“[A]n 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.” – Kovach v. Zurich Am. Ins. Co., 587 F.3d 323 (6th Cir. 2009)
Ah, if only that was possible. Or is it…
The latest insurtech/startup news being reported by the media (i.e., the latest PR being regurgitated without journalistic scrutiny) is that Lemonade is testing out a revolutionary new “open source” homeowners renters policy that will allow the industry and consumers to “co-create” an insurance policy that can be used by anyone. Here is the sample policy alleged to be the “big bang” of hip, easy to understand insurance policies:
Here is the Github area where you can comment or ask questions:
Github Policy 2.0 Collaborative Site
How many consumers are experienced at drafting legal contracts? How many insurance industry professionals have experience in creating insurance policies that pass legal and regulatory muster? If it was so easy, it would be difficult to find any case law involving insurance policies.
Below are some observations, questions, and suppositions based on my initial perusal of the document at the link above. It’s the best I can do given that the “policy” reads like a “Deep Thoughts” SNL Jack Handy skit.
- The welcome introduction says the policy is written in a way that’s simple, easy to understand, and fun to read. I find nothing in this rambling, babbling amalgamation of seemingly random thoughts to be easy to understand. And, let’s face it, insurance policies in any form are not “fun to read” even if you include super cool, awesome language like “your stuff,” “yuck,” and “ouch” that might appeal to pre-teens. But, if that’s your market, I’d add some cartoon drawings, maybe teddy bears that shoot lightning out of their eyes to simulate a power surge exclusion.
- Lemonade seems to believe that being able to place your homeowners insurance in 2-3 minutes using a contract that’s only a few pages long is a good idea. I wonder if this is ignorance, naivete, or maybe something else.
The first part of the policy says it’s “The Squeezed Version.” Another super cool, groovy, far-out, and gnarly play on words (I’m an old guy…what do today’s hipsters use for “groovy” and “far-out”?). In any case, I’m assuming “Squeezed Version” refers to a summary of policy terms, such as:
- The policy covers “events” that take place during a particular time period. What contractually constitutes an “event”?
- Coverage appears to be for the 6 perils of theft, vandalism, fire, smoke, burst pipes, appliance leaks, plus “damage others may accuse you of causing” whatever that last term means. Have you ever run across a homeowners policy that only covers a half dozen or so perils? Ever? In modern history?
- There appears to be a per-item limit of $2,500. I don’t think I’ve seen that in any other policies. And what constitutes an “item”? So there’s only $2,500 for your new $4,500 John Deere riding mower? But wait…keep reading because, unlike other homeowners policies, there appears to be ZERO coverage for your riding mower.
- Temporary living expenses are covered up to $2,500. That should be good for about a week of coverage. Maybe two weeks if you don’t SuperSize your meals.
- If the exact item damaged or destroyed is not available, the insured will be reimbursed an amount to buy something “equivalent.” What about antiques? Does “equivalent” mean functional replacement cost or another antique that is equivalent? And don’t forget the maximum $2,500 per item you don’t usually find in other homeowners policies.
- The personal property limit, temporary living expenses limit, and $100,000 liability limit are the “maximum we will reimburse you, in total, per year – even if the losses you suffer are larger.” This sounds like an aggregate limit. Every mainstream homeowners policy I’ve seen has an automatic reinstatement of limits, not any aggregates.
The next part of the policy says it’s “the full story” which presumably is the details of coverage:
- The policy covers “stuff that you own” and that’s normally kept at your home. Most homeowners policies cover property that you own OR USE. People rent, lease and borrow property of others.
- It says that owned property is covered for four perils: a fire, a burst pipe, theft, or vandalism. Didn’t the “Squeezed” version earlier also include smoke, appliance leaks, and “damage others may accuse you of causing” (whatever that last thing means)?
- And what about proximate cause vs. concurrent causation, an issue addressed in most homeowners policies because of extensive case law? If vandals disable your sump pump and your basement is flooded, is that covered or not?
