The End of Insurance as We Know It

by Rob Galbraith

  Insurance carriers have been working hard to streamline their claims handling practices. At a high level, the several steps are:

  1.Report of claim by the insured

  2.Insured provides supporting documentation

  3.Carrier investigates claim to determine coverage

  4.Development of a claim estimate

  5.Adjustment of the claim subject to policy provisions

  6.Offer made or coverage denied

  7.Appeals (if necessary) and resolution of claim

  Typically, either the insurance agent or a claims representative will receive what is known as the First Notice of Loss (FNOL) from the insured (first party) or another third party claimant. This represents the first time that a claim is reported to the carrier. In addition to simply reporting the claim, all parties involved including the insured and any third-party claimants have obligations that must be fulfilled in order to receive a claims settlement. They are found in the “Conditions” section of a policy and include things like requirements to report the loss in a timely fashion. Even if a claim is potentially covered, it can be denied if a party does not fulfill their responsibilities as outlined in the insurance contract including supporting documentation of the cause of loss as well as the valuation of the items subject to the loss.

  Due to the principle of indemnification, insurance carriers have due diligence that must be performed when adjusting a claim. The facts of the specific loss event matter a great deal in determining coverage. This is the primary role of the claims adjuster: to gather all of the relevant information surroundings the facts of the loss, then apply the policy language to determine if coverage will be afforded. This is also known as how the policy responds given the set of facts involving in the loss event. In addition to fully understanding the circumstances of the loss event, the extent of the damage must be determined through the process of developing a claim estimate. Based on the estimate and the cause of loss, the claim is then adjusted subject to the relevant policy provisions which include, but are not limited to, any deductibles, policy limits or sublimits, definition of perils, policy exclusions and exceptions to those exclusions, etc.

  The process of producing documentation in accordance with the obligations set forth in the insurance contract can be straightforward or quite onerous, depending on the circumstances of the loss. The more complex the loss, the more documentation is required and the longer it will take to ultimate resolve the claim. Property claims are typically more straightforward than liability claims. Most claims are resolved relatively quickly, in less than a week, but others can take months and sometimes years to complete. The time involved on the part of the insured (and claimants) can be quite lengthy and involve a lot of back-and-forth correspondence with their claims adjuster. Time is also spent finding and setting up appointments with contractors, auto repair shops, medical facilities, etc. as well as securing receipts, proof of ownership, etc. In addition to all of the personal time involved, insureds can incur personal costs in order to fulfill their obligations under the contract, either directly or indirectly through lost income from missed time at work. These obligations are a “feature”, of standard insurance products which are, by definition, binding legal contracts that confer obligations on all parties to the agreement, but which are not necessarily understood by insureds at time of purchase.

  Once the adjustment process is complete, the claims adjuster will then communicate their determination of coverage to the claimant and either make an offer of a claims settlement (which can be accepted or rejected) or deny coverage (or some combination of the two depending on the loss). Claimants have some channel by which they may appeal the claims adjuster’s decision (possibly with the assistance of their insurance agent) and, in the worse case scenario, pursue mediation, arbitration or legal action through the courts.

  IN DENIAL

  Consumer expectations have always been high, and in our modern world with Internet-based retailers, smart phone apps and global reach, consumers are more demanding than ever. Furthermore, when consumers are dissatisfied they have more ways to vocally express their frustration thanks to the power of social media. As mentioned previously, insurance is expensive and complex and it’s not entirely clear what you are receiving in return as a consumer. So the true test as a consumer is when you attempt to use your insurance product - that is, file a claim.

  A smooth claims experience can create a loyal customer for life. A poor claims experience that results in your claim being denied can be enormously infuriating even if the proper response from the carrier. While insureds would be well served to RTFP - Read The Full Policy - to be properly informed on what is and is not covered under their policy, insurance contracts are complex and frankly tedious and boring to read. A good agent makes a huge difference in this area, but often agents are relegated to explaining after the fact to insureds why a claim denial was the proper decision by the claims adjuster. Just because a denial may be the correct decision based on the insurance contract does not mean the consumer feels any better about it. It is very hard, as an insured, to feel anything other than a sense of betrayal when a claim is denied.

  When a claim is denied, the consumer is left with economic damages that they must now find a way to remedy on their own. Any reason for the denial is frustrating from a consumer’s point of view, but perhaps it is even more angering to know that if only the same amount of damage had been from a covered peril, the claim would have been covered. Whether the denial occurred because the damage did not occur from a named peril or because it was specifically excluded in the policy is of little solace to the consumer. Most denials leave consumers feeling alone and confused, searching for answers and questioning the value of the expensive insurance product they purchased.

