Do you plan on buying insurance for the first time? Then you should know about coverage limitations. Getting insurance doesn’t mean the insurer will cover everything under any circumstances; otherwise, insurance companies would go under, and premiums would be unaffordable. Coverage limitations vary from specific conditions and restrictions to exclusions. Discover ten coverage limitations that apply if you are a first-time insurance buyer.
1. Criminal Charges
Can someone obtain an insurance policy if they have a criminal l record? Yes, but it’s not simple; some restrictions and exclusions apply. Insurance companies offer policies based on risk analysis and management. Thus, a criminal record signals risky behavior. Since insurers want to protect themselves from risk, they may impose restrictions and exclusions to manage exposure.
The three most common coverage limitations for people with a criminal record are higher premiums, limited coverage, and exclusions. Higher premiums are because the insurer sees you as a higher risk, while limited coverage depends on the type of criminal charge. For instance, if someone assaulted a bail agent with falsified information, insurers will impose limitation of coverage to protect their interests.
If you are a first-time insurance buyer with a minor criminal charge, you may wonder if it matters. The answer depends on whether your record is spent or unspent. A spent conviction has been removed from your record, while an unspent one will show up on a basic criminal records background check. If you intentionally hide a criminal conviction from an insurer, your claim will be invalid.
2. Wear and Tear
Generally, insurance doesn’t cover normal wear and tear. Normal wear and tear types stand out: cosmetic damage, gradual deterioration, and known defects. For instance, your car insurance may not cover scratches on your bumper because it doesn’t affect functionality. Home insurance may not cover normal paint fading because of normal deterioration. Please consult with your insurance to know their scope of wear and tear.
It makes sense that insurers don’t cover normal wear and tear. The whole point of insurance is covering unexpected events and accidents beyond the capabilities of the policyholder. Wear and tear are normal and often within the capabilities of a policyholder. As an illustration, no matter how new and high-quality flooring is, it will thin and fade over time.
Covering normal wear and tear, even for first-time insurance buyers, would result in a moral hazard where policyholders don’t take care of their items. For example, someone could neglect their car outside because the insurer will cover pet scratches. Insurers would incur higher costs covering normal wear and tear, which is predictable and bound to happen. Consequently, the policies would be higher than most people can afford, beating the whole logic of insurance.
3. Out of Network
One of the most common terms you’ll hear as a first-time insurance buyer in the health market is ‘out-of-network’ and ‘in-network.’ If you use out-of-network services, it means your insurer has not negotiated reduced costs; thus, the cost may be higher for the policyholder. That’s why insurers impose restrictions on getting services in out-of-network health centers.
That doesn’t mean you can’t access services in an out-of-network facility or health provider. Instead, it means policyholders have to pay higher deductibles or share costs. If you visit a ketamine wellness clinic, you may have to pay for some services out of pocket. Other insurance providers put a cap on the maximum you can use in an out-of-network clinic. Restrictions may also come in the form of balance billing and authorization requests.
Insurance imposes coverage limitations for other reasons besides direct cost considerations. Since they invest significant resources in creating networks, they want to emphasize that policyholders use these networks for cost-effective care. Besides, without such restrictions, policyholders may overutilize services out-of-network when they’re easily accessible in in-networks.
Flood damage can cause significant structural damage and infrastructural deterioration. Why don’t general policies cover flooding, yet it’s an unexpected event resulting in significant economic loss? The most obvious answer is the magnitude of loss. If you pay a premium of $2000 per month for your home, and a flood damages it, it will cost the insurer way more to cover the cost of building the home.
It makes sense then that general policies don’t cover floods but recommend specific flood insurance policies so that the premiums can match the magnitude of the loss. Home insurance policies are meant to be affordable for the average homeowner. If it were to cover flooding, the costs would be prohibitive, and the home insurance industry would suffer financially. Thus, coverage limitations are a risk-management strategy.
Besides, the government is heavily involved during catastrophic events. In the U.S., FEMA is involved in responding to flooding emergency cases. Non-profit organizations may also be involved in assisting. However, insurance providers may cover damage caused by other types of flooding, such as when septic pumps get damaged.
No business is as concerned with lying as insurance. Lying can lead to massive losses. According to the Insurance Fraud organization, 10% of property-casualty losses are because of fraud, while Medicare loses $60 billion yearly. That’s why insurance is so diligent in preventing misinformation and lying. Lying when applying for your motor vehicle insurance to get cash for your junk car could land you into problems with an insurance company and the law.
As a first-time insurance buyer, you may not know what constitutes lying. In the insurance context, lying could be providing misleading information, skipping out on important details, and giving incorrect details about an event. One can lie or falsify health information, leading to adverse selection. The adverse selection causes an imbalance of risk pools and higher costs for insurers.
Without any intervention, lying could lead to more fraudulent behavior where people give false information to get covered. It could also destabilize insurance providers who depend on correct information to create risk management strategies. Such behavior would cost both the taxpayers and legitimate policyholders regarding claims. Thus, they’d have to pay higher premiums.
