You Can’t Just Say “Yes, There’s Coverage”
A couple of recent articles in Insurance Journal highlighted an important issue that exists in light of coverage and how hard it is to answer a question broadly. The problem (broadly) is that no two carriers’ policies are alike. That means that you can never answer a question like, “Will everyone have coverage…” with a definitive yes or no. Yes, they are similar, but things that are similar are not the same. We have two dogs at home and they are similar. One is young, and we think she has some greyhound in her. She’s the fastest thing in the neighborhood. The other is older and is a shih tzu mix. He’s a wonderful companion, but he barks at the slightest sound. They are similar, but certainly not the same.
We often teach and speak about the base ISO policy.
Since I teach, write, and speak about policies, I need a starting place. Since so many carriers use a variation on the ISO products, that’s where we start. That provides us a basic understanding of policy language because the ISO products have a particular tone and rhythm. I know, you think I’m crazy, but it’s true. Their products have a certain flow that I have come to count on. You can count on certain phrases and words. You can count on them working with other policies in very predictable ways. You can count on their definitions to be consistent. Yes, they can be complicated to read, but policies are complicated to read for a lot of reasons and that’s not the point today.
Many carriers use a variation on the ISO policy.
Even with a quality product like the ISO policy, a carrier might not want to use it just the way it is. The carrier may take the base form and add their own endorsements to it. That way, the carrier can customize the policy to provide additional coverages, based on the way they read the needs of the market. The carrier can also add endorsements that restrict coverage that they don’t want to provide from the base ISO form.
The other side of the coin is that the carrier may take their endorsements and the ISO policy and combine them into their own proprietary coverage form. That way they don’t have to add endorsements for coverage changes that they are making on every policy. They can still add endorsements to amend coverage provisions as they need to, but when they have a few changes that apply to the majority of policies, they can simply skip the step of endorsing.
The last piece to remember about a carrier’s specific form is that admitted carriers are subject to filing those forms (whether a proprietary form, or the ISO form with endorsements) with their state insurance department. Depending on the filing requirements of the state, they may have to have these forms specifically approved before they can use them. In this way, they are subject to the requirement of explaining why they added or restricted coverage in the way that they did. As a fan of smart regulation, I like the idea of requiring carriers to prove why they are making certain changes to their policies. One item that a carrier might need to justify is any specific exclusion that is “out of the normal”. For example, a Florida homeowners’ carrier will need to justify the use of a windstorm or hail exclusion and make sure that the state knows that they are only using that form in the wind-only territory (where the state residual market takes up coverage).
Surplus lines carriers use whatever they decide is best for the risk.
The other side of the coin is that many admitted carriers will restrict writing policies in certain areas that they can show are statistically at higher risk for certain types of losses. Looking back at Florida, carriers will file that they are not writing homeowners’ policies in certain coastal counties because of the risk of hurricane, or that they are not writing sinkhole coverage in other counties that are at higher risk of sinkhole activity. In those cases, non-admitted carriers will take up some of the policy writing. These non-admitted carriers are referred to as the surplus lines market, or excess and surplus lines carriers. They operate legally by complying with the state surplus lines laws, but they do not operate under the specific supervision of the insurance department. They do not have to file their rates. They will charge what they decide is an appropriate premium for risks.
They also do not file their rules and forms with the state. That means that they can truly customize every policy as they decide that the risk deems it necessary. Those non-filed forms mean that no one knows exactly what each policy will cover. It also means that the insured may have an exclusion that most other policies don’t have.
States are each different.
Having dealt with the different ways that carriers deal with the risks that they choose to write and choose not to write, we also have to deal with the most fundamental issue in our insurance system in the US. Each state operates its own regulatory system. Yes, all of the states are regulated in similar ways, but things that are similar are not the same. Every state has an insurance commissioner, who is responsible for the regulation of the insurance market in her state. Each state has an insurance department (all named differently) that makes that regulatory system work every day.
States don’t do it the same. One state will approve particular policy language while other states will reject the same language. One state will require specific wording in specific situations while other states aren’t concerned about it. Some states hold elections for their insurance commissioners while other states appoint him. Some states deal with very specific issues that other states don’t. It’s a grand mix of interpretations, rules, needs, requirements, and different shades of red-tape. (PS – I love it that way, but that’s a story for another day.)
It’s easy to accidentally create confusion.
People ask broad questions because they want to understand. The press will ask an insurance commissioner if there is coverage for some catastrophic event and the commissioner will (best she can) answer broadly because that’s what we pay government officials to do. That’s usually three minutes before an insured somewhere in the state calls their agent to report a loss, leaving the agent in the uncomfortable position to tell them that their policy on their home doesn’t work the way that the governor, insurance commissioner, or newspaper reporter said it should.
The insurance commissioner and the reporter aren’t trying to create confusion. They’re just trying to do their jobs in days when they are likely getting about 45 minutes of sleep between phone calls and emergency meetings. Yep, I’m working on the assumption that people are trying to do their best to help. If you have a different assumption, you can disagree with me. That’s fine. I’m just doing my best to help and comment on a tough topic.