  BEDTIME READING

  So how are consumers supposed to be fully informed of what perils are covered subject to what conditions and/or exclusions for which items of property? Certainly the insurance agent who sold them the policy should be able to answer this basic question. However, a big part of the challenge is that the answer to any hypothetical scenario is almost always “it depends”. Agents are not omniscient: they cannot answer every hypothetical questions about policy coverages with 100% certainty and they cannot anticipate all of the possible perils that an insured could potential face that will cause damage. Agents also vary in their ability to properly educate their customers on the product they are purchasing: some agents excel in this arena but others do not take the time to do so. The reasons why this transfer of knowledge about the product does not occur to the extent it should in an ideal world vary. Many agents leave the details to their Customer Service Representatives (CSRs) to review with their customers, who can be quite knowledgeable or, conversely, very inexperienced.

  Consumers that do not visit an agent’s physical office but acquire their policy over the phone from a call center may not have as robust a conversion with the representative they speak to as they would in an office setting. This could be due to pressures in the call center to manage and monitor Average Handle Time (AHT). Consumers who purchase their insurance on a website or mobile app receive even less guidance unless they proactively seek it out. Generally, these experiences allow users to go through the process of quoting and issuing a policy as quickly as possible, while providing options and help support to allow for deeper investigation if desired and contextual help to prevent channel shifting. But how often do customers dig into the nitty gritty details of their insurance contract? Most consumers have a “set it and forget it” attitude towards insurance; it is often a compulsory purchase, and all too often, consumers simply want to acquire the product as quickly as possible at a reasonable price to “check the box” - without worrying much about what they actually have coverage for.

  While relying heavily on an insurance agent that you trust is important, this does not absolve consumers of the ultimate responsibility of reading their own insurance policies carefully. However, one of the biggest challen
ges can simply be locating a copy of the policy in the first place. Typically a policy will be provided at its original inception but often it is either:

  •contained in a large envelope that was provided by the agent or mailed to the insured and immediately filed away who knows where, or

  •delivered electronically as an attachment or link that is subsequently dragged into a computer folder never to be seen again or deleted entirely from email.

  At renewal consumers rarely, if ever, receive a full copy of their policy. Instead, they are sent consolidated policy updates via regular mail or e-mail (or other electronic notification). If the consumer does not have a copy of the policy, they can request one from the agent, but this is often not offered voluntarily and may occur after the loss event - too late to determine whether a certain peril is covered prior to its occurrence.

  Even if insureds do have access to a copy of their insurance policy and the time and motivation to read through the entire document, it is still virtually impossible to determine how adequate that policy is relative to the exposure faced. Consumers do not have the data and statistical analysis at their fingertips that educate them on the likelihood of a particular loss occurring (unlike insurance carriers do). Even if consumers did perform an independent risk analysis, the reality is that stuff happens. A rare event that agents and consumers haven’t discussed because it has an exceedingly low probability of happening could occur.

  In some ways the chances of experiencing a major loss are akin to the chance of winning the Powerball. The main reason people have insurance in the first place is precisely to provide a mechanism to avoid economic losses that are caused by an event that has a low likelihood or frequency of occurring but, if it did happen, would result in a high economic cost or severity. Hurricane forecasters have made their careers on predicting the number of tropical storms each year, but even if the prediction is for a below-average season the reality is it one takes one hurricane making landfall where you are to change your life forever.[58]

  NOT THERE WHEN YOU NEED US

  Sometimes the items that consumers want to insure are covered against common perils, but not when you might need insurance protection the most. For instance, it is very common to exclude damages that occur from breaking, marring, or scratching when moving furniture and other personal property from one location to the next. From a consumer’s point of view, this is one of the times where the possibility of their stuff getting damaged is greatest (or, in insurance terms, their exposure to loss is highest). By specifically excluding coverage for damage to property when in transit, protection disappears at the time consumers need it most. Alternatively, you may have coverage for some perils during a move, but only if you produce a schedule your personal property on what is known as a bill of lading that clearly documents every single item being moved, its valuation, and proof of ownership. You also may have coverage for items located in a storage unit - or not.

  Questions of coverage can get very complicated quickly. Consumers may assume that there personal property is covered through a move from one location to another with a stop in the storage unit along the way, but the likelihood is that during part, if not all, of the entire journey they may not have full coverage. Movers often provide some protection against damage (if they are reputable) but generally this is only a rate of reimbursement per pound. For instance, in the state of Texas movers are required to offer a minimum compensation of $0.60/lb if any item is damaged in a move event. As a consumer, this is far from enough protection to entirely replace a large piece of furniture that is damaged during a move and certainly is far from adequate compensation for items such as electronics which do not weigh much but are quite expensive to replace.

  Another example is known as a Named Driver Exclusion (NDE) in auto insurance. One of the major determinants of auto insurance premium for a household is the presence of a youthful driver (typically a teenager) that is inexperienced and more likely to be involved in an accident (and, perhaps, have a propensity to go over the speed limit). If a driver accumulates enough driving activity in the form of accidents and traffic tickets, an insurance carrier may refuse to renew the auto policy unless that driver is specifically excluded (not covered). While no family wants to have their auto insurance policy dropped, their biggest liability is most likely the driver that the carrier is seeking to exclude. If that driver were to subsequently be involved in a serious accident that injures their passengers or those in other vehicles and there is no insurance coverage, the family could be facing a significant lawsuit and risk losing a substantial portion of their assets in order to compensate those who have incurred medical bills as a result of the accident.

