Keep It Simple

While the theory is great, special causes of loss forms are a pain. Instead of simplifying the claims process (Hey, everything is covered that isn't!), we end up spending hours in a typical CE class arguing over such disasters as whether beavers eating wooden flagpoles, skunks launching stink bombs against dwellings or cats fur-balling the new carpet are covered. In a named peril world, the answer is quick and simple: "Do you see 'beaver eating a flagpole' on the list of covered perils? No? I didn't think so. Case dismissed."

Related: Read Amrhein's previous column, "Care, Custody, or Control part 2."

And while such plumbing the depths of arcana can be interesting, according to numerous studies the vast majority of claims under a homeowners form are caused by fire, lightning, windstorm/hail, water damage/freezing, or theft. If we could get flood in there somehow, there isn't a whole lot left worth the time and trouble we take to analyze, interpret and dissect in class, to say nothing of the angst and frustration of insureds who somehow have the impression that "all risk" provides a maintenance policy.

Gleaned from our industry's incessant barrage of marketing that "broader is better and special is spectacular," perhaps? I'm just saying that back in the days when the HO-1 and HO-2 roamed the land in herds that rivaled the buffalo at their peak, seldom was heard about whether a given circumstance was covered or not. Clients weren't necessarily thrilled if there was no coverage in a given situation, but they certainly understood the reasoning. And speaking of understanding the reasoning, we arrive at "simpler insurance world" No. 2.

2. Let coinsurance mean what every insured thinks it means

Do a quick search online for the term "coinsurance." Eliminate the few that specifically mention property insurance. What do you find? Nearly unanimous opinion that the term means just what would seem to be obvious: Two or more parties are sharing (co-insuring) the loss. In some cases, those two parties are two different insurance carriers, but in the majority of citations, the insured and the insurer are the sharing partners. And any percentages specified renders the term even more obvious: the percentage is the split between the parties. Ignoring deductibles, benefit caps and other complexities (health folks have found myriad ways to muddy the claims waters as well), if the insured is subject to 20 percent coinsurance, the insured pays 20 percent of the claim.

Now to a coinsurance clause in a property form. It is not primarily about claim-sharing; it's a rating mechanism. For example, the formula is not based on amount of loss, but the full insurable value of the property. And any percentage specified is not applied to the claim amount, but rather to that full value of the property, to determine whether the insured carried the amount of insurance the particular rating mechanism required for that type of policy. Ignoring deductibles, this leads to such weirdness as "If insured complies fully with the 80 percent coinsurance requirement, the carrier will pay 100 percent of the loss, up to the applicable coverage amount." Or the possibility that under business income, proper coverage may require 125 percent coinsurance (unless the insured wants to estimate a shorter period of restoration, in which case getting 100 percent of the loss paid may require only 50 percent coinsurance).

Related: Read Amrhein's column "Puzzling Coverage Out".

Can we just kill this whole "coinsurance rating" idea and replace it with simple "insurance to value" underwriting requirements such as is already done with the BOP? The insured either meets the underwriting requirements or no coverage—much as my local grocer seems to think it I'm not willing to cough up for a full dozen eggs, I can just take my business elsewhere. Following property coinsurance logic, there would be one price for 1 to 6 eggs, then the price per egg would change with each additional egg purchased. Nice thought, but the store doesn't want the confusion or the argument. Which brings me to "simpler insurance world" No. 3.

3. Fly your deductible flag high

If 20 years ago it seemed reasonable for a $40,000 house to have a $250 deductible, what sense is there today in a $400,000 house having a $500 deductible? Or consider that I once owned a Chevy Vega worth all of $2,100 brand-spanking new (and considerably overpriced at that, unless you considered massive amounts of rust a collector's item) and my car insurance policy seemed reasonable with a $250 collision deductible. Ergo, shouldn't a similar deductible for the $30,000 and up vehicles running the roads today be at least $3,000? Carriers don't want the small claims anyhow, and most insureds don't turn them in, either to avoid the hassle or just plain fear of getting canceled. Plus if a little more insured skin in the game is good for the moral and ethical soul of health insurance, why not property and casualty?

Sure, I can hear some of you now protesting that carriers just don't give enough credit for those higher deductibles. May I opine on two points?

• First, in whose opinion? I hear agents complain about those credits, but in my dealing with consumers, apparently few have been asked. And given that in some studies more than 50 percent of property-casualty insureds never file a single claim, over a lifetime of coverage those supposedly minuscule credits add up to a considerable amount of money in the insured's pocket.

Related: Read "Every Coverage Tells a Tale".

Even for those who have a couple of claims, over a lifetime those savings still may more than offset the additional out of pocket. So just who is allegedly getting gouged by minimal credits for higher deductibles? That extremely small minority—in some studies, as few as 1 percent to 3 percent of insureds—who make multiple claims. And what carrier hasn't spent the last two decades trying to rid itself of those folks, anyway?

• Second, if you agree higher deductibles are reasonable for insureds these days, why not get after your carriers to increase those credits? Agents push hard for competitive pricing on every aspect of accounts; why not deductible credits? Talk about your win-win-win: agents get better pricing options, insureds get more credit for assuming a greater part of the risk and carriers get all those overhead expense eating nickel-and-dime claims off their backs!

So there you have it: three simple suggestions at simplifying life, liberty, insurance and the pursuit of daydreaming in the shade.