Insurance is confusing to lawyers and non-lawyers alike. When you apply for insurance, a homeowner's insurance policy for example, the insurance agent will ask you anywhere from what your roof is made of to whether you have a fire extinguisher to what type of breed your dog Spike is. After compiling that information, he gives you what your insurance will cost and sends you a packet full of numbers, information, and language that appears to come from another planet. It is at this moment that you ask yourself: What exactly is it that I'm buying? Why did he have to ask me all of those questions? What are all of these numbers? Is this policy language in English? It is in this stream of blogs, “Understanding Insurance Policies,” that I will attempt to answer these questions.
What are the Policy Limits?
An insurance company will not cover everything that happens in your life. Additionally, the things that an insurance company will cover are only covered up to a certain amount. This amount is called your insurance policy limits.
It is essential that you sit down and think about how much coverage you require for adequate protection before jumping online and purchasing the cheapest policy available. The cheapest policy available is usually the policy with the lowest policy limits, or in other words, the least amount of protection for you, your family and your property.
Remember: your insurance company will only cover you for the amount of risk that you are willing to pay protection for.
For example, let's look at the unfortunate story of Joe Bloe (we will be looking at the unfortunate events of Joe Bloe throughout this blogging series, as he has messed up several times). Mr. Bloe does what many do and shops for automobile insurance policies based on the cheapest one out there. When the insurance agent asks Joe, “How much coverage do you want?” Joe simply responds, “I don't care so long as I don't have to pay a lot for it.” The insurance agent gives Joe a price Joe can't refuse and sends Joe the insurance policy. Joe throws the policy into a dusty filing cabinet without a second glance.
One day, Joe is running late to work and blows a stop sign, slamming into an innocent old lady and severely injuring her. As a result of the accident, the old lady has $100,000 in damages. Joe thinks, “No problem, my amazingly cheap insurance policy will cover all of it.”
Not so fast. Because Joe didn't consider how much protection he wanted, it turns out that his cheap policy has only $15,000 available in policy limits for “liability coverage.” Joe's insurance company will pay the old lady $15,000 for her troubles, but not a penny more. If the old lady wants to go after Joe for the remainder, Joe may very well be personally responsible for forking up the additional $85,000. If Joe had spend just a little more time thinking about how much protection he needed and spent a little more money to have that protection, Joe would not be in this financial hole.
Tip: Look at your Cover Declarations Page (often near the front of your policy). This page will give you an overview of your policy limits: the most amount of money that your insurance company will pay for each type of coverage under the policy. Spend some time thinking about whether those limits are sufficient enough to protect the things that are important to you. If it is not, consider calling your insurance agent and adjusting those figures. You will have to pay more for more protection, but the increased price tag comes with the comfort of knowing that you're covered.