  There are other, less common events that can occur for which the economic costs of damage can be financially ruinous if not covered but obtaining coverage is far from straightforward. Take earthquake coverage for example: In California, the primary coverage is typically not covered by a standard homeowners policy but rather through the California Earthquake Authority (CEA). To obtain this separate policy, you need to talk to an agent who sells CEA policies and the contract language and policy options are different than your homeowners carrier. In fact, you cannot purchase a stand-alone CEA policy and must go through an approved participating residential insurer.[59] The list of participating insurers is not the same as all residential property insurers in the state of California, and the deductible options are not the same as standard renters or homeowners insurance. The lowest CEA deductible is 5% and it goes up in increments of 5 to 25%.[60] At the highest deductible of 25%, this means that if a consumer suffers a covered loss from an earthquake, they will only recover money if the claim amount exceeds 25% of their coverage limit. For example, if you rent and are covered for $60,000 and experience an earthquake, at a 25% deductible you will not recover money until you incur $15,000 worth of damage - which you have to pay for out of pocket. Similarly high earthquake deductibles exist in other states, and some states allow policies to be sold that do not cover man-made events, even as those states have seen a large increase in seismic activity that has coincided with the rise of fracking - setting up the potential for litigation and a long delay to determine whether the policy will even pay out any amount.

  Other types of losses that are often not covered are mold, sewer backup and pollution which can all cause significant economic damages for consumers. Some of these can be covered through the purchase of optional endorsements, but generally at a high cost. Other products are generally not available from standard personal lines carriers and can only be acquired through non-admitted carriers, also commonly referred to as excess and surplus (E&S) lines. These are carriers which are not subject to the same state-based insurance regulations than typical admitted carriers are and therefore have more flexibility in terms of contract language and rates they can charge.

  Other common examples of coverage that is often not provided when you need it the most include:

  •Expensive jewelry when worn regularly

  •Camera equipment when traveling

  •Wind and wind-driven rain in some coastal locations prone to hurricanes

  A PERILOUS JOURNEY

  For such a major purchase, insurance is an anti-climactic and opaque buying experience. In addition, insurance is the antithesis of an easy-to-use product or service with a seamless user experience that builds in a lot of “delighters” for customers. Learning up front what perils are covered and not covered and assessing whether your exposure to loss is adequately protected is a real challenge. A good insurance agent can help, but there is no substitute for an engaged customer who takes the time to be as informed as possible about the insurance product they are purchasing. In reality, this is like asking customers to read thoroughly every user manual and set of terms and conditions they ever receive: it’s an unrealistic set of expectations, particularly in a modern world with so many other demands on people’s time. Insurance may be perceived as a “set it and forget it” but it far from a simple a
nd user-friendly product to use. The next two chapters continue this theme of insurance as a necessary but insufficient product by exploring problems that result from consumers having only partial or no coverage for the exposures that consumers face.

  1

  CHAPTER 8 - GLASS HALF EMPTY

  GREAT NEWS! I’M (PARTIALLY) COVERED

  It can be confusing to consumers when their claim is denied because the loss was not caused by a covered peril. Arguably, it is even more confusing for policyholders when some coverage exists - but everything is not covered. A common example is when flood water, seepage or mold forces an insured to temporarily vacate their apartment or home while repairs are made. The cost of temporary accommodation may be covered if the property is uninhabitable, yet the property damage itself is not covered. Similarly, food spoilage that results from the power going out from a severe thunderstorm may not be covered, yet the damage to the home from wind is covered. Or, in the same event, a tree is blown down and causes damage to the fence: the fence may be repaired but the cost to remove and replace the tree may be limited to $500.

  There are numerous scenarios in which part of a claim is covered but part of the same claim is denied. How do consumers feel about this? Again, in the majority of cases the claims adjuster is properly applying the facts of the loss and the parts of the claim that are denied are done so properly. In speaking with many claims adjusters over the years, my impression is that they feel better working with an insured when they are able to provide at least some coverage. A full denial of a claim is a hard message to deliver to a customer. The bitter medicine of a denial goes down a bit easier if some parts are covered, even if overall it is a minor part of the loss and the vast majority of damage is not covered. But is that really true? This approach likely provides some emotional benefit to the claims adjuster who may feel less “bad” than having to fully deny a claim. Personally, I’m not convinced that customers “feel” any better about having a portion of their claim paid while other parts denied. In both scenarios, insureds are attempting to “use” their insurance policy that they have been paying premiums on (potentially for years or even decades) and being told no.