State laws or lenders require people and businesses to buy certain types of insurance. Most states require Automobile Liability insurance on all registered vehicles. If vehicles are financed, lenders usually require Collision and Fire coverage. Employers must carry Workers Compensation in most states, and mortgage lenders commonly require borrowers to insure buildings against fire and other perils.
However, many kinds of insurance are not required by anyone. In some states employers can opt out of buying Workers Compensation coverage. Although nearly all businesses use computer networks, no laws or lenders require them to buy insurance for damage to their systems or for losses others might suffer because of a problem with those networks. State laws also do not require employers to carry Employment Practices Liability coverage.
Lenders normally do not require people who live in low-risk flood zones to buy Flood coverage, and no laws require businesses to buy Umbrella policies, which provide additional liability insurance above standard Liability and Auto policies. This raises a common question: if an individual or business is not required to buy certain types of insurance, should they skip them?
The reasons for passing on non-mandatory insurance are compelling. Although the future occurrence of a loss is uncertain, the cost of an insurance premium is not. Insurance can cost significant amounts of money that many people would rather put to other uses.
People might also believe they are unlikely to have some types of losses and therefore do not need coverage. For example, many businesses do not carry Cyber Liability insurance for this reason. People who do not live near bodies of water often do not think about Flood insurance. Some types of insurance can also be difficult to obtain; in parts of the U.S. prone to earthquakes, the market for Earthquake coverage is limited.
There are good reasons for buying insurance even when it's not required. Many of these policies cover jury awards in injury and damage cases, and those awards can be substantial.
Consider the following awards that would likely be covered by Employment Practices Liability insurance:
A jury awarded $934,000 in damages to a deaf man fired by the convenience store that employed him.
An Alabama man who was fired after complaining about his employer to the federal Equal Employment Opportunity Commission was awarded $314,000.
A jury ordered an employer to pay $900,000 to a Cleveland woman for discriminating against her because of her age.
Umbrella policies would come in handy in situations like these:
A woman who suffered injuries when she fell in a store was awarded $3.2 million.
A jury awarded $11.7 million to an elevator mechanic who was injured while working on a construction site.
People and businesses who think they don't need Flood insurance might want to reconsider. Floods can result from melting snow and water main breaks as well as rainfall. According to FEMA, people outside of high-risk areas file over 20% of Flood insurance claims and receive one-third of disaster assistance for flooding. FEMA estimates that as little as one inch of floodwater in a 2,000 square foot home can cause up to $21,000 in damage.
For these reasons, it is wise to at least consider buying insurance that no one requires. If you want information about individual coverage options, see Individual Life Insurance.
Renters and people who lease property should also consider protections designed for tenants; for more details, see Tenant Insurance (Renter's Insurance).
You can talk to an agent who can answer questions and help you weigh the costs and benefits of buying extra coverage. Going without insurance can be a very costly mistake; just because coverage isn't required doesn't mean you shouldn't buy it.
Frequently Asked Questions
What types of insurance are commonly optional?
Optional policies often include Umbrella liability, Cyber Liability, Flood (in low-risk zones), and some employment practices coverages; requirements vary by lender and state.
If my lender doesn't require flood insurance, should I still buy it?
Flood insurance can be valuable even outside high-risk zones because many flood claims come from lower-risk areas and flood damage can be costly.
Can a jury award exceed my standard liability limits?
Yes, jury awards and settlements can exceed standard policy limits, which is why some people buy Umbrella coverage for extra protection.
Is Cyber Liability insurance necessary for small businesses?
Many small businesses find Cyber Liability useful because cyber incidents can cause data loss, business interruption, and liability to customers.