This is the introductory article for a series of articles discussing the widespread use of undisclosed coverage restrictions and other policy limitations in insurance policies. Basically, the purpose of insurance is to protect the public.
Over 4 decades, I have had the opportunity to see the property and casualty industry serve the public through hurricanes, major floods, tornadoes, fires, workplace tragedies, deaths, injuries, internal fraud, etc. No serious loss is easy—for anyone—but the industry largely serves the public well.
Unfortunately, there are companies quietly delivering inferior or worthless "insurance product"1 to an unsuspecting public. The use of "sound-alike" and "look-alike" policies is widespread. Restrictive proprietary policy forms or pages and pages of endorsements added to complex standard form insurance policies make comparisons difficult for even experienced industry personnel. Many insurance companies engage in practices that intentionally or unintentionally mislead or deceive the public. In loss situations, the consequences are appalling.
An inferior insurance product isn't limited to a particular segment of the industry. The perception may be that it is more widespread in the commercial excess and surplus (E&S) lines market, but many E&S programs provide superior coverage and address issues the mainstream insurance market will not. In fact, E&S programs can deliver an exemplary insurance product while main street companies deftly amend product to reduce coverage.
Insurance Policy Development
Contemporary insurance policy forms have developed over decades and centuries to address broad categories of well-recognized risk. The policy forms evolved over time to provide protection for a segment of the market (e.g., homeowners, personal automobile, commercial automobile, commercial general liability, commercial property, and crime). The policy forms evolved over time to address changes in risk and exposure. Employment practices policies have evolved since the early 1990s. Cyber policies recently began their evolution.
Insurance policies are highly complex contracts. Comparing different policy forms can take hours or days for knowledgeable practitioners. The forms must be carefully read and compared word for word, sentence by sentence, and paragraph by paragraph. With rare exceptions, the reader needs a source of credible insurance forms and credible reference materials before the comparison starts.
As an effort to protect the public, standard insurance policy forms evolved over decades. The 1943 Standard Fire Policy is one of the most widely known and well-used examples. Standard form comprehensive general liability policies were also introduced in the 1940s. For decades, most state insurance regulators required policy forms to be submitted for approval before they could be sold to the public. The late 1970s and early 1980s saw a countrywide initiative to produce more readable insurance policies.
Unfortunately, the decades-long initiative toward standardization (or policies providing equivalent coverage) and readability has been followed by the diminished use of standard (or equivalent) policy forms. Proprietary forms reducing coverage have proliferated. Unsuspecting buyers may purchase insurance only to discover their policies exclude needed coverage elements found in more widely used policies. The consequences may be financial ruin.
Today, insurance companies submit policy forms to regulators with limited—or perhaps no—requirements for approval. The 1943 Standard Fire Policy, as a minimum standard, is no longer mandated in many states. Inferior policy forms are sold to an unsuspecting public, and a significant percentage of the public suffers a loss of protection.
"Look-Alike" and "Sound-Alike" Insurance Policies
Some insurance companies prepare policy forms that outwardly appear identical to standard (or equivalent) forms. Radio or TV ads from inferior providers use the same words as competitor companies selling credible products. The policy print and headings are identical; many words are identical. The content is not. The buyer could experience a ruinous loss and discover their insurance is worthless.
Evaluating an insurance policy form is trying for knowledgeable practitioners. With over 4 decades of technical experience, I recently spent 2 full days pro bono reading a small package policy using nonstandard forms. The church had a single building and a small number of employees. The account developed a modest annual premium. I found several discrepancies where uninsured exposures were in the range of $50,000 to several hundred thousand dollars. When we called the national insurance company's help line, their personnel were unfamiliar with such topics as agreed amount, computer fraud, and fraudulent instructions.
The problem isn't limited to small business. A consulting client serviced by a national broker is paying a seven-figure sum in insurance premium and retained losses each year. That account had different but similar issues.
Inferior insurance product creates a host of complex problems for the insurance buyer. Not only are their claims excluded, the named insured may be in breach of contract with their landlord, firms for whom they provide products or services, or out of trust with their lender. The consequences of each instance can be severe.
An Appropriate Analogy?
It may be illegal to knowingly sell an automobile with brakes that work 95 or 75 percent of the time in emergency situations. Insurance companies can easily remove 5 or 25 percent (or more) of standard form coverage by removing or changing a few words or adding highly complex endorsements. A restrictive policy form may outwardly look identical to standard forms. Many endorsements are coded references to policy provisions deleted or changed. There is no explanation as to how an endorsement changes the policy. Finding the deletions or understanding the amendments may require many hours or days of careful study.
Firms selling diminished or grossly inferior insurance product often do so with impunity. Further, companies selling inferior insurance product often take severe positions in claim settlements. Even when a claim is covered, the insured may still lose.
What to Do?
The insurance buyer should select industry representative(s) who exhibit a high level of business acumen and exercise great care in their transactions with the industry. The insurance buyer needs to work with their insurance representative(s) and carefully disclose their exposures. The conversation should be one of risk in relation to insurance coverage provided instead of the widespread practice of simply buying a policy. The insurance buyer needs to carefully question the provider(s) about product quality and inquire as to the use of nonstandard forms, limiting forms, endorsements, etc. The insurance buyer has every right to ask, "What does this mean?" and receive a well-informed reply.
The use of proprietary policies, nonstandard forms, and policy endorsements should be carefully reviewed—and understood. There are providers whose policies are appropriate while others are not.
It is unrealistic to expect the average consumer to analyze and comprehend complex insurance policies. Indeed, even many men and women selling insurance are unaware of their own insurance products' deficiencies.
Deception in promotion and misrepresentation in the delivery process ill serves the public and discredits an essential industry in our nation's economy.
The purpose of insurance is to protect the public.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
Many insurance professionals will object to the categorization of insurance as a "product." Insurance is certainly not a commodity, but using the term "insurance product" is fitting for this series of articles and will be used throughout.