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Indemnification: How Auto Insurance Works

Written by W. Lane Startin. Posted in Definitions, Research Last Updated: 06/11/2013

What indemnification is, how it works and how to recognize exclusions and policy language that may lessen its impact.

Indemnification is how this loss can be compensated.

Like any other professional field, insurance is full of terms that may be unfamiliar to the outsider. One of these is “indemnification.”

Aside from being a mouthful, what is indemnification? Well, it’s a very important insurance concept which deserves a closer look.

What is Indemnification?

Indemnification is a central concept of insurance in general, not just auto insurance. It’s a term that comes up in every form of insurance, be it homeowner’s, renter’s, life, commercial liability or what have you. Indemnification is, in the recent words of a major carrier, the means insurance companies use to “get you back to where you belong.”

The concept is simple: by definition insurance should replace or otherwise pay for exactly what you lost. There should neither be profit nor loss in an insurance claim. That’s the theory, anyway.

How Indemnification Works

Say you’re in an auto accident and the other driver is found at fault. For the sake of simplicity (and because we like you) we’ll say that you weren’t injured, but your car was totaled. We’ll also assume the other driver had adequate liability coverage on his vehicle.

Depending on the policy and your preference you may be able to do one of two things: get a new car comparable to the one you had, or take a cash payment equal to the value of your car at the time of loss. Either way, the insurance company indemnifies you for your loss.

In another example, assume you have full coverage on your vehicle and you accidentally hit a tree. The car isn’t totaled, but there is $3,000 worth of body work needed. After your pay your $500 deductible, the insurance company picks up the remaining $2,500. While the deductible isn’t covered per the terms of your insurance contract, the rest is. That $2,500 claim payment is indemnification for your loss. You would profit from any further payment, but lose out from any less.

Indemnification isn’t automatic. Your claim must go through the proper channels and be investigated by a claims adjuster, who determines the amount of loss and what the insurance company is responsible for. If you disagree with the amount, you can hire a third party adjuster to take another look, or in extreme cases take the insurance company to arbitration or court.

Pitfalls of Indemnification

One should bear in mind indemnification does not take into account exclusions such as depreciation. It is very important to know if an item is covered for “replacement cost” or “actual cash value.” If the latter, you’ll only be covered for what the item was worth at the time of loss, which may or may not be enough to replace it.

Aftermarket accessories on separate auto inland marine policies are often covered at actual cash value, for example. Many commercial policies also make wide use of actual cash value clauses in their contracts. Ask your agent to be sure.

What indemnification is, how it works and how to recognize exclusions and policy language that may lessen its impact.

Like any other professional field, insurance is full of terms that may be unfamiliar to the outsider. One of these is “indemnification.” Aside from being a mouthful, what is indemnification? Well, it’s a very important insurance concept which deserves a closer look.

What is Indemnification?

Indemnification is a central concept of insurance in general, not just auto insurance. It’s a term that comes up in every form of insurance, be it homeowner’s, renter’s, life, commercial liability or what have you. Indemnification is, in the recent words of a major carrier, the means insurance companies use to “get you back to where you belong.”

The concept is simple: by definition insurance should replace or otherwise pay for exactly what you lost. There should neither be profit nor loss in an insurance claim. That’s the theory, anyway.

How Indemnification Works

Say you’re in an auto accident and the other driver is found at fault. For the sake of simplicity (and because we like you) we’ll say that you weren’t injured, but your car was totaled. We’ll also assume the other driver had adequate liability coverage on his vehicle. Depending on the policy and your preference you may be able to do one of two things: get a new car comparable to the one you had, or take a cash payment equal to the value of your car at the time of loss. Either way, the insurance company indemnifies you for your loss.

In another example, assume you have full coverage on your vehicle and you accidentally hit a tree. The car isn’t totaled, but there is $3,000 worth of body work needed. After your pay your $500 deductible, the insurance company picks up the remaining $2,500. While the deductible isn’t covered per the terms of your insurance contract, the rest is. That $2,500 claim payment is indemnification for your loss. You would profit from any further payment, but lose out from any less.

