What Can You Insure?
If you have a car, you need either car insurance or some other form of proof of financial responsibility to ensure you can pay in the event of a loss.
The overwhelming majority of states require that any car operated on public roads be insured. However, in some cases it can be tricky understanding when you need to purchase car insurance and what you can insure.
Car insurance, for example, can get confusing for parents when their children begin driving. Whose insurance policy is covering the car? Can you still have the car under your policy when your child is away at school?
Finding the answers to these questions requires an understanding of some of the basics of insurance. We’ll review them here.
Insurance and Loss
Insurance essentially revolves around loss. You buy insurance to protect you from possible losses you might suffer.
You may have recently bought your child a remote control car. While there is a decent chance that your child might crash that remote control car and damage it, there is little chance that damage will cause any real financial losses to you.
However, the house that you have worked so hard to provide for you child, might possibly have a nearby tree fall on it causing some significant structural damage. This could be extremely costly and will definitely cause significant loss, which is why homeowners insurance is so valuable.
While the risk of loss is the driving force behind the need for insurance, not all things that come with the risk of loss can be insured.
In the insurance world, risk of loss can be divided up into one of two categories:
- Pure risk.
- Speculative risk.
Pure Risk vs. Speculative Risk
Pure risk, sometimes referred to as static risk, involves situations that only produce the possibility of loss.
For example, owning your car comes with all sorts of risks of loss, and essentially no chance of financial gain. The most glaring risk of loss comes with the risk of causing an accident.
If you cause an accident you will almost certainly be financially responsible for any costs related to injuries or property damage suffered by others. You stand to gain nothing from this, and you risk losing a large sum of money and even your personal assets.
This is why liability car insurance is so important. It covers the pure risk of operating your car and causing a car crash.
Speculative risk refers to risk involving the chance of both loss and gain. The most common example of speculative risk is investing in the stock market. You may suffer extreme losses if your stocks plummet, but if they rise you may be rewarded with great gains.
Insurance companies do NOT work with speculative risk, meaning insurance is only available to cover pure risk. This is mainly because speculative risk is much more difficult to calculate and predict, and the risk of loss tends to be much higher than with pure risk.
Now that you understand a little more about how insurance works to protect losses, it is important to understand that in order to be covered by insurance you must actually have the potential to directly be affected by the possible losses the insurance policy is protecting.
This notion relates to insurable interest, an insurance term that basically means you would suffer financial losses if something happened to the insured item.
You cannot get insurance for something you have no insurable interest in. This primarily protects insurance companies from insurance fraud.
How does this protect against fraud?
If, for instance, someone drives a car they have no insurable interest in, but he somehow has it covered in a policy, he could purposefully damage the car without suffering losses and still collect on the insurance.
By ensuring the insured has an actual interest in the car, the provider protects itself from potentially fraudulent claims.
Who Has Insurable Interest?
Again, if you stand to lose money when something damages the insured item, you have insurable interest. Let’s look at a couple examples.
If you are a parent and you let you child take your car when she moves out of state to attend college, can you still insure the car under your policy?
YES. You own still own the vehicle, so you have insurable interest in it. You would simply add your child to your policy if she is not already on it.
If your child purchases your vehicle, your insurance company will most likely require that your child insure the vehicle under her own policy, as she now has the insurable interest. However, if your name is also on the title, you may be able to cover it under your policy.
If you plan to buy a new car in a year and you told your daughter she could buy your current car once you’ve got a new one, she could not insure the vehicle ahead of time, because she would not have insured interest in it. She would have to wait until she owned the car and had financial interest in it before she could insure it herself.
In understanding how insurance covers potential losses and how those losses have to directly affect you, hopefully you get a better idea of how the insurance industry works, and a stronger understanding of just what you can insure.
When insurance companies decide what type of events can be covered by insurance policies, they think about the probability of that event occurring and whether or not it will cause losses.
In insurance lingo these are referred to as insurable events, or events that may or may not happen that will incur a loss.
If an loss is predictable, it either cannot be insured or will be very expensive to insure.
Your engine, for example, will not last forever. It’s eventually going to break down like all engines do, and if you really want to keep that car, you are going to have to replace it. This is a loss that is predictable, so it won’t be covered by your car insurance.