As an insurance expert, I frequently field questions from friends and family about their policies. It’s not surprising that people don’t understand the nitty-gritty of insurance, but over the years, I’ve discovered that most don’t understand the basics, either.
Insurance education is out there; I’ve dedicated my career to it. But unfortunately, it’s only when something goes wrong that people start to look at what the policy they’ve been paying for actually covers. It’s understandable. People are busy, and they buy insurance because they have to. Aside from reviewing rate increases and maybe taking some time to see if they can get their coverage cheaper, they see insurance as a set-it-and-forget-it expense in the same category as a utility bill.
Not understanding your water bill is unlikely to affect your life. Not understanding your insurance coverage, on the other hand, can be catastrophic.
Denied claims and financial burdens
Misunderstanding how your insurance works and what is covered can be disastrous when you file a claim.
After Hurricane Ian, nearly 30% of homeowners insurance claims were closed without payment. Although there are many reasons for a claim to be denied, the most common is that the policy didn’t cover the damage. In the case of hurricanes, damage is often caused by flooding; while most hurricane damage is covered, overland flooding is not covered by standard home insurance.
Only 35% of structures in high-risk zones in Florida are covered by flood insurance, according to FEMA. Outside of high-risk zones, that percentage drops considerably. For some, not buying flood insurance is a choice based on perceived risk: It won’t happen here.
But there’s also confusion about what homeowners insurance covers; many believe it covers all hurricane damage, which can result in a denied claim and a big repair bill.
And it’s not just flood insurance. I’ve seen a homeowner angry that insurance refused to pay to remove a tree from their yard that they knew was a risk and later fell on the house. I’ve been asked if car insurance covers rust.
In both cases, there’s a fundamental misunderstanding of what insurance is.
What insurance is for, and what it’s not for
One of the biggest areas of confusion stems from misunderstanding the purpose of insurance. When I am asked about coverage, the answer is usually found in the purpose of insurance. So, let’s start with what insurance is for.
Insurance is to get you back to where you were before a sudden, accidental event caused injury or damage with financial consequences.
The important thing is that insurance only covers sudden, accidental damage. It doesn’t cover preventative maintenance, like removing a tree, or wear and tear that happens over time, like rust. Neither of those things is sudden and accidental damage.
And it only covers getting you back to where you were before the incident. So, if your car is a total loss, your insurance will cover you for the vehicle’s value before the loss and not for a new car.
The cost of not understanding your insurance
The obvious cost of being unclear on the coverage and function of your insurance policies is having a claim denied. And that can be financially devastating.
But failing to understand your coverage can have less obvious costs as well. First of all, filing a claim can raise your rates, even if the claim is denied. Insurance companies report claims to a database called the Comprehensive Loss Underwriting Exchange (CLUE). These records go back up to seven years and include home and auto insurance claims.
One denied claim isn’t likely to raise your rates much, but insurers look for patterns. Multiple claims, even those that were denied, can indicate a pattern that increases the risk you’ll file a claim in the future.
And that’s not all. Consider the situation mentioned above, where a tree that needed to be removed fell on a house. In this case, the insurance company paid the claim, but afterward, it nonrenewed the policy. The policyholder was angry because they believed the insurance company should have paid to remove the tree during a previous claim where a limb had fallen. However, the insurance company was well within its rights and could have denied the claim.
A standard home insurance policy is a contract, and part of that contract is that the homeowner is responsible for maintaining the property to reduce the risk of a claim. Removing a diseased or damaged tree is the homeowner’s responsibility, and if that tree does damage, it’s negligence on the homeowner’s part and a violation of the contract.
Because the homeowner didn’t understand their coverage, they didn’t take the tree down, wound up with major damage to their home and lost their insurance.
Understand your insurance so you don’t pay the price
Insurance is complicated, and it does require some help from an expert to get it right. In the past few decades, people have moved towards making insurance decisions themselves online. There are a lot of perks to that: You can easily find the best rate and shop for insurance at whatever hour suits you.
But the move away from working with insurance agents has left many people buying policies without the guidance they need. When it comes to insurance that protects your home, protects you from liability lawsuits and ensures you have a car to get to work and back, it’s important to know what you’re buying.
Get expert advice before you buy, especially if you are new to buying auto or home insurance. Even if you choose to shop and buy online, take the time to make sure you’re buying what you really need. Just shopping by price can save you a little money. Shopping for the coverage you need and understanding how that coverage works could save you thousands.
According to FEMA, the average flood insurance claim over the past five years was $69,000. Not knowing homeowners insurance doesn’t cover floods could be a financial disaster. The average cost of a flood insurance policy with the National Flood Insurance Program (NFIP) is $1,169 a year.
Whether or not you want to take the risk or pay a little more to buy flood insurance is your choice, but it’s a choice you can only make when you’re properly educated about insurance coverage. It’s worth your time.
Resources
- Florida Office of Insurance Regulation. “Hurricane Ian”. Accessed May 2025
- Federal Emergency Management Administration. “For Floridians, Flood Insurance Is a Sound Investment.” Accessed May 2025
- Floodsmart. “Client Risks: Lack of Flood Insurance.” Accessed May 2025