It is not unusual for an insured to purchase more than one policy. While this is most likely to occur with health insurance, it can happen with any type. In the policy, the ownership of more than one policy will be referred to as other insurance. It specifically refers to more than one policy that covers the same perils or the same possible loss. To qualify as other insurance, the policy must be for the same insurable interest, it must cover the same insurance subject, and it must assume coverage for at least some of the same perils.

As we have repeatedly said, insurance is not designed for consumer profit. Although buying more than one policy for the same risk is not illegal in itself, it may increase the probability of a loss because of the moral hazard involved. There are two types of moral hazard. The first (spelled moral) is a subjective characteristic of the insured that increases the probability of loss. This would include the person who uses arson for their personal financial gain. The other morale hazard (spelled morale) refers to indifference to financial loss. This would include an individual who is careless in safety issues, although their intent is not that of producing a loss. They merely increase the chance of loss through their carelessness. Although underwriters may lump the two together, their distinction is important. There is certainly a difference between an arsonist and a person who carelessly throws down a lit cigarette. The arson would be termed a moral hazard while the careless smoker would be termed a morale hazard. The insurance underwriters consider both a problem since both actions result in claims.

When an insured purchases more than one policy to cover the same peril, underwriters do consider this a possible attempt to profit from insurance claims. Therefore, policies address this situation in an attempt to reduce the moral hazard involved. If no policy provision were made, it is conceivable that many people would over-insure. Even though the indemnity principle states that a person cannot profit from over insuring, the courts could rule differently if the situation were not covered in the policy. The method preferred by insurers is to eliminate the ability to purchase multiple policies, but that is not always possible. Even so, through their application process, their intent is to learn of the presence of other existing policies by clearly asking. In this manner, if information is concealed, they may void the policy.

The 1918 New York Standard Fire Policy approached this head-on by prohibiting other insurance policies unless express permission (in writing) was obtained by the insured. In 1943 the New York Standard Fire Policy provision was changed to permit other insurance as follows: Other insurance may be prohibited or the amount of insurance may be limited by endorsement attached hereto.

Who pays what?

When more than one insurance policy exists on the same property, what amount is paid by which company has the potential of becoming complicated. Some cases may be easily determined, but others will be complex.

Most policies contain what is termed a pro rata liability clause. It may also be called a contributing provision. Whatever name is used, it means that the company will only be liable proportionate to their part of the total loss. The actual policy language will depend upon the company, but it will either be based on the New York Standard Fire Policy or it will use the simplified updated language. Either way, the intent will be the same: to limit the claim payout to their portion of the loss.

Some policies adhere to actual cash value as a limiting factor, while others will be based on a replacement cost basis. When two different values are used in two different policies covering the same property, loss adjustment problems can certainly arise. Usually the insurance companies will work together to determine each insurers liability, but that is not always the case. Each insurer may simply determine what they believe their portion of the loss to be and offer that as payment to the claimant. Unfortunately, many claimants end up in court because they feel they have been cheated by their policies.

Some of the overlapped coverage is the result of no-fault laws governing auto insurance. Automobile first-party medical benefits may overlap with any health insurance carried by the injured person, although many medical policies state they will initially pay, but expect to be reimbursed by the auto policy when the claim is settled. Some medical claim forms ask if the injury is due to an accident. If it is, they may refuse payment altogether since they expect the auto coverage to pay the claims.

When there are several policies covering the same risk that are basically alike in all their terms, they are called concurrent plans. In this case, the application of the contribution rule is simple: each company pays a pro rata proportion of the loss. So, if Company A has issued a policy for $10,000 and Company B has issued a policy for $20,000, they would pay according to the liability issued. If the loss is $30,000, the equation is simple: each company would pay up to their limit. It gets more complicated when the loss does not come out so evenly. In that case a formula is used as long as the companies agree that the policies are essentially the same and contain no special limited clauses.

