Professor Jay Feinman

Gaps in Insurance coverage are an increasingly significant issue. The Rutgers Center for Risk and Responsibility and the Rutgers Law School will hold a conference on The Protection Gap in Property Insurance, on Friday, March 29. This conference will address the protection gap in residential and commercial property losses and related types of losses in the United States.

Why should consumers be worried about insurance coverage gaps? One reason is because your insurance agent may be trying to reduce the cost of your insurance hoping you will not shop with other agents for insurance based on price. “Cheap insurance” leaves huge gaps in coverage in the event of loss. Still, some agents sell on price rather than quality and some fail to warn of these costly gaps in coverage. Of course, some purchasers of insurance look to purchase the least expensive insurance and only argue about gaps after the loss occurs and the gap captures them as they fall into financial ruin. Don’t Buy or Sell Cheap Insurance!

Solutions to the property insurance gap will be explored in much greater detail at the conference. But, the conference webpage has a couple of examples:

What solutions are there for protection gaps?

. . . .

• Legislators and regulators can require information disclosures and prescribe policy terms to ensure adequate coverage. In the wake of the California wildfires, the legislature enacted a series of reforms aimed at improving consumer understanding and better coverage for homeowners.

• Insurers and intermediaries can innovate products and marketing and can reduce costs to increase availability of coverage and consumer awareness. Insurtech, on-demand insurance, and parametric insurance are being offered as solutions to protection gaps.

I recently spoke at the Oklahoma Roofers and Contractors Association Conference. In part, I discussed the issue of insurance gaps of coverage which may allow some insurers to only pay actual cash value rather than full replacement cost to parts of a damaged building. An audience member told me how horrible the Farmers Smart Plan policy was with bizarre and very anti-consumer language regarding “marring” and how little it pays for wind or hail damage compared to other insurance policies.

After reading the Smart Plan policy form, I agree it is horrible. It should be per se negligence for Farmers agents to sell it. The form does not comply with Fannie Mae or Freddie Mac minimum requirements for property insurance on a federally guaranteed mortgage. Regulators should ban the Farmers Smart Plan policy form. It is stupid to allow the Farmers Smart Plan policy and those like it to be sold. The truthful name should be the Farmers Stupid Plan policy.

Another critic of the Farmers Smart Plan form stated the following:

Farmers is a pro at marketing. As mentioned above…they seem to be investing all of their money in bringing in clients, and none in actually caring for them. Although they have great commercials, these TV spots represent nothing about how Farmers actually handles its current clients.

Farmers Insurance has been changing its policy a lot over the past few years. I have seen every variation of their policy, and with every change, it just seems to get worse.

Right now, the version of their policy being pushed on clients is called the “Next Generation” policy. It was designed to save you money…and give you less coverage. Recently, they have begun phasing the Next Generation policy out in favor of a new policy, which was recently approved.

Farmers’ newest policy is being called the “Smart Plan Home Policy.” Let me be very clear: there is NOTHING smart about this policy.

Rutgers insurance law Professor Jay Feinman has put together a fine panel to speak at this conference. I recently noted a part of Feinman’s work in How to Stop Delay, Deny, Defend.

Yours truly will be presenting a paper and speaking at this conference on the very nerdy issue of Property Insurance Coverage Gaps Caused By Mortgage and Lender Requirements. Click here to register for the conference and I encourage all to attend.

Thought For The Day

Real happiness is cheap enough, yet how dearly we pay for its counterfeit.
—Hosea Ballou

  • There is an independent agent in NY who has an initiative to have regulators be more proactive about informing consumers that all insurance policies are not the same. This could consist of advertising restrictions similar to those imposed on the pharmaceutical industry, requiring all policy forms to be readily available to the public for review, etc.

