Question

After Hurricane Katrina, a number of cases where a question of whether property damage was wind related or water related were brought to the public’s attention.. Homeowners tend to insure against those negative situations that they deem to be most probable. In a case such as a hurricane, should an insurance company be willing to cover all types of damage even if the homeowner is insured only for water damage. Why?

Answer 1

Insurance can be understood as a protection against a loss as insurers try to hedge the risk by insuring the property. Insurance is usually taken against any asset that is most probable to come under risk. There are various type of insurances like home insurance, life insurance, vehicle insurance. A hurricane can damage property and houses of the owners who live in that area and the damage done to the houses would not be from one from source but various sources. In such a case, the insurance company will not cover all types of damage done to the house but only cover those which the owner had insured against. Usually insurance companies do not cover for damages which have been caused by floods if the flood policy was not opted for when insuring. This is because an insurance company is also a rational profit maximising entity and if they covered all the damages if the homeowner is insured only for water damage, then this would mean that they might run into bankruptcy. This situation might arise because the homeowner is only insured for water damage and would be paying a premium for the same but if they will have to pay for all damages then it would not be profitable. Also since they will have to do this for all the insured houses in the area, it would not be possible for a single insurance company. This is why there are seperate catastrophe insurances available for high risk prone areas.