The term “replacement cost policy” is a misrepresentation by many insurance companies about the product they are now selling. Insurance regulators should not allow the general public to be duped into buying something which is obviously not what the insurance company is promising. Accordingly, I propose that we should consider that unless minimum standards within a policy are met, insurance companies selling any all-risk replacement insurance are required and must warn that they are selling a Non-Standard Non-Replacement Cost Policy. Insurance products that are deemed to be Replacement Cost Policies in the residential market should at least meet the criteria found in mortgage requirements for federal negotiable mortgages.

The genesis for this suggestion is found in previous works against insurance protection coverage gaps. Professor Jay Feinman of the Rutgers Center For Risk and Responsibility called for significant reform of this problem in, The Protection Gap in Homeowners Insurance: An Introduction. Professor Feinman noted the primary insurance protection gaps as follows:

• Entirely uninsured. The property owner lacks insurance for all risks.

• The underinsurance gap. The policyholder has coverage, but in an amount that is less than the extent of actual or potential losses.

• The risk protection gap. The policyholder is insured, but certain risks are not covered.

• The coverage gap. The policyholder is insured, a risk is covered, but coverage is subject to other limitations. Limitations or restrictions in the insurance policy other than the exclusion of risks prevent full coverage for actual or potential losses.

• The claiming gap. The insurance in place potentially covers risks and losses, but factors in the claim process result in a failure to pay fully.

Amy Bach and United Policyholders have continually raised the issue of policyholders being subject to insurance which is not what is advertised. United Policyholders has started RISC to combat this problem:

The Restoring Insurance Safetynets Coalition (RISC) is a national initiative launched by United Policyholders in 2020. The purpose of this initiative is to reverse the trend of insurance policy re-writes that are shrinking coverage for damage to homes. These re-writes are dangerously eroding insurance safety nets that homeowners are paying for and expecting to be able to rely on when disaster strikes. They are causing a ripple effect of harm to people, communities, real estate values, lenders and ultimately, all of us.

Holly Soffer has worked closely with Amy Bach on this issue. Soffer co-presented with me on the topic as noted in, Insurance Gaps Are Killing Policyholders, Your Business and Your Ability to Restore Damaged Property—Sign Up For This Friday’s Insurance Gaps Seminar. In that post, this is how I stated the problem:

Insurance coverage gaps are a recurring problem for policyholders, restoration contractors, and public adjusters. With coverage gaps between policies, policyholders and those left with fixing the damage are at risk for being left with little to possibly nothing to adjust for underinsured policyholders. We have to stop allowing insurance companies to sell insurance products that are akin to a hardware store selling a water bucket with holes in the bottom.

Even insurance agents are calling on state insurance regulators to do a better job protecting consumers by vetting insurance policy submittals. In his book, When Words Collide: Resolving Insurance Coverage and Claims Disputes, insurance agent educator Bill Wilson explains:

State regulators must do a better job of vetting policy forms. That may involve establishing minimum coverage standards or prohibiting policy provisions that violate the public interest. It involves employing qualified staff or hiring independent consultants to review policy form submissions even in use and file or file and use states. I would further advocate that regulators require coverage transparency by insisting that insurers make their policy forms readily available to prospective insureds and even competitors, most likely by posting on their web sites, and that they be prohibited from refusing to provide copies of policies to insureds until after the purchase.

In 2011, Professor Daniel Schwarcz of the University of Minnesota Law School published an article, Reevaluating Standardized Insurance Policies,1 which included a study of the content of different homeowners insurance policies. He conducted this study and wrote the associated article entirely in his role as a legal academic. The article has received substantial recognition from numerous sources: it was awarded the 2011 Liberty Mutual Prize for an exceptional article on the law of property/casualty insurance, has been the basis of articles in newspapers including the New York Times and Wall Street Journal, and has prompted a start of regulatory and legislative reforms and initiatives.

Researching this article, I came across the difficulty he had obtaining the data on the various forms of different worded policies issued by competing insurers:

In my 2011 article Reevaluating Standardized Insurance Policies, supra, I reexamined the conventional wisdom that homeowners insurance policies are essentially homogeneous across different insurance carriers. To do so, I systematically studied the content of homeowners policies issued by the top ten insurance groups by premium volume in six states: North Dakota, South Dakota, Pennsylvania, Illinois, California, and Nevada. I focused on these six states because these were the only states in which state regulators were willing to issue a data call to the top ten insurance groups in the states requesting complete copies of their “standard” homeowners policy, including all mandatory endorsements. Alternative methods for systematically acquiring complete and accurate copies of homeowners’ insurance policies proved impractical for several reasons. First, the vast majority of insurers did not make copies of their homeowners policies available to prospective policyholders or otherwise publicly accessible on a pre-sale basis. Second, state regulatory records in all states examined did not include complete and reliable copies of most carriers’ homeowners insurance policies despite the requirement in the vast majority of states that such policies be filed with and reviewed by state regulators. The reason, in short, was that carriers typically submitted policies for regulatory review when they were altered, and then generally submitted only the specific text that was altered rather than the entire policy. At the same time, regulatory records only dated back several years, making it impossible in most instances to piece together a complete picture of each carrier’s coverage on the basis of regulatory records. An additional impediment to acquiring complete and accurate copies of different carriers’ policies using regulatory records was that almost all state insurance regulators did not make their records easily public accessible, frequently necessitating a Freedom of Information Act request or similar procedure to even gain access to their records.2

I have been writing about the problem of insurance gaps and that policyholders have to watch out for “cheap insurance” which does not deliver after a loss occurs for over a decade. The problem is getting worse. More needs to be done. For the same reason regulators and public policy mandated a standard fire policy over 100 years ago, we need to mandate requirements of a Standard Replacement Cost Policy.

Merlin Law Group is going to put its money where its mouth is and do more to support a movement for reform and force insurers to admit when they are selling non-standard and not up to grade replacement cost coverage. We will join United Policyholders and help provide greater support for United Policyholders through its Restoring Insurance Safetynets Coalition (RISC). We hope others will join us in any capacity they can.

State regulators need to do more. Market Conduct officials need to examine this type of wrongful marketing conduct by insurers. The NAIC needs to step up to the plate and do something about this problem.

They seem to need a push to do their jobs and get this done. If not by us, who?

Thought For The Day

One individual can begin a movement that turns the tide of history. Martin Luther King in the civil rights movement, Mohandas Ganhi in India, Nelson Mandela in South Africa are examples of people standing up with courage and non-violence to bring about needed changes.
—Jack Canfield
1 Daniel Schwarcz, Reevaluating Standardized Insurance Policies, 78 University of Chicago Law Review 1263 (2011).
2 American Family Mut. Ins. Co. v. Chavez, No. 2:14-cv-00411, 2015 WL 11004179 (D. Ariz.) (Expert Report and Affidavit of Professor Daniel Schwarcz).