Homeowners need to be able to buy good insurance coverage and understand what they are buying. When losses occur, insurance companies need to deliver on the protection they have promised. The Essential Protections for Policyholders project analyzes and recommends state laws that make sure that happens.
Every state regulates homeowners insurance and insurance companies, but states differ dramatically in how much and what kind of regulation they provide for the benefit of policyholders. The Essential Protections provide a roadmap in four categories that every state can follow in improving homeowners insurance.
Read a summary of the Essential Protections
Read the full report
SPECIAL REPORT: USE IT AND LOSE IT
Why Essential Protections?
The purpose of property insurance is to be a source of peace of mind and funds to pay for loss recovery. Fires, accidents, and storms cause expensive damage. A consumer that carries property insurance reasonably expects that it will pay for damage repairs and rebuilding. Policyholders expect their insurance companies to be trusted partners in the process of coping with losses.
But insurance company products and employees do not always meet policyholders’ reasonable expectations as to the loss recovery funds and claim service their policies will provide. Consumers are limited in their ability to shop effectively for insurance by a lack of information. Policies offered by some insurance companies may have gaps in coverage. Sometimes the policies offered by every company lack the complete coverage that policyholders need and expect. The promise of security can be frustrated by complex, confusing, and surprising terms in insurance policies. And when losses occur, disputes can arise between policyholders and their insurance companies about the extent of coverage under the policies and the scope and value of the losses.
To address these problems, homeowners insurance is heavily regulated by state law. Legislatures, insurance departments, and courts recognize that the market for insurance can be improved and that insurance carries an important public interest that requires legal regulation.
Again, every state regulates insurance and insurance companies, but states differ dramatically in how much and what kind of regulation they provide for the benefit of policyholders. The Essential Protections provide a roadmap that every state can follow in improving homeowners insurance. The Essential Protections also provide a scorecard to evaluate states’ current systems of regulation and to identify areas for improvement.
What protections are essential for homeowners?
States regulate many aspects of homeowners insurance, and the Essential Protections for Policyholders project focuses on those that are—essential. We had two selection criteria for deciding what to include:
First, the issue had to be important. United Policyholders has decades of experience aiding and advising homeowners about their insurance which provided a unique resource to generate and evaluate potential topics. I have studied the insurance landscape and written scholarly and popular works on the topic. Both UP and I also talk to many people professionally involved in insurance.
Second, the issue had to be one in which state legislation or regulation directly concerns the relationship between homeowners and their insurance companies. That excluded many potential topics such as improving the consumer complaint process that insurance departments administer or interpretation of insurance policy language.
The product is a list of key issues for insurance consumers in four categories: Buying insurance, Coverage, the Claims Process, and Disaster Victims:
Consumers need readily available, easily understandable information about the insurance policies available to them and the insurance companies that offer those policies to shop effectively for insurance. The Essential Protections aim to give consumers full, understandable information about insurance policies and insurance companies so that they can make wise buying decisions and to create competition among companies that leads to better products and fairer prices. Statutes, regulations, and administrative action are needed to provide consumers with more and better information. Giving consumers full, understandable information about insurance policies and insurance companies enables them to make wise buying decisions when shopping for insurance and when renewing insurance policies, and it creates competition among companies that leads to better products and fairer prices.
Consumers should have easily available, understandable information and tools for comparing coverage in insurance policies.
Insurance departments should post online commonly used policy forms and comparisons of key policy provisions for consumers to view and compare.
Consumers should have easily available, understandable information about insurance companies’ claim practices.
Insurance departments should post online information about insurance companies’ practices in paying claims for consumers to view and compare.
Policyholders should be given clear information about their own insurance policies.
Insurance policies and notices to policyholders should be clearly organized and written in plain language.
Insurance companies must give to applicants for insurance and policyholders at the time of renewal clear explanations of key policy terms, significant limitations and exclusions, the need for and availability of additional insurance for natural disasters, and any new and altered policy terms in the case of renewal.
All homeowners need basic protection from their insurance policies and many buy additional protection. The Essential Protections require that policies contain minimum guarantees of protection and that companies offer some kinds of additional protection. Policyholders also need to be protected against unfair cancellation or nonrenewal of their policies, and the Essential Protections set standards there, too.
Homeowners’ insurance policies should contain minimum guarantees of protection and insurance companies should offer essential additional coverages.
Every homeowner’s insurance policy should contain essential terms and coverage, and policyholders at the time of purchase or renewal should be able to purchase additional important coverage.
Insurance companies must observe reasonable standards for canceling and renewing policies and reporting claims.
Insurance companies may not use an inquiry about a loss or a single claim as the basis for cancellation, nonrenewal or premium increase of a policy. All homeowners need basic protection from their insurance policies and many buy additional protection. The Essential Protections require that policies contain minimum guarantees of protection and that companies offer some kinds of additional protection. Policyholders also need to be protected against unfair cancellation or nonrenewal of their policies, and the Essential Protections set standards there, too.
The protection and security that an insurance policy provides must be guaranteed by a fair and efficient claims process. The Essential Protections require insurance companies to provide information to insureds about the claims process and to implement reasonable standards for processing, investigating, evaluating, and paying claims.
Insurance companies must provide policyholders with essential information about the claims process
After a claim has been initiated, insurance companies must provide policyholders with information about the claim process and policyholder rights and, upon request, with a copy of the claim file.
Insurance companies must observe reasonable time limits in the claims process.
Policyholders should have reasonable time limits for filing claims and, in case of a dispute, for filing litigation against the insurance company.
