Understanding The Auto Insurance Company

What the insurance company sells

An auto liability insurance company is engaged in the business of selling responsibility.

To be more clear, an insurer sells responsibility for having to clean up the mess should something scary happen.

Something scary like a cracked windshield.  Something scary like a fender-bender.

Something scary like a lawsuit.  

Since life can be scary, the insurance company exchanges cash for responsibility.

Or, if you prefer, you could say the insurer is in the business of buying problems.

For the low, low price of $79.99 (a month), the customer can sleep easy, knowing that this month if her Toyota Highlander ends up in a wreck, it will not be her responsibility.  Nope, this month—well, assuming she paid on time . . . or, if she didn’t, assuming there was no effective Cancellation—this month, that will be the insurance company’s problem.

How the insurance company makes money

Since auto liability insurance is a business, the insurance company is interested in making money.  And insurers obtain money by selling, as noted above, Responsibility.

At first glance, you may think their sales pitch: “You give me a little money now, and, in exchange, I’ll give you big money later” does not seem like much of a business.

You’d be wrong.

But, to be fair, the very nature of the company’s product means that making a profit can be tricky. . . .

The quick and dirty:

Step One: The insurance company must carefully decide what risks to take on, and how much to charge for taking on those risks.  

Risks, here, refers to the ways you could get hurt and your car could get damaged.

And, just to be extra clear: One of the ways you can get injured in a car accident is by getting sued.

The insurer determines the risks for which it is willing to assume responsibility.  In exchange for doing so, it charges a particular policyholder, a particular price—referred to as a premium.  The premium is closely tied to the type and size of the risks the insurer takes on: The bigger the risk, the bigger the premium.

But the premiums alone do not bring the insurance company a profit.

Step Two: The insurer must be fruitful and multiply.

The insurer must then multiply the cash (premiums) it obtained in Step One, by investing it in money-generating stuff.  Stocks, bonds, and other fancy financial things.

If it does this well, the insurance company will make enough to have money left over (i.e., profits) after Step Three.

Step Three: The insurer must give back to its policyholders what they purchased, and only what they purchased.

In this step, the insurance company is the 7-11® store manager making sure those darn juvenile delinquents don’t run out with fistfuls of slushies and Funyans.

As briefly mentioned, the insurance company decided how much to charge for its product based on a Formula™—it took a highly educated guess as to the likelihood that the scary event might happen to a particular policyholder. Then, it took a highly educated as to how much, if it happened, the scary event would likely cost.

Then it charged that much. 

 

Well, that much, or more. Preferably more.

If the insurer does its job right, the money generated in Step One (from all of its policyholders), and the money paid out in Step Three (in all of its claims) will just about balance each other out.

Therefore, in terms of generating profit, an insurance company is only as good as how well it performs Step Two.

Simply put, the insurance company is not getting rich from premiums.

And, despite what you may hear, the insurer cannot get rich by holding on to money and refusing to pay valid claims.  

To the contrary, insurance is a highly-regulated industry. That means the government is all up in their business.

So, as you will see later, many laws assist policyholders in recovering all to which they are entitled and penalize insurance companies for purposely dragging their feet, playing games, or even just moving too slowly.

So, ultimately, an insurance company’s profitability really hinges on Step Two: its financial investments. To make money, the insurance company’s investments must make money between the time they leave the customers’ hands (as premiums) and the time they return to the customers’ hands (as paid claims).

Yep, an insurance company is basically your Uncle Alvin borrowing cash to fund his casino habit.  When ol’ Al borrows cash, he only ends up ahead if his luck at the casino outpaces the 38% interest you will be tacking on each day.  Likewise, an insurer succeeds only if the cash in its hands grows faster than the rate at which it must pay it back.

Except, when a policyholder demands payment, mere excuses won’t cut it—unlike ol’ Uncle Al, the insurance company must ante up. Ok, it’s just like your Uncle Al.

It’s all about control

Since the insurer does not make big money through premiums, to keep its situation running smoothly, the insurer must control what it can.

Control Risks

Starting with Step One, the insurer must carefully agree only to take responsibility for true risks.

This is because insurance company can only predict the odds of true risks.

True risks are a product of pure chance.  

By only agreeing in Step One to take on responsibility for events that are the pure product of chance, an insurance company can more closely calculate how much it will later have to pay out overall, in Step Three.

It’s like a coin toss.  The outcome of a single coin toss cannot really be predicted.  But, the overall outcome of a million coin tosses can be pretty well estimated.

As long as no funny business is going on (ahem, cheating), out of a million coin tosses, you can be pretty sure that will end up with somewhere in the neighborhood of 500,000 heads. And probably around 500,000 tails.

