An insurance policy short enough to read before the coffee gets cold sounds nearly miraculous. Berkshire Hathaway says it has accomplished that feat with THREE, a small-business policy built around a three-page coverage form.

Veteran insurance professional Larry Seal brought this policy to my attention. Larry has decades of experience in commercial underwriting, loss control, claims management, product development, and insurance placement. He was right that this policy deserves a serious look. It is one of the insurance industry’s more provocative attempts to answer a problem policyholders and insurance professionals have complained about for generations. Insurance policies are too long and too difficult to understand.

Berkshire introduced THREE in 2019 as a single policy combining commercial property, general liability, errors and omissions, directors and officers liability, commercial auto, cyber coverage, and workers’ compensation. Instead of delivering a small business a suitcase full of separate policies and endorsements, Berkshire promised one integrated insurance product written in plain English.

The marketing message is wonderfully simple. The current THREE website promises “No fine print. No surprises.” Berkshire also suggests that fewer pages mean fewer possible reasons to deny a claim. The last proposition is a marvelous sales pitch, but is also incomplete.

Additional pages can certainly contain exclusions, limitations, conditions, and cleverly placed traps. But policy language can also provide reasons to pay. Additional pages often contain coverage extensions, exceptions to exclusions, valuation protections, civil authority coverage, dependent property coverage, ordinance or law coverage, extended business income, newly acquired property protection, appraisal provisions, and rules limiting the insurer’s discretion.

Deleting words from an insurance policy does not necessarily delete only exclusions. Sometimes it deletes coverage.

There is another catch. The product is not literally an entire insurance contract contained within three pages. The June 2024 form I reviewed has a three-page core policy containing roughly 1,900 words. But the sample package also has a separate three-page policy summary and contemplates state supplements, endorsements, and coverage extensions. Calling it a three-page policy is a little like advertising a three-room house without counting the closets, garage, and additions. The core is genuinely short, but the issued contract may be considerably longer.

There is much to admire in the revised policy. Electronic data alteration is treated as physical damage. Defense costs are expressly paid outside the liability limits. Business income includes increased expenses, lost net income, and payroll. Tenant improvements, exterior glass, and certain property in the insured’s care, custody, or control are expressly addressed. The form also contains fairly generous additional insured and contractual risk-transfer provisions.

The real test, however, is not whether a business owner can read the policy. The test is whether the business owner can correctly understand how it applies after a loss.

The current form still limits coverage largely to listed buildings and listed owned or leased vehicles. It contains a sweeping ordinance or law exclusion encompassing zoning, shutdowns, and government action. Pollution and asbestos exclusions are broad. Cosmetic roof damage is excluded. The form does not expressly provide many of the familiar business-income and property extensions found in conventional commercial forms, including civil authority, dependent property, extended business income, and newly acquired property coverage.

The valuation language also deserves attention. Berkshire promises to repair damaged property when possible or replace it with something having “similar capabilities.” That may permit functional replacement rather than replacement with property of like kind and quality. A business owner may understand those words perfectly and still be surprised by what Berkshire believes they mean when an expensive building or specialized equipment must be replaced.

The occurrence definition presents another concern. It generally requires the accident or repeated harmful conditions to begin during the policy period. That language could become enormously important in claims involving hidden moisture, progressive deterioration, repeated water intrusion, or other conditions crossing policy periods.

Then there is the insured’s duty to cooperate. The form warns that failing to satisfy policy obligations may cause the business to lose “some or all” coverage. That is short, but it is hardly precise. Breach of what obligation? Must the insurer prove prejudice? When does a relatively minor failure justify forfeiting the entire claim? Three pages can eliminate fine print without eliminating litigation.

Shortly after THREE launched, insurance educator Christopher Boggs published a blistering 2019 critique titled Analysis: Warren Buffett Champions an Inferior Product in THREE Policy. Boggs identified missing coverage for property of others, tenant improvements, exterior glass, ordinance or law, dependent property, civil authority, debris removal, additional insureds, hired and nonowned autos, and many other exposures. He also questioned whether defense costs were inside or outside the liability limits and whether the form could be adequately customized.

Many of Boggs’s criticisms were legitimate when written. But fairness requires acknowledging that Berkshire changed the policy.

The June 2024 revision expressly places defense costs outside the limits. It addresses exterior glass, tenant improvements, and certain property of others. The additional insured language is substantially improved, and the policy package now contemplates extensions and endorsements. Berkshire’s current marketing also offers hired and nonowned auto, employment practices liability, liquor liability, equipment breakdown, inland marine, and other coverages that were either missing or unclear in the original product.

Boggs found real holes, and Berkshire apparently repaired several of them. Other concerns remain. The broad ordinance or law exclusion, limited business-income extensions, unusual occurrence trigger, valuation uncertainty, absolute pollution treatment, and lack of developed case law cannot be dismissed simply because the policy is easy on the eyes.

This brings us back to whether readable means understandable. As I recently discussed in Insurance Experts Can Misread an Insurance Policy: What a Remarkable Virginia Law Review Study Really Shows, researchers studying homeowners insurance comprehension found that giving people the actual policy language sometimes caused them to become less accurate about coverage while becoming more confident in their incorrect answers.

The THREE form may improve comprehension by eliminating much of the cross-referencing and structural complexity found in conventional policies. But nobody has yet produced an independent empirical study showing that THREE policyholders better understand their coverage, experience fewer claim disputes, or receive better claim outcomes.

The marketplace evidence is encouraging but incomplete. THREE has survived since 2019, expanded geographically, revised its form, and added an agency distribution system after originally emphasizing direct sales without a middleman. Berkshire does not separately report THREE’s policy count, retention, loss ratio, combined ratio, claim acceptance rate, or litigation frequency. Survival proves that the policy can be sold. It does not prove how well it performs when a significant loss occurs.

I do not think THREE is merely a gimmick. It is a serious and worthwhile drafting experiment wrapped in an exceptionally powerful sales hook. Berkshire deserves credit for challenging an industry that too often treats incomprehensible policy language as inevitable.

Still, simplicity should be measured at the moment of truth. If a three-page form allows a policyholder, adjuster, lawyer, and judge to reach the same coverage answer after a loss, Berkshire will have accomplished something extraordinary. If disputes merely migrate from complicated language to missing language, undefined promises, and silence, the uncertainty has not disappeared. It has simply been compressed.

The best insurance policy is not necessarily the shortest one. It is the one that most clearly explains what will happen when the policyholder needs it most.

Thought For The Day

“With THREE a small business can be confident in the protection it is getting, because the whole policy can be read in a few moments.”
—Warren Buffett