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Friday, January 18, 2013

Can multiple insurance policies cover the same risk?

Background
Insurance policies are designed to ensure that the recipient of the policy benefits do not collect more than the claim is worth (risk coverage), regardless of how many insurance policies may be in force. 
Insurance is designed to protect against financial losses from damage. It is not meant to be used as a way to gamble and make money off damage to your business or personal assets. If you own multiple policies that cover the exact same risk, the payout result depends on the type of insurance coverage.


Kind of Insurance Contracts
Policies will typically build in wording to address how they will respond in the event of a claim and other insurance is available. There are a few ways that policies can interact with each other and there is no one standard provision that can be applied to all policies. When you buy insurance, you are given a policy that explains the terms of your agreement. Your policy states what your insurance company will do if you own another policy for the same risk. 
Some policies pay on a pro-rata sharing basis, meaning they divide the payments with the other companies. 
Other policies designate themselves as primary or excess policies. Primary policies always pay claims first, whereas excess policies wait until the other contract has paid before making payments. 
Some contracts offer no coverage at all in the event you own a duplicate policy, making your extra coverage worthless.
Let us look at it on a case to case basis for various types of insurance that we do.

Auto Insurance

If you own duplicate auto policies, it is crucial that you review the terms of your contracts. Auto insurance does not pay more than the limits of your insurance. If your vehicles are insured for the same amount by each company, it is possible that the two companies will argue over who should pay. This could delay the payment of your claim, forcing you to pay for your bills out of pocket. You should never use two auto policies to cover the same risk.

Health Insurance

 Owning two types of health insurance is more common and can have some benefit. This often happens when a person enters Medicare while he is still working. Health insurance policies follow the "coordination of benefits provision" created by the National Association of Insurance Commissioners. If you or your employees own two policies, the provision designates one policy as primary and the other as excess. The primary policy covers the health claim up to its benefit limits. If you or your employee still owes money for a medical claim, the excess policy picks up the difference. The insured needs to pay the deductible and co-pays for the primary policy first. If the excess policy needs to be used afterward, its deductible and co-pays also need to be paid.

Life Insurance
Life insurance policies follow different rules for duplicate coverage. While someone may destroy property to earn a profit, few would end their lives to make a profit on life insurance. As a result, owning duplicate life insurance policies will not reduce your future payment. Both policies will pay their face value in full after your death. While an insurance company may refuse to sell you excess life insurance coverage due to existing coverage, it will not refuse a death benefit for an outstanding contract.

 

In the worst case scenario, some policies state they will not pay any claims in the event any other insurance is available for the same loss and achieve this denial of coverage in a few ways. Some policies simply include policy language to exclude any coverage in the event another policy covers the same loss. Other policies will reduce the amount of insurance by any other insurance available. If the other available insurance is in an amount equal to or greater than the policy's limits, essentially no coverage will be available from this policy.

Knowledge of such overlapping policies and the provisions in your insurance contracts can go a long way in saving your money and giving you surprises at the end of the day.

Cheers

Manoj Arora

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