Modern insurance is a financial product that was historically developed overseas rather than in the United States. Many insurance contract legal principals were also first developed by English Courts. Accordingly, reading how the theory of insurance law has developed outside of the United States can be enlightening and helpful to American insurance attorneys, adjusters and consumers interested in this topic.

Malcolm Clarke, a professor of Commercial Contract Law at Cambridge has written a splendid insurance law book, Policies and Perceptions of Insurance Law in the Twenty-First Century (Oxford Univ. Press 2007). His work should be in the library of and cited by all policyholder attorneys because his explanations of insurance are very helpful to consumers of insurance.

So, why do you buy an insurance policy? Sometimes, it is required by a mortgage or a loan. Often, you buy insurances because you view the risk of devastation by a catastrophe to be far worse than "hedging" against this situation by paying a small premium.  I think most of us buy insurance for the peace of mind in knowing we will be able to recover should a catastrophe occur.

Professor Clarke addressed the reason why consumers purchase insurance in the context of risk, risk aversion, stress aversion, and peace of mind:

"To ordinary policyholders, who may well not be models of behavior or rationality, something is risky if loss is relatively likely to happen, or, although it is not likely to happen, if the effect will be disastrous if it does….Policyholders are less concerned with the precise probability than with whether the risk seems probable or bad enough to justify paying (premium) to soften its effect; that depends on their view of things, i.e., what psychologists call risk aversion.

Risk Aversion

In the words of The Economist, risk aversion is the feature of human nature that explains why, ‘when given a choice between, say, losing 1 dollar and a 10 per cent chance of losing 10 dollars, most people would prefer a certain outcome (losing 1 dollar) to a risky one (losing 10 dollars or nothing)’. ‘Prospect theory tells us that people making decisions in uncertain conditions weigh prospective loss twice as heavily as prospective gains. If people know that there is a 1 per cent chance of total loss of their £100,000 house, they may be willing to pay more than £1,000 for insurance, and one of the main reasons is that they are willing to pay to offload anxiety. Such people are ‘risk averse’. The Association of British Insurers (ABI), the organization that speaks for the insurance industry, projects insurance as something that enables people who are insured to organize their household budgets, or plan their business activities, with greater certainty…This raises the question: What is it that makes a risk so unacceptable that people decide to do something about it and, in particular, to buy insurance cover?

Stress Aversion and the Purchase of Peace of Mind

Risk aversion grows from stress aversion. One of the causes of stress in human Beings–in the motor car, the work place, or anywhere else–is a sense of not being in control of their situation, or of themselves. For many of those who avoid flying, the reason is not only fear of an air crash but also fear of losing control of themselves, as a result of stress. Research also shows that, in a given risk situation on the roads, the anxiety levels among passengers are higher than among drivers. Drivers feel in control; passengers do not…

One of the ways in which people seek to regain control of their lives, to reduce stress and to move towards some kind of peace of mind, is by taking out insurance. That is why some insurers send their sales staff on courses to learn about the ’emotional needs’ of the customer. That is also why some insurers advertise life insurance for ‘life-long peace of mind’ and travel cover ‘to give you peace of mind when travelling’ . A major bank has offered ‘a free home insurance review to ensure peace of mind’. Insurers also point to peace of mind when underlining that the cheapest insurance is not always the best insurance. Advertising of this kind has an enduring appeal, and even the courts have recognized this–in other countries.

Associated with the wish for peace and certainty is a desire for security. Sociologists tell us that on a descending scale of priorities, just after people’s basic needs for food, clothing, and shelter, comes the need for security. Insurers know this too, and security is another prominent feature of the image that insurers project of their products to the insured.

…An important feature of insurance contracts is that a significant part of what policyholders are paying for is peace of mind."

One reason why emotional distress damages and consequential damages beyond the insurance policy should be granted to policyholders is because the insurance industry contemplates these consequences if the insurance company wrongfully performs its obligations. Every insurance adjuster knows that the purpose of buying the insurance is defeated if the underwriter wrongfully underpays a claim or fails to pay at all. Peace of mind is one of the most basic attributes of an insurance product, even though it is never mentioned in the policy.

Policyholders and attorneys seeking justice during insurance litigation should remind the court and jurors that this peace of mind is a large part of the bargained-for-exchange. The emotional toll caused by an insurer’s unjust claim delay and denial is lost peace of mind.