Insurance law professor Daniel Schwarcz has a significant academic publication, Reevaluating Standardized Insurance Policies, 78 University of Chicago Law Review 1263 (2011), that should be studied by every insurance regulator and those practicing in, studying and considering property insurance law matters. His article provides a very brief executive summary of important findings:

This Article empirically debunks the common claim that homeowners insurance policies do not vary across different insurance carriers. In fact, 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. Despite this substantial variability in policy terms, even informed and vigilant consumers are currently unable to comparison shop among carriers on the basis of differences in coverage. The Article reviews various regulatory and judicial options for responding to this lack of transparency in homeowners insurance markets. It closes by considering the broader theoretical implications of the findings for regulatory theory and the efficiency of standardized form contracts.

The State Bar of Michigan picked up on the legal significance of his work when it noted in its blog that:

It’s not often that a law review article has such obvious practical, down-to-earth information that its substance migrates to the mainstream media even before publication, but that’s what’s happened with University of Minnesota law professor Daniel Schwarcz’s article "Reevaluating Standardized Insurance Policies." …the article says that despite widespread consumer presumptions that homeowner insurance policies are basically all alike, what were once standardized provisions have evolved into a plethora of significant deviations. According to Schwarcz the deviations, which mostly decrease the amount of coverage relative to the presumptive industry standard, are so widespread that even informed and vigilant consumers are unable to comparison shop among carriers on the basis of differences in coverage. He calls for state insurance commissioners to help make the contracts more transparent… 

Even before the article was published, the New York Times noted it in Not All Homeowners’ Policies Are Alike. The Times quoted Schwarcz:

Most consumers, he said, choose a homeowner insurance carrier based on the premium quoted, the company’s financial soundness or a vague idea about its reputation. That approach assumes that one company’s underlying policy is pretty much the same as another. Yet an analysis of contracts from large insurers obtained from seven states, he said in an interview this week, shows that belief is “a myth.”

Here’s one example: The standard contract insures a home against risk of “direct physical loss to property,” he noted. But some insurers have altered that language to say “sudden and accidental” direct physical loss to property. (His paper doesn’t identify which specific insurers use the language, he said, because he wants to focus on changes regulators should make.) Such wording, he said, might be used to deny claims for vandalism or from a threat that grew over time — say, an old tree that weakens and eventually falls on a house. It’s conceivable, he said, that the language could be used to deny claims for theft on the grounds that the loss wasn’t “accidental.”

The upshot, he said, was that such changes were “an indication that insurers are writing policies so they can deny claims whenever they want.” (emphasis added)

Professor Schwarcz has now made observations very similar to those I noted almost three years ago in Is the State Farm Policy Really Worth Anything?:

What is the value of insurance if it does not pay for insured losses? Imagine if you had a significant accidental water damage to your home or business, do you know whether your insurance company has your back? Will it really be there to help you? Don’t count on it. Today, modern insurance companies are re-writing their insurance policies to limit what is covered and excluding many losses that used to be covered under all-risk policies. State Farm, as an insurance industry leader, is leading the charge of making an insurance product that no consumer should trust as providing the amount of coverage the insurance product afforded 25 years ago. It is always important to remember that Policyholders Buy Insurance for Peace of Mind and Not Economic Advantage and that concept is being defeated as carriers try to gain economic advantage by changing small print in the policy that may have significant consequences discovered by the policyholder only after disaster happens. To be Fair And Balanced with State Farm, I could have substituted Allstate, Nationwide and USAA into the title.

Many State Farm policyholders reading these exclusions probably worry that anything that accidentally breaks down will not be covered. State Farm and its competitors should make customers aware of how much is not covered, rather than advertise its affordable rates and those syrupy feel good advertisements. The true nature of the insurance company is determined by the coverage sold and the performance of the claims department. Those advertisements have nothing to do with what truly happens in the field on a day to day basis…

…At an American Bar Association National Institute on Coverage, I delivered a paper entitled "Does this Insurance Policy Cover Anything? An Insured’s Perspective of the Late Twentieth Century All-Risk Policy.” I suggested that the anti-concurrent causation language and re-writing of exclusions rendered the all-risk coverage illusionary. Many scoffed at my suggestion that the exclusionary causation language adopted by many insurance companies invited creative findings of excluded causes "directly, indirectly, in any sequence, or as part of or a result of a loss," so that a loss would be denied or threatened to be denied. This is exactly what is happening and is the result I feared.

I am delivering a presentation at the Annual Convention of the National Association of Public Insurance Adjusters this week. In preparation, I spoke with a colleague, Jonathon Wilkofsky who will be part of a panel in the educational discussion. Jonathon was the NAPIA Co-Person of the year with me in 2007. In our discussion, Jonathon complained that he was being forced to request the New York Department of Insurance to decertify newly written exclusions as against public policy in a number of instances. His perception is the same as mine–insurers are significantly limiting the amount of coverage with small, but significant, changes in policy language that most, including regulators, would not appreciate until after a loss occurs.

Professor Schwarcz’s conclusion is the same as mine and those of other policyholder advocates: 

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. It explains the ignorance of most information intermediaries about the details of contract terms. And, to a substantial degree, it explains the willingness of courts to treat insurance policies as ordinary contracts.

As this Article has shown, this myth is false. Not only does there exist substantial heterogeneity in insurance policy terms but most of this heterogeneity reflects the efforts of carriers to limit coverage relative to the presumptive industry baseline. 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.

I will follow tomorrow with some of Professor Schwarcz’s suggestions for reform.