Insurance OpEd: Reverse Engineering - Making Lemons from Lemonade?

An Op-Ed from the founder and former director of the Big “I” Virtual University

“[A]n insured should not have to consult a long line of case law or law review articles and treatises to determine the coverage he or she is purchasing under an insurance policy.” – Kovach v. Zurich Am. Ins. Co., 587 F.3d 323 (6th Cir. 2009)

Ah, if only that was possible. Or is it…

Lemonade’s latest announcement

The latest insurtech/startup news being reported by the media (i.e., the latest PR being regurgitated without journalistic scrutiny) is that Lemonade is testing out a revolutionary new “open source” homeowners renters policy that will allow the industry and consumers to “co-create” an insurance policy that can be used by anyone. Here is the sample policy alleged to be the “big bang” of hip, easy to understand insurance policies:

Lemonade Policy 2.0

Here is the Github area where you can comment or ask questions:

Github Policy 2.0 Collaborative Site

How many consumers are experienced at drafting legal contracts? How many insurance industry professionals have experience in creating insurance policies that pass legal and regulatory muster? If it was so easy, it would be difficult to find any case law involving insurance policies.

Below are some observations, questions, and suppositions based on my initial perusal of the document at the link above. It’s the best I can do given that the “policy” reads like a “Deep Thoughts” SNL Jack Handy skit.

The welcome introduction says the policy is written in a way that’s simple, easy to understand, and fun to read. I find nothing in this rambling, babbling amalgamation of seemingly random thoughts to be easy to understand. And, let’s face it, insurance policies in any form are not “fun to read” even if you include super cool, awesome language like “your stuff,” “yuck,” and “ouch” that might appeal to pre-teens. But, if that’s your market, I’d add some cartoon drawings, maybe teddy bears that shoot lightning out of their eyes to simulate a power surge exclusion.
Lemonade seems to believe that being able to place your homeowners insurance in 2-3 minutes using a contract that’s only a few pages long is a good idea. I wonder if this is ignorance, naivete, or maybe something else.

Digging deeper into the details…

The first part of the policy says it’s “The Squeezed Version.” Another super cool, groovy, far-out, and gnarly play on words (I’m an old guy…what do today’s hipsters use for “groovy” and “far-out”?). In any case, I’m assuming “Squeezed Version” refers to a summary of policy terms, such as:

The policy covers “events” that take place during a particular time period. What contractually constitutes an “event”?
Coverage appears to be for the 6 perils of theft, vandalism, fire, smoke, burst pipes, appliance leaks, plus “damage others may accuse you of causing” whatever that last term means. Have you ever run across a homeowners policy that only covers a half dozen or so perils? Ever? In modern history?
There appears to be a per-item limit of $2,500. I don’t think I’ve seen that in any other policies. And what constitutes an “item”? So there’s only $2,500 for your new $4,500 John Deere riding mower? But wait…keep reading because, unlike other homeowners policies, there appears to be ZERO coverage for your riding mower.
Temporary living expenses are covered up to $2,500. That should be good for about a week of coverage. Maybe two weeks if you don’t SuperSize your meals.
If the exact item damaged or destroyed is not available, the insured will be reimbursed an amount to buy something “equivalent.” What about antiques? Does “equivalent” mean functional replacement cost or another antique that is equivalent? And don’t forget the maximum $2,500 per item you don’t usually find in other homeowners policies.
The personal property limit, temporary living expenses limit, and $100,000 liability limit are the “maximum we will reimburse you, in total, per year – even if the losses you suffer are larger.” This sounds like an aggregate limit. Every mainstream homeowners policy I’ve seen has an automatic reinstatement of limits, not any aggregates.

The next part of the policy says it’s “the full story” which presumably is the details of coverage:

