Regulators have long sought to make it easier for consumers tocomprehend the terms of insurance contracts by insisting thatpolicy forms be written in language that most consumers canunderstand. They typically do this by requiring that policylanguage meet certain quantitative "readability" standards.

But if readability standards measure the degree to which policyforms are intellectually accessible to consumers, what standardsaddress the physical accessibility of policy forms toconsumers?

In response, The National Assn. of Insurance Commissioners (NAIC) hasformed a Transparency and Readability Working Group toinvestigate the matter and propose solutions, some of which couldtarget the agent community. NAIC is less concerned if consumers areable to comprehend the information contained in the policy form,and more about the ability consumers have to obtain and read theforms, or to otherwise obtain precise information about contractterms, prior to purchasing coverage.

Related: Read Phil Gusman's article "Revise MuddyInsurer Contract Language, Consumers Urge NAIC."

According to University of Minnesota law professor DanielSchwarcz, who moonlights as an NAIC-designated "consumer advocate,"a consumer shopping for homeowner's insurance is unable to comparedifferent insurers' coverage terms because neither companies noragents will provide the forms or disclose accurate informationabout contract terms unless the consumer buys the policy. Stateinsurance departments are of no help, either.

These assertions are based entirely on a recently published law review article that Schwarczwrote. In a nutshell, Schwarcz's narrative goes like this:There is a widespread myth that all homeowners' insurance policiescontain standardized coverage terms developed by the InsuranceServices Office with little or no variation among differentcompanies' policies. In fact, many companies, especially largemulti-state writers, have increasingly deviated from the ISOstandards. Sometimes, this results in more generous coverage butmore often, the policy language has been tweaked to narrow thecircumstances that would constitute an insured loss.

If every insurer sold the same coverage, the only grounds forpreferring one insurer over another would be price and service. Itwouldn't make sense for consumers to pore over the policy forms ofdifferent companies before deciding which one to buy. But that,Schwarcz notes, is not the world we live in. The substantialvariations in coverage terms among competing companies means thatcoverage, and not merely price and service, should be an importantconsideration in choosing which company to buy from.

Schwarcz sees only sinister motives in the failure of mostinsurers to make policy forms available prior to purchase. They are"exploiting consumer ignorance to ratchet back coverage" and "haveactively hidden and obscured this trend, in notable contrast to thecomparatively transparent marketing of the few carriers who havedeparted from standardized policies to improve coverage." Moreover,the standardized policy form myth "explains regulatory rules thatdo nothing to promote insurance contract transparency."

It also "explains the ignorance of mostinformation intermediaries [i.e., insurance agents] about thedetails of contract terms." Indeed, "many insurance agents are bothunaware of potential differences in coverage among carriers andunfamiliar with many details of the coverage they sell."

One might think that these inflammatory charges would besupported by a large and convincing body of evidence, but theevidence presented by Schwarcz is thin. Readers of this magazinewill no doubt be interested in the supposition that agents areignorant of the policies they sell, so let's focus on that.

Schwarcz says he interviewed 11 agents—seven captives and fourindependents—in four different states. He conducted five interviewsin person with agents from Minnesota, his home state. Heinterviewed the other six by telephone. Of these, four were fromIllinois, one was from Nevada, and one was from Pennsylvania.Schwarcz doesn't indicate how these 11 individuals were selected,but it hardly matters because even the most sophisticated surveyresearch methodology would not be capable of identifying 11 peoplewho could plausibly serve as a representative sample of the morethan 400,000 agents operating in the U.S.

Related: Read the article "NAIC To Review PersonalLines Contract Transparency" by Mark E. Ruquet.

As for the content of the interviews, Schwarcz asked his 11agents "whether they believed that carriers' policy forms differedin their generosity." He next asked about "the coverage provided bythe policy forms they sold," with particular reference to a list ofcontract arcana that included concurrent causation, affirmativecoverage grants, increased risk clauses, mold and pollutioncoverage, collapse coverage, coverage for property damage fromartificially generated electrical currents, coverage for increasedcosts due to an ordinance or law, water damage from off-premisessources, the definition of an "occurrence," and liability stemmingfrom illegal consumption of alcohol.

