Some of the more interesting discussions about property insurance losses which I have read lately come from Steve Patrick’s “Level The Playing Field” Facebook Group. Recently, Leland Coontz wrote the following:

I’ve been triggered again. Someone mentioned on Facebook that ‘The insured is not allowed to profit from their loss.’ Show me your law license and I might respect your wrong opinion. But it would still be wrong.

His post triggered over 130 comments with very different opinions.

I wrote the following comment:

LeLand—you are right. Some products, like replacement coverage, had to be legislated for allowance because the policyholder was in a better position after the loss than before. The Valued Policy Laws raised huge debates in the 19th Century for the same reason. People recite principles without thinking that they are not always applicable and have exceptions.

Of course, a number of people refused to believe what I wrote and said that the principle of indemnification prevented people from profiting from their loss. So, I had to provide an example—using my old shoes example which I often do during speeches and presentations where I literally show off my old shoes:

So how do you explain that I am not profiting when my almost valueless old and worn out, almost unusable leather shoes with holes in the bottoms, when they get burnt up, I get to go buy brand new ones for $200 and the insurance company pays me for them? I can play this game with you all day long showing how an insured profits from replacement cost coverage and even give you extra expense examples in commercial situations. Why don’t you just accept that in some situations, the insurance product is sold that intends to put the insured in a better position and not back to how he was? Go read some of Chris Boggs discussions of this topic which he presents to the Big I—even insurance agents get taught that replacement cost coverage puts the insured in a better position than before and is an exception to traditional notions of indemnity. Cheers and good luck. Not trying to start a fight, but it is pretty obvious that insureds can profit from a loss as Leland points out.

For those interested, here is a presentation Chris Boggs made to the “Big I” regarding valuation.

And do not get me wrong, most discussions of “indemnity” as an insurance principle recite:

Indemnity

The principle of indemnity ensures that an insurance contract protects you from and compensates you for any damage, loss, or injury. The purpose of an insurance contract is to make you ‘whole’ in the event of a loss, not to allow you to make a profit. Thus, the amount of your compensation for a loss is directly related to the amount of loss that you actually suffered.

I am just saying that the modern insurance product can be purchased which totally blows this old and often recited “principle” away. Some people freak out with change, some believed the earth was flat and threw scientists in jail for saying otherwise and the rest of us study, learn, and comment on facts. Those old shoes don’t lie.

Thought For The Day

The church says the earth is flat; but I have seen its shadow on the moon, and I have more confidence even in a shadow than in the church.
—Ferdinand Magellan

  • Edward Fako

    Wonderful topic posed by Leland and it obviously struck a chord with you too Chip.

    I find it so perplexing, that most others refuse to open their own eyes, to even allow for the possibility that an RCV Policy offers the Potential For Betterment. RCV is Indemnity Plus style of potential.

    Thank you for chiming in.

  • The principle of indemnity fits basic insurance like the Standard Fire Policy that only pays the actual cash value of the loss. Replacement cost coverages and valued policy law allow for putting the person insured in a better position than he or she was before the loss. Insurance is a contract and if you are willing to pay more for replacement cost coverages than you are entitled to receive what you paid for.

    • I agree. Most liability policies only pay ACV for third-party property damage, which is what most courts have determined to constitute indemnification. However, for first-party property coverage, the insured and insurer are free to contract under whatever terms they mutually agree to.

  • Chip, when I come to Orlando in a couple of weeks, would you like me to bring you my old wingtip shoes? They’re in better shape than the ones in the photo.

  • Stephen Sarasohn

    Insurance is based on the principle of indemnity but the policy doesn’t actually promise you that. Simply having a deductible prevents the carrier from making you whole. Law and Ordinance coverage make you better than whole.

  • Leland Coontz

    Thanks Chip!

  • shirley heflin

    Dear Chip:

    And my Facebook comment – in response to your comment – on this topic is/was:

    “…and i’m w/you all day long, Chip, cuz I don’t feel and/or see that the insured is “profiting” from anything if they got a better pair of shoes than the ones that burnt up!! that’s the ENTIRE PURPOSE OF INSURANCE!! Indemnification = properly and fully indemnifying an insured following a loss (and whether that loss is via water, hail, fire, hurricane, mva, etc.) the insurance policy is to “make it all BETTER” and if that’s “profiting” then so be it!!!

    Respectfully,
    SHIRLEY HEFLIN
    Tampa, FL