Insurance policies are difficult to read and understand. Another name for an insurance policy is a “legal contract.” An insurance policy is a specific kind of legal contract. Without training and experience, aren’t most legal contracts difficult to understand? This is not an excuse for unnecessary complexity, but context.
One important reason insurance policies are so complex is because silence is deadly. Most people read legal contracts, including insurance contracts, by simply reading what is in front of them, and this is where experience and fairness apply. Quite often, the most critical part of a contract is what the contract does not say. Whether it is an insurance policy contract, a purchase agreement or especially some nondisclosure agreements, it is the missing parts, the silent parts, that are the most dangerous.
Such silence is so deadly because most humans do not like to read contracts, especially insurance policies. A fantastic marketing gimmick is to advertise one’s super simple, awesome, easy-to-read, no-fine-print contracts because that is what people want to hear. I saw an insurtech firm advertise something to the effect that, “You wanted an easy-to-read policy and we are finally providing it because we’re not stuck in the past.”
The problem with super-simple contracts is that being short and simple, the contracts will have many, many voids. The contracts will be silent on many important points, and yet most people will not know these missing points are deadly. A meticulously fair contract writer will understand this issue and will do their best, within confines, to address these silences because they know readers will not have the experience to know what the contract should, but does not, include.
The people most at risk of being taken advantage of are those who have limited experience reading a particular kind of contract, have limited education, or have reading and concentration issues. Also at risk are those who just don’t like reading contracts, and those who wishfully believe that everything will always work out just fine, along with other wishful thinkers who believe a handshake should take the place of legal minutia. Many people in many industries, including the insurance industry, have targeted these people by writing simple contracts. Their mantra is, “Give the consumer what they want,” or “Don’t talk down to them that the contract needs to be complex. Treat them like adults.”
These folks understand their market extremely well, and honestly, their product works just fine most of the time because most of the time, no one really needs insurance except for verification purposes.
People do not often need insurance otherwise because most of the time, no one has a loss. Insurance is meant to be a severity solution, not a frequency solution. This plays into these nefarious peoples’ marketing plans quite well. The buyer does not want to buy insurance in the first place, and they definitely dislike reading the policy. They do not know what they should be looking for, and they know they will rarely need the policy for an actual claim because actual claims are rare (unless one lives in a hail zone). The seller says, “Here is something simple and cheap” knowing major gaps exist and that by the time anyone figures this out, when the buyer has their one claim every 10 years, it will be too late.
When coverage is denied, the consumer will not have any idea the company purposely wrote the contract with many gaps. The buyer will think this is how all policies are written, with the express purpose of ripping off consumers. Silence is deadly for the consumer, but it is also damaging to the more reputable insurance companies and agencies.
The solution is easy to say and difficult to achieve, but education is key. Education begins with the insurance company and the insurance agency. Underwriters need to understand their own coverages and other companies’ coverages, so they learn the differences and see the gaps whether in their own forms or their competitors’ forms. At the carrier level, this has to happen if the company is going to be part of the solution.
Next, a carrier must decide how to disseminate this knowledge, assuming the carrier is one of the more ethical ones writing more standard complex contracts (relative to the simple, three-page versions). They have the opportunity to educate their agents, the public or both. In today’s advertising world, that is full of savings versus competitors (those commercials are an entirely different kind of deception because of the way the statistics are being used and, I’d argue, abused), space exists for advertising quality of coverages.
Opportunity absolutely exists for better educating agents, and if the companies do not do this, agents that want to represent quality have to become far better educated. I teach coverage classes all the time and often when we begin a program, CSRs and producers do not know nearly enough about different companies’ coverage comparisons or even how coverage options within a single carrier’s forms work. They immediately give clients price options but not coverage options, because they do not know coverages well enough to give coverage options.
Agents can also advertise quality, concern for policy gaps and a willingness to read policies for insureds, including explaining the silences. A portion of the public truly wants this service. They do not want to read the policies themselves, but they want a trusted agent to read the policies for them and point out issues and options. An agency can advertise this service. Yes, this increases the agent’s standard of care, but if the agent is doing their job well and fulfilling their advertising promises, their E&O exposure will decrease even if their standard of care is higher. And, they will sell more coverage.
Entities, especially nefarious parties, purposely appeal to people seeking simple answers to complex situations by writing simple policies with big silences that are deadly to everyone who cares about the public and the industry’s reputation. There is a great quote by Einstein, “Everything should be made as simple as possible, but not simpler.” A short and sweet insurance policy is too simple unless it states, “All risks for all situations and never any exclusions.” Instead, make insurance policies as simple as possible by learning your coverages thoroughly and working with your clients so they understand what they need and how you can help them. And read Chris Boggs’ article on this subject from March 2019, titled “Analysis: Warren Buffett Champions an Inferior Product in THREE Policy.”
Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. Email: firstname.lastname@example.org.
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