The policy covers “stuff that you own” and that’s normally kept at your home. Most homeowners policies cover property that you own OR USE. People rent, lease and borrow property of others.
It says that owned property is covered for four perils: a fire, a burst pipe, theft, or vandalism. Didn’t the “Squeezed” version earlier also include smoke, appliance leaks, and “damage others may accuse you of causing” (whatever that last thing means)?
And what about proximate cause vs. concurrent causation, an issue addressed in most homeowners policies because of extensive case law? If vandals disable your sump pump and your basement is flooded, is that covered or not?
Cash is excluded. That’s not the case for most renters policies. There’s an exclusion for “assault weapons” and any other firearms that are not “stored securely and used responsibly.” What constitutes being stored securely…if they’re stolen, that’s defacto proof they weren’t stored securely? Who decides whether use is responsible?
In the “what’s not covered” section, it says damage to property is covered for fire, smoke, theft, vandalism, burst pipes, or appliance leaks (ah, welcome back smoke and appliance leaks). Hey, what happened to “damage others may accuse you of causing”?!
Once again, they say your stuff is covered for $10,000 per year. Sure sounds like an aggregate limit, something not found in most other HO policies.
The policy does not cover “losses that could have been foreseen or prevented by you through reasonable steps.” Aren’t many losses preventable, like that frayed extension cord? And, again, what is “reasonable”?
Neither illegal property nor illegal activity are covered. What makes something “illegal”? If you burn leaves when, unbeknownst to you, there is a burn-ban in effect and you damage your and your neighbor’s property, there’s no coverage because what you did was “illegal”? And, since there is no severability clause in this policy as there usually is in most other policies, does this exclusion apply only to the person committing the allegedly illegal act, or does it apply to everyone?
The policy excludes damage by “motorized vehicles of any kind.” So, there’s no coverage for using a riding lawn mower? What about someone injured by a child’s “Barbie” car? Most homeowners policies provide some coverage for this.
There is no liability coverage for “assault weapons” or other firearms that are not “stored securely and used responsibly.” I thought Lemonade was socially conscious. So much for innocent victims.
Excluded is “Damage that’s related, or similar to, something you’ve been accused of in the past ten years…isn’t covered.” Is this just liability claims or direct property damage claims too, because the policy doesn’t separate the two. What makes something “similar to”?
Apparently they have a “Bad Weather Package.” Does this mean there’s no windstorm or tornado coverage?
The policy says Lemonade can cancel or nonrenew with 10 days notice. Presumably that will change with state laws. Maybe.

Here are some “Issues” that Lemonade responds to from open source contributors, including:

“Clarification around ‘stuff that’s used for your business’”

“Clarification around cannabis coverage”

Much of these “clarifications” from Lemonade are what policy form drafters include in the contract language to begin with. Otherwise, interpretation of the extensive broad, vague, ambiguous wording in Policy 2.0 is subject to varying interpretation by different individuals over time. That’s not contract certainty and not desirable. It’s exactly what leads to litigation.

When my son moved into an apartment, the management required proof of renters insurance. If you didn’t have any, they had an endorsed vendor where you could buy coverage online. To their credit, the policy form was available online. It was pure crap. Very limited named perils. Very little in the way of bonus coverages. $50,000 liability coverage. And the deficiency list goes on. The cost of the policy was $120. I got him a quality policy with a mainstream insurer on an open perils and replacement cost basis for $180. Homeowners insurance is not a commodity and an insurance contract should not be structured, in accordance with the infinite monkey theorem, as if it was the result of a warehouse full of typing monkeys that came up with an insurance policy instead of a Shakespearean work.

It’s interesting that an innovative insurtech is proposing a policy that appears to have less property coverage than the 75-year-old 1943 New York Standard Fire Policy with an Extended Coverage endorsement. To quote the old Firesign Theater comedy troupe, “Forward, into the past!” So what is Lemonade really trying to do?

I wonder if their highly hyped behavioral algorithms aren’t working as expected and their loss experience is poorer than anticipated. When that happens, one approach is to abandon the industry-standard ISO HO-4 you’re selling for something worse than the E&S marketplace currently provides and hype it as a good, innovative thing. And make it open source so that your competition has an equally inferior product to sell. Given the lack of journalistic acumen in today’s media, most will simply guzzle the PR and regurgitate it like a drunken sailor on shore leave. At least the old snake oil salesmen of yesteryear conducted business with a wink and a nod.

Yes, I admit it…I’m an old guy questioning new things. But being an old guy might explain why I enjoyed reviewing this latest Ralph Kramden-like scheme of Lemonade so much…it reminds me of Ted Mack’s Original Amateur Hour. Come on, kids, let’s leave the contract drafting to the professionals like ISO. As real “innovator” Al Einstein said, everything should be made as simple as possible, but no simpler.

More about Bill Wilson…

William C. Wilson, Jr., CPCU, ARM, AIM, AAM is the founder of InsuranceCommentary.com. He retired from the Independent Insurance Agents & Brokers of America in December 2016 where he served as Assoc. VP of Education and Research and was the founder and director of the Big “I” Virtual University for over 17 years.

He is the former Director of Education & Technical Affairs for the Insurers of Tennessee and, prior to that time, he was employed by Insurance Services Office, Inc. He is a graduate of the Illinois Institute of Technology with a B.S. degree in Fire Protection & Safety Engineering.