We wish to call attention to a disturbing trend, that even in the highly regulated field of personal lines coverage, homeowners and auto policies, the insurance industry is engaged in courses of conduct designed to write policies that reduce and undercut the “standard” protections the companies claim publicly to offer, thus securing maximum premium dollar for minimum, in some cases, deceptively minimum coverage.

In a study published in 2011, Daniel Schwarcz,Reevaluating Standardized Insurance Policies, 78 U. Chi. L. Rev. 1263 (2011), Professor Schwarcz exhaustively reviewed homeowners’ policies being offered in a variety of policy forms and found that it is simply a myth – although a well-publicized one – that these policies are standard.  Rather, the policy forms that are ultimately provided to buyers contain stark deviations from what we all consider standard coverage: provisions for accidental property loss (including fire) and liability (defense of claims brought against the homeowner )  often contain specific coverage language that is less favorable to policyholders than the corresponding ISO forms.  Buyers, of course, do not see the policies and are not provided with prospective policy language until the actual policies are delivered, often many months into the actual coverage period.  Even then, most consumer buyers would not trouble to read or try to interpret the “fine print” of the multi-page documents they are then provided.

The author also examined the extent to which information about the details of coverage and its limitations and exclusions is available to a buyer from brokers, agents, and insurance regulators, and found the results extremely disappointing.  Indeed, he found that some insurers’ marketing activities misrepresent the thrust of their coverage provisions, loudly claiming greater benefits for less money than the facts showed to be true.

Professor Schwarcz concluded that regulators were remiss in not controlling the proliferation of policy forms which significantly curtail the scope of coverage, many in language which tends to obscure the loss of coverage, and which mislead uninformed buyers.  One immediate lesson is to not assume that all homeowner coverage terms are essentially the same and that a means must be established – Schwarcz thinks that this requires legislation, and we are inclined to agree — to allow the consumers to actually review the scope of coverage with their brokers before purchase.  And in the longer term, Schwarcz believes, it may not be possible to provide transparency in homeowners’ insurance unless laws are written to require that their policy terms (perhaps at least the major ones) be standardized, and be made available to buyers before the policy is bought.

Likewise, we are aware that auto insurers, frustrated with the tight regulations controlling the rates they can charge based on loss, experience and set levels on profits, have embarked on new schemes for pricing called “Price Optimization.”  This is a new form of pricing at renewals that evaluates how much an insurer can raise the cost of the coverage without encouraging the consumer to comparison shop.  The increases may be small on an individual basis, but over millions of customers, the profits can add up.  This sort of pricing may be directed to consumers of a certain demographic more susceptible to just accepting small increases—is this discriminatory pricing?  According to Dave Jones, our California Insurance Commissioner, it is both illegal and discriminatory.  Earlier this year our Insurance Commissioner issued a notice to all property and casualty insurers, warning them that Price Optimization is unfairly discriminatory and illegal.

The Insurance Information Institute contests these conclusions and has been fighting regulators across the country on this practice.  Buyer  beware!