What Is Insurance For?

By Author: Marcus Stalder
Total Articles: 491
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This has the easiest possible answer. All insurance policies are private contracts between you and the insurance company. In return for paying out the premium, the insurer pays you if you suffer an accident and incur a loss in one of the circumstances identified in the policy. But if you scratch the surface a little, there's a more complicated answer lurking just underneath. When you insure your vehicle, you are one of a large group of individuals creating a central fund under the control of the insurer. The purpose of this fund is to pay out whenever someone is injured or suffers loss in a traffic accident. The notion of compensating victims means the fund is held as a financial and safety net. It catches people who would otherwise have to pay for their losses out of their own pockets. If you wanted to be political about it, the whole scheme is intended to be a redistribution of wealth from the drivers who can afford to pay and the victims who may not be able to pay. In some people's books, this makes insurance one of these socialist inventions better suited to a communist country rather than the capitalist US.

So how ...
... should we view this "social contract"? The liability version is mandatory in all but three states. This is a form of government intervention, lifting the policy out of the usual private contract law, and placing it into a version of public law. To confirm this uneasy alliance between the state and the insurers, every state has an Insurance Commissioner heading a Department of Insurance. Their job is to police the market and protect you, the consumers. This is a balancing of interests. You as the consumers may be the drivers paying the premiums, or the victims collecting your compensation. Unfortunately, your interests oppose each other. Drivers want to pay as little as possible. Victims want the maximum compensation. To demonstrate the problem, let's look at New Jersey where the law requires insurers to offer an equal amount of liability, and uninsured and underinsured coverage. The state legislates to direct how insurers shall run their business. GEICO is now the subject of a class action alleging it deceptively sold its policies, hiding the amount of UM/UIM coverage on offer.

This is a classic example of a state imposing a duty on auto insurance companies and then being prepared to act in a policing role when insurers are shown to have ignored the law. This actually makes it quite difficult for the ordinary citizen when it comes to buying a policy. When you come online and ask for those multiple car insurance quotes, do you know what your state's law requires the insurers to include in their policies. If not, you could be innocently buying a policy that fails to give you the protections required by the law. In one sense, this is not so bad for the drivers because, if it turns out you have been deceived by your insurer, you can sue. But there are legal problems if people standing on a sidewalk are injured. They do not have an insurer to sue. That's why it's good to see individual states prepared to police their own laws.