Since insurance is an ever-evolving industry, it stands to reason that individuals and businesses who do not specialize in insurance do not always have the most accurate or up-to-date ideas regarding its scope, purpose, rating factors, or laws and regulations.
Insurance myths constantly flow in and out of personal and professional conversations, so consuming new insurance information critically and double-checking its veracity with your agent is a great way to stay properly insured.
Falling victim to misconceptions about insurance can have costly or even dangerous consequences.
With this in mind, our team at Henry Insurance Service is here to help you separate insurance facts from fiction so that you can effectively protect your assets.
Insurance Myths Debunked: Personal Lines
Myth #1: “Flood insurance for my home isn’t important if my lender doesn’t require it.”
Though the likelihood of flooding varies greatly depending on the elevation of your property and its proximity to bodies of water, the potential for flooding is never zero.
According to the National Flood Insurance Program, “anywhere it rains, it can flood.” When floods occur, a homeowner, renter, condo, or dwelling fire policy will not cover the damages to the structure or its contents, so having a flood policy is necessary to properly insure against the risk, even if your mortgage company does not require you to have one.
Myth #2: “Life insurance never pays out in the case of suicide.”
Life insurance companies do pay death benefits in the case of suicide, but the myth that claims the contrary is rooted in the existence of a “suicide clause,” which is in most life insurance policies.
A “suicide clause” states that beneficiaries are not entitled to death benefits if the policy holder commits suicide within the first two years of the policy’s inception.
After two years, insurers will pay out death benefits to the beneficiaries in the case of a suicidal death unless the policy specifically states otherwise.
Jacqui Kenyon with USA Today writes in her article detailing the relationship between suicide and life insurance policies, “Life insurance companies must protect themselves by limiting the risk of an individual opening an insurance policy with the intention of taking their own life to provide financial assistance to their families.”
Myth #3: “Credit doesn’t affect my insurance rate.”
A person’s credit score does impact their insurance rate. An article published by Forbes explains that individuals with poor credit scores are more likely to file claims, which makes them more expensive to insure than those with good credit.
Therefore, those with low credit scores are required to pay more in premiums to offset the additional risk posed to insurance companies.
Myth #4: “My insurance company will pay for a whole new roof even if the damage isn’t very extensive.”
Insurance does not cover maintenance work on your property. Even if your roof is old, insurance companies are only obligated to pay for damages caused by covered, isolated events, such as specific storms.
There have been many cases of insureds having their whole roof replacement paid for by their insurance company after they were extensively damaged by large storms, but if the damage to your roof is minimal or confined to a small area, the insurance company is not obligated to replace your entire roof, even if the roof is beyond its life expectancy.
It is your responsibility to replace your roof after years of regular wear and tear.
Myth #5: “My insurance rates are only affected by my own claims history.”
By design, insurance exists to spread the financial responsibility of risks among many people.
This means that the cost of your insurance does not only depend upon your losses, but the losses of others as well as other factors like inflation, the cost of labor, and cost of materials/parts.
Insurance Myths Debunked: Commercial Lines
Myth #6: “I don’t need a Workers Compensation policy if all my employees are 1099.”
The Louisiana Workforce Commission indicates that individuals who are considered employees and not independent contractors must be provided with workers’ compensation insurance.
A business owner could face severe penalties if they fail to cover 1099 workers and subcontractors per Louisiana law RS 23:1170, which states that the first instance of failure to provide workers’ compensation insurance for an employee will result in a fine of $250.00.
Each subsequent offense is a fine of $500.00 with a maximum of $10,000. Continued and willful failure to insure can even result in jail time.
Myth #7: “Insurance doesn’t allow for customers to enter work areas due to liability.”
Liability insurance policies do not prevent customers from entering work spaces such as auto shops, warehouses, or other areas where heavy machinery is operated.
Buildings and work areas owned by businesses and individuals are considered private property, and admittance is dependent upon the owner’s discretion or their willingness and preparedness to equip customers with the appropriate gear to access work spaces safely.
It is important to note that businesses operating in the United States must adhere to regulations set by the Occupational Safety and Health Administration, or OSHA.
Businesses are responsible for ensuring that both employees and customers comply with these guidelines, as failure to do so can result in high fines, which may explain some businesses’ hesitance to admit customers into work areas.
Myth #8: “General liability covers everything.”
In the case of small businesses, general liability covers an array of risks, such as damage to someone else’s property or accidental customer injuries that might occur on your business’ premises. It also covers damage done to others through libel or slander.
But general liability does not cover everything that needs protecting when you own and operate a business. Physical property, such as buildings, vehicles, and tools, are not covered under general liability and require their own policies.
Myth #9: “You can transfer any insurance policy into someone else’s name.”
The only type of policy that can be transferred from one insured to another is a national flood policy.
Other insurance policies consider the policyholder when calculating rates, therefore, they cannot simply be transferred over to a different individual.
When ownership of a business or property changes, the policy must be rewritten with the information belonging to the new owner.
Myth #10: “I only need to purchase a surety bond to advertise my business as ‘licensed, bonded, and insured’.”
While commercial bonds are an important part of the equation, they do not satisfy the other two components. A license indicates that a business is equipped with the knowledge necessary to complete their service successfully, and it is not connected with the purchase of a surety bond or insurance policy.
The purpose of a surety bond is to protect the party hiring a business to do work for them, while an insurance policy protects the business itself. The perceptions of overlap between bonds and insurance policies are understandable, since surety companies that issue bonds and insurance companies both pay out claims, but they have entirely different purposes.
A bond signifies an agreement between the principal (the business), the obligee (the entity requiring the bond, most likely the state or municipality), and the surety (the company that issues the bond and pays out claims) while an insurance policy is an agreement between the business and the insurance company stating that the business owner will pay a premium, and in return, the insurance company will pay for claimed losses.
In the case of a surety bond, the amount paid out by the surety company to cover a claim must be repaid by the principal. So, to be able to advertise that your company is “licensed, bonded, and insured,” all three criteria must be met.