There's an old joke about the college football team that was so terrible their opponent finally threw up its hands in disgust and walked off the field.
Three plays later the inept team scored.
On a field goal.
Ah, the glories of another college football season are upon us. Yet there will always be the dashed hopes of loyal fans soon to learn their team that looks so unbelievably great on paper sadly collapses when confronted with the reality of the field.
That's exactly how I feel about ISO's latest Homeowners' policy revisions, filed with the states to take effect October 2015.
Begin by reviewing my November 2014 article, "This Turkey Deserves Killing," for a discussion of the very real problem ISO is attempting to fix: a claim-time "gotcha" buried within the Homeowner policy definition of "residence premises." While there are a great many details in that article, here is the basic summary: Homeowners policy in effect. Loss occurs. Carrier denies claim. Reason for denial: A covered claim must occur on the "residence premises", defined in the policy as "the one-family dwelling where you reside; (author emphasis). If for any reason, a named insured ("you") does not reside on that premises at the time of the claim, no coverage—period. In November, I provided numerous examples of such "non-residency" that would be considered totally innocent on the part of the named insured, and yet leave them—and often their agents—aghast when their carrier flat out denied what were sometimes major claims. In that November article, I called this one of ISO's major "turkeys" that cried out to be fixed. A policy definition, obscure to insureds and easily overlooked by agents, should never be able to wreak this kind of potential coverage havoc.
The HO 06 48 10 15, Residence Premises Definition Endorsement modifies the "residence premises" definition. The key change in wording: "The one-family dwelling where you reside…on the inception date of the policy period shown in the Declarations…" A nice clarification; instead of the named insured's residency being enforced as of some unknown claim date in the future, the coverage is now locked for the entire policy period by one clear question: Did the named insured reside on the residence premises on the inception date If yes, coverage is good to go, subject to any other exclusions or limitations.
In all other cases, no coverage under the applicable homeowners—other policies and/or endorsements (such as the new HO 06 49 10 15, Broadened Residence Premises Definition Endorsement), will be required.
Congrats to ISO and the agent advocates who have lobbied for a solution. Too bad this filing is too much like our wayward college team: great on paper, but deeply flawed when actually expected to execute. ISO's chosen approach will be undone by our own long-entrenched dynasty.
Direct bill.
Or more specifically to our homeowners' issue, direct bill escrow.
Permit me a brief stroll down memory lane. Prior to direct bill, an insured making a Homeowners' premium payment typically meant a trip to the agency, payroll envelope or checkbook in hand. We'd meet them at the front counter, pull that manila file folder, and check the current account balance. They'd give us cash or a check, then leave with a paper receipt in hand, confirming their payment and any balance remaining. Our CSRs and bookkeeper would use the carbon copies of the receipt book to fill in their payment records and determine what was set aside to pay the carrier account current and what went into the agency commission account.
Seems simple, but direct bill was touted as a breakthrough in invoicing, payment and accounting simplicity for all parties. Instead of the insured having to make a trip, the carrier-generated bill went straight to their home. At least in theory, agencies could now devote resources previously tied up in billing and collections to more profitable pursuits, such as service and sales. And when in later years the vast majority of those homeowner billings went direct to escrow accounts, better yet—now the consumer didn't even have to open the bill or write a check.
How could simplified billing directly threaten to torpedo ISO's well-intended fix? It turns out a lot of current information was exchanged in even the most casual, short conversations over the receipt book. And the odds that a Homeowners' policy would be written, much less renewed, without us knowing the current resident status of the insured was highly unusual, if not unthinkable.
Now recall the fix turns on a single question—does a named insured reside at the residence premises on the policy inception date? While there may be no problem nailing that down at initial issuance, now consider years of annual renewals. As I lamented in a recent article, E&O experts claim more than 90% of agencies can't even find the time to complete a simple coverage checklist, much less do an adequate annual review. So exactly how should it be determined if a named insured is actually resident?
ISO's answer was to create the HO N 009 10 15, Residence Premises Questionnaire. The form, or its carrier equivalent, is meant to be used prior to each renewal to ask the named insured to sign off on a very simple "Yes/No" question: "Will at least one named insured listed above reside at the location listed above on the inception date of the policy period shown above?"
Simple idea, but in a direct bill escrow world, how realistic? Who will be responsible for that form being completed for every Homeowner policy prior to renewal?
And what if there is no signed form at renewal? The policy language, as amended by the new endorsement, doesn't care.
So while it may look good on paper, reality reveals this entire "amend the definition" approach is simply wrong. There is a far better solution: Remove the entire residency requirement as a coverage issue and put it where it belongs — underwriting. That's where key information retrieval is already centered, sifted and evaluated. If there are issues of occupancy an underwriter feels are not properly addressed, then handle it at policy issuance with endorsements or shifting from homeowners to dwelling forms. Even if the Homeowners' policy is renewed missing key occupancy information, carriers still have the protection of clear policy provisions such as unoccupancy or fraud to address truly egregious claims. What they should not do, or be allowed to do, is use an obscure definition to put all the burden for error or oversight on an innocent insured who will only learn of this built-in bomb when it explodes their coverage at the worst possible moment: claim time.
Chris Amrhein, AAI, is an insurance educator and speaker, and serves as the chief fun officer at insuranceisfun.com.
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