Notable Coverages and Exclusions, in 500 Words or Less?
Timothy O'Brien | August 9, 2013
As if to remind us of the prescience of the 2-century-old observation "Every nation has the government it deserves," lawmakers in New Jersey reacted earlier this year to the many uncovered losses that arose after Superstorm Sandy by passing a new law. What new remedy did state lawmakers so quickly craft that has eluded the insurance industry these many years? To spare New Jersey home owners the disappointment and surprise of uninsured losses in the future, state legislators have determined that insurers simply need to provide policyholders with a "one page summary of the policy, including notable coverages and exclusions under the policy." This article asks insurance professionals if there aren't more meaningful ways to address this important challenge.
Yes, the words "one page summary of the policy, including notable coverages and exclusions under the policy" are the actual and most operative words the legislature used to provide specific instructions to insurers in framing this new law. Further, the act stipulates the document provided by insurers be "written in a simple, clear, understandable, and easily readable way." Again, all of this added consumer insight is to be provided on one page.
Not to be upstaged, the New York State Assembly, though silent on the number of pages, acted this June to pass a similar bill, titled "Homeowners Bill of Rights." With apologies to the well-intended New Jersey politicians, those of us who have actually read a homeowners insurance policy are left to wonder which coverages and exclusions are the "notable" ones that should be summarized and which ones should be omitted? Given that the act stipulates the policy summary must be simple, clear … and one page in length, insurer executives have good reason to expect from lawmakers more substantive language than the glib instructions provided.
However flawed the prescribed solution, it is the impetus for this legislation that should concern those of us in the insurance industry. As previous articles in this column have indicated, our industry has much work to do in helping consumers to make better informed decisions about their risks and the insurance coverage available to protect them. There will always be politicians who blame the insurance industry for uncovered losses. Our industry has a much larger cause-and-effect issue to confront: marketing campaigns cause consumers to prize premium savings over protection, and the effect is public dismay over protection deficiencies after each natural catastrophe. Is it any wonder that after every major catastrophe, our industry becomes the target of politicians eager to curry favor with consumers asserting "No one told me __________ was not covered by my policy"?
Many agents and brokers know quite well that many of the aggrieved consumers never expressed any interest in the coverage that was or was not being provided by their insurance as they clamored for the lowest cost policy available. Meanwhile, we also need to understand that by enabling consumers to pursue premium savings above protection, we become party to the "no one ever told me" consumer assertion that follows every natural catastrophe. While a one-page summary will not solve the age-old "no one told me" issue, we should all work to develop practical solutions to help consumers better understand their protection limitations and options.
A Counterproposal
For insurance professionals who also feel we do not need prompting from pandering politicians to help consumers better understand their insurance coverage, lawmakers must be wondering why we have not yet done so on our own. Moving forward, can we agree the act of providing policyholders a better summary of the coverage that is (and is not) provided by a policy is indeed a worthy objective? We also know there is great room to improve the clarity of the language used in most insurance policies. Is there no room for policy wordsmiths on the insurer side, along with their counterparts at Insurance Services Office, Inc. (ISO), and American Association of Insurance Services, to improve the readability scores of most policies? Finally, and most importantly, our industry should work with state regulators in each state to establish a single standard deductible and event trigger to be used by all admitted insurers for covered losses caused by hurricanes and/or windstorm.
Although agents and brokers are greatly impacted by how insurers respond to regulations concerning consumer disclosures, too often decisions on strategy and execution are left solely with insurance company executives. Since it is self-evident that no meaningful understanding will be gained by consumers from a one-page summary, agents and brokers should engage insurers and encourage them to expand on the superficial act passed in New Jersey to develop more meaningful strategies that will actually help consumers understand their insurance protection.
Available Tools
New Jersey, along with other states, already provides citizens with access to a handy consumer's guide, "Insuring Your Home." While helpful, the 16-page guide on homeowners insurance is not quite "simple or clear" and is representative of the consumer guides provided by other states.A guide published by the National Association of Insurance Commissioners is also a bit deficient. For readers who question the quality of information provided by governmental agencies, I offer this remarkable online coverage comparison tool provided by the Texas Office of Public Insurance Counsel. While not perfect, this innovative tool enables Texas insurance consumers to contrast different aspects of coverage provided by up to five different insurers, quickly, and provides a good amount of detail. Insurance department officials in New Jersey and other states would be wise to contact their counterparts in Texas to learn more about developing a similar tool for consumers to use. I must wonder, however, now that the state has built this great consumer tool, how many Texas citizens actually use it each year?
