My Insurance Policy

My Insurance Policy
What Does It Mean to Indemnify? What is a Loss? What is a Peril?

As we defined in our first post, an insurance policy is designed to indemnify a policyholder from a loss.  We also determined that a peril was the conditional susceptibility (exposure) to loss or damage.  So let’s take a few moments to discuss each of those terms: indemnify, loss, and peril. Because the timing of activity actually starts with peril, we’ll go over the three definitions in reverse order.

On a primary - but important note - REVIEW your policy for the PERILS and LOSSES that are covered.  Not every policy is the same and not every thing that is discussed on the website applies to you.  Read your insurance materials!

A peril is the exposure to loss or damage.  The simplest way to elaborate on this is to give some basic examples (which are NOT full listings of possible perils):

For auto insurance, perils may include: General Driving, Animals, and Weather
For a home policy, they may include: Fire, Lightning, Explosion, Windstorm, and Hail
For your life or physical-based policies (disability, long-term care), perils are: Smoking, Obesity, Workplace Hazards, Medical conditions

Please do not confuse these as the actual losses or damages - these are the conditions or elements by which damage or loss MAY occur.  Animals aren’t the damage, but they cause damage if you hit one; lightning comes with almost every storm, but your house is not necessarily struck; and the wet floor at the office doesn’t hurt anyone until someone slips on it.

This leads into the discussion of losses.  A loss is the actual physical damage or financial detriment that is experienced as a result of a peril.  Losses and perils can be easily confused, so again, we’ll make use of examples:

Dents in automobile body or broken windshield caused by hail.
Shingles ripped from your house’s roof during a windstorm.
Dislocated hip after slipping on a wet floor at work.

As you should be able to see through these examples, perils and losses are the equivalent to the classic ’cause and effect’ scenarios.  You have the causes of the damage (hail, wind, wet floor) and the effects, or actual damage or losses (denting, shingle damage, hip dislocation).

Of the terms we’ve discussed so far in this post, one of the most misunderstood terms is indemnify or indemnification.  I would like to squelch the impression that the limits of coverage established on your policy are NOT the payout amounts for each and every claim (with exception to financial products like life insurance).  To indemnify, or indemnification, means to place you back in the condition or financial status just prior to the loss - no more, no less. 

Let’s say you are involved in an automobile accident of which you are the liable driver.  If you have the coverage Medical Payments on your automobile insurance policy, this will help to pay the medical costs associated with your injuries.  However, if you carry limits of $25,000 in Medical Payments does not mean that your company will pay the full amount of your limits; instead, the insurer will pay UP TO the limits to cover the medical bills.  So if you only have $2000 in medical injuries, that’s all that they’ll pay for!

Another example, you have a home valued AND insured for $225,000 for the dwelling portion and it is totally and completely destroyed by fire (not arson).  Then your homeowner’s insurance policy will pay out or pay to rebuild a home of equal value to the loss.  So, there are instances that the payout does equal the limits, but only to bring the insured (or property) back to the status before loss occurred, or indemnification.

Granted there are endorsements, or policy additions, that can affect ACTUAL coverage, but our intent was to simplify the principles of indemnification, perils, and losses.

Hope this explains a bit more about your insurance policy.

Until next time…

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