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.