Of course, there are at least a few insurers that go to great length to document the coverage provided by their policies. Meanwhile, such documents are often marketing tools designed for agents and are not nearly as disclosing of the losses that are excluded by that insurer's policies. While many insurers choose not to make such documents easily available to the public over the Internet, consumers searching for this information can thank third parties for making them easily found with a few well-selected key words. For example, this link provides good detail from Chubb documenting the differences in coverage between an HO 3, an HO 5, and Chubb's Masterpiece Homeowners Policy. A well-detailed chart from Chubb contrasts the coverage provided by Travelers with several other forms of policies.
Documenting the protection provided by a homeowners policy is not overly difficult; doing so clearly and succinctly is quite another matter! Perhaps that is what New Jersey lawmakers had in mind when inserting the subjective term "notable" in their act.
Discerning between Notable and Not Notable
Recall that in an effort to keep the disclosure brief, the New Jersey legislation instructs insurers to merely document the coverage and exclusions that are "notable." To a home owner with an uncovered loss, this author would dare to assert to New Jersey lawmakers that there is no such thing as an exclusion that is not notable. As a result, we would all be wise to provide consumers with a brief list of each of the exclusions that restrict coverage. Following are the commonly listed exclusions in an HO 3 (ISO 2000) policy.
- Earth Movement
- Ordinance or Law (some coverage may be provided in your policy)
- Water Damage (sudden and accidental water damage is automatically included; others can be endorsed onto the policy)
- Power Failure
- Neglect
- War
- Nuclear Hazard
- Intentional Loss
- Government Action
- Collapse (some coverage may be provided in your policy)
- Theft to a Dwelling under Construction
- Vandalism or Malicious Mischief (only if vacant more than 60 days)
- Mold, Fungus, or Wet Rot (some coverage may be provided in your policy)
- Wear and Tear, Deterioration
- Mechanical Breakdown
- Smog, Rust, and Corrosion
- Smoke from Agricultural Smudging and Industrial Operations
- Discharge, Dispersal, Seepage of Pollutants
- Settling, Shrinking, Bulging, or Expanding
- Birds, Vermin, Rodents, Insects
- Animals Owned by Insured
Naturally, there are different ways to depict other forms of coverage. Of course, homeowners insurance policies also provide "extra coverage," and consumers should also be better informed how their policy provides often limited coverage for other important risks such as:
- Backup of sewers or drains
- Damage to foundation or slabs
- Extended or additional dwelling replacement coverage
- Law or ordinance coverage
- Mold remediation
- Replacement cost—dwelling
- Replacement cost—personal property
- Water damage from a plumbing, heating, or air-conditioning system
Declarations Pages: Great Room for Improvement
All agents and brokers understand that the biggest challenges in helping consumers to understand the actual terms and conditions of their policies stem from the fact that many policyholders believe that the policy declarations pages mailed with each renewal are the actual policy. The misperception that declarations are the policy is common, and it seems obvious that state regulators should spend a lot more time to determine how to expand the currently limited coverage disclosures provided by all insurers on the only policy-related document that many consumers actually do review annually.
For example, special (higher) deductibles that apply to covered losses in homes with undisclosed renovation projects are detailed in the contracts of at least a few national insurers. While these insurers make the terms of such deductibles very clear in their policy language, these "special deductibles" are not disclosed on a declarations page and should be. Rather than passing feel-good legislation requiring insurers to identify the deductibles that apply to hurricane losses in a one-page letter, regulators would far better serve the public by requiring insurers to more clearly document all deductibles on the declarations pages for all renewal policies. In all states, insurers should also be required to indicate the precise dollar amount of any deductible if a percent deductible is to be applied.
Since declarations pages are the single most important policy document provided to consumers each year, it is disappointing that our industry has not effectively collaborated with state regulators to use them to more transparently document more "notable coverages and exclusions." This missed opportunity may explain why lawmakers who do not understand our industry have felt a need to pass legislation that seeks to fix the coverage disclosure problem we are aware of but have not resolved on our own.
What Else?
IRMI readers represent some of our industry's best thinkers, and we should consider what we can do to preempt and negate the need for legislation such as the acts recently passed in New York and New Jersey. The leaders in our industry must work together and do a better job finding and fixing the issues that cause consumers to focus on what is "wrong" with the insurance industry.
Knowing that many policyholders will seek to assign blame for an uncovered loss, what actions can we take to more clearly document the risks that are excluded or for which coverage is limited by a homeowners policy? What procedures or documents can we develop to more clearly and transparently document the "notable coverages and exclusions"? What else can insurers and agents do to make the limitations of coverage much more transparent? These are just a few of the questions we should work to address, before the next catastrophe and another silly new remedy is thrust on us by lawmakers. Consider sharing your thoughts and suggestions on the IRMI Personal Lines Forum on LinkedIn.
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