Insurance Isn’t About Getting Back the Money You Shelled Out in Premiums

Q: I just sent off my home and auto insurance premiums, and every time I write those checks I get madder and madder. I’ve never had a single claim in all the years I’ve paid insurance, and yet I seem to pay more every year. I hear all the time about people having to fight their insurance companies to collect what is owed them. If something does happen, how can I make sure I get back what I’ve put in all these years?

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A: I’ll answer your question in a minute, but first we need to address a common misconception that you expressed mid-letter.

You have insurance to protect yourself against financial disaster, not as some kind of “investment” that has to have a payoff. In fact, you should be rooting that you’ll never see that money again.

Chat with a family who lost every material thing, from the blender to the photo albums to the family pet, in a house fire. Or to someone who still has back pain from an auto accident 10 years ago. Or to people whose houses have been burgled, particularly if they were home at the time. Insurance might have made them financially whole, but nothing will restore them emotionally.

That doesn’t mean you should have insurance to protect against every conceivable loss; it’s ridiculous to shell out for collision insurance on a 10-year-old junker, for example, or to pay higher premiums so you can have a $100 deductible. You can trim your insurance costs to some extent by “self-insuring.” That means having an emergency fund to cover smaller losses.

It’s also worrisome that you’re paying more for insurance than you were last year. Although the premiums you pay don’t always reflect the value you get (more on that later), you should at least be paying less for auto insurance this year. Every major auto insurer has slashed its rates in California, so you should be able to save a few hundred dollars by shopping around. Homeowner rates haven’t dropped much, unfortunately, but that could change.

To understand how insurance pricing works, you need to know a little bit more about the industry. The fact is that insurance principles and the marketplace have an uneasy relationship at best; add in government regulation and you sometimes get chaos.

Insurance principles dictate that a company charge enough to cover the risks it’s taking on, plus something extra to make a profit.

To do this, the companies rely on actuaries, those math whizzes who figure out how many houses are likely to burn down or people to die in a given year. In some areas, such as human mortality, actuaries are amazingly good at predicting risk. They might not know that your great-aunt Velma will keel over tomorrow of a heart attack, but they know that someone will in a population of 100,000 people. They’re less skilled at predicting natural disaster damage, which is why the Northridge earthquake and Hurricane Andrew caught so many insurers flat-footed.

Sometimes, however, market forces compete with insurance principles for insurers’ attention. Insurers sometimes charge too much or too little for insurance because of competition, or the lack thereof, rather than using sound underwriting principles. When a lot of companies vie seriously for customers, insurers might expand coverage too much or keep rates too low to cover their own risk. When regulation or market conditions keep competitors out, the remaining companies often charge higher rates. Consumers can contribute to the problem by not shopping around for better rates--or by looking only at rates, and not at insurer stability and claims-paying history.

Quite often there’s a lag time as market conditions change, which is why auto insurers in California are enjoying tidy profits now even while they’re cutting rates.

Now, to answer your question:

If you want to increase the odds that your claim is handled fairly, you need to do some homework beforehand, and perhaps get some professional help afterward.

Shop around for competitive rates at least once a year, but don’t give a company your money, no matter how cheap its rates, if it has a bad habit of consistently denying claims.

Our state Department of Insurance doesn’t make this easy, because it no longer publishes insurers’ complaint ratios (although it promises to resume publishing these “soon”). But your friends and neighbors can be a good source of referrals. You can also check an insurance company’s financial ratings with A.M. Best or another rating agency to make sure the insurer has the money to pay its claims. Most libraries carry a copy of A.M. Best’s ratings, and you can also check at https://www.insure.com.

Next, you need to inventory all your belongings, and update the list, along with your file of receipts and warranties, whenever you buy or sell anything of significant value. A videotaped record is good; keep it off-site, either at work or in a safe deposit box.

If you have a claim, tell your insurance company immediately. If theft is involved, notify the police; if there’s property damage, do what’s necessary to prevent further damage, and keep track of your receipts for repairs.

If you run into trouble getting a claim paid, consider hiring an attorney to help make your point. But chances are if you’ve done your homework in advance and picked a decent company, your claim will be paid promptly.

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Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.