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Why it's impossible to compare home insurance policies

Why are insurers so mealy-mouthed about homeowners' policies, wonders University of Minnesota law professor Daniel Schwarcz. Why are they cutting back on coverage in many cases and obfuscating their actions with legalese? And why not put home insurance contracts on their Web sites, so consumers can comparison shop easily?

apples to apples"It's virtually impossible for an ordinary consumer to assess -- on a pre-purchase basis -- the policy language that different insurers employ," says Schwarcz. "They don't make this available on their Web sites. And their marketing materials never describe it in such a way that a consumer could make a competitive assessment."

Schwarcz is criticizing policies and practices that have long been standard operating procedure in the insurance industry, so it's not surprising that he would draw the ire of insurers. He’s a consumer advocate for the National Association of Insurance Commissioners (NAIC), which collectively governs the insurance market, and his research is extensive, including reviewing the policies of the 10 largest home insurers in four states.

The state commissioners set up a working group to study the "transparency and readability" of homeowner's contracts at their October 2010 meeting. "Schwarcz has raised important questions," says Andrew Mais, a spokesman for the New York State Insurance Department.

The insurance industry has a different take: "This is a solution in search of a problem," says Robert Hartwig, president of the Insurance Information Institute, dismissing Schwarcz in a heated debate between the two men that has played out for months in insurance industry media. "We haven't heard complaints from customers about this."

At this juncture, the Minnesota law professor isn't offering any answers. He's merely pointing out that homeowner insurance contracts − the kind that nearly everyone buys to protect their houses against fire, theft and other damage − need to be reviewed to see if they are fair and easy to understand. He sees no reason why they can't put these policies online so that people could read and -- hopefully -- understand them.

"In other areas, motivated consumers can get detailed information about the differences in products sold by different firms," he says. "Even at RadioShack you can research and find out what you need to know."

Insurance companies aren't RadioShack

Insurers argue that they're not RadioShack:

  • Home insurance is complicated because each state has its own regulations that have to be applied to every contract, making it difficult to put anything precise online that’s useful on a national basis, says Alex Hageli, director with the Property Casualty Insurers Association of America, an industry trade group.
  • In addition, each policyholder can request special amendments or "endorsements" to a contract, further complicating comparison shopping.
  • And finally there's the judicial overlay -- countless court decisions from Texas to New York to Alaska -- any one of which may require a specific clause in a specific state or affect coverage definitions.

Regulators also grumble privately that one of the biggest problems is that consumers fail to read their home insurance policies until a claim needs to be made.

"A policy is a legal contract," says Hartwig. "You can't boil it down to a numerical rating in Consumer Reports." It's up to insurance agents to walk a prospective buyer through the contract, he says and, generally, they do a good job.

The hundreds of carriers offering thousands of policies is actually a plus for the consumer, says PCIAA's Hageli. "The customer can walk down the street to another insurer."

A disturbing home insurance trend

Schwarcz says that several alarm bells should be going off. For one thing, the language of these contracts has been subtly changing and a "substantial majority of these provisions reduce the amount of coverage." Among them are clauses that require losses to be "sudden and accidental," meaning that homeowners can't let problems such as mold or water in the basement exist for any length of time if they want to file a claim. The new contracts place even more burden on the homeowner and give insurers more wiggle room to avoid paying claims.

Schwarcz also challenges the objectivity of insurance agents by arguing that many policies are sold by "captive" agents who work for only one company, or by so-called "independent" agents who receive commissions from certain insurers to sell their policies. "Their integrity is compromised by the fact that they take kickbacks," he says.

But Schwarcz saves some of his harshest comments for the NAIC itself and its regulators, who "don't know the differences between the policies that are being sold in their states and may not have even partial copies of the policies their insurers are using."

Mais says otherwise about New York. "We are well aware of what's in every single policy form used in New York," he says. "And you can get any of them by filing a Freedom of Information request with us."

More from Ed Leefeldt here

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