Insurance 101 through a look at the Farmers Insurance flying water heater TV ad

By Associate Dean Jennifer Wriggins

Professor Jennifer WrigginsIf you watched the Wimbledon Tennis Championships recently, you saw a hilarious ad for Farmers Insurance. The ad was based on an actual incident, in which a hot water heater somehow launched itself out of a house, high into the air, and landed on a car. The punchline was that yes, Farmers Insurance covered the damage from this event.  Viewers are supposed to think; “How wonderful – Farmers covered this very rare event! I’ll buy Farmers in case something really bizarre like that happens to my house or car.” But if we step back and think about insurance and risk, the perspective shifts. Insurance is a way of pooling and financing risk. Risk is key. Homeowners and car owners pay premiums to a company, which are used for paying claims, paying employees, paying for advertising, and making money for the company from investing the premiums. If something that is covered by insurance happens often, the company pays a lot of claims. If something happens rarely, the company pays fewer claims and can invest more of the premiums received from customers to make money for its shareholders. Flying hot water heaters are exceedingly rare occurrences.  In other words, the risk is very low. It is not at all surprising, then, that the damage caused by flying water heaters is covered by Farmers.  Standard homeowners policies will even cover damage caused by a wheel falling off a plane and hitting your house. How likely is that? Not at all likely.

What is a more likely risk is that a homeowner will be a victim of identity theft or data breach and suffer damages from that. Also more likely is that a homeowner will suffer water damage from a flood or other weather or man-made event. Yet, cyber-losses and water losses are excluded from standard homeowners policies. Why?  Because these events happen frequently, and therefore the risk of these events is higher.  Companies would have to pay an astronomical number of claims, often at the same time, if they covered these risks. People can and must buy separate policies for flood risk or cyber risks if they want to protect themselves from these risks through insurance. There is nothing wrong with this arrangement; it stems from the nature of risk.  It’s important for all of us to understand the basics of insurance and risk. Buy whatever insurance makes sense for you, but please do not make the decision based on whether it covers flying hot water heaters.