In written opinions, judges persistently express the proposition, argued by defense attorneys, that “policyholders are expected to read and understand their insurance policies.” I can appreciate that there may be some duty to read insurance policies, despite nobody doing so. However, I don’t think it’s academically honest because the law in some states requires people to understand the policies they purchase.
The truth is, almost nobody actually understands these policies. Not in the way judges pretend they should. I noted in “Homeowners Cannot Understand Their Policy Even When They Read It” that academia has research backing up my view.
For years, those of us who work in the trenches of property insurance claims have known that most policyholders have no real shot at understanding their homeowners policy. It is not because they lack intelligence or initiative. It is because the documents are drafted in a way that defies ordinary comprehension. A remarkable new study by Professors Daniel Schwarcz, Brenda J. Cude, Kyle Logue, and German Marquez Alcala finally provides empirical support for that truth.
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The researchers conducted a series of experiments with thousands of homeowners. Some participants were shown short excerpts of actual policy provisions from the ISO HO-3. Others were asked to answer the same questions based solely on their general beliefs about what a homeowners policy covers. You might assume that the group given the actual contract language would perform better. In several scenarios, they did. But in others, something startling happened: people who read the policy became significantly more wrong about coverage than those who never saw the policy language at all.
One seasoned insurance expert, James Mahurin, writing for IRMI, candidly admitted and explained the problem modern policyholders face in an article everybody in the insurance business should read, Insurance Is Supposed to Protect:
Unfortunately, there are companies quietly delivering inferior or worthless ‘insurance product’ to an unsuspecting public. The use of ‘sound-alike’ and ‘look-alike’ policies is widespread. Restrictive proprietary policy forms or pages and pages of endorsements added to complex standard form insurance policies make comparisons difficult for even experienced industry personnel. Many insurance companies engage in practices that intentionally or unintentionally mislead or deceive the public. In loss situations, the consequences are appalling.
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Insurance policies are highly complex contracts. Comparing different policy forms can take hours or days for knowledgeable practitioners. The forms must be carefully read and compared word for word, sentence by sentence, and paragraph by paragraph. With rare exceptions, the reader needs a source of credible insurance forms and credible reference materials before the comparison starts.
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It may be illegal to knowingly sell an automobile with brakes that work 95 or 75 percent of the time in emergency situations. Insurance companies can easily remove 5 or 25 percent (or more) of standard form coverage by removing or changing a few words or adding highly complex endorsements. A restrictive policy form may outwardly look identical to standard forms. Many endorsements are coded references to policy provisions deleted or changed. There is no explanation as to how an endorsement changes the policy. Finding the deletions or understanding the amendments may require many hours or days of careful study.
Firms selling diminished or grossly inferior insurance product often do so with impunity. Further, companies selling inferior insurance product often take severe positions in claim settlements. Even when a claim is covered, the insured may still lose.
And yet courts continue to cling to the fiction.
The problem is not that policyholders are lazy or indifferent. The problem is that insurance policies are not ordinary contracts. They are complex, standardized, highly technical documents filled with cross-references, exclusions, endorsements, and legal terminology that even lawyers and adjusters struggle to parse. Regulators themselves acknowledge that many insureds purchase policies without understanding what is covered or what exclusions may later defeat their claims.
So why do judges and the law keep insisting otherwise?
The disconnect becomes even more troubling in insurance agent negligence cases, such as those discussed in yesterday’s article, Resolving a Complex Insurance Broker Negligence Case in Florida. Too often, courts accept the argument that the agent is merely an “order taker” and that the burden rests entirely on the policyholder to know what coverage they need and whether the policy provides it. That premise collapses under even minimal scrutiny.
If the overwhelming majority of policyholders do not and cannot understand these policies, then the agent’s role is not clerical. Agents hold themselves out as professionals. They market expertise and guide consumers through coverage decisions that can determine financial survival after a catastrophe. To pretend otherwise is to ignore both marketplace reality and common sense.
If courts continue to insist that policyholders must understand what they plainly do not, they effectively excuse failures in communication, misrepresentations, and inadequate guidance. Worse, they shift the consequences of systemic complexity onto the very people insurance is supposed to protect.
Insurance, at its core, is a promise. A promise of protection against the unexpected. That promise loses meaning if it is buried in language that only a specialist can decipher.
Thought For The Day
“The law must be stable, but it must not stand still.”
— Roscoe Pound
