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The underlying assumption of insurance buyers is that, in the event of a loss, a claim will be paid in full. If insurance is seen as less than reliable and certain, its perceived value drops, dramatically. Why? Because certainty-or rather, the quest for certainty-is the main reason for insurance. Despite the fact that we know nothing in life is truly certain, we continue to buy insurance, primarily because it makes us feel more secure.
Economists Richard and Barbara Stewart have carefully analyzed this assumption as it relates to insurance purchasing and have determined that certainty is no longer likely or even feasible. In their article, "The Loss of the Certainty Effect" (Risk Management and Insurance Review, May 2001), they assert that while "the insurance buyer's belief that claims will be paid is essential to the value of what insurers sell . . . recent changes in the insurance business have placed a cloud over the assumption of certain payment, particularly for large commercial buyers of property/casualty insurance."
The individual wrongful denial of claims, when...