Indemnification isn’t automatic. Your claim must go through the proper channels and be investigated by a claims adjuster, who determines the amount of loss and what the insurance company is responsible for. If you disagree with the amount, you can hire a third party adjuster to take another look, or in extreme cases take the insurance company to arbitration or court.

Pitfalls of Indemnification

One should bear in mind indemnification does not take into account exclusions such as depreciation. It is very important to know if an item is covered for “replacement cost” or “actual cash value.” If the latter, you’ll only be covered for what the item was worth at the time of loss, which may or may not be enough to replace it. Aftermarket accessories on separate auto inland marine policies are often covered at actual cash value, for example. Many commercial policies also make wide use of actual cash value clauses in their contracts. Ask your agent to be sure.

Understanding Insurability

Written by W. Lane Startin. Posted in Definitions, Research Last Updated: 08/04/2011

What insurability is, how it’s determined for both the vehicle and the driver, and the differences in insurability from company to company.

Insurability for a Sports Car

Check with your agent to make sure this baby is insurable.

As part of the larger property and casualty line of insurance products, auto insurance shares some basic characteristics with other forms of insurance. One of these characteristics is insurability.

What is insurability, and how does it impact you the auto insurance consumer?

At a basic level, if an insurance company deems a certain risk to be acceptable to its business, it is considered insurable. Otherwise, the risk is considered uninsurable and therefore ineligible for coverage.

This is true regardless of whether you’re talking about auto insurance, homeowner’s insurance, life insurance or any other line of insurance you care to name.

When it comes to auto insurance, insurability is dependent on two factors: the auto and the driver. Both must be deemed insurable before an auto insurance policy can be written. This is accomplished in the underwriting process.

Insuring the Auto Itself

With most auto insurance companies, the auto meets insurability requirements if it is built by a recognized manufacturer and has a vehicle identification number, or VIN. This includes the vast majority of cars on the road today. Autos that do not meet insurability requirements with most standard companies typically include kit cars, exotic sport cars and models with particularly poor safety ratings. Your insurance agent will be able to tell you if your vehicle meets insurability requirements, but barring unusual circumstances you’re probably in good shape.

Model year does not have much of an effect on insurability itself, but it does have an impact on overall premium. For the most part, newer vehicles cost more to insure than older vehicles all other things equal.

Trailers and RVs are subject to similar insurability requirements, but remember that it is not possible to insure a trailer for full coverage. You can only get comprehensive and collision with them.

Insurability on the Driver

From an insurance carrier’s standpoint determining insurability on the vehicle itself is pretty easy. It’s either insurable or it’s not. Determining insurability on the driver, however, takes many variables into consideration. These include age, sex, marital status, driving history and past insurance history.

Further, if a vehicle is driven by multiple drivers then all drivers must be considered for insurability. Generally speaking, auto insurance on a vehicle is rated for the highest risk driver in any given group of drivers. This is why teenage drivers can cause their parents’ insurance premiums to dramatically increase.

Driver insurability is periodically reviewed by the company, and a driver may be dropped by the company if he or she no longer meets the company’s insurability requirements. Remember an insurance company can only drop a driver at renewal, so you may have time to shop around for a new policy if you find yourself uninsurable with your current company.

Driver insurability on commercial auto insurance policies takes into consideration a slightly different set of criteria. For example, drivers under 25 or over 74 are often deemed uninsurable on commercial policies regardless of other circumstances.

Insurability is Not Uniform

If your vehicle and/or you do not meet insurability requirements with one company, don’t fret. One company’s definition of insurability is always at least slightly different than another’s. Chances are there is a company out there that will take you. While many standard auto insurance companies shy away from kit cars and sports cars, there are other auto insurance carriers that specialize in them. Your agent may have access to one of these companies through a brokerage.

