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August 13, 2014

Has Auto Insurance Become a Commodity?

Summary:

No. TV ads emphasizing the speed of application suggest otherwise, but you don't pick a dentist based on how fast he does a root canal.

Photo Courtesy of Tom

A boomerang kid lost his job and moved back home with his parents. While driving his mother’s car, he negligently struck another vehicle, causing several thousand dollars in property damage. The mother’s insurer denied the claim on the basis that the driver’s residency was not reported to the carrier within 30 days of his return home.

Fifteen minutes can save you 15%, anyone? Actually, the latest online ads say you can get a car insurance quote in only 7 ½ minutes.

Buying insurance may not be a pleasant task for most people, but neither is getting a root canal, and you wouldn’t choose a dentist based on how fast he or she can complete a procedure where your health is at stake. Yet consumers routinely risk everything they own and much of what they might earn in the coming years by choosing the fastest, lowest-cost insurance with the cleverest advertising campaign.

The denial of the boomerang kid’s claim arose from an exclusion in the insurer’s policy for accidents involving undisclosed household residents, unless the insurer had been notified within 30 days of the residency. What insured would think to report something like this to his or her auto insurer? If an “ISO-standard” policy had been in place, that wouldn’t be necessary.

At a rapidly accelerating rate via TV advertising, online “ease of use” promotion and proliferating media articles, consumers are being duped into believing that personal lines insurance is a commodity, with the only significant difference being price. Nothing could be further from the truth. While a lower price doesn’t necessarily imply lesser coverage, that is often the case.

In the words of sales legend Morty Seinfeld, “Cheap fabric and dim lighting. That’s how you move merchandise.”

What Does the Caution to Compare ‘Apples to Apples’ Really Mean?  (Hint: Nothing.)

Recently published studies by firms like McKinsey, A.M. Best, Nomura Equity Research and Gartner proclaim that auto insurance is now officially a commodity. Some of their conclusions predict the demise of the insurance agent, as the direct sales model wins the commodity war. Have any of these researchers ever read their own auto policies, much less compared the coverages in multiple policies?

The media perpetuate the myth. The typical “How to Save Money on Car Insurance” article cautions consumers to make sure they compare “apples to apples.” Translation: Make sure you’re getting quotes on premiums for the same liability, uninsured motorist and medical payments limits and physical damage deductibles. It’s as if broad coverage categories, limits and deductibles were the only differences between auto insurance policies.

A Wall Street Journal article, “Car Insurance Rate Shopping Can Pay Off,” says, “The Consumer Federation recommends consumers shop around to get quotes from insurers that don’t use agents, such as Amica Mutual Insurance and USAA (for families with military ties), and then ask an agent to beat the best price.” Not a word about any coverage differences—only the price.

More Proof That the ‘All Car Insurance Is the Same’ Mantra Is an Illusion

A Florida insured’s auto was in the