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:
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.