- Cash is excluded. That’s not the case for most renters policies. There’s an exclusion for “assault weapons” and any other firearms that are not “stored securely and used responsibly.” What constitutes being stored securely…if they’re stolen, that’s defacto proof they weren’t stored securely? Who decides whether use is responsible?
- In the “what’s not covered” section, it says damage to property is covered for fire, smoke, theft, vandalism, burst pipes, or appliance leaks (ah, welcome back smoke and appliance leaks). Hey, what happened to “damage others may accuse you of causing”?!
- Once again, they say your stuff is covered for $10,000 per year. Sure sounds like an aggregate limit, something not found in most other HO policies.
- The policy does not cover “losses that could have been foreseen or prevented by you through reasonable steps.” Aren’t many losses preventable, like that frayed extension cord? And, again, what is “reasonable”?
- Neither illegal property nor illegal activity are covered. What makes something “illegal”? If you burn leaves when, unbeknownst to you, there is a burn-ban in effect and you damage your and your neighbor’s property, there’s no coverage because what you did was “illegal”? And, since there is no severability clause in this policy as there usually is in most other policies, does this exclusion apply only to the person committing the allegedly illegal act, or does it apply to everyone?
- The policy excludes damage by “motorized vehicles of any kind.” So, there’s no coverage for using a riding lawn mower? What about someone injured by a child’s “Barbie” car? Most homeowners policies provide some coverage for this.
- There is no liability coverage for “assault weapons” or other firearms that are not “stored securely and used responsibly.” I thought Lemonade was socially conscious. So much for innocent victims.
- Excluded is “Damage that’s related, or similar to, something you’ve been accused of in the past ten years…isn’t covered.” Is this just liability claims or direct property damage claims too, because the policy doesn’t separate the two. What makes something “similar to”?
- Apparently they have a “Bad Weather Package.” Does this mean there’s no windstorm or tornado coverage?
- The policy says Lemonade can cancel or nonrenew with 10 days notice. Presumably that will change with state laws. Maybe.
Here are some “Issues” that Lemonade responds to from open source contributors, including:
“Clarification around ‘stuff that’s used for your business’”
“Clarification around cannabis coverage”
Much of these “clarifications” from Lemonade are what policy form drafters include in the contract language to begin with. Otherwise, interpretation of the extensive broad, vague, ambiguous wording in Policy 2.0 is subject to varying interpretation by different individuals over time. That’s not contract certainty and not desirable. It’s exactly what leads to litigation.
When my son moved into an apartment, the management required proof of renters insurance. If you didn’t have any, they had an endorsed vendor where you could buy coverage online. To their credit, the policy form was available online. It was pure crap. Very limited named perils. Very little in the way of bonus coverages. $50,000 liability coverage. And the deficiency list goes on. The cost of the policy was $120. I got him a quality policy with a mainstream insurer on an open perils and replacement cost basis for $180. Homeowners insurance is not a commodity and an insurance contract should not be structured, in accordance with the infinite monkey theorem, as if it was the result of a warehouse full of typing monkeys that came up with an insurance policy instead of a Shakespearean work.
It’s interesting that an innovative insurtech is proposing a policy that appears to have less property coverage than the 75-year-old 1943 New York Standard Fire Policy with an Extended Coverage endorsement. To quote the old Firesign Theater comedy troupe, “Forward, into the past!” So what is Lemonade really trying to do?
I wonder if their highly hyped behavioral algorithms aren’t working as expected and their loss experience is poorer than anticipated. When that happens, one approach is to abandon the industry-standard ISO HO-4 you’re selling for something worse than the E&S marketplace currently provides and hype it as a good, innovative thing. And make it open source so that your competition has an equally inferior product to sell. Given the lack of journalistic acumen in today’s media, most will simply guzzle the PR and regurgitate it like a drunken sailor on shore leave. At least the old snake oil salesmen of yesteryear conducted business with a wink and a nod.
