Let’s face it, we are a society of price sensitive shoppers. We like to look for the best deal and try to avoid ever overpaying for something. While this logic generally works in our everyday shopping, there are some exceptions. For instance, most of us would agree that paying more to get a safer, better product is worth it and in fact many of us do exactly that when we buy things like cars, electric appliances and even food. Why then do many people tend to automatically price shop for such an important item as insurance?

John Glenn put it quite well when he famously declared about his Mercury spacecraft, "it's hard to be confident when you know that the missile you're sitting on has been built by the lowest bidder." The same principle can apply to insurance. It’s great saving a few dollars on your homeowner’s insurance but if the insurance company has a bad history of denying claims then you probably don’t want them as an insurer no matter how cheap the policy. This issue is especially critical for insurance like disability or long term care that you will potentially need to pay claims for long periods of time. If your auto insurer fails to pay the full amount of your claim the remedy is usually simple, you (albeit reluctantly) pay the difference and change to a new, better insurer. If your disability or long term care insurer fails to fully honor a claim, your options are far more limited because you can not just switch insurers.

So how do you get a "good" policy and more importantly a good insurance company that stands behind its policies? Here are some simple guidelines:

Use an insurance agent you can trust – Ask around for referrals. Your friends, financial planner, relatives, etc. have probably all had experiences with various agents and can at least may help you avoid getting a bad agent. The ideal agent will specialize in the type of insurance you seek and represent multiple providers of that type of insurance.

Ask lots of questions – Insurance people tend to love to use jargon of the trade that can be difficult to understand so ask questions that will get you straightforward answers. For example, if an agent talks about your homeowner’s policy having "replacement coverage" ask "does replacement coverage mean that if my two year old TV is stolen you’ll replace it with a new TV or just pay me for a two year old TV?" These kinds of "What if?" questions can be very revealing.

Don’t make assumptions, find out the facts – Many people find out the hard way that their policies don’t cover what they think they covered. Your homeowner’s policy may cover flooding damage from a broken pipe but not flooding due to rainwater that seeps through your foundation from outside. Again, the key is to ask lots of questions.

Know the limits of coverage – Most policies have caps on the total amount of coverage they provide and sometimes those caps can be surprisingly low. Things like jewelry, clothes and silverware may only be covered for a few thousand dollars unless the limit is specifically raised at the time you purchase the policy. This principle applies to other policies as well. Major medical, long term care, and disability policies can all have caps on the total amount of the claims. Know what the caps are on all your policies.

Check the general reputation of the insurance company – Some companies have better reputations for making fast, fair claims than others. You can sometimes get a feel for this from anecdotes from friends or stories in the news. The best way to research this is to contact your State Insurance Commissioner. Most State Commissioners keep data on complaints about insurance companies that do business in your state. Generally, the fewer the complaints the better the claims paying history.

The key to having quality insurance coverage is to know exactly what your insurance will cover and how readily your insurer is likely to pay claims. You may well choose to go with cheaper policies and take your chances and that’s fine. However, make that decision knowingly and don’t find yourself with an unhappy surprise because you didn’t take the time to fully understand what you are paying for. Remember, the lowest bid is not always the best bid.

Randy Gridley

July, 2007