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Recovering on Your First Party Insurance Case, Part 1: What is Insurance and How Does it Work?

Insurance is the means by which we, as a society, pool risk of loss. Insurance is a contract that transfers the risk of financial loss from an individual or business to an insurance company, which collects premiums from policyholders and pools it together to pay losses. It is regulated by the government — State and national, in some instances — so as to optimize how societal risks are assessed and the loss allocated. For example, in the State of Texas, in order to access the public thoroughfares in a motorized vehicle, one must purchase insurance. There are specific requirements as to how much insurance must be maintained. Each driver must have a minimum of $30,000.00 (as of this writing) in insurance in the event of an accident.

Here is an explanation of how car insurance works. However, there are many different lines of insurance covering many different types of risk.  Some have found risks increasing due to climate change and other factors. Property and casualty insurance provides protection to businesses and individuals for losses related to their belongings or assets, both physical and financial. Life and health insurance protects people from financial loss due to premature death, sickness or disease.

The reason why we, as a society, allocate risk is based in economics. If one person were to get in an accident, the damages and risk of loss could be catastrophic. However, if many hundreds of thousands of people (or more) were to come together and set aside a small amount of money to protect which one of the hundreds or thousands of people (or more) gets into an accident, then each person gives up a very little bit for the security of knowing that they will not be wiped out financially from getting into an accident.

Plain and simple, that is how it works.

Insurance companies are required by the government to maintain a minimum amount in reserves. This is to ensure that they do not go bankrupt or are financially unable to pay the risks that they have underwrittten.

It is important to know what to do in the event you have to make a claim on an insurance policy. There are good resources online discussing how to do that. We’ll discuss that topic next on this blog.