Policy Issues: Coverage 'in theory' won't cut it with consumers

"No, preacher" shouted the crowd, "for all the sheep are His!"

"And if you owned a mere 10 pigs, would you deny the Lord His due and refuse to offer the fattest hog?"

"Wait a minute, preacher!" came an anguished cry from a deacon. "That's going too far!"

"And why is that, brother?"

"Because I do own 10 pigs!"

Isn't that the truth? As long as a discussion is clearly hypothetical, everyone gets along just fine. But the minute it becomes real to someone, things get serious in a hurry.

The story of the preacher and the pigs came to mind recently when a poor, unsuspecting student in one of my classes nearly sustained whiplash during a discussion. We were talking about personal-lines claims scenarios, and I offered examples of situations that agents sometimes overlook that can come back to haunt them. In the back row was one of those life forms known to all who teach or attend continuing-education classes. Their heads usually remain hidden from view throughout the session as they peruse "USA Today." Younger members of the species may stare at their Blackberries, held just below table level, while the lights of their Bluetooth earpieces blink just behind their temples, as they check e-mail messages and field telephone calls. Their fondest wish is to be left alone, since they are attending the class only to pick up a few CE credits before their next qualification date.

Most instructors find that the best strategy for dealing with such beings is to grant them the anonymity they desire and concentrate on those students who wish to glean a modicum of knowledge from the day's lesson. And as long as we stick to the insurance equivalent of numberless cattle and hundreds of sheep, life is good.

But every so often, we inadvertently stumble across a pig. Then the previously somnolent people bolt upright in their seats, eyes wild and newspaper/Blackberry temporarily forgotten. They thrust their hands in the air, or simply shout out, as did the astonished pig farmer in the preacher story, "Wait a minute! That's going too far!"

The pig in this case was a boathouse on the end of a dock. The dock ran from the insured homeowner's property out into a major river, and the boathouse was actually a utility building the insured had constructed for storing fishing tackle and boating equipment.

The question before the class was whether a fire loss to the boathouse was automatically considered a Coverage B claim under the insured's home-owners policy. The consensus was that such a loss would be covered. A few insurance-class veterans, though, voted no-only because they assumed that if the answer were so obvious, I wouldn't have asked the question. While I admire those who "game the game," so to speak, I shudder to think how such scenarios actually play out in an agency when a real claim arises.

You can imagine the students' reaction when I pointed out that not only is there no guarantee that the boathouse claim will be paid, but that, technically, it shouldn't be, since the homeowners policy clearly affords no coverage.

That sent a jolt through the slumbering "USA Today" and Blackberry contingent. A few began searching the homeowners form. Others, who had long ago perfected the art of collecting CE credits without paying attention-and thus wouldn't recognize a coverage form if it bit them-simply asserted with great fervor that I was dead wrong.

"You're nuts!" said one particularly eloquent representative of that faction. "I encountered that claim myself, and the carrier paid it." And with that, he sat back with a smug expression. There was only one problem: He was wrong.

Even casual students of the claim game know that a carrier's paying a particular claim is not equivalent to Moses bringing stone tablets down from the mountain. Not only can you get different answers about a specific claim scenario from different carriers, you also can get different answers from the same carrier, depending on which claims office you query.

Let's return to the boathouse claim and see why it may be denied. Go to the ISO homeowners form and read the Coverage B section. Here is the applicable wording:

"1. We cover other structures 'on the residence premises' set apart from the dwelling by clear space. This includes structures connected to the dwelling by only a fence, utility line, or similar connection."

Note the key phrase "on the residence premises." So, in order for coverage to apply to a structure, it must be located on the residence premises. Where is the boathouse located? On the river. And who owns the land under a navigable waterway, such as a river? The government! So technically, that boathouse is located on government property, not the insured's. Thus, there's no Coverage B protection.

Now some would argue–and not without reason–that the boathouse is actually located on the dock, which is attached to the insured's residence premises. A good argument, if we assume the dock isn't one of the many that is actually located on public or other private land, and the homeowner is merely granted access to it via an easement agreement. But I'd argue that even a dock running right from the insured's yard out into the river isn't located "on" the residence premises. The dock may begin on the premises, but clearly it–or at least most of it and the posts that support it–is planted in that government-owned riverbed.

You may disagree, but consider now the conundrum. Consumers don't grasp such subtleties. To an insured, all claims simply are covered or not. And some cynics would argue that, in fact, all consumers (and, according to some adjusters, all agents) think the answer to every claim is "covered."

And therein lies the problem. Let's say we have 100 agents in a room. In another, we have 100 owners of boathouses located at the ends of docks running out into a major river. Ask the group of trained insurance professionals about what appears to be a relatively simple claims situation, and you get a variety of answers: "Sure." "Not likely." "Probably." "I'd rather not stick my neck out, since you are going to have to tell us anyway." Ask the room of insureds and you'll get one answer 100 times: "Absolutely!" After all, we are talking about their pig.

Given this reality, it's a bad idea to leave potentially arguable coverage situations, such as damage to the aforementioned boathouse, to the possible vagaries of claims adjustment, lest the outcome be not as you expect. Better to nail down the coverage prior to a claim than to find out at the worst possible time–after a claim arises–that you "backed the wrong horse."

The homeowners program provides two methods to specifically address property coverage issues like the one in question. First, the declarations page provides an area to fully describe what you and the insured consider to be the "residence premises" for insurance purposes. While often used for such purposes as describing a property's location (if the mailing address is a post-office box or rural route), it is not limited to such use. A simple clarifying statement such as "including dock and attached boathouse" could work wonders. Now the insurance company is apprised that the structures exist and that the insured considers them to be covered by the policy. If the carrier issues the policy with the additional wording intact on the declarations page, then it acknowledges that Coverage B applies to the dock and boathouse and that they are covered within the limitations imposed on any such item.

And what if the carrier does indeed object to that coverage? Then you use the second method and add the boathouse and dock to the homeowners policy by using the Coverage B–Other Structures Away From The Residence Premises (HO 04 91 10 00) endorsement. It might cost a few extra dollars but would be a worthwhile investment, since it converts the coverage from a fervent wish to an absolute certainty.

It's so easy for those of us who are deeply immersed in the insurance business to think about claims in theoretical terms, like those cattle on a thousand hills. But never forget: To insureds, coverage is never theoretical when it involves their pig.

And when claims arise, you'd better bring home the bacon.