If a standard insurance company says you’re uninsurable, a non-standard or high risk company will probably take you instead. You might have to get an SR-22 or join an assigned risk pool to get insured, but auto insurance is available for just about anyone driving just about anything.

Driver’s Safety Courses

Written by Todd Clay. Posted in Definitions Last Updated: 10/21/2011

Known as many different names, driver’s safety courses help drivers learn to be safer behind the wheel and can offer some money saving perks as well.

An Off Ramp to a Driver’s safety courses

Sometimes drivers need to take the exit off the main road into a driver's safety course.

Driver’s Safety courses, also known as defensive driving courses or traffic school, help drivers who may have forgotten the safe way to operate a vehicle. These courses are designed as a quick update of driver laws and techniques for the driver. They can be mandatory for bad drivers and voluntary for older drivers just looking for a car insurance discount.

Driver’s Safety Course Education

Basically  driver’s safety courses are a very summarized version of Driver’s Ed. Most courses are only for about 8 hours and can be broken up into a handful of small sessions or one full Saturday session.

What you will learn in your driver’s safety courses:

  • Accident Avoidance Techniques
  • Proper Lane Changing
  • Stopping at Red Lights
  • New Driving Laws for Your State
  • Safety Restraints
  • Post-Accident Tips
  • Speeding Laws

These are just some of the subjects that your driving school instructor may go over. The final subject matter will depend on the state that you live in. They will present the information to you in the form of lectures, worksheets, and reading material.

If you are lucky there will be a comedy driver’s safety course for you to take in your area. This new form of traffic school offers everything that the regular course does, but is presented in a comedic fashion by the instructor.

The Perks of Driver’s Safety Courses

Driver’s safety courses not only make you a safer driver (yes, this is a perk), it also helps to decrease your insurance premium. If you have tickets and accidents on your driving record, this course could decrease the number of points that are charged on your record for these violations. The lower amount of points means that the insurance company won’t charge you so much for your premium.

Back to the becoming a safer driver. Safer drivers enjoy the perks of not having accident and ticket surcharges on their insurance policies. This means that they are paying less for the same insurance coverage that you have. By paying attention in this class and driving safer than you have been, after your tickets and accidents have fallen off your record, you also can enjoy this low premium perk.

Eligible driver’s safety courses can also add a discount to your insurance policy if you are an older driver. This discount will help to decrease the premium that the insurance company is charging you for your age. The driving classes for older drivers have nothing to do with traffic school and are not because of tickets or accidents.

Locations of Driver’s Safety Courses

The locations of driver’s safety courses vary by your state and even by the area of the state that you live in. In some states you can take your driver’s safety course online from the convenience of your home. To find out when and where the driver’s safety courses in your area are offered, contact your local Department of Motor Vehicles or local police department. You can also check online for the driver’s safety courses near you.

If your driving record is bad enough, the authorities will tell you where to go; you won’t have to ask. This is because your driver’s safety courses will be mandatory.

Fraud Investigators: The Police Detectives of Insurance

Written by Michele Wilmonen. Posted in Definitions Last Updated: 11/17/2015

Fraud investigators are essential to the prevention of fraudulent insurance activity.

Fraud Document on an Investigators Desk

Insurance fraud is a fraud investigators main focus.

Insurance fraud is sometimes regarded as a victimless crime. This means that the crime is not directly violating the rights or endangering any particular person (victim).

This definition of insurance fraud does not exactly stand if you consider the repercussions of insurance fraud. The amount paid out to people that commit insurance fraud and the money that has to go into finding and persecuting these criminals are funneled out to all of us in increased insurance premiums.

This makes all of us victims of insurance fraud and is why fraud investigators are important to the industry and to all of us that have insurance.

What Are Fraud Investigators?

Fraud investigators work directly for insurance companies or for the state insurance commissioner’s office (or department of insurance) researching questionable insurance activity. This activity can be anything ranging from the most common fraud of fake insurance claims to premium being stolen. The concentration of a fraud investigators case can be a fellow employee of the insurance company, an agent, a claimant and even the insurance company’s own clients.

