ConsumerInfo about Insurance

The Insurance Scene


By J.B.M. Murray

"My husband and I both work. I pay for a Family Health Plan at my work because my company will carry us on our plan when we retire. My husband belongs to Blue Cross, but his company drops his plan when he retires. Now here's my question. I have no trouble getting duplicate bills for the drugs, but why can't I collect from both plans – they take our money and I know quite a few people who do collect twice. What are the regulations concerning medical plans?"

This is a complicated question, and it is one which I am sure concerns many policyholders – not just under Health policies, but Homeowners and others as well. I will try to keep the answer as simple as possible.

The insurance business is based on a number of legal principles. These principles are part of the common law of the land and have been recognised for hundreds of years by the courts of law in most, if not all, countries. They are not part of the policy wording. It would be impossible to set down all the legal principles governing the law of insurance in the policy, and it is not necessary to do so. However, some policy wordings may vary under the common law and, in that case, it is necessary to include the changes in the policy wording.

One of the most important of these principles is known as the Principle of Indemnity, and this says that, if you suffer a loss under an insurance policy, you are entitled to recover the actual amount of your loss – no more and no less – up to the amount insured by the policy and subject to any deductible or depreciation, if applicable.

Another legal principle is the Principle of Contribution, which says that, if you have two or more policies covering the same subject matter against the same perils, then each insurer pays its proportion of the total loss.

Thus, in the case of fire insurance, if you insure your house with two companies, each policy covering the full value, then, in the event of a loss, total or partial, each insurance company would pay you one-half of the loss. In other words, the law does not permit you to make a profit as the result of the loss. Notice, however, that it is not the insurance company that doesn't want to pay you; it is the law which says the company is not allowed to pay you.

If you insured your house twice over, intending to set fire to it and make a handsome profit, you would not be entitled to any return of premium because of the duplication, but if it was an innocent mistake, then I expect you would receive some return of premium for the current term of the policy.

The subject gets more complicated with health insurance policies or plans because the Principle of Indemnity does not apply as a general rule. The reason for this is that, when a policyholder is injured or suffers a disease, it is impossible to say exactly in dollars and cents what is his actual loss. For example, a businessman could continue his job after the loss of an arm much more easily than, say, a pianist or a manual worker, and therefore the loss of income would be different in each case. The result is that, if an insurance company wishes to apply the Principle of Indemnity in an Accident or Health policy, it must be included in the wording of the policy. Life policies, similarly, are not subject to the Principle of Indemnity, and therefore, you can hold as many life policies as you can afford and all of them will pay the sum insured at the specified time.

So it is not quite true to say that you have been paying twice for the same coverage, and secondly, the reason you get duplicate drug receipts is for income-tax purposes if you are claiming a reduction in tax because of medical expenses, not so that you can claim twice over for the same loss!

The best advice I can give you is to look at the wording of the two plans to see exactly what they provide. If there is duplicate coverage, you may be able to discontinue the overlapping coverage and pay a lower premium. If you have trouble understanding the wording, write to your insurance company or ask your local insurance broker to help you.

J.B.M.Murray, FCII, MAAA, is a Chartered Insurer and Casualty Actuary.