Insurance companies must observe reasonable standards in the claim process.
Insurance companies must promptly, fairly, and objectively process, investigate, evaluate, and resolve claims.
Insurance companies must observe reasonable standards for determining the amount of loss.
Policyholders should have access to efficient, effective means of dispute resolution.
Insurance companies must not unreasonably pressure policyholders to settle claims
Policyholders must have effective remedies if insurance companies act unreasonably.
If an insurance company acts unreasonably, a policyholder should be able to sue and recover damages, including attorneys’ fees, that are adequate to fully compensate for its loss and to deter wrongful behavior by insurance companies.
In each of the Essential Protections for Policyholders, the report identifies and discusses an issue, recommends action that legislatures or sometimes insurance commissioners should take, usually offers recommended statutory language, and provides context in a summary of current law. Like other scholarship in the law and public policy realm, it requires a certain amount of self-confidence to offer a “best” solution to difficult and important issues.
A feature of the project that justifies that self-confidence is what lies behind the summaries of current law in the report. On each issue we conducted a broad survey of the law—often a 50-state survey—before formulating recommendations. (Being in a law school with interested students and colleagues made that kind of extensive work possible.) Those surveys informed the recommendations by offering alternative approaches and language and often suggesting considerations we would not have thought about otherwise. On many topics there are no comparable, publicly available surveys, although I expect they exist in the files of insurance companies and industry trade groups.
The database of current law has value going forward, too. Here’s an example: A state regulator was considering a new rule on an issue related to mandatory disclosures about the contents of insurance policies. In the discussions with industry representatives and consumer advocates, the question was posed what other states were doing. One industry representative professed ignorance and suggested that it would be a large undertaking to acquire the information. Another participant in the meeting called Professor Feinman, and the next week he was able to provide a seventeen-page memo summarizing other states’ law. As we continue to expand and update the database, we are open to helping others in similar ways.
A homeowner who has paid premiums for years suffers a loss and files a claim; the insurance company responds by dramatically raising the homeowners’ premium or even refusing to renew the policy altogether. Even if the homeowner just calls their insurance agent to see if a loss would be covered or files a claim for which the company doesn’t pay anything, the event may get recorded and treated as if a claim was paid, resulting in a premium increase or non-renewal. This is the practice known as “Use It and Lose It.”
Insurance is about financial and emotional security. But that security is illusory if policyholders are penalized for actually using their insurance by Use It and Lose It. Use It and Lose It has become a huge problem for homeowners. Insurance companies collect information on consumer inquiries and claims and share the information with each other through national databases. If a policyholder is dropped by one insurance company, it can be hard to find comparable coverage at an affordable price. As homeowners become aware of the practice, they are deterred from filing claims even if the losses would be covered under their policies.
Insurance companies legitimately can use some elements of policyholders’ claims experience in deciding whether to renew policies and how to price them. But companies should not be able to engage in practices that punish policyholders just for asking a simple question or getting the coverage their insurance policies promise and that discourage legitimate claims.
To combat Use It and Lose It, the Essential Protections for Policyholders project recommends that states should prohibit insurance companies from surcharging, increasing premiums, or refusing to renew policies because policyholders have made inquiries about coverage or have filed a single claim
Only two states—Rhode Island and Texas—earned a five-star rating for protecting consumers from improper rate increases and non-renewals for inquiries, claims closed without any payment, and a single claim.
Eighteen states have no explicit protection at all from Use It and Lose It.
Every state regulates homeowners insurance and insurance companies, but states differ dramatically in how much and what kind of regulation they provide for the benefit of policyholders. Each state is evaluated based on how well it meets the Essential Protection standards for Use It and Lose It:
State law should prohibit an insurance company from using a single claim within three years, a claim that results in no payment by the company, an inquiry by a policyholder that does not result in a claim, or a single claim for loss caused by weather or a natural disaster as a basis for not renewing a policy or
imposing a surcharge or premium increase.
Essential Protections for Policyholders is a project of the Rutgers Center for Risk and Responsibility in cooperation with United Policyholders. The Rutgers Center for Risk and Responsibility at Rutgers Law School explores the ways in which society makes choices about risk, its proper allocation, and compensation for the harm caused when risks materialize.
From Rutgers, Jay Feinman the author of the report. He teach Insurance Law and other subjects at Rutgers Law School and is a Distinguished Professor of Law and Co-Director of the Center. His books and articles include The Law of Insurance Claim Practices, The Regulation of Insurance Claim Practices, and Delay, Deny, Defend: Why Insurance Companies Don’t Pay Claims and What You Can Do About It. Read more here
At United Policyholders, Amy Bach is Executive Director. A professional advocate for insurance consumers since 1984 and an attorney since 1989, she is a nationally recognized expert on insurance claim and legal matters; frequently interviewed in print and broadcast media, and the author of numerous publications including "The Disaster Recovery Handbook" and consumer tips and guides in the UP Claim Help Library. She is a Consumer Liaison Representative to the National Association of Insurance Commissioners.
Dan Wade began as a law student volunteer for UP and has been Staff Attorney at UP since January 2014. He works primarily on the Advocacy and Action Program, helping draft and coordinate amicus curiae briefs, legislative advocacy, and legal research in partnership with UP staff and volunteers.
Many others helped in researching this project, notably Rutgers librarian Nancy Talley and students Jessica O’Connor, Evan Kerstetter, Brian Portny.
For more information, see:
Rutgers Law School in New Jersey Launches Project to Improve Homeowners’ Insurance