Why do we Need Fraud Investigators?

We need fraud investigators to help catch the criminals that commit insurance fraud and also to stop insurance fraud before it is too late. In the case of fraudulent claims, a fraud investigator can help prevent a fake claim from being paid out. They can also prevent too much from being paid out on an exaggerated claim.

If a fraud investigator can prevent the money from being paid out by the insurance company, the insurance company won’t have to raise premiums for the people insured with them to recoup the loss. The less that we have to pay out because of other people’s criminal activity should be good news for all of us that have to pay insurance premiums.

Fraud investigators also investigate fraud that may be happening with insurance premium. Situations like agents that are keeping premium instead of passing it on to the insurance company for their client’s coverage. They also investigate clients that lie about where they live to get cheaper insurance rates. Nothing in insurance is safe from fraud which is why insurance investigators work with just about every department of an insurance company.

A Dangerous Job

On June 7th, 2011 two fraud investigators in the state of Louisiana were killed while trying to obtain documents from an agent that was the focus of a premium fraud investigation. The agent that was under investigation, for stealing his client’s insurance premiums, shot and killed both unarmed fraud investigators before killing himself.

Being the main focus of an insurance fraud investigation is as unwelcoming as being the main suspect of a police investigation. People that find themselves in this position act out defensively and sometimes cause injury to the investigators or damage to their vehicles. People show less restraint of their bad intentions with fraud investigators than they would a police officer and unfortunately fraud investigators have to do their job unarmed…..at this time.

Insurance Company: A Brief History and Definition

Written by Michele Wilmonen. Posted in Definitions Last Updated: 07/15/2011

Like all businesses, the insurance company started out small with one product and grew into the multiple product corporations that we know today.

Files of Insurance Company Products

Insurance companies sell many different types of insurance.

Insurance companies are now everywhere and unless a person has been living under a rock, they have been a part of all of our lives at one point or another.

But, if someone ever asked you what an insurance company actually is what would you say?

Most people would only be able to answer that it is a company that sells insurance. But, the history and exactly what these companies sell can’t accurately be explained in one simple sentence.

Insurance Company History

The concept of insurance has been around since 3000 B.C. and was started to protect goods while being transported from the seller to the buyer over the seas.

The Chinese were the first to come up with the idea of insurance and it was passed on over the centuries from one culture to another. Today we still have this type of insurance along with home, auto, life, burial and health insurance. Out of all the insurance policies that are available today, the auto policy is the one that is the most frequently sold.

In 1897, the very first of these auto policies was sold in Dayton, Ohio by Travelers Insurance Company. At this time when the automobile was first being introduced, liability insurance was not mandatory to have like it is today. It was a purchase that was made by smart vehicle owners to protect themselves and their vehicle if an accident were to happen.

It wasn’t until 1927, when Massachusetts became the first state to make carrying insurance mandatory for motorists. Over the years, many states followed suit and now it is mandatory to carry the minimum of at least liability insurance on your vehicle to be allowed to drive in all states.

What do Insurance Companies Sell?

Insurance companies sell financial protection for you in the case that the item you purchased an insurance policy on becomes damaged or causes damages.

In the case of auto insurance; insurance companies sell you liability insurance so that you don’t have to worry about paying for the damages or medical bills to a person that you hit with your car out of your own pocket. Comprehensive and collision coverage are available so that you don’t have to pay to get your vehicle fixed.

Other products car insurance companies sell to protect you financially:

  • Towing/ Road Side Assistance
  • Rental Car Coverage
  • Personal Injury Protection
  • Medical Payments
  • Bodily Injury Liability
  • Property Damage Liability
  • Comprehensive Coverage
  • Collision Coverage
  • GAP Coverage

As you can see an insurance company has more to it than just “a company that sells insurance.”

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