Lets consider a loss of $25,000 with each company insuring up to 80% of the loss. The total insured amount is $30,000. The equation would be set up as follows:

Company A: 10,000

30,000 X $25,000 = payment amount

Company B: 20,000

30,000 X $25,000 = payment amount

Since we are merely supplying the formula, we did not actually list the payment amount. It is the equation that is important:

Insured amount of company

Total of all insured amounts X Amount of loss = Payment due from specified company

Companies who are not able to pay

We dont like to think about it but it can happen: a company is no longer solvent. When more than one company is covering the same loss, all companies are considered in the equation, whether solvent or not. Special consideration should be given to the section of the contribution clause that provides for pro rata liability. There it will state whether collectible or not. This means each policy is considered even if the claimant will not be able to collect from the company issuing the policy.

Originally, this clause was included because it was common for people to buy policies from companies with cheap rates and unstable financial standings. Financially stable insurers wanted to protect themselves from companies who were financially weak. Today there is less validity in this thinking since companies must now justify their finances and rates with regulatory agencies.

Other Insurance alternatives

There are various ways that a policy may deal with the possibility of other insurance. They may simply prohibit it altogether. They may also establish their liability on the basis of contribution by equal shares. The policy may declare itself as excess in the event that other insurance is involved. When there are two or more policies each declaring themselves to be excess coverage, typically claims will be settled on a contributory basis.

Because this course is dealing with agents in multiple states, it is always important to know the laws of your individual state. While most states seem to have much in common, court cases often create variations that are important to understand.

While the first thought that may come to mind when a buyer has multiple policies is that he or she is trying to profit from a loss, it is more likely that he or she is attempting to cover all that is owned. When a desired insurer will not fully cover a perceived risk, it is common for the insured or the insureds agent to simply submit the risk to multiple insurers. Eventually the insured felt adequately covered. While this is not necessarily an efficient way to insure, it is a common way.

Today we are seeing a layering of insurance products. That is, each policy is designed to only take effect when a previous layer of insurance has been exhausted. This has been the result of many things, but primarily the use of higher deductibles, higher limits, and new policy types. Consumers have been encouraged to use higher deductibles (absorbing first dollar losses themselves) in order to keep their premium rates down. This is true in all types of insurance.

The layering of insurance has been effective for many consumers. The initial policy that pays first will be the most expensive. Each subsequent policy is less expensive since it will only have to pay once the first policy has been exhausted of benefits.

Non-concurrent policies

When policies are issued for the same risk, but do not agree in their terms, they are non-concurrent policies. It is much more difficult to assign payment of loss when the policies have different terms of coverage. The differences can involve multiple things including the property description. Policies may be blanket, which covers all items under one sum of money, floating insurance, which covers the stated property at any location within policy specifications, or excess insurance which may be either contributing or non-contributing. Excess coverage, as youll remember, only covers a loss that is in excess of a given figure. Non-concurrent policies may differ in where the property will be covered (property location). The interests insured may also be different.

When such differences are involved in various policies covering the same risk, settlement of claims can be time consuming and frustrating for the policyowner. Where possible, policies should be constructed so that they will work together as much as possible. In the past, it was common to find a major risk subdivided into several policies. Today, agents try to put multiple policies together in a working format. Where it was difficult in the past to find one policy that would adequately cover all risks, doing so is easier with todays policies. This is due to several factors including companies that will insure to higher limits, utilization of reinsurance, independent agents with greater knowledge of what is available, and the role-played by corporate risk managers. Account underwriting has lessened the difficulties of non-concurrent policies. Even so, agents still need to be sure that written portions of all policies work together and not against each other.

When Homeowners and other package policies became increasingly common under multiple-line underwriting laws, an effort was made to resolve the problems that had previously been experienced with overlapping policies and principles. Individual agreements addressed to correct specific problems often no longer worked effectively. A decision was reached to establish new Guiding Principles. In June of 1959 committees appointed by the National Board of Fire Underwriters, the Inland Marine Underwriters Association, and the Association of Casualty & Surety Underwriters began the job of establishing the new guidelines necessary to alleviate some of the previous problems experienced. They consulted other organizations, including the National Automobile Underwriters Association, during their decision making process.