Instead of providing summaries or even verbatim transcriptionsof each interviewee's responses to specific questions—which wouldhave been easy enough to do, given that so few agents wereinterviewed—Schwarcz simply reports that the agents provided anexplanation of coverage "that was almost always incomplete and, inseveral instances, incorrect." Interviewees are quoted only whentheir utterances provide grist for Schwarcz's mill, such as thecaptive agent who said, "I know just enough to be dangerous, butthat's all the insurance company wants me to be."

What exactly is going on here? First, it is important to notethat law review articles often lack the scholarly rigor of articlespublished in the professional journals of traditional academicdisciplines. Law review articles are selected for publication bystudent editors and are generally not subject to professional peerreview. Moreover, law professors generally have no advanced degreebeyond a law degree and no training in quantitative researchmethods. Their formal education is generally the same as that ofevery other lawyer: they have been trained to perform as advocatesin an adversarial legal system.

In contrast to more scholarly disciplines, there is noexpectation that the authors of law review articles approach theirsubjects from a neutral perspective. The purpose of legal researchis not so much to test hypotheses as it is to present arguments insupport of, or against, a certain proposition. Schwarcz's agentinterviews, then, are best understood as a set-up in which a lawyerattempts to plead his case by playing gotcha with a handful ofunsuspecting agents.

There is not enough space here to provide adetailed assessment of Schwarcz's indictment of insurance companieswith respect to policy transparency. Suffice it to say that thestory he tells is hardly cause for alarm. Schwarcz examined thepolicy forms of 24 insurance groups operating in six differentstates. He compared various contract provisions and discoverednumerous deviations from the ISO HO3 form. While none of thecompanies in these groups made their policy forms available toconsumers on their websites or through their agents, those offering"more generous" coverage did tend to provide a considerable amountof detail trumpeting that fact on their websites and in theirmarketing materials. Those offering "less generous" coverage tendedto be more reticent. This is hardly surprising or scandalous.

Related: Read the article by Arthur D. Postal"Insurer Exec, Consumer Advocate Debate Dodd-Frank ProvisionsBefore Congress."

First, it is at least arguable that consumers benefit more froma detailed description of the various coverages and exclusionscontained in the policy form, rather than being overwhelmed by theraw policy form itself (which is necessarily complex, as evenSchwarcz acknowledges).

Second, it seems reasonable to view insurers' behavior, bothwith respect to the relative generosity of the coverage they offeras well as how forthcoming they are about it, as a function ofconsumer demand. Homeowners' insurance markets are intenselycompetitive in nearly every state; to the extent that an insurerprovides consumers with information they regard as useful (whichmay or may not be the same information that Schwarcz thinks theyshould have), that insurer will be rewarded with increased marketshare. Insurers who decline to provide such information will, allelse equal, see their market shares decline. In short, consumerscan vote with their dollars to demand the kind of policyinformation they want before purchasing coverage. Absent marketfailure, there is no economic justification for regulatoryintervention in the domain of policy transparency.

That does not mean that Schwarcz will not find a receptiveaudience among policymakers. For that reason alone, insuranceagents and the companies whose policies they sell should not takeSchwarcz's accusation lightly. In addition to his advocacy at theNAIC, Schwarcz has delivered his broadside in testimony before theU.S. Congress and in interviews with numerous mainstream newsoutlets. He has raised the specter of a new class of "insuranceintermediaries," consisting of soi-disant consumer advocates andmagazines such as Consumer Reports, who, armed with policy forms,will "police the market" by imposing "reputational fines" oninsurers whose contract terms they deem insufficiently generous.The effect, if not the intent, would surely be to discreditinsurance agents as reliable intermediaries, marginalizing them inthe insurance buying process.

Thus far, the agent community has been strangely silent in theface of this attack on the competence and integrity of its members.The question is whether they can afford to remain so.