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.
Background
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.
Read more on this topic in
Nonstandard Policies Deceptively Similar to Standard Policies.