Seriously, Insurance Is NOT a Commodity

About three years ago, I published a book of 1,500 of my favorite quotations. As I was working on an updated edition recently, I came across a quote by 19th century British philosopher John Ruskin that I believe has significant relevance to the insurance industry: “There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey.”

In my January and February columns, I wrote about the incessant price-focused advertising that dominates the insurance marketplace and how this leads consumers to believe that most insurance policies are commodities differentiated solely by price.

The obvious problem this presents is that many consumers will buy the cheapest policy, oblivious to the fact that this policy may have significantly less coverage than one only slightly more expensive. In probably no other line of insurance is this more prevalent than personal auto insurance.

I was reading recently about an auto comprehensive claim in Florida where the driver’s vehicle was flooded when he entered an intersection with water deeper than he thought. According to the news account, his auto insurer denied the claim on two grounds.

One was that his policy excluded “damage resulting from driving through a flooded area.” He says he didn’t think the intersection was “flooded.” It had standing water, but it appeared to be only a few inches deep. Most personal auto policies cover “hail, water or flood” without any stipulation prohibiting “driving through a flooded area.” Allegedly, this policy either didn’t cover flood damage at all or limited coverage to stationary vehicles.

The second exclusion cited by the insurer was that the vehicle was “being used for business purposes.” Most personal auto policies cover business use of certain autos with a few limitations such as use in an automobile business. Allegedly, his policy excluded “business use” — period. This is not that uncommon. I’ve seen policies that do this or policies that prohibit business use of non-owned autos or, specifically, pickup trucks, along with other variations.

Use of a vehicle as a public or livery conveyance, or words to that effect, is a common exclusion. The “public conveyance” provision usually applies to vehicles being held out to the general public for hire, such as a neighbor of mine who will drive anyone to the airport for $50. The “livery conveyance” provision would likely apply to another neighbor who will use his pickup truck to transport property from the point of purchase to someone’s home or take junk to the city dump. However, I’ve seen auto policies that exclude ANY type of “delivery” use, including one claim that was initially declined following an accident involving an insurance agency producer who was “delivering” insurance policies to customers.

I consulted on a claim a couple of years ago involving a personal auto policy that insured three vehicles. The insured was trading in one of the autos, the oldest one, on a replacement vehicle. The auto being traded was the only one of the three on which he had dropped collision coverage. So, of course, two hours after the trade was consummated, he totaled the new car in an at-fault collision.

Unfortunately, his policy only extended the coverage on the vehicle being traded to the replacement vehicle. In other words, he had no coverage on the new auto until he reported it under this policy. Under an “ISO standard” personal auto policy, the replacement vehicle would have the broadest coverage available on any declared auto and that’s been the case for almost 30 years.

All the other auto insurers the insured’s agency represented followed the ISO language except this one. What are the odds that coverage in this case might be found only on the agency’s E&O policy, perhaps within the deductible?

Most personal auto policies provide broad coverage for resident family members, but I’ve seen policies that exclude “undisclosed household residents.” How many families today have “boomerang” children who have moved back home unbeknownst to their auto insurer?

My auto policy extends liability coverage for the personal use of virtually any vehicle with at least four wheels designed for use on public roads. Some policies exclude certain types of vehicles, e.g., those with a gross vehicle weight in excess of 10,000 pounds. If I rent a U-Haul truck to move some personal property, my policy extends liability coverage. Do all of the policies you sell do that?

Some policies exclude losses that involve “criminal acts.” If a claim is accompanied by a DUI charge or perhaps even a speeding ticket, does that preclude coverage? What is a “criminal act,” a charge or a conviction?

In a couple of previous columns, I’ve described the difference among auto policies in how the “racing” exclusion applies to certain situations. Some policies only apply their exclusion for racing inside a facility designed for racing, others apply their exclusion to any organized racing event, and some exclude even “spontaneous” (unorganized) street racing.

Needless to say, this list of examples could continue indefinitely if space allowed.

Over the years, I’ve taught many dozens of all-day personal auto classes and talked about issues like this in hundreds of other seminars and webinars. I’ve never lacked for examples of claims denied under some policies yet covered under others.

Finally, keep in mind that, even if policy forms are identical, the insurance contract is only part of the “insurance product.”

Two people can interpret the exact policy language differently. Claims practices vary by insurer or even adjusters within an insurer in comprehensiveness and speed to resolution. Valuation is often subjective and more stringently applied by some insurers than others.

As the opening quotation in this article says, people who consider price only are usually the lawful prey of those that sell an inferior product cheaply. The policy matters. So does the agency advocate and the insurer itself. Choose wisely.