The committee worked on rewriting the new guiding principles for four years. During this time, those on the committee sometimes changed due to death or retirement, but despite these changes the work continued. Once unanimous accord was reached, the New Guiding Principles were submitted to the executive committees of the various organizations participating. Once approved by the organizations, they were recommended to the insurers. Each insurer had the option of following the new guidelines; adherence was not mandatory.

As hoped, the vast majority of insurers did adopt the New Guiding Principles in nearly every respect, despite the size of the loss that would result. Even companies that were not members of the participating organizations adopted the new principles. Since the new principles established procedures for quickly determining primary and excess coverage, settlement of claims was much faster for the insurers. It is likely that this did save time and money, even when it meant that claims paid were higher.

Adjusters have mostly been instructed, when overlapping policies exist, to adjust the loss by application of the New Guiding Principles, utilizing their purpose and intent, which avoids differences that would otherwise exist between insurers policies. The New Guiding Principles are generally referred to as simply the Guiding Principles.

What happens when claimants refuse the offer?

When an insurer offers settlement of a claim, there is no guarantee that the claimant will accept it. Although many disagreements do end up in court, settlement is typically a better option for both the claimant and the insurer. To come to a settlement outside of court, arbitration is typically the method used. As it applies to insurance, arbitration has more than one meaning although all meanings have a common goal of saving premium dollars.

One definition of arbitration could more accurately be called the appraisal process. When the insurer and the insured are not able to come to an agreement on the actual cash value or the amount of loss, each party will hire an appraiser. The two selected appraisers will select a third appraiser to act as an umpire. The three appraisers will then do only one thing: determine the dollar amount of the loss. Once that loss is determined their job is done, but their decision, because it is a contractual agreement, will become binding on both parties whether they agree with the decision or not. Assuming no fraud was involved, the courts will recognize and accept as fact the amount of loss determined by the arbitrators. Since few courts would have the factual knowledge that the arbitrators have, this is the most satisfactory route since the amount of loss established is likely to be accurate. When the courts must determine the amount of loss it is not only a long process, but typically an expensive one as well.

The uninsured motorist section of the private automobile policy contains the Arbitration Clause, which is similar to the appraisal process in that appraisers are still selected. Past that it can be very different. When the uninsured motorist coverage is applicable, the insureds own company could be put in the position of a legal adversary. Since the determination of negligence should probably not be left up to the insurer in such a situation, the use of appraisers is an advantage for the insured. In spite of the common sense of using appraisers to determine loss, the legal community has generally not accepted it. Some states have been receptive to appraisers to determine loss, but not all of them. Some states permit arbitration of all issues whereas others place limitations on their use.

While the two previous uses of arbitrators are similar, the final type is very different. Arbitration is now becoming a method of settling inter-insurance company claims. This is not a new process. It has been used since 1944. Although not initially used widely, the growth in its use has prompted the method to be called the worlds largest private judicial system.

Insurers use inter-insurance company arbitration when the amount of money owed by each insurer involved in the claim is in dispute. The actual insured person will probably never realize this type of arbitration has even been used since it is an established principle that the loss payment should be made prior to arbitration. By paying the claim prior to the inter-insurance company arbitration, the companies involved can avoid an unhappy claimant. If it is necessary for one company to repay the other following the arbitration process, this will be done. The client will never even realize that loss may have been reevaluated later on.

In nearly every case, participation in arbitration is a voluntary action. Since arbitration is considered a means of avoiding costly legal action, it makes sense to participate. If a participant does elect to use arbitration, by the terms set down, the decision is legally binding. Arbitration is used in virtually every aspect of insurance, including (but not necessarily limited to) automobile damage, fire and allied lines, third-party claims, no-fault benefits, and workers compensation claims.

For the insured, arbitration is an alternative that should not be overlooked. Hiring attorneys is expensive and time delays are numerous. Even if the amount of the claim turns out to be less than desired, when legal fees are factored in it is probably still the best financial route.