Earthquakes, like floods, are not covered in your typical insurance policy. First, such unexpected events are not widespread. The National Earthquake Information Center locates about 55 earthquakes daily around the world. Policyholders would get tired of paying premiums in some areas that experience earthquakes after so many years. Other places have never had an active earthquake for millennia. Yet if one happened, it would leave devastation in its wake.
Thus, it may be difficult for an insurance company to add natural events on normal policies when the damage could be so great and paced so far. Instead, they recommend taking a specific policy covering earthquakes. Commercial properties may have more stake in earthquakes, so that they may take such as policy. Insurance companies also manage risk by excluding earthquakes from their main policies. With multiple people affected simultaneously, it may be prudent to have a separate program.
The government is also involved in responding to earthquake emergencies. The government of Turkey has been involved in restoring people affected by the most recent earthquake. Non-governmental organizations such as WHO and Red Cross also run massive campaigns to raise funds to cover people affected by earthquakes, for instance, by doing roof replacement. In short natural events are so massive no one insurance company can provide effective response and restoration.
7. Vehicle Misuse
Are you a first-time insurance buyer who misuses an insured vehicle? You may be affected by insurance policy limits. You are misusing your car if you’re overspeeding, driving under the influence, or driving in unauthorized areas. Motor insurance is one of the few mandatories in the U.S. It also means the industry is huge with multiple players. If someone was misusing their vehicles, it could result in imbalancing risk pools.
Insurance pays for services at auto repair shops and sourcing for replacements. With hundreds of millions of cars on the road, inclusive practices could put the whole industry under for some time. That’s why insurers put in place coverage limitations to encourage responsible behavior.
An exclusion may look like denying insurance if an investigation shows your negligence caused the damage. If you hit a pole because you were drunk, you may have to bear the cost of fixing the car. By putting coverage limitations in place, insurance companies are able to respond in a saturated industry with people with different personalities.
8. Intentional Damage
In our first point, we highlighted that people with criminal records may get coverage limitations because they’re perceived as high-risk. Insurers also limit coverage in intentional damage scenarios. If you intentionally burn your house, consume poisonous materials, or hit another car intentionally, the insurance company will not cover you. The point of insurance is to cover emergency cases.
Insurers manage risk by encouraging personal responsibility and limiting coverage. If insurers covered intentional damage, some people would take advantage and do intentional damage to get a new house or car. Arsonists would burn down apartments to insurers and pay for fire damage cleaners, and construction. The cost of premiums would not be enough to cover the damages, and the insurance companies would become financially unstable.
As a first-time insurance buyer, you should know intentional damage may not be necessary because of criminal intent. If you operate a car without the requisite knowledge, your actions could lead to damage, but it’s not because of criminal intent. Even in such cases, the insurer may be shy to cover you. Another instance is drawing graffiti on a neighbor’s wall. You may think of it as an art form, but your actions still lead to damage.
9. Pest Damage
Did you know insurance may not cover pest damage in all instances? As a first-time insurance buyer, you should know instances in your coverage may cover pest damage. Most home insurance policies will only cover unexpected damage, such as a pest infestation because of flooding. The insurer may not cover you if the damage is due to your negligence in calling an exterminator.
Some insurance policies specifically exclude pest damage, effectively limiting coverage for such cases. You can find specific policies to cover pest damage in that case. Another strategy insurers use is limiting coverage to certain pests. They may only cover damage by rodents and leave out all other pests. Insurance companies may also limit coverage based on maintenance efforts.
One of the reasons insurance companies may limit coverage for pest damage is to prevent negligence. Pests are an avoidable nuisance through hygienic practices and home design. If there’s a pet infestation, you can call a pest removal company to remove them before damage occurs. Insurers are also managing risk by limiting coverage on pest damage.
10. Lack of Payments
As a first-time insurance buyer, you should know that an insurer may not cover you if you default on payments, deductibles, and co-payments. An insurer will suspend or terminate coverage until you can start premium payments. Even though you had paid for some time before stopping payment, you’ll experience a lapse in coverage for services such as dent repair. Without such restrictions, insuring companies would not be financially stable. Besides, covering people paying and those who don’t would be unfair.
Coverage limitations in insurance policies can be in these three forms: coverage lapse, grace period, and reinstatement fees. When you are in a coverage lapse, your insurance provider will not cover you even if an event arises. Some insurance providers will give you a grace period to make payments, after which your coverage will be affected. Alternatively, they can impose a fee for reinstating your coverage.
To bring it all together, insurance covers unexpected events, but that doesn’t mean it covers everything. Insurance is an old science developed over time to design carefully crafted policies that ensure effective coverage for policyholders and profit for insurers. As a first-time insurance buyer, knowing what coverage limitations an insurer has put in place is essential, so you don’t go beyond them. Some, however, are universal. For example, no insurer will honor a claim if you lied during the application process.