What is Insurance?

"If I had my way I would write the word "insure" over every door of every cottage and upon the blotting book of every public man, because I am convinced that, for sacrifices that are conceivably small, families can be secured against catastrophes which otherwise would smash them forever."

Winston Churchill

Insurance exists to protect your possessions against unforeseen loss or damage. Whether you're insuring your house, car or CD collection, the basic idea is that you pay an annual premium and your insurance company will pay to replace or repair whatever items are insured if lost or damaged.

An insurance policy is a legally binding contract that demands complete honesty from both parties. If you lie or mislead your insurance company, your policy can be declared void. Likewise, if your insurance company doesn't treat you fairly, you can take your case to court or to the Insurance and Savings Ombudsman.

No Better or No Worse

The underlying principle of any insurance contract is to enable you to be in the same position you were in before a loss. This is because if you were in a better position after an insurance claim there would be a financial incentive to make claims.

Why Have Excesses?

An excess is the amount you pay for each claim you make. Excesses help keep the cost of premiums down. The higher the voluntary excess, the lower the premium. For example, an excess of $300 means you pay the first $300 of any claim, and the insurance company pays anything in excess of this amount up to the policy limit.
You can also minimise your insurance costs by only claiming for larger losses where you cannot easily afford to pay for the damage yourself.

Utmost Good Faith

An insurance policy is a contract of 'utmost good faith' between the insurer and the customer.

The insurer is required to observe and honour the contract conditions. The customer is required to disclose to the insurer all material facts that could affect the risk. For example, a person who travels overseas and leaves their house empty needs to tell their insurer, as an empty house is more risky to insure than an occupied one.

Failure to tell your insurance company everything they need to know to assess your risk accurately may jeopardise your insurance cover. If in doubt about what you need to declare, ask your insurance company.

A rule of thumb is that you should declare any information that would make the insurer alter the terms and conditions of your contract.

The Cost of Insurance

The cost of insurance (ie. premiums) is determined by the claims experience of the company. This is why young drivers, who have a high claims rate, may pay higher car insurance premiums than drivers over 25 years of age. This is also why female drivers, who are considered a lower risk, may get cheaper car insurance than males. If claim numbers and the cost of claims increases, then so may insurance premiums.

People who try to recover their excess or premiums by overstating the value of items on an insurance claim increase the cost of insurance for everyone.