Insurance companies have been fighting with their customers since the earliest days of the modern insurance industry, when merchants pooled their assets at places like Lloyd's of London to protect against individual cargoes being lost at sea. Disputes often center on what property is covered by insurance and what risks are insured against.

Relations have gotten even more contentious since the early 1980s, when the insurance industry started to become a self-service market. It began selling a growing percentage of policies directly to customers by mail, phone and even computer online systems. With the traditional middlemen - independent agents selling insurance - gradually squeezed out of this newly deregulated and competitive marketplace, consumers are forced to evaluate competing policies for themselves.

Companies have also cut back on customized coverage and now offer a few basic policies of each kind. Many customers have had problems dealing with these off-rack policies.

Reading the Fine Print

A little practical cynicism is in order here. Insurance companies - even the best ones - profit by not paying out claims. And even when they must pay, it's in their best interest to settle claims as cheaply as possible. The result is that most companies create a corporate culture of stinginess.

Essentially, insurance companies save money in two ways: they raise the amount they charge in premiums, and they build a lot of exclusions into the policies they sell.

In a competitive marketplace, especially one where insurance is sold directly to the public, raising premiums often means losing market share - something insurers understandably don't like. The alternative - packing their policies with fine print exclusions - has turned out to be far more palatable.

It's especially important to pay attention to the parts of a policy that deal with definitions and exclusions. Unfortunately, this isn't easy since they're the most mind-numbing aspects of a mind-numbing field. To give you a little guidance, here is a quick tour of the types of exclusions you should be wary of.

Personal insurance - covering your home, rented dwelling, personal property or car - usually excludes:

  • Business losses. This includes parts of your house that you use officially for business, data or papers you've taken from work and computers, software or other property that belong to your company
  • Losses caused by ordinance or law. This means enforcement of any ordinance regulating construction, repair or demolition of a structure. For example, if your house burns down and a city ordinance requires that it be replaced with a stronger structure, your policy might not cover this.
  • Loss caused by neglect. This means your failure to use "all reasonable means" to save and preserve property after a loss.
  • Losses caused by earth movement. This means earthquakes, land shock waves and tremors related to a volcanic eruption. It also includes landslides, mud slides, sinkholes and other rising or shifting.
  • Losses caused by:
    • wear and tear, natural marring or deterioration
    • smog, rust or other corrosion, mold, wet or dry rot
    • birds, vermin, rodents or insects
    • animals you own or keep

Stay Out of Court

Many people whose claims are turned down under a policy exclusion get infuriated and sue their insurance company. It's often easy to find a lawyer to take such a case, because the companies have lots of money and get little sympathy from juries.

But relying on the court system should always be a last resort. An insurance company with lots of lawyers on the payroll is almost surely better positioned to litigate a long dispute than you are.

If you know the rules that courts use to decide these disputes, though, you may be able to negotiate a better settlement - and avoid court altogether.

Here are the important rules:

  • Insurance policies are contracts, and courts strictly enforce their terms. An insurance company may fix the terms of its policies as it wishes, provided they are not contrary to law, and it may insure against certain risks and exclude others. Theoretically at least, if you aren't happy with a policy, you can negotiate different.
  • Since the insurance company selects the words used in a policy, any ambiguity or uncertainty as to the meaning of those words is usually interpreted in the policyholder's favor.
  • If language can be interpreted two different ways, the interpretation sustaining coverage will be adopted. In keeping with this principle, terms of exclusion are narrowly construed.
  • The policy should be read as a lay person would read it, and not as it might be analyzed by an attorney or an insurance expert.
  • An insurance contract is interpreted in its entirety. One section can't be read in a way that undermines or contradicts another.

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