I sometimes follow a Facebook group called Insurance Soup. This past week, one discussion centered on a TV report of an auto insurance claim denial. The background of the claim and carrier can be found at the TV station’s web site in an article entitled “Flooded Car and Insurance Won’t Pay.”

The carrier is reportedly a Florida-based nonstandard auto carrier. Most of us in the industry know what “nonstandard” refers to, but the average consumer has no idea that, from a coverage standpoint alone, “nonstandard” is often a euphemism for “substandard.” Why? Because of our own industry’s fixation on price-focused advertising, as I blogged about last week.

And the reality is that it is not only “nonstandard” auto carriers that use deficient policy forms, but also some of the best-known carriers in the country. “Deficient” is a relative term. At one time, the “ISO standard” personal auto policy (PAP) was an industry standard for coverage, with some policies providing less coverage and others more coverage. Increasingly, the ISO PAP has, pardon the pun, become the “Cadillac” of marketplace personal auto policies.

Historically, PAPs have provided extremely generous liability coverage, with broad insuring agreements and very limited, specific exclusions. The reason is that public interest demands it. Given the carnage on the roads, insurance regulators have insisted that PAPs provide broad liability coverage and minimum limits to protect the public. This, I believe, is less true today, with too many regulators seemingly not vetting coverage reductions as they did in the past.

As more and more carriers compete on the basis of price, at some point, they can’t get the premium any lower on the expense side. This is the focus of many of the so-called “disrupters” flooding the marketplace. Aside from their “customer experience” (aka convenience, aka “fast, easy and cheap”) and “our cool phone app goes to 11” marketing angle, their pricing premise is that they can provide insurance much more efficiently (and, thus, cheaper) than entrenched insurers.

Let’s assume that assumption is true. With phone apps and limited human intervention due to reliance on “big data,” at some point insurers will operate as efficiently as they possibly can. That leaves the loss and loss adjustment expense side to address and it’s, by far, the biggest component of the bottom-line premium. So, when you can’t reduce expenses any more, how do you reduce losses and loss adjustment expenses? No doubt, some of the same approaches will be used as those employed to reduce the expense ratio. However, those methods have their own costs. By far the easiest way to reduce the loss ratio is by selling insurance policies that cover less and/or engaging in more restrictive claims adjusting.

And that’s where the danger lies, especially in a decreasingly vigilant regulatory environment. So, back to the claim in the TV story. According to this account:

Two days later, [the insurer] made it official, sending this letter refusing to pay for the damage, in one sentence saying, “The vehicle was being used for business purposes.”

Then, in another paragraph, saying Exclusion 25 says they, ‘Will not pay because of damage resulting from driving through a flooded area.’”

I have not seen the policy and can’t vouch for the accuracy of the new story, but they aver that the claim was denied because the vehicle was allegedly being used for business and was driven through a flooded area. It does not appear that either of these would be excluded by the plain vanilla ISO PAP.

Several years ago, I wrote an article for Independent Agent magazine called Price Check which gave several real-life and serious (from a 5-figure property damage claim to a multi-million-dollar liability claim) claims that were denied by inferior auto policies. The article also included a laundry list of examples of exclusions in real policies that could result in large or even catastrophic uncovered claims, including:

  • Undisclosed household residents are excluded. How many families have “boomerang” kids living at home that the agency and insurer are not aware of?
  • Business use of non-owned autos is excluded. Have you ever borrowed a neighbor’s car or made a business stop in a dealer loaner auto?
  • Business use of ANY auto is excluded. Do any agency employees ever run to Staples or the post office on agency business?
  • Use of ANY non-owned auto is excluded. Better not drive anyone’s car but your own.
  • Vehicles over 10,000 pounds in GVW are excluded. Have you ever rented a U-Haul truck or an RV thinking your liability coverage extended to the rental?
  • Any type of delivery is excluded. Denied claims include pizza, newspapers, Mary Kay cosmetics and yes, even the delivery of insurance policies to customers by an agency producer (a real claim denial by a carrier the agency represented).
  • Permissive users only get minimum limits. This can apply to people who borrow your car or even unlisted household drivers (and such step-down limitations may be illegal in some states).
  • “Street racing” is excluded. Google “street racing” and see how often people are killed or critically injured in the process. I was personally involved in consulting on one denied claim involving a fatality.
  • Criminal acts are excluded or limits reduced. DUIs or even speeding tickets may preclude coverage.
  • Medical payments only include licensed physician fees. One insured incurred a $25,000 “life flight” helicopter fee that would not be covered, even in part, by a policy with this exclusion.
  • Theft without evidence of forced entry is excluded. One insured had a four-figure vehicle theft loss denied because he left his keys in the car.
  • Sales tax is not covered under loss settlement. This cost one “same coverage” insured more than $2,000 out of pocket for sales tax on a replacement auto.

So, the next time someone tells you that auto (or any kind of) insurance is a commodity, print out this blog post and shove it…in front of them. Please share this article with your staff. More important, share it with your customers and prospects. As a reminder, any of my blog subscribers are free to reprint my blog posts absolutely free as long as you retain my copyright and acknowledge the source, as outlined on this page of my web site.

In addition, the Big “I” has a free public online resource with tons of information you can use to educate your customers that insurance is NOT a commodity differentiated only by price and that, as their trusted advisor and advocate, you earn every single penny of the meager commission you’re paid to help them protect themselves and their families from financial ruin.

Spread the word:

“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.”  – John Ruskin

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Bill Wilson

Founder at InsuranceCommentary.com
One of the premier insurance educators in America on form, coverage, and technical issues; Founder and director of the Big “I” Virtual University; Retired Assoc. VP of Education and Research from Independent Insurance Agents & Brokers of America. Reprint Request Information

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