InsurOp-Ed: From 2.0 to 3

“[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…

The preceding was the introduction to an article I wrote in May 2018 called “Reverse Engineering: Making Lemons From Lemonade.” The article was about insurtech upstart Lemonade’s attempt to simplify a homeowners renters policy by introducing an open-source product they called Policy 2.0.

In that article, I enumerated numerous wacky features in that proposed renters policy (e.g., it covers your “stuff,” a term not defined in the policy) and illustrated how the policy, as it stood at the time, appeared to be dramatically inferior to the “ISO standard” forms being used by Lemonade at that time.

I have blogged extensively, including LinkedIn Pulse articles, about insurtechs and the mistaken belief that they are “disrupting” the insurance industry. For the most part, I’ve attributed much of the sometimes bizarre (and often dangerous) things they do to the premise that they just don’t “get it.” They really don’t understand that the mission of the industry is not fast/easy/cheap convenience but rather assisting individuals, families and organizations in minimizing their exposure to serious or catastrophic financial loss.

Sadly, this is all too often true of our own established institutions. An example is the pervasive perception that insurance, especially personal lines, is largely a commodity. As an industry, via our incessant price-focused advertising, we have conditioned consumers into believing this commodity myth. Even worse, we have apparently convinced ourselves of the same thing, as illustrated by this quote from industry icon Warren Buffett:

“Insurers have generally earned poor returns for a single reason: They sell a commodity-like product. Policy forms are standard….”

One would think that Mr. Buffett would know better, but apparently his knowledge and expertise do not extend to the policy level. That is further evidenced by the recent announcement of a new Berkshire Hathaway small business insurance product that he refers to as “THREE.” This products purports to provide property, business income, general liability, professional liability, D&O, cyber, auto, and workers compensation coverage in a policy form that is…get this…JUST 3 PAGES long.

I first read about this in the daily Coverager newsletter then came across a more detailed explanation here:

Berkshire Hathaway’s New “THREE” Page Policy Aims To Revolutionize Small Business Insurance

There is a link in the article that takes you to the proposed 3-page policy. I’ve only had time for a cursory look, but here are some initial unstructured observations and questions:

• Is this actually a legal contract? There is none of the language found in traditional insurance policies that establishes offer, acceptance, and consideration.
• There is no mention of coverage territories for property, liability, or autos, so what law(s) apply to liability, court jurisdiction, etc. For example, presumably there is worldwide coverage for the use of autos, which might not be that important because…
• It appears that there is no coverage for the hired/nonowned auto exposure (including rental cars and temporary substitutes), only listed vehicles presumably equivalent to ISO Symbol 7 coverage.
• There is also no mention of auto coverages like un(der)insured motorists and no-fault laws. If an insured is curious about what is and isn’t covered, I suppose they’re expected to obtain a copy of governing state laws and decipher them?
• Property coverage appears to extend only to property owned or leased by the business, with none of the Additional Coverages/Coverage Extensions provided by ISO standard forms, including coverage for damage to the property of others. Or is damage to such property covered by the liability portion of the policy since it has very few listed exclusions such as those related to care, custody or control (see below).
• Non-building structures appear to come within the limit for business personal property, not the building(s) limit. Could this create potential gaps for insureds who are landlords or tenants only?
• Property coverage appears to be on an open perils basis with express coverage for theft. Unlike most traditional property forms, there doesn’t appear to be an exclusion for theft by business partners, employees, etc.
• Coverage is for “physical damage” to property. Since there is an obtuse reference to cyber coverage, does such coverage extend to loss of data and information that is not “physically damage” since it’s not physical property?
• Is there debris removal coverage since the policy only references coverage for “physical damage” to property?
• I see no exclusions or limitations for damage due to flooding, earthquake, war, terrorism, widespread off-premises power failure, vacancy, freezing of plumbing or sprinklers in an unheated building, and the list goes on. Nor is there any anti-concurrent causation wording.
• There is no apparent limitation for insurable interest…if you “own” it or presumably any part of it, it’s covered.
• There are no appraisal or arbitration clauses such that claim resolution is limited solely to the insurer’s discretion.
• Property may be replaced with that of “similar capabilities,” whatever that means.
• The only insureds appear to be the business and “listed Additional Insured or employees.” Hopefully, this is all employees and not just those “listed.” In other words, let’s hope “llsted” refers on to Additional Insured, meaning that there is no option for automatic AI coverage. This limited insureds provision appears to preclude coverage for volunteers, permissive auto drivers, spouses of partnerships, and vicarious liability insured status for the use of autos.
• I see no exclusions or limitations for faulty workmanship nor any of the ISO CGL property damage exclusions, employers liability, damage to property in an insured’s care, custody or control, liquor liability, aircraft/watercraft, product recall, and the list goes on.
• There also appears to be no restrictions on autos used off public roads or when racing. If that’s accurate, someone could take up stock car racing and be covered, whereas ISO’s CGL policy has an exclusion for that.
• The pollution exclusion appears to be almost absolute, whereas the ISO CGL policy generally provides coverage for most pollution incidents that occur off premises if the pollutant doesn’t belong to the insured. ISO property policies also include some amount of pollutant cleanup coverage.
• Since no mention of “bodily injury” or “property damage” is made (just reference to an insured’s legal liability), does the policy cover things like discrimination, fines, penalties, etc.? Does it cover criminal liability? EPLI coverage?
• I see no automatic coverage, even for liability, for acquired autos until they are listed and presumably the carrier can refuse to add any auto they choose.
• There is no mention of loss of use or transportation expenses coverage.
• Where’s the medical payments coverage?
• Where’s the Other Insurance clause?
• The cyber coverage does not appear to preclude coverage for data breaches or hacks by insureds. There is no mention of coverage for the loss or reconstruction of data and information.
• Workers compensation coverage is governed by state laws. Where is the employers liability coverage?
• There appears to be no general liability Separation of Insureds clause. In fact, there is a specific exclusion for insured vs. insured (cross liability) claims involving the business and Additional Insureds, a condition that probably puts most contractors in breach of contract, which raises another question….
• How is contractual liability handled? There appears to be an absolute exclusion for contractual liability without any carve-out of explicit coverage for “insured contracts” typically found in other policies for leases, easements, assumption of tort liability, etc. For many insureds with such contracts, this puts them in breach of contract.
• There is no coverage for property damaged during illegal transportation. Does that include an accident involving speeding?
• The policy does not cover any occurrences that start “or take place” outside the policy period. Does that mean, for example, that a fire that starts during the policy period and continues after expiration will not be paid in full?
• No endorsements of any kind? No Protective Safeguards requirements? UM? Etc., etc., etc.

I have to admit, when I saw this article and perused the policy, I immediately thought about the date, sure that it had to be April 1.

I can only imagine who sees this policy as an advancement for the industry. First would be business owners who Mr. Buffett says don’t “…have the time to actually read through the policy forms that are supposed to protect them….” He goes on to say that “…a small business can be confident in the protection it is getting, because the whole policy can be read in a few moments.” I suspect that the only confident parties involved are policyholder attorneys and expert witnesses whose futures are assured by the litigation virtually guaranteed by this policy.

Let’s see how regulators view this in the coming months and whether 3 pages of “policy” forms become 300 pages of processing and explanatory documents.