Insurance in Not a Commodity- What’s The Difference?

I wrote earlier about the fact that insurance is not a commodity. So what is a commodity? Sugar, beans, cattle, and pork bellies are all commodities: they’re all the same. But insurance policies are NOT all the same. Sure, auto insurance is highly regulated and polices must meet certain criteria. But while many insurance companies advertise low rates and encourage you to switch and save money, often the reason their rates are lower is due to the fact that they are able to “carve out” coverage.

Here are some examples:

  1. Permissive user step-down clause. Many auto insurance companies add this clause to their policies in an effort to limit their own liability, in effect dropping coverage limits to the statutory minimum ($20,000) on drivers not listed on the policy. The reasoning here is that the insurance company doesn’t have any data on the other people you allow to use your vehicle, so once the limit is exhausted, their own insurance can pick up the difference. Problem: say your daughter living in New York City is home visiting and using your car. She doesn’t own a car herself, so she doesn’t have her own insurance. If she is then involved in a fatal accident in which someone else is killed, she only has $20,000 of coverage
  2. Coverage only applies to licensed drivers. Problem: your 6 year old son gets in your car, puts it in gear, and it rolls down the driveway into another car. With this clause in place you would have no coverage in this situation.
  3. Comprehensive coverage written on “named peril” basis, rather than “all risk” basis. Comprehensive coverage is designed to cover risks not falling within collision coverage. Problem: if your car suffers damage from something not listed as a named peril, there is no coverage.

There are other situations where it is assumed that coverage applies but it does not. For instance, many auto insurance policies exclude coverage on cars while being used for pizza or newspaper delivery.

It is important that you are aware of differences such as these when considering placing your auto insurance coverage. Yes, price is a consideration, but is should not be the only consideration.

Nick Chapekis, CIC, CRM