I like journalistic rants as much as the next guy: when I was a reporter I lived by the motto "comfort the afflicted and afflict the comfortable." So I really wanted to like this Bloomberg News story, I really did. But I don’t. If I didn’t know anything about the matters written about in the story, or if I was willing to overlook certain gaps in logic, or if I was the kind of person who believes insurance companies sacrifice daily to Satan, I guess this story would really do it for me. But since none of those things are true, it doesn’t.
I’m not saying that insurance companies don’t make dumb decisions. Nor am I defending any of the companies named in the story — I am not an insurance company spokesman. But there’s a whole lot of stuff mixed together in this story that doesn’t belong together. The anecdote that leads off the story I think is terribly weak. If you read to the end, you find out it concerns the lack of replacement cost coverage for the home. But what does the issue of replacement cost homeowners coverage have to do with other more serious allegations later in the story, such as systematic claims fraud? Although many insurers have dropped guaranteed replacement cost coverage, it is still generally available in most markets from certain insurers, and there is nothing per se wrong with not offering the coverage — you can still purchase enough insurance to pay replacement cost, it’s just that you have to determine what that level is yourself.
Let me show you the last three paragraphs of the story, and these are the ones that made me vote two thumbs down. First, some brief background — Julie Tunnell lived in San Diego and her house was destroyed by a wildfire. She thought she had replacement cost coverage for the structure, but didn’t — State Farm had dropped this coverage from homeowners policies five years earlier, and five years after Tunnell first bought her insurance. The amount the insurer offered — I’m guessing it was the policy limit although the story leaves that important detail out — was some $86,000 short of the replacement cost. So here now are those three paragraphs:
Tunnell says she doesn’t recall being notified [of the change in the coverage]. She says her family debated hiring a lawyer and suing, and eventually decided the battle would be too stressful. The Tunnells took the $220,000 and borrowed money to build a new house.
“Why is this happening to people over and over again?” Tunnell asks. “State Farm keeps underinsuring people, and they get away with it. This is unthinkable.”
As long as insurers make the rules and control the game, Tunnell and homeowners across the U.S. won’t know whether their homes are fully insured, no matter what their policies say.
Some sense of understanding that not every gripe about insurance companies is of equal gravity, severity or plausibility would have improved the story. It’s not up to your insurance company to make sure you have enough liability insurance to protect your assets if you hit someone with your car, or to make sure you buy enough property coverage to replace your jewelry, or to sit down at your table and make sure you understand you are not covered for earthquakes or floods. First, the law presumes that you the consumer know how much insurance you need, and if you don’t get it, that responsibility is yours. Second, this is the theory of a standard-form contract — the market eliminates the transaction costs of having to negotiate with every person in the world. In return for these savings, it is legally presumed you have read and understood the contract, whether you did or not. For contracts like homeowners policies that are renewed each year, these can be amended through endorsements each year: sometimes coverage is broadened, sometimes it is narrowed. No one is guaranteed that the policy you bought 11 years ago will be exactly the same today.
Do you remember what the last line of that story said? Won’t know if they are fully insured "no matter what their policies say." But hang on a minute, if you read Jule Tunnell’s policy, it will almost certainly say there is no replacement cost coverage and the policy limits are $220,000. So what’s the problem? The contract said what they would get, they just didn’t read it. The failure to realize that the lead anecdote is a poor example to prove the point of insurer fraud really hurts the credibility of the remaining allegations.