Professor Daniel Schwarcz: Coverage comparison ‘impossible’ with home insurance policies

University of Minnesota law professor Daniel Schwarcz is taking on the home insurance business. In December 2011, a report he wrote that maintains not all home insurance policies are created equal will be published in the University of Chicago Law Review.

InsuranceQuotes.com spoke with Schwarcz to get his take on the state of home insurance policies.

InsuranceQuotes.com: Let’s start with a broad question — what’s wrong with home insurance policies?

Throughout his academic career, Daniel Schwarcz has focused on regulations and public policy surrounding insurance.

Daniel Schwarcz: There’s zero transparency, so there are big differences in different companies’ policies, and differences that could be very important in a wide range of settings. It’s essentially impossible to figure out which companies are offering which types of products. So, you can compare on price, but you can’t compare on coverage.

InsuranceQuotes.com: How did that come to be?

Schwarcz: The basic answer is that historically, there weren’t differences in policies. For that reason, a system evolved, both a regulatory system and a market system that operated on the assumption that there was no need to compare coverage — that buying homeowner’s insurance from Company A, you get the same as you would get from Company B. So there was no need for any mechanism to exist that would support comparison shopping. That assumption is just no longer true.

InsuranceQuotes.com: Who’s policing this industry, and why is this practice being allowed to persist?

Schwarcz: State insurance industries are regulated by state regulators in every state. The reason they’re allowing it to persist is because, really, until my research, even they thought that most policies were essentially completely standardized. To the extent that they hadn’t realized there wasn’t standardization, they hadn’t really thought through what the implications of that were for the adequacy of their processes.

To be honest, I think it’s an example of regulatory failure. The real question is that now that it’s been pointed out to them, how quickly and how well are they going to act to address that issue.

InsuranceQuotes.com: What’s your prediction on that?

Schwarcz: I’ve said before, I’ll say it again — cautious optimism. They’ve (the National Association of Insurance Commissioners) formed a working group to study the issue and propose solutions. That group has not really even formed yet. It’s been a slow process. Part of that is because there hasn’t been much public awareness of this. I think now that this is getting some more coverage that pushing regulators to act more quickly is definitely on the radar screen; it’s just a question of what are they going to do about it. Are they going to create meaningful reforms, or are they going to respond in a way that basically does little to allow for meaningful transparency?

InsuranceQuotes.com: Is it somewhat of a thrill for you to be affecting public policy change?

Schwarcz: A “thrill” might be too far. My whole academic career, I’ve been focusing on studying insurance regulation and studying insurance public policy. I like to think that what I do has an impact on public policy, and I’ve been involved with the National Association of Insurance Commissioners for a while, and I’ve tried before to help move along issues. By far, this is the issue that has the most obvious and important public policy implications. Some of my other stuff is a little bit more, maybe, esoteric. So, it’s exciting, but I feel like it’s important and it does demonstrate some problems with our regulatory process.

InsuranceQuotes.com: What’s a practical example of how the wording in some of these policies is being used to deny claims?

Schwarcz: I provide about 20 different examples (in the research paper). The irony is that some of the more important examples are harder to explain. Some of the easier ones to explain are that different policies have different coverage limits for different types of personal property. What type of coverage is it going to provide if you have an accidental electrical surge? Some policies only limit coverage to say, ‘We’re only going to provide $1,000 in coverage total.’ Some say, ‘We’ll pay $1,000 for each damaged item.’ Well, this is important if you have HDTVs, computers, anything electrical. That’s a huge difference. Then, you might have 10 things each that are $10,000 — that’s $10,000 versus $1,000.

InsuranceQuotes.com: How can consumers put themselves in a better position?

Schwarcz: They can’t do anything right now except pressure their regulators to fix the problem. There’s literally nothing they can do. They need to say, “This is not an acceptable state of affairs. You guys are falling down on your jobs. Fix this quickly.”

–Kevin Allen