What it means
Insurance works because a large pool of similar risks makes losses predictable enough to price. Property that is almost certain to be damaged, or where the loss cannot be measured, breaks that logic.
Insurers therefore decline it rather than charge a premium that nobody could afford. Some property is excluded by law or public policy.
Contraband, stolen goods and items that are illegal to own cannot be insured, because a policy would reward wrongdoing. Other property is excluded because the buyer has no insurable interest, which means the person does not stand to lose money if the item is damaged.
A third group is excluded for physical reasons. A derelict building that is likely to catch fire, a property in an area where flood or wildfire losses are repeated and severe, or goods stored in an unsafe way may be turned down.
Insurers may also decline items with no objective value, such as irreplaceable personal papers, or limit cover to the cost of reproducing them. Uninsurable is not always permanent.
A building that fails an inspection may become insurable again once wiring is replaced or fire protection is installed, and some high-risk areas are served by government-backed schemes or specialist markets. The price in those cases is usually much higher and the terms narrower.
For a finance team, the lesson is to check whether significant assets are actually covered before relying on them as security for loans or investment. An asset that cannot be insured may reduce its value to a lender, and an uninsured loss falls directly on the profit and loss account.
Self-insurance, which means setting aside money to absorb losses, is sometimes the only practical response. Lenders and investors care about insurability because insurance protects the value of the asset that backs their money.
Most loan agreements require the borrower to maintain cover and to name the lender on the policy. If cover is cancelled or cannot be renewed, the borrower may be in default even though every payment has been made on time.
In practice
Real-world examples.
Example
A warehouse owner tries to insure a neglected building with faulty wiring and a record of small fires. Insurers decline until the owner replaces the wiring and installs a sprinkler system, after which the property can be covered. The upgrades cost the owner money up front, but they also lowered the premium that was eventually quoted.
Example
A collector buys a shipment of goods that turns out to have been imported illegally. No insurer will cover the stock, because insuring contraband would be against public policy.
Example
A restaurant operator in a repeated flood zone cannot buy standard cover for stock in the basement. She moves the stock to the first floor and buys specialist flood cover from a government-backed scheme at a higher premium.
Case study
Seen in the real world.
Brackenridge Storage is an illustrative, fictional company that bought an old textile mill to convert into self-storage units. The purchase price was low partly because the mill had no sprinklers and a history of electrical faults.
When the finance director asked for insurance quotes, three insurers declined and a fourth offered cover only for fire at a very high deductible. The lender then threatened to withdraw its $3,500,000 facility, because the building could not be insured to the level the loan required.
The company spent $400,000 on wiring and sprinklers, after which the building became insurable on ordinary terms. The illustrative lesson is that insurability should be tested before a purchase is finalised, not afterwards. Brackenridge also recorded in its board minutes which assets were insured and which were deliberately left uninsured. The finance director now includes an insurance quote as a standard step in every acquisition checklist, alongside the survey and legal review, and the board will not approve a purchase without one.
Watch out
Common mistakes.
- Assuming any property can be insured if the premium is high enough, when some property is refused outright whatever the price.
- Buying an asset without checking insurability first, which can leave a lender or investor unwilling to proceed.
- Assuming uninsurable means permanently uninsurable, when fixing the cause of the risk often makes cover available again.
Questions
People also ask.
Can I insure property I do not own?
Only if you have an insurable interest, meaning you would suffer a financial loss if it were damaged or destroyed.
What can I do if no insurer will cover an asset?
Options include reducing the risk, using a specialist or government-backed scheme, or setting aside funds to cover losses yourself.
Does an exclusion in a policy make property uninsurable?
Not necessarily, because an exclusion removes cover for one cause of loss while the property may remain insurable for others.
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