Try it and see.

By only taking on true risks, the insurance  company can make sure it charges each policyholder a premium that makes sense.

Control Investments

For Step Two, the only control the insurer has is to hire stellar money pros to hedge its bets and increase the likelihood that its investments will pay dividends.

But, the insurer only has so much control here. Just like any investor, an insurance company is subject to the ebb and flow of the economy and the financial markets.

Control Claims 

Finally, when it comes to Step Three the insurer must make sure that it pays only for the risks it agreed to take on in the first place.

Remember, to avoid losing money, but not quite to make money, the insurer exchanged cash for those true risks it took on—it was betting on those risks, and no other.

So, to make money, the insurance company must pay only what those risks are really worth.

This is where the process of claims settlement come in and where understanding how an insurer views and assess those claims helps make the difference when it comes time to negotiate.

But more on that later.

Notify insurance carriers of the accident

To settle or sue? That is often the question.

But whether you decide to sue or not, in all cases you will need to present your case in such a way as to maximize its value in the eyes of the insurer.  You accomplish this by researching, preparing, and presenting … your Demand.

But more on that later…

To quote the Cheshire Cat (or was it the Mad Hatter..?)  “Start at the beginning and when you come to the end, stop.”

In that spirit, let us begin at the start: Start by tracking down insurance.

Yes. If you have not already done so, you need to track down the car insurance policies that may potentially apply.

How?

The Police Report.

Or, if you have already initiated litigation, in your discovery requests ask for the identification of any and all insurance policies that may apply.

Then, before you do anything else; before you send your demand, before you eat, before you breathe, before anything—give the defendant’s insurer a heads-up that your claim is coming their way.

You will thank yourself later.

1. Notify Carriers of the Claim

In Georgia, the defendant’s insurance company is entitled to notice.

But not just any notice—timely notice.

And not just any ‘timely notice’: Timely written notice.

(e) Each policy of motor vehicle liability insurance issued in this state on or after October 1, 1991, shall provide that the requirement for giving notice of a claim, if not satisfied by the insured within 30 days of the date of the accident, may be satisfied by an injured third party who, as the result of such accident, has a claim against the insured; provided, however, notice of a claim given by an injured third party to an insurer under this subsection shall be accomplished by mail. Each policy of motor vehicle liability insurance issued or renewed in this state on and after October 1, 1991, shall be deemed to include and construed as including the provision regarding the notice requirements provided in this subsection.

OCGA 33-34-3(e)

You see, if the liability insurer does not get timely written notice of the claim from somebody (anybody), it may not—just may not—have to pay up on the defendant’s behalf.

Which is a problem for the defendant.

But, let’s be real here, it’s a problem for you.

To be sure, by the time you hop onto the case, the defendant’s insurer may already know you are coming for them.

Yes, of course, their insured probably notified them of the accident. Maybe it was even your client.

And one of them may have even done so in writing.

But, making certain is what lawyers do best.

So go ahead, feed your little carrier pigeon and send him off with his first mission: To notify the defendant’s insurer of the claim. You will also need to know whether the defendant had valid insurance at the time of the accident.  And, if so, what the limits are.

And, depending on the extent of the plaintiff’s damages, you will need to find this information out for each and every car insurance policy that potentially insured the defendant. You need this information not for your own vacation planning, but because you must determine whether the amount of available liability insurance is enough to cover the plaintiff’s claim.

You should therefore send this request to each insurer that issued a policy potentially providing coverage for the defendant.

This step becomes absolutely critical if you intend to make a UM claim.

See, the thing is you cannot just hit up one liability carrier—or skip them altogether—then look to UM for coverage. To the contrary, in Georgia all available liability insurance must be exhausted before UM can be tapped.

2. Request a Certificate of Coverage from the Plaintiff’s Insurer

If it becomes necessary to pursue a UM claim, you will also need to know ahead of time whether your client had UM coverage. … And, if so, how much.

You’re feeling good.  You’re feeling great.

You drafted an air-tight Notice of Claim, and you’re in a writing mood.  You are looking for something to add that will save you time and effort down the road.

Do yourself a favor: Request a Certificate of Coverage from the plaintiff’s own insurer.

It sounds like it would be something you could frame, and hang on your refrigerator next to your law degree, but is really just the insurance carrier’s official acknowledgment that your guy was insured on the date and time in question. And, since you are corresponding with insurance companies anyway, why not just make them your pen pals?

Send a note to find out precisely with how much money you are dealing with.

sample request verification-of-insurance-coverage

Whoever is first in the field and awaits the coming of the enemy, will be fresh for the fight; whoever is second in the field and has to hasten to battle will arrive exhausted.

~Sun Tzu, The Art of War.