The increased use of non-standard forms in the personal lines market makes it more difficult for consumers to make an informed decision when purchasing insurance. Consumers are no longer buying essentially the same scope of coverages. Therefore, mere price comparisons are not a valid basis for making a decision to purchase. If the reason the same model car costs less is that it has a six-cylinder engine, rather than the standard V-8, then the consumer should know this prior to purchase. So too, if a homeowner's policy costs less because it limits or excludes coverages provided by a more expensive policy, then the consumer should know this prior to purchase. Moreover, insurance, unlike automobiles, is purchased in the hopes that it will never be used. Accordingly, there is no test-drive and no opportunity to trade in the insurance policy for the more desirable model once the event of loss triggers the need for its use. Since policies are complex contracts that are difficult for many consumers to read and compare, it is important for regulators to provide oversight of the sales and marketing process to assure that it is fair and not deceptive. Thus, there exists the need for transparency of coverage differences.
Certainly, the need for increased oversight of personal lines marketing is concurrent with the erosion of the scope of coverage afforded under personal lines policies in areas of both property and casualty. In Florida, the most glaring examples include the legislative enactments that have diluted the sinkhole coverages that were once mandated, and mold exclusions or separate reduced limits for mold damage. Other examples include the exclusion of dog bite injuries altogether, or for "dangerous breeds."
A tremendous proliferation of restrictions by way of definition or exclusion has also been evolving in the policy forms. Carriers are incorporating modifying definitions to the terms "occurrence" or "accident," in order to state the an assault and battery is not an occurrence. The broad language, "arising out of," is being used in the context of assault or battery exclusions to preclude coverage for even the "innocent insured" who is sued for negligent supervision of fighting children. The "criminal acts" exclusion is being similarly extended by the "arising out of" language to preclude coverage of innocent property owners for negligent security. Such coverage limitations leave the consumer personally exposed and the injured victim without the ready access to a financial recovery, thereby defeating the public purposes insurance exists to promote.
I read with interest the National Underwriter's responsive article. The notion that the modern policy forms reflect a diverse marketplace designed to offer consumers options and flexibility of coverages completely misses the point. Rather, the point is that it is difficult, if not impossible, for consumers to make a knowledgeable choice reflecting the qualitative differences among the variety of offered policies. Typically, consumers are only told that the policy covers "multi-perils," wind-only, ex-wind, and has $X liability limits. In fact, please take a look at the "Shop and Compare" insurance site sponsored by Governor Crist's office: http://www.shopandcomparerates.com/HOCompareRates.htm. There, you will be directed to basic criteria for an example of the average rates approved by county. The information provided is purely dollars. The provided disclaimer states:
NOTE: THIS IS BEING PROVIDED FOR COMPARISON PURPOSES ONLY TO DEMONSTRATE THE IMPORTANCE OF SHOPPING FOR INSURANCE QUOTES. Insurance companies listed below may not be writing new business in all counties. Citizens Property Insurance Corporation is writing in all counties.
There is no further disclaimer regarding the "quality" of the coverage, such as: "Not all policies provide identical scope of coverage. It is important to compare the actual policy forms and extent of coverages such as sinkhole, mold, dog bite liability, liquor liability, assault and battery, and other coverages afforded by each insurer when making a complete comparison. Buying a policy at a reduced premium may be a reflection of a reduced scope of coverage."
NAIC needs to urge all state regulators to return consistency to personal lines so that the consumer is comparing an "apple to an apple" when comparing premium cost. Where flexibility in the policy form is approved, there needs to be transparency afforded. One such method of affording consumers transparency is to require a "materiality" disclosure of reduced coverage at time of underwriting. For example, any deviation from the scope of coverage afforded by the ISO HO-3 form would require a Truth-In-Coverage Statement signed by the purchaser that specifically states in plain language the nature of a specific reduction in coverage from the HO-3. This would be a condition of the regulator's approval of any non-standard policy form. In this way, the consumer can make a knowledgeable choice to buy less coverage for less money. (See e.g., Section 627.727 Florida Statutes (2009) which requires a written rejection/selection of underinsured motorists coverage signed by the insured on an approved form.). Of course, insurers would continue to be free to promote "flexibility" by enhanced coverage that supports a higher premium quote that undoubtedly would be voluntarily disclosed to consumers to encourage the sale.