Are All Insurance Policies Ambiguous?

In January 2023, my monthly column was titled “Insurance Coverage and Television.” I’ve written and spoken extensively about how the property and casualty insurance industry spends billions of dollars on advertising and the vast majority of it is price focused. The article gave credit to some advertising that focused on coverage, but it used examples that clearly weren’t covered by the policies of the insurers doing the advertising.

I made my usual lament that we spend so much money on this type of advertising but virtually nothing on actually educating consumers and/or countering destructive bad advice and information such as an Instagram commercial (https://www.instagram.com/p/DC0ZuAJMSez/) that claimed that 80% of your auto premium goes into the pockets of agents as commissions, that most people don’t need flood insurance if they’ve never experienced a flood loss, or that there’s no need to purchase the loss damage waiver when renting a vehicle if you have auto insurance (https://pas10.blogspot.com/2013/01/15-insurance-policies-you-dont-need.html).

But it was the introduction of that January 2023 column that prompted this month’s column:

“Last month, insurance educator Chris Kendall, CPCU, ARM, et al., posted some results of a survey of 2,000 U.S. homeowners on LinkedIn. Conducted or commissioned by Goosehead Insurance Inc., one of the most revealing statistics was that 65% of policyholders agreed that they “have no idea what my home insurance fully covers.” This tracks with a similar survey conducted by Plymouth Rock Home Assurance in 2020 which found that about 70% of U.S. homeowners aren’t sure what their home insurance covers.”

So, perhaps two-thirds of homeowners really don’t know what their homeowners insurance does or doesn’t cover. The question is, IF they actually read their policies (they don’t and the reality is that many, perhaps most, insurance professionals likely don’t either), would they understand what is and isn’t covered?

At its summer meeting this year, the NAIC’s P&C Insurance Committee heard a presentation titled “Research Related to Transparency in Policy Language.” The researchers of this presentation surveyed 2,500 homeowners about homeowners insurance in seven vignettes involving four claim contexts. The four claim scenarios involved earthquake damage, a deck collapse due to termite damage, liability for a slip and fall, and damage caused by an electrical fire.

Some homeowners were given ISO policy language and others were given no policy language. They were asked to judge whether the losses would be covered and to state how confident they felt in their answers. The presentation slides referred to a “2010” ISO HO3 policy. Presumably, this refers to the 2011 ISO HO 00 03 05 11 policy form.

In three of the seven vignettes, providing the actual relevant policy language allegedly had a large and statistically significant negative effect on their understanding of coverage. Being able to read the policy language allegedly had a positive effect on their confidence that they understood what the language meant, but they were no more likely to answer the coverage questions correctly than the consumers who saw no policy language.

Errors and omissions (E&O) defense attorneys regularly cite the insured’s duty to read the policy when trying to defeat some E&O claims. The findings of this research raise questions as to whether that duty is a meaningful defense. Every state has readability requirements for insurance policies–but “readable” doesn’t necessarily mean “understandable.”

In full disclosure, at least one of the researchers involved in this presentation has been overtly critical of the P&C insurance industry (not without cause on some points), so there is the possibility of some bias in the conclusions of the researchers. For example, one conclusion in the presentation was: “Homeowners insurers routinely include non-standard terms in policies that limit coverage relative to the ISO policy in a unique and unexpected way.” I’m not sure what “non-standard” refers to or what constitutes a “unique and unexpected way.”

One recommendation included in the presentation was: “State insurance regulators should not allow insurers to limit coverage in ways that depart from broad industry standards.” I believe that suggestion has some merit.

Every state has readability requirements for insurance policies–but ‘readable’ doesn’t necessarily mean ‘understandable.’

For example, given that state minimum auto policy liability limits are established by law around the country and some states still have Standard Fire Policy total loss statutes as well as various cancellation and nonrenewal laws, a state could establish broader minimum coverage standards for certain lines of insurance or prohibit certain types of exclusions. Some states such as New York have some minimum standards, and other states such as North Carolina have prescribed forms available.

But even if all insurers used the same forms or policy language, how they interpret such “standardized” terms under varying loss circumstances could vary significantly. The bigger question, based on the conclusions of this research, is whether all or most insurance policy forms are simply inherently ambiguous. An untold number of court cases would seem to suggest that this is not the case given that courts often agree with insurers that policyholder attorney ambiguity assertions are unfounded.

On the other hand, judicial findings supporting ambiguity often lead to revisions of policy form language that only make coverage, or lack thereof, even less understandable to consumers. And, if the revised language is later successfully challenged by policyholder attorneys, further revisions can lead to greater complexity.

For example, a pollution exclusion in a commercial general liability (CGL) policy that reads “This insurance does not apply…to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental…” ultimately expands like mold in a damp forest into a page and a half of a 19-page policy. As a result, what was once a pretty clear exclusion becomes a “Where’s Waldo” search for the truth.

As I’ve blogged about before, insurers from Lemonade to Berkshire Hathaway have attempted to simplify policy language (in my opinion, unsuccessfully). In Kovach v. Zurich Am. Ins. Co., 587 F.3d 323 (6th Cir. 2009), the court opined that “an insured should not have to consult a long line of case law or law review articles and treatises to determine the coverage he or she is purchasing under an insurance policy.”

Easier said than done.

Wilson, CPCU, ARM, AIM, AAM is the founder and CEO of InsuranceCommentary.com and the author of six books, including the Amazon 4.8 star rated “When Words Collide…Resolving Insurance Coverage and Claims Disputes.” He can be reached at Bill@InsuranceCommentary.com or InsuranceCommentary@outlook.com.