Damn Lawyers Again

I had occasion to examine my household insurance policy recently and was a little surprised to note that damage from earthquakes is excluded from the cover. I have not done anything about it yet and perhaps there is nothing that I can do.

I still find it a bit odd, though, and disconcerting: Cork is not entirely immune from seismic activity. Looked at from the other side, why does the insurer exclude it ? Does the industry know something that I don't ? (What a thought ! With such ramifications ! I must return to it some day). Surely offering the cover is an easy way to make money ?

It got me thinking about what went into the insurance company's decision to exclude earthquake cover and how I could persuade them to offer it to me. And then, the other day, serendipity intervenes and I find the following imaginary dialogue from Ron Baker at www.verasage.com.  He is actually having a tilt at the way (some) lawyers price their services. (The sentence which I have underlined is a gem):

Insurance Company Agent (ICA):  "Good afternoon, CSAA, how may I help you."

Ron: "Hello, this is Ron Baker and I am interested in earthquake coverage for my home."

ICA: "Excellent, Mr. Baker. I see you've been a customer with us for nearly 30 years. We will take excellent care of you, as we have in the past."

Ron: "Great. How much would the standard earthquake coverage premium be for my home ?"

ICA: "Before I answer, Mr. Baker, I need to ask you if you are aware of the fact that our company was recently acquired by a consortium of lawyers and CPAs ?"

Ron: "Uh, no, I wasn't aware of that. Congratulations, I think."

ICA: "Thank you. You see, at their recent partnership retreat they had what's known as a BFO (Blinding Flash of the Obvious). You see, Mr. Baker, we really don't know how much it is going to cost to insure your home against an earthquake. There are far too many risks and uncertainties in this line of business. We don't know how big the next quake will be, where it will hit, or what the damage will be to our policyholders homes. How could we possibly give you a fixed price under these conditions, which is what our new owners asked themselves during the retreat. I think you agree that is certainly a conundrum, no ?"

Ron: "I guess, but how I am suppose to know if I can even afford this extra coverage ? How can I make a prudent and informed buying decision on the value of the coverage if I don't know the price ?"

ICA: "I understand the question, Mr. Baker, and it's a good one. In fact, I've been getting it all week from our policyholders. Our new owners answer is that it would not be fair to charge you a premium that exceeded the actual damages, plus a normal rate of profit of course, including the time value of money. Nor would it be fair to charge you a premium that did not cover the actual damages, plus a normal rate of profit, of course. So you see, we simply can't give you a price for your earthquake insurance. There are just too many variables. Does that answer your question ?"

Ron: "Not really. I can't really make a decision about this until I know the price."

ICA: "Well, Mr. Baker, I understand your dilemma, but I don't think you're viewing this from our perspective. The new way it works is as follows: We put your name on the earthquake insurance list, along with the date you decided to opt for coverage. Heaven forbid, if an earthquake were to strike, and your home is damaged beyond the deductible, you will submit a claim. We will aggregate all the claims we receive, tally them up, then divide by the number of policyholders on the list, adjusted by a complicated equation for time. We will then simply send you a bill for the retroactive costs since you've been covered, adding a normal profit and the time value of money, of course."

Ron: "How do I know that your costs will be accurate ?"

ICA: "Mr. Baker, I'm not sure I appreciate the tone of that question. We here at CSAA are very fastidious and ethical. Our costs accountants are excellent CPAs, who will carefully, and accurately, keep track of all outflows. I really think you must put yourself in our shoes. There is simply no other way to give you a fair price, wouldn't you agree ?"

Ron: "But I know the price of everything else I purchase before I buy for it."

ICA: "Well that may be true for commodities like groceries and clothing, but it's certaintly not true for law, accounting, and other professional services, is it now, Mr. Baker ?"

Ron: "Touche."