I have heard (but haven’t verified) that in a lot of cases(pretty much all cases except life insurance) writing claims against two insurance policies covering the same thing is illegal in most jurisdictions. Now, is it? Why?
I just fail to grasp the logic here of why people consider it illegal (or even a little unethical). Given the hypothetical:
I buy a vase at a garage sale for $2. I get it appraised and it turns out to be a $50,000 work of art. I insure it with insurance agent A against destruction and theft for it’s appraised value with a premium of $1000 a year. I insure it with insurance agent B against destruction and theft for it’s appraised value with a premium of $1000 a year. I pay both premiums. The vase gets stolen. My understanding is that I have two insurance policies that I PAID FOR that insure me against the loss of the vase at $50,000 each. Now frankly it feels like my dealings with insurance agent B is none of A’s business and vice versa. I’m not insuring myself against the personal hit against my net worth, I’m insuring myself against the loss of a vase. A vase I lost.
Why is it that I don’t have $100,000 coming my way? It doesn’t make sense to me logically, legally (based on how other thigns work in law, I understand insurance law is a completely different beast), morally or ethically.
Maybe vases are different. What about cars? Houses?
IANAL, I know next to nothing about insurance or insurance law.
But it would seem that the scenario you describe would be an invitation to fraud. You could buy several insurance policies on your vase, then break it and collect a huge amount of money.
Which is illegal in of itself. Having multiple policies on a vase is akin to cheating the FDIC insurance cut-off at $100K by saving your money in different institutions. Which is perfectly legal, and nobody considers immoral.
Under your system, you’re getting twice the value of the item. So all you have to do is hide it, and report it missing (and even sell it again on the QT after you get the two insurance checks). There is a clear incentive to commit fraud. If that sort of thing were allowed, people would buy not just two, but five or six policies on the same item and cash in (even if you just smash the thing to smithereens and say it was a covered accident).
Allowing this would bankrupt insurance agencies in quick order, unless the costs of all policies rise to pay for it (along with the extra time it takes to investigate a claim).
In order to prevent this sort of scam, insurance companies don’t allow for duplication of covereage. That way, only one company takes the hit, and there’s no incentive to try this scam.
Life insurance is a VALUED contract. You are insuring a life against premature termination. There are a lot of reasons why a person’s existence could correspond to a rough monetary value, and would therefore be something worth insuring. On the whole, however, you can’t determine precisely the value of a life. So you buy how ever much coverage you think is appropriate to “replace” the person who dies. The more coverage you buy, the more you pay. There is little chance that the insured person will deliberately die in order to get the policy to pay out. It happens from time to time, but it’s not common.
Property insurance is an INDEMNITY contract. The intent of the contract is to compensate you financially for the loss of an item that can be given a distinct monetary value. In the case ofa total loss/theft, the item itself can not be replaced so this type of insurance is intended to enable you to replace it with something similar. The possibility of an item being intentionally damaged or fraudulently reported as stolen is very high.
The “why” in all of this is difficult for me to explain because I see your point. Never mind that the intent of the insurance is to restore you to a pre-loss condition, why shouldn’t you be able to collect from contracts you’ve been paying for? The only reason can give you is, “Because.”
If you received $100,000 in total for the loss of a vase valued at $50,000, you’d actually be making a profit from that “loss.” It would be an undesirbale incentive to, say, assist destiny a bit in destroying your vase.
Double the market value. I was stating that on the premise that you insure the vase for the total amount of what it’s worth to you. If that total amount exceeds market value(which it should for almost anything you own, otherwise why do you own it?) you just get more policies up until you’re satisfied. I can see why an individual insurance agent would not insure a $50,000 vase for a $100,000 (if that’s how much you feel it’s worth to you), but two of them? Each of them is out $50,000 if the vase breaks. Exactly the same situation as if there was only one policy.
I can see how it invites fraud. I can see why insurance agents might not want to do it. Is it a law somewhere? Are there insurance agents that will let you double insure property?
But think of it this way. You have two insurance policies on your vase. Your vase is stolen. You file a claim on policy A, which replaces the value of your vase. At this point you now have the equivalent of your vase, paid for by company A. If you now try and file a claim on policy B, you are defrauding company B because you’ve already replaced the value of the vase, so you are trying to get them to replace something that is no longer lost.
Even if the vase is recovered, it now belongs to company A, not you (since they reimbursed you for it), so there is no way for company B to ever pay out on the claim.
The only way two policies would be legal is if company A insured only part of the value of the vase (say, $30,000) and company B insured for the rest ($20,000). In this case, company A would only be replacing its portion of the value of the vase. Since the remainder of the value has not been compensated for, you could then file a claim with company B for the unpaid remainder.
As an insurance professional for many years . I can tell you that insurance policies have written into the policy exclusions for this type of situation. Believe me, this something you really want steer clear of whether it be intentional or unintentional.
It occurs to me that an insurance settlement, even life insurance, is not subject to federal income tax as “income” because it’s not income. When an item is replaced with money, you’ve no net financial gain (capital gains for buying a $50,000 vase for $2? I dunno exactly).
If you have two payouts for a given item, you are gaining wealth, and that difference would be taxable. So there’s a tax monster involved in your answer here too.