Yes, I admit it…I’m an old guy questioning new things. But being an old guy might explain why I enjoyed reviewing this latest Ralph Kramden-like scheme of Lemonade so much…it reminds me of Ted Mack’s Original Amateur Hour. Come on, kids, let’s leave the contract drafting to the professionals like ISO. As real “innovator” Al Einstein said, everything should be made as simple as possible, but no simpler.
P.S. Be sure to check out the Comments below. If you are an insurance professional, I suggest you go to these pages linked above and to the LinkedIn page in the Comments section below and voice your opinion. Virtually all of the comments regarding Policy 2.0 are made by people who know little or nothing about insurance. It’s important that they be introduced to reality.
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Bill Wilson
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Here is a LinkedIn article from Lemonade on Policy 2.0:
https://www.linkedin.com/pulse/worlds-first-open-source-insurance-policy-daniel-schreiber/
The following are additional observations I have regarding the article linked above.
“The renters policy we launched with is ‘industry standard,’ which is to say it’s 40 pages long, and contains some 20,000 words, many of them from middle-English.”
My understanding is that their policy is the 2011 edition of the ISO HO 00 04 form. That form is about 20 pages long and I don’t see “many”middle-English words, nor do I see words like “ouch” and “yuck” that appear in the Lemonade proposed policy.
The article talks about exceptions. Exceptions to exclusions are good, not bad. The problem with Policy 2.0 is that so little is covered to begin with that there is no need for exceptions. Then you have a discussion of sublimits:
“There’s a $1,000 limit for the removal of your neighbor’s fallen trees… But there’s a $500 limit for any one tree… And you get nothing if the trees didn’t damage ‘a covered structure’; Except, that is, if they block the driveway; On condition the blockage ‘prevents a ‘motor vehicle’ from getting by; Except, that is, if the ‘motor vehicle’ isn’t “registered for use on public roads.”
In Policy 2.0, I don’t see ANY coverage for this.
“There’s a $2,500 limit for pewterware (whatever that is).”
Policy 2.0 has a $2,500 for ANY single item of property (whatever an “item” is).
“Your claim’s capped at $1,500 for ‘furnishings’ of a ‘watercraft’ (huh?)”
I don’t see ANY coverage for this in Policy 2.0.
“And you’ll get zero if your pewterware, furnishings, antennas, tapes, wires or records were in the hands of a “bailee” at the time they were stolen.”
The same is true for Policy 2.0 because it says it excludes coverage for property that you’ve entrusted to someone else, like clothes at a dry cleaners.
“Policy 2.0 doesn’t aim to increase or decrease coverage per se. It aims to balance relevant coverage with affordability, while allowing users to choose additional coverage that makes sense for them.”
This is a roundabout way of saying, “Our policy doesn’t cover much.” Any insurance professional can read Policy 2.0 and see that it DOES aim to decrease coverage compared to that available from mainstream markets. And WHO is going to explain why broader coverage via endorsement makes sense to most consumers? It’s been said that an attorney who represents himself or herself in court has a fool for a client. The corollary here is that any consumer that buys his or her own insurance directly has a fool for an agent.
No matter how you ‘slice’ it, insurance centers on a legal, binding contract. The more you try to ‘dumb down’ the policy language, the more likely you are to create ambiguity. Policies are written the way they are because the preciseness of the language removes much of the interpretative discretion the insurer has at claim time. With broad, vague, rambling sentence structure, an insurer can interpret the language just about anyway it wants.
“Today’s policy deals at length with volcanic eruptions, nuclear fallout and ‘civil commotion,’ but says nothing about laptops or smartphones. Say what?!”
There’s no need to specifically mention laptops or smartphones in most renters policies because they’re covered like any other property.
