Honesty is the best insurance policy

Why government should require insurance policies to declare what is not covered

I have introduced legislation in the U.S. Senate to make future insurance policies easier for consumers to understand. The “Honesty is the Best Insurance Policy Act” calls for requiring insurance companies to state in plain English and big letters exactly what their policies do not cover.

Most insurance policies are long, complicated and written in legalese. In addition to the policy itself, just about every month, your insurance company probably sends you page after page of addendums and changes to your various policies, which also are lengthy and complex.

My bill won’t do away with all this intimidating language and paper, but it will require the companies to include up-front a very un-intimidating, user-friendly “non-coverage disclosure” box as part of the policy’s documentation.

In this box, you would find a concise re-statement of all conditions, exclusions and other limitations to the policy’s coverage — all clearly written in type twice the size of the policy’s main text.

We Mississippians in particular know why having clearer insurance policies is so important. Thousands of Hurricane Katrina’s victims saw their homes heavily damaged or destroyed, only to learn that their insurance policies were practically useless.

Obviously this bill won’t help those of us whose homes were damaged or destroyed by Hurricane Katrina and who now are negotiating with our insurers or confronting them in court.

But by clarifying policy terms and stating them up-front, this act would increase consumer confidence in future insurance products, and even reduce litigation for both consumers and insurance companies.

In fact, the bill actually would reduce costs to insurance companies. As policies are clarified, fewer consumers would sue insurers citing obscure policy terms that are subject to interpretation.

More importantly, the act could save consumers billions of dollars. If all Katrina homeowners had been adequately insured, total payments to them would be about $100 billion. Instead, Katrina homeowners suffered about $65 billion in unprotected losses, a figure that will likely increase when damages are fully and accurately assessed.

This plan has already garnered endorsements from consumer groups, including the Consumer Federation of America and the Consumers Union. It would require no cost to taxpayers, and the costs to insurance companies would be negligible — requiring only some additional ink.

Enforcement would be administered through the Federal Trade Commission’s Division of Financial Practices. The federal government already is heavily involved in insurance regulation through the National Flood Insurance Program, which insures more than $700 billion in assets through more than 4 million policies. Clearly there is precedent for the federal government to be involved with insurance regulation.

The Honesty is the Best Insurance Policy Act won’t solve the current questions about insurance coverage in South Mississippi and other areas of the country. But Katrina has clearly shown the need for better communication among insurance companies, lending institutions and consumers.

Folks buying insurance want and deserve polices that are honest and straightforward. Having a simple explanation of policy provisions is good for consumers, as well as for insurers, and it should be a standard part of all insurance policies.

In anything we do, honesty is always the best policy. That applies to the insurance industry, too.

Sen. Trent Lott, R. Miss., welcomes questions or comments about this column. Write to: U.S. Senator Trent Lott, 487 Russell Senate Office Building, Washington, D.C. 20510 (attn: Press Office).

Topics Carriers Legislation