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Bedbugs, Lava And Bowling Balls: Inside My Homeowners Insurance Policy

Oct 3, 2014
Originally published on October 5, 2014 9:49 pm

My homeowners insurance policy reads as though somebody took all of the bad things that can happen in the world and divided them into two buckets: stuff that is covered and stuff that is not covered.

I'm covered for damage from fire, lightning and malicious mischief. I'm covered if a volcano spews lava onto my house. It's right here under "Additional Coverages." Paragraph 10. "Volcanic Action."

But there's this other section, "Losses Not Insured," that tells you how insurance really works. For example, Paragraph 2, Subparagraph e:

"War, including any undeclared war, civil war, insurrection, rebellion, revolution, warlike act by a military force or military personnel ... "

War is what insurers call a correlated risk: If my house gets blown up in a war, it's much more likely that lots of other houses across a wide area are also going to get blown up around the same time. Correlated risks are really hard to insure against. Insurers could go decades without paying anything, then suddenly face more claims than they could ever pay.

A lot of the stuff insurers don't cover falls into this category. Earthquakes and floods are both correlated risk.

But there's this other category of stuff that insurance companies won't pay for that's not explained by correlated risk.

My insurance policy doesn't cover bedbugs — or any kind of bugs, for that matter. Bedbugs, despite what you may have heard on the local news, are not a disaster on the scale of an earthquake.

Insurance companies won't cover things like bugs because they don't want to give you an excuse to do ridiculous things. If I had bedbug insurance, I'd furnish my entire apartment from stuff I found on the street. What's the worst that could happen?

The fancy term for this is moral hazard.

"Moral hazard essentially involves being less careful because you have insurance," says Dan Schwarcz, an insurance expert at the University of Minnesota. "And so, if you have insurance you have less reason to be careful because the insurer will pay for it."

Moral hazard turns out to explain one of the most mysterious details in my policy: falling objects. I'm covered for damage from falling objects — trees, satellites, whatever — but only if they first damage the roof or an exterior wall of my building. I kept thinking: What other damage could I have from a falling object? Schwarcz explained it to me:

"This coverage excludes scenarios in which there's some falling object in your home, right, that's not caused by an external force. So, let's say that you put your favorite bowling ball right on your shelf and the bowling falls and smashes into your television."

Bowling ball breaking the TV: not covered by my insurance policy.

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STEVE INSKEEP, HOST:

Now let's talk about economic setbacks. Suppose your house is infested by vermin or overwhelmed by lava or struck by objects falling out of the sky. When it was over, you would naturally reach for your home insurance policy to see if you're covered. You know that document that says, please read your policy carefully? Many people haven't, but Jacob Goldstein of NPR's Planet Money team did.

JACOB GOLDSTEIN, BYLINE: The policy blew my mind. It's like somebody took all of the bad things that can happen in the world and divided them in two buckets - stuff that is covered and stuff that's not covered. I'm covered for damage from fire, lightning, malicious mischief. I'm covered if a volcano spews lava onto my house - it's right here, additional coverages paragraph 10, volcanic action. But there is this other section, losses not insured, that tells you how insurance really works. I asked Dan Schwarcz, an insurance expert at the University of Minnesota, to help me decode this part, to understand what insurance doesn't cover. We started with paragraph two subparagraph E - war - I am not covered for war, including undeclared war, civil war, insurrection, rebellion, revolution, warlike act by military force or military personnel. What does that mean? I never even thought about it.

DAN SCHWARCZ: When wars occur, lots and lots of property is destroyed and when lots and lots of property is destroyed at the same time, it's very hard for insurers to actually cover that.

GOLDSTEIN: Wars is what insurers call a correlated risk. If, God forbid, my house gets blown up in a war, it's much more likely that lots of other houses across a wide area are also going to get blown up around the same time. Correlated risks are really hard to insure against. Insurers could go decades without paying anything, then suddenly face more claims than they could ever pay. A lot of the stuff insurers don't cover falls into this category - things like paragraph two, subparagraph B, earthquakes, and subparagraph C item one, flood. When one building gets flooded, lots of building gets flooded. That's what happened in lower Manhattan in 2012 after Hurricane Sandy. Jeff Waddle is a State Farm agent in Greenwich Village.

JEFF WADDLE: It was very difficult because down here where we're located, we didn't have power. The majority of my customers lived down here. They didn't have power.

GOLDSTEIN: People were forced out of their homes, and they did what you do when they're hit by disaster. They called their insurance agent. Waddle had to tell them the bad news.

WADDLE: Unfortunately, we had to explain the reason for the power outage was due to Sandy, which was flooding, and flooding's not covered. So their hotel stay, their expenses associated with not being able to live in their apartment were not covered under the policy.

GOLDSTEIN: Flood, earthquake, war - these all make sense once you think about correlated risk. But there is this other category of stuff that is still hard to understand.

What are some of the other sort of big things that are not covered?

WADDLE: Bedbugs. Lots of - you know, a couple of years ago especially when bedbugs was really prevalent in the news, a lot of customers were freaking out.

GOLDSTEIN: Bedbugs, despite what you might have heard on local news, are not like an earthquake or flood. They're relatively isolated and not that expensive to deal with, compared to some giant disaster. Insurance won't pay for bedbugs or for that matter any kind of bugs for a different reason. They don't want to give you an excuse to do ridiculous things. If I had bedbug insurance, I'd furnish my entire apartment from stuff I found one the street. What's the worst thing that could happen? I have bedbug insurance. The fancy term for this says Dan Schwarcz is moral hazard.

SCHWARCZ: Moral hazard essentially involves being less careful because you have insurance, and so if you have insurance, you have less reason to be careful because the insurer will pay for it.

GOLDSTEIN: My policy is full of language trying to deal with moral hazard. If a pipe suddenly bursts, I'm covered, but if a slow leak makes a hole in the floor over time, I'm not. I should have fixed the leak. Moral hazard turns out to explain one of the most mysterious details in my policy - falling objects. I am covered for damage from falling objects, trees, satellites, whenever. But only if they first damage the roof or an exterior wall of my building. I kept thinking what other damage could I have from a falling object? Schwarcz explained it to me.

SCHWARCZ: This coverage excludes scenarios in which there's some falling object in your home - right? - that's not caused by an external force. So let's say that you put your favorite bowling ball right, you know, on your shelf and the bowling ball falls in and smashes into your television.

GOLDSTEIN: Bowling ball breaking the TV? Not covered by my insurance policy. Jacob Goldstein, NPR News. Transcript provided by NPR, Copyright NPR.