“So Policy 2.0 will drop coverage for ‘volcanic action’ and suchlike, while doing away with ‘gotcha’ limits for jewelry and electronics (not to mention ‘antennas, tapes, wires and records.’)”
How would consumers in Hawaii feel about dropping volcanic action coverage? Of course, since it’s never mentioned in the policy, the absence of coverage might never occur to them compared to policies that specifically address this exposure.
“Each Policy 2.0 will be unique and dynamically-generated, based on the choices the user made. While people can print Policy 2.0, it’ll be at its most powerful on a screen. When the policy says that $20,000 of property is covered, for example, our Live Policy technology makes that sentence clickable, so the user can instantly change that to $30,000. If the user wants to add earthquake coverage, to take another example, they can initiate that from within the policy itself, and the policy will morph to include earthquake coverage.”
Likewise, they can unilaterally REDUCE covereage. Who is going to counsel them that a particular decision could be pennywise and pound foolish. This is what good insurance agents do daily. “Fast, easy and cheap” is not necessarily good, especially when you thousands of dollars at stake or even more when it comes to a liability claim.
“This draft was created in consultation with state regulators….”
I’d be interested in knowing what regulators participated in this draft.
Check out the Comments section at the end of the article. The vast majority are positive and appear to be written by people who likely know little or nothing about insurance.
And what about anti-trust and related issues? What are the implications of advocating that the industry adopt a uniform standard policy, especially one significantly inferior in coverage to most in the marketplace today?
Lemonade has a LinkedIn post about Policy 2.0 with about 100 comments. Almost all of the comments are enthusiastic. They are almost all from people who appear to know nothing about insurance. Lemonade’s hype and hyperbole appeal to the ignorant and uninitiated and I don’t mean that in a derogatory way. They are preying on people who are willing to drink the Kool Aid…I mean Lemonade.
Here is a tweet from a venture capitalist that explains part of this phenomenon:
“Most interesting observation after 3 months as VC is how critical I am of things I know something about and how excited I get when clueless.” – Villi Iltchev
Policy 2.0 is a stripped down renters policy, far worse than even the old HO-1 or the HO-8. In fact, if you go back to the 1943 New York Standard Fire Insurance Policy (apparently ahead of its time since it only had 2 pages) with an Extended Coverage endorsement, THAT had more coverage than Policy 2.0.
P.S. I wish the insurance industry media would show more journalistic integrity and not just regurgitate every press release they get as “News.” This isn’t news, it’s propaganda from a player with allegedly very poor loss experience who can improve that by replacing a very good policy with a far inferior form that covers less. For their customer base, I’m reminded of the pledge paddling scene from Animal House where the paddler is being told by the paddlee, “Thank you, sir, may I have another.”
I generally agree with the skeptics, and I find Lemonade’s dismissal of received wisdom to be irritating, but I’m interested to see if this initiative can actually stimulate engagement in policy drafting, the core task of contractual risk-sharing.
Like many commentators, I wonder if many consumers will have the desire, let alone the legal knowledge, to draft personal lines policies. However, I see far greater potential for such an approach among small commercial lines accounts, albeit under the guidance of experienced risk professionals.
Small businesses today face a huge challenge with a growing array of newly emerging exposures–cyber, discrimination, harassment, environmental, violent acts, etc.–and the corresponding coverages, in addition to property, auto, and general liability. The ability to craft policy language as well as select limits and deductibles may be very useful in making the most of limited premium dollars.
Joe, I’m all for feedback in policy form drafting. For almost two decades, as part of the Big I’s advocacy with forms organizations, we worked extensively with ISO to provide feedback on proposed changes and suggestions for new forms, form language, or changes. I recall trying to get ISO to provide an endorsement options to increase Loss Assessment coverage beyond $1,000 for master policy deductible assessments by HOAs. ISO wouldn’t do it, so we went to AAIS which did it in a matter of months and ISO followed. Given the markets in some areas where high master policy deductibles are a fact of life, this advocacy was critically important to consumers.
