coverage that you can get. But, you don't want to scrimp on coverage and then wind up having more trouble than you should be down the road when you need the insurer to make you whole again.
Will there be a penalty if I cancel my insurance policy?
Well, that's something you really need to focus on with your insurance agent when you take the coverage. The only penalty that you know for sure is if you cancel your insurance coverage and you're not replacing it with something else, you're going to be left exposed to any losses in the interim. So you want to make sure that there are no gaps in the insurance coverage. If you do cancel your insurance coverage, for instance if you're moving, changing homes or something like that, so that you want to end the insurance coverage for the home you're leaving, you want to make sure that your homeowner's insurance for your new dwelling is in place the day you move in. You do not want to leave a gap, because even one hour could leave you exposed for catastrophic loss.