When An Insurance Company Wouldn't Sell Insurance
Insurance companies are in business to sell insurance coverage. Most of the time, they actively sell new policies and additional coverage on existing ones. Sometimes, however, situations arise that cause them to declare a moratorium on selling new policies or coverage.
Unlike most other service providers, insurance companies do not know the final costs of their services when they sell them. They do not know whether they will pay nothing for claims or millions of dollars. Companies have statistics that help them predict future losses, which enables them to set prices appropriately.
When a disaster is approaching or already happening, insurance companies know with great certainty that there will be large volumes of insurable losses. In these situations, it does not make sense for them to sell insurance. Insurance works for unpredictable events; the purchaser transfers to the insurer the uncertainty of whether losses will occur and how much they will cost. In return, the purchaser pays the insurer a premium, which is a fee for transferring that risk.
When a disaster is approaching or already happening, it no longer makes sense for the insurer to accept that transfer. The insurer knows that there will be a large amount of insurable losses. The only way for it to profitably absorb the losses would be to charge the purchaser more than that amount, a charge the purchaser will not pay.
Consequently, insurance companies often declare moratoriums when these events are likely or happening:
- Hurricanes. Insurers often declare moratoriums when a hurricane watch or warning is posted, lasting until 24 to 78 hours after the watch is lifted.
- Wildfires. For example, one insurance company suspends its agents' ability to bind coverage at the time a wildfire alert is declared, including all locations within 15 miles of the fire, and keeps it in force until the alert is lifted.
- Earthquakes. Insurers may suspend sales of earthquake coverage immediately after a quake in order to clearly distinguish one earthquake event (including its aftershocks) from another.
- Floods. The National Flood Insurance Program's policies do not take effect until 30 days after purchase, with a few exceptions. For example, coverage takes effect immediately for a newly-purchased home. Otherwise, the waiting period applies to discourage buyers from waiting until a flood is imminent.
- Civil unrest. Some insurers declared moratoriums during the riots that occurred in Baltimore in the spring of 2015.
Whether you own a home or a business, the potential for moratoriums makes it even more important to review your insurance coverage at least once a year. You may find that you are missing a coverage (such as flood) that you will not be able to get when an event appears likely. You may also find that, while you have essential coverage, you may not have enough of it. Moratoriums usually apply to increases in coverage as well as new sales.
The wrong time to find out about an insurance gap is right before the storm hits. Prepare ahead of time to ensure that you are adequately protected.
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