May 24, 2024

Bucks: Homeowners’ Policies Not All Alike

Few of us would enjoy parsing the language in our homeowner insurance policies. But Daniel Schwarcz, an associate professor at the University of Minnesota Law School, has spent a lot of time doing just that — and what he has found is troubling for consumers.

Professor Schwarcz found that the wording used in homeowner insurance policies can vary widely among insurers, despite the common belief that such contracts are uniform throughout the industry. And some wording is better for homeowners than others.

As a result, he is urging state insurance commissioners to post contract language online, so consumers can compare policies. His report will be published later this year in the University of Chicago Law Review.

Most consumers, he said, choose a homeowner insurance carrier based on the premium quoted, the company’s financial soundness or a vague idea about its reputation. That approach assumes that one company’s underlying policy is pretty much the same as another. Yet an analysis of contracts from large insurers obtained from seven states, he said in an interview this week, shows that belief is “a myth.”

Insurers long have relied on groups like the Insurance Services Organization, an industry group, to help them crunch risk data and draft policy language. The group developed a homeowner’s form, called the HO3, that became the industry standard for stand-alone, single-family homes. But as insurers have grown larger, they have begun to rely more heavily on their own data and insight and have started tweaking contracts to their liking. As a result, Professor Schwarcz found, many policies today differ “radically” from the HO3, often in ways that reduce coverage for homeowners.

Here’s one example: The standard contract insures a home against risk of “direct physical loss to property,” he noted. But some insurers have altered that language to say “sudden and accidental” direct physical loss to property. (His paper doesn’t identify which specific insurers use the language, he said, because he wants to focus on changes regulators should make.) Such wording, he said, might be used to deny claims for vandalism or from a threat that grew over time — say, an old tree that weakens and eventually falls on a house. It’s conceivable, he said, that the language could be used to deny claims for theft on the grounds that the loss wasn’t “accidental.”

The upshot, he said, was that such changes were “an indication that insurers are writing policies so they can deny claims whenever they want.”

Making matters worse, he said, is that it’s nearly impossible for consumers to compare various insurers’ contracts. Companies don’t make their policy language available until after the homeowner buys coverage, and many state regulators don’t even have complete copies of insurers’ contracts on file. A handful of states do make at least partial form filings available online, but the language is often unfathomable to a nonexpert. “Only a seasoned expert,” he wrote, with a substantial amount of time and patience can wade through this material” and make sense of it.

“It’s a pretty shocking state of affairs for ordinary consumers,” he told me.

Partly in response to his research and advocacy, he said, the National Association of Insurance Commissioners, made up of state regulators, has formed a working group to propose ways to make insurance contracts more transparent for consumers. Professor Schwarcz serves as a consumer representative to the association. “I’m cautiously optimistic” that the effort will result in policy language being more widely available online, he said. Consumers will still need help interpreting the language, he said, but knowledgeable advocates can help with that, once the information is available.

Erin Johnson, a spokeswoman for the insurance commissioner group, said in an e-mail that the association had no comment on Professor Schwarcz’s research.

Have you discovered that your homeowner’s policy wasn’t as comprehensive as you thought? Did it affect the outcome of any claims you have made?

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