Sue My Insurance Company

In the next few posts, I will provide an overview/explanation of the various types of policies (liability, property, auto, health, etc.). But before we get into the weeds – let’s ask ourselves: do we know what insurance is?

I often hear folks define the word insurance as a “risk transfer mechanism”. As a mentor of mine used to say, “that is completely true without being truly complete”.

A bicycle helmet is a “risk transfer mechanism”; it transfers the risk of impact from your head and places it on a helmet. “Insurance”, as that word is commonly understood today, refers to a very specific concept and product.

Simply put: “insurance” is a bet. If you want a more polished description, you can call it an “aleatory contract”, which Blacks Law Dictionary defines as follows:

aleatory contract (ay-lee-ə-tor-ee) [fr. Latin aleator “gambler,” fr. alea “the throwing of dice”] (1891)

A contract in which at least one party’s performance depends on some uncertain event that is beyond the control of the parties involved. • Most insurance contracts and life annuities are of this type. — Also termed hazardous contract; wagering contract. Cf. certain contract.“A contract is aleatory when, because of the nature or according to the parties’ intent, the performance of either party’s obligation, or the extent of the performance, depends on an uncertain event.”

CONTRACT, Black’s Law Dictionary (12th ed. 2024)

As you can probably tell, the definition of an “aleatory contract” is pretty similar to a “bet”.

Say you want to protect your house against the risk of burning down. The “vehicle” through which you do this is via an “insurance contract”.

For example, an insurance company says that, in exchange for a $1,000.00 premium, they’ll insure your house for up to $100,000.00. That amounts to you telling the insurance company “I bet you $1,000 that my house will burn down in the next 365 days.” Insurance company says, “I’ll give you 100-to-1 odds”, and there you have the policy limits. You win the bet if your house burns down (assuming no foul play) and collect your winnings.

So let’s pick a state, any state. In Washington State, the definition of insurance is found in the Revised Code of Washington: RCW 48.01.040:

Let’s translate that into English. Insurance is an agreement in which one person agrees to pay or indemnify another person if a certain thing does or does not happen. In other words, a bet. “Determinable” means the risk being insured against can be “determined” or reduced to writing. “Contingencies” means a “fortuitous” event.

So I go to Vegas and place a bet. One person (the sportsbook) agrees to pay another person (me) a specified amount (my winnings) upon a determinable contingency (Max Verstappen winning the 2024 F1 Driver’s Championship). Same principles as insurance.