    In addition, here is a white paper from the U. of Minn. law school about differences among homeowners policies and insurers:

    “Reevaluating Standardized Insurance Policies”
    by Daniel Schwarcz

    “The current personal-lines insurance marketplace is largely organized around a myth. That myth is that personal-lines insurance policies are completely uniform. This myth explains regulatory rules that do nothing to promote insurance contract transparency.”

    “Different carriers’ homeowners policies differ radically with respect to numerous important coverage provisions. A substantial majority of these deviations produce decreases in the amount of coverage relative to the presumptive industry standard, though some deviations increase coverage.”

    “These insurers have actively hidden and obscured this trend, in notable contrast to the comparatively transparent marketing of the few carriers who have departed from standardized policies to improve coverage.”

    “If regulators do not act to substantially improve consumer protection in this domain, then it can be expected that coverage will continue to degrade for most carriers, in a modern-day reenactment of the race to the bottom in fire insurance that triggered the first wave of standardized insurance policies.”

    “It is virtually impossible for consumers to comparison shop on the basis of these pervasive differences in policy forms” because:
    • Insurers refuse to make their policy forms publicly available before purchase
    • There is a widespread perception among independent and captive agents that all homeowners policies are essentially the same
    • Many of the insurers who use the most unfavorable forms also utilize captive agents, rather than independent agents, who are particularly unlikely to be knowledgeable or forthcoming about how different carriers’ policy forms compare

  • Robin Chapo

    This article is false. Farmers Smart Plan is designed to offer full coverage – but does allow the consumer to modify coverages they might not need. Why do you need marring of a metal roof coverage if you don’t have a metal roof? Not everyone wants identity theft coverage. Why pay for replacement value on fences if you don’t have a fence? Review of coverages with clients is what we do best, so the client knows what they are buying. We review coverages every 6 months to a year unless the client refuses. We have 3 ranges of special limits and can add on coverages for many special items. The only way a client is not covered correctly, is if they give incorrect information about their property or choose it that way.

  • Anthony

    Ok now tell me why water intrusion is excluded unless there is a physical hole in roof or wall. Most every other policy will cover the spot of water on bedroom ceiling or around window from wind driven rain. Farmers does not. I could go on.

  • Robin,

    You are a Farmer’s Insurance agent, correct?

    You are stuck selling Farmer’s products.

    We have not gotten into Farmer’s claim culture, but since you have commented, why did Farmer’s have a claims goal to “Bring Back a Billion”?

    How was that ethical?

    You may be well meaning, but you would be better off selling other products for another company.

  • Mark Jacoby

    Ms. Chapo,

    Perhaps you’re unaware of policy exclusions as they are applied to actual claims. A-la-carte coverage options are not the issue.

    In the minds of the majority, does “full coverage” mean any sudden and accidental event that damages property unless the peril is specifically excluded? Does full coverage mean a return to pre-loss condition? Does full coverage mean that losses are assessed on a property basis and not a component basis?

    Consider how the “marring exclusion” and how “matching” coverage would be applied to auto and health insurance… If someone swiped your parked vehicle in a parking lot, should covered be denied for marring? If the paint color was off by 10%, is that a close enough match? If you cut your fingers with a kitchen knife, should coverage denied for marring? Should the non-life threatening rash that covers your body be covered with make-up so that the epidermis matches?

    Has the language contained in the policies become overtly ambiguous and is coverage being awarded subjectively? Has the concept of “pre-loss condition” and “indemnification”, the heart and soul of insurance, been abandoned?

    Policies are suppose to be easy to read and understand as required by state regulation bodies. Can the policy language be used to deny coverage for nearly any water damage scenario? The cross references for exclusions are more exasperating than a looping computer process, aka the whirligig.

    If 51% of claims from Insured’s with this policy are denied coverage (not including the ones awarded under deductible/depreciation) isn’t that evidence that the majority of policy holders do not understand the coverage they purchased? Does selling or brokering a “full coverage” policy, that denies coverage for most claims, constitute misrepresentation?

    That’s just some of the subtext.