What I would question is where this input is used verbatim to create contract language. ISO in particular would ask us to provide specific language recommendations, but they would never use the suggestions verbatim because they had to be couched in historical case law considerations. I see no place for insurance contract language using words like “ouch” and “yuck.” That’s just silly. I would think GOOD regulators who still vet forms would go after that long before the courts have a field day with it.
Lemonade needs a reality check by enlisting feedback from people who actually know what they’re doing.
Thanks, Bill.
I generally agree with you, and I certainly would NEVER craft a policy covering me without the aid of an attorney and/or seasoned risk professional. I’ve been writing about this stuff for 23 years, and I was amazed a few months ago, when I “re-shopped” my household insurance, to see how complicated it could be to compare “plain vanilla” HO and personal umbrella policies.
If—and it’s a big “if”—Lemonade and others are successful in engaging buyers in crafting policies, words like “ouch” and “yuck” will be supplanted by more precise terms. Wildly optimistic predictions will be replaced by more modest but nonetheless meaningful expectations. The received wisdom embodied in policy forms will provide a foundation, not a straightjacket, for risk-sharing.
I’ll return to my situation. When re-shopping my personal coverage, I sought ways to cover my home-based work. It was not easy, and I was surprised to learn that even some major carriers had no endorsements for addressing it. I was forced to seek stand-alone commercial coverage with a relatively high minimum premium for an incidental exposure.
Suppose an agent who knew me and my situation were empowered to draft coverage on the spot and charge a premium within carrier guidelines? It would be one more tool for producers, an enabler more than a disruptor. We’ll have to see, however. Experience, not hype, will determine if my vision is viable.
“Suppose an agent who knew me and my situation were empowered to draft coverage on the spot and charge a premium within carrier guidelines?”
Joe, you’re a bigger risk taker than me. I know some excellent producers, but I’m not sure I can think of one I’d rely on to draft an insurance form on the spot.
I think it I’m dignified and unfortunate that Innovation is derided in the manner that it has been derided in this article
Incredible. Thanks for breaking this down Bill!
I’m a techie at heart, having done a fair share of consulting work on RMIS technology over the years. So I am not inherently anti-innovation, and the insurance industry certainly could use some innovation. Even so, the hype (including but even before “Policy 2.0”) from Lemonade strikes me as ignorant, self-serving, and dangerous to unwitting consumers.
This is the financial equivalent of giving a loaded gun to a child and telling them to have fun. Where are the adults in the room? What especially troubles me is that I’m pretty sure there are some industry heavyweights on the Lemonade team, and some regulators seem to be lapping up (no pun intended) all that Lemonade serves. And how do their “biggest reinsurers in the industry” feel about the Policy 2.0 amateur hour show? Maybe they’re okay with the more restrictive coverage, who knows. I wouldn’t want my fingerprints on this mess.
I was giving Lemonade the benefit of the doubt when they first launched, but I grow more skeptical and more concerned for naive consumers with each new batch of Lemonade hype. The positive, glowing comments from (presumably) Lemonade supporters and policyholders remind me of the Kevin Bacon “fraternity paddle” scene in Animal House: “Thank you sir, may I have another?”
I’ll refrain from offering my personal judgement here as Bill already accomplished my attack points. However, I will be most interested in the judgements from the following entities:
1. 50 State Commissioners (and PR and territories), their lawyers, policy filing technicians, and related associates; especially in NY, FL, NJ, IL, TX, PA, (sorry CA, you don’t make the prime list because you’ll think this is hip and you’ll actually think about it for a while).
2. 50 state Legislatures (and PR and territories) and their lobbyists at interest.
3. Big I, FAIA, PIA, etc. and etc.
4. IRMI, The Institutes, National Alliance
5. The BIG ONE: Plaintiff’s Bar
I’d like to opine that 1 thru 4 will be overwhelmingly influential; but my chips are on #5.