‘Where’s Waldo?’ Why Are Insurance Policies So Long and Complicated?

Ambiguity and incomprehensibility seem to be the favorite tools of the insurance trade in drafting policies. Most are a virtually impenetrable thicket of incomprehensible verbosity. It seems that insurers generally are attempting to convince the customer when selling the policy that everything is covered and convince the court when a claim is made that nothing is covered. The miracle of it all is that the English language can be subjected to such abuse and still remain an instrument of communication.” — Universal Underwriters Ins. Co. v. Travelers Ins. Co. (Ky ct. App., 1970)

My career in the insurance industry began in 1969 when it was not uncommon to see policies in the marketplace that were assembled from a two-page form affectionately referred to as the “165 Lines.” That form was the 1943 New York Standard Fire Insurance Policy (SFP). Declarations, insuring agreements, conditions, and exclusions (DICE) were included and, in its early days, a property might be insured entirely by 165 lines of numbered insurance contract language on the front and back of a single sheet of paper.

As time went by, longer explanatory forms were added to detail and clarify what was and wasn’t covered. If you were insuring damage to a home, you attached a dwelling form. Commercial buildings used a general property form. If you wanted to insure perils beyond fire and lightning, such as windstorm, hail, riot, etc., you needed an extended coverage (EC) endorsement. Then forms began to combine property and liability coverages in a single policy and, to make them more marketable, additional forms were developed with various options. Before we knew it, the pages of common policies had spread, as legendary insurance educator Chris Amrhein would say, “like mold in a damp forest.”

As a result of this evolution (or devolution in some minds), a seven-page policy morphed into a 70-page policy over a few decades and the quest to ascertain whether a loss was covered or not and for how much became a “Where’s Waldo?” search. The question is, why? The answer is somewhat complicated, though not quite as complicated as modern policies themselves.

Litigation

The first and, I believe, primary reason is litigation. A claim denial often leads to a search for ambiguity in the language of the policy or for an imagined cause of loss allegedly not specifically excluded in a policy. For example, what is a “flood”? As Inigo Montoya said in the movie The Princess Bride, “You keep using that word. I do not think it means what you think it means.”

When Hurricane Katrina hit the Gulf Coast in 2005, there was massive flooding in parts of New Orleans. Without flood insurance, most insurers denied claims under property policies because of the flooding exclusion. In the ensuing policyholder litigation, attorneys argued that a concurrent or proximate cause of loss was the failure of levees and not flooding per se. As a result, ISO and insurers revised water damage exclusions to include reference to levees, dams, seawalls, etc.

In ISO’s 1973 CGL policy, the pollution exclusion consisted of one 66-word sentence. Today, the current ISO CGL policy exclusion is over a page long, consisting of almost 800 words. Why? Litigation.

The 1973 exclusion applied only to sudden and accidental loss, but scores of court cases sought to torture every conceivable pollution incident until it confessed to be sudden and accidental. In our litigious society, no matter how understandable you believe insurance contract language has been expressed, someone is going to refute it and sometimes the courts agree with them. As a result, insurer attorneys oversee an expansion of the form language in an attempt to clarify the intent.

Regulation

The second reason is regulation. When ISO or an insurer issues a revised countrywide policy form, it has to be filed with regulators around the country. Some may approve the form only with further revisions. Others may approve the original or revised form, but it could take several years. One insurer may still use the 1991 ISO homeowners forms today, while others use the 2000 or 2011 editions and still others are preparing to move to the latest 2022 version.

As I have written before, answering an insured’s question — “If I injure someone while using my riding lawn mower?” — is not a simple task. In the aforementioned ISO homeowners editions, coverage expands and contracts dramatically from one edition date to another, not to mention the differences found in non-ISO forms. As for variations by state, one business had locations in 37 states. Their insurance package included four different property forms, three different business income forms, and four different CGL forms, together comprising hundreds of pages. As a result, what is covered at one almost identical business location may not be covered at another.

Evolution

The third reason is that society and loss exposures evolve, and it becomes necessary to update policy forms to reflect these changes. That sometimes results in added coverage or more restrictive language in a policy, or in the drafting of new endorsements that may be mandatory or optional depending on rates and rules filings of insurers.

Form drafters are reticent to change time- and court-tested insurance contract language. Doing so may result in unintended consequences. Worse, in a situation like revising the flood exclusion language to include levee failure, the trial bar may argue that the change is proof that prior editions of that form DID cover flooding due to levee failures.

The Policy Drafting Challenge

The fourth reason is simply that it’s hard to express in words whether an almost infinite number of possible causes of loss are covered and for how much. When I retired from the Big “I” and started my own consulting practice, one of the first offers I received was from a captive that asked me to draft property policy forms from scratch. I suggested they simply use ISO forms, but they insisted that this was too expensive. I responded that if they thought that was expensive, wait until they got my proposal to draft forms from scratch.

The reality is that there are some poorly drafted and borderline incomprehensible policy forms in the marketplace. I encourage insurers to contract with experts in this field like ISO. However, they always seem to prefer the unknown expense of litigation to the largely known cost of expert drafting. The result is sometimes bizarre forms like Berkely’s “Three” policy or a Lemonade draft of a renter’s policy that covers the insured’s “stuff.”

I recently read an article that quoted a policyholder attorney who said, “Insurance companies write insurance policies to be dense and unreadable to allow them to deny coverage as often as possible.” Balderdash. No respectable insurer engages in intentional ambiguity. As long as lawsuits arise when this perspective is applied to claim denials, insurance contracts will be written to pass judicial muster. Although we can and should do better, the results all too often are insurance contracts that are overly long and complicated.