Merriam-Webster’s Online Dictionary describes insurance as, “coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.” The central concept of insurance is “guarantee against loss”. No matter what is covered by a given insurance policy, it involves trust. The insurance company has to trust the party seeking coverage to give accurate information about the nature and magnitude of the risk; the party purchasing coverage has to trust any claim for loss will be compensated fully and fairly.
Our economy depends on the role played by insurance contracts. Large building projects, major equipment sales, vehicle rentals and a host of other transactions would be impossible without a way to protect the parties against loss. When policies are not handled in good faith, there are consequences that impact more than just the two parties. Third parties, such as other businesses or persons, may also be harmed by insurance contracts that turn out to be invalid either through the actions of the insurer or the applicant.
Insurers seek to insure qualified risks; qualified risks are assessed by using applications. An insurer relies on the information that an applicant provides on the application to decide whether a policy should be issued, how much to charge, what amount of coverage it can grant and any conditions for providing the protection. Insured parties have to trust the insurer can cover any losses they insure and that they will handle any loss fairly and efficiently. Ideally both parties approach the contractual agreement honestly and fairly.
Because there are times that people or companies do not act in good faith, there are formal protections for both the insurer and the insured. Technology frequently makes it possible to check an applicant’s information to judge the potential risks and costs associated with providing insurance.
In the Washington auto insurance market, insurance companies can review a person’s driving records in Washington and nationwide using state records, the Comprehensive Loss Underwriting Exchange (CLUE) or other claims information databases. Tickets, traffic violations, DUI convictions, and other facts about a person’s driving record typically show up for at least three years and for some offenses seven years or more.
With Life, Disability or Health Insurance, an insurance company can consult the Medical Information Bureau. MIB maintains extensive databases of pre-existing conditions of potential clients. If you have ever been denied coverage by an insurance company for health reasons applying somewhere else without disclosing the information will not work. If you lie on an application and the insurance company does not catch it, the company still has time to discover the lie and cancel the policy. Even if you die before the insurance company catches a misrepresentation the insurance company may perform an investigation before paying benefit. Any material misrepresentation of fact could affect the contract and any benefits.
When it is the insurance company that refuses to cover an eligible loss without a valid reason there are protections in state laws or regulations. In Washington State, the Insurance Commissioner is charged with protecting consumers and regulating the activities of insurance companies and agents. Their mission: “We protect consumers, the public interest, and our state’s economy through fair and efficient regulation of the insurance industry.”
While there are times when one party fails to handle their insurance obligations in good faith, these are the exception. Our economy is made possible in some part because most parties deal with each other honestly and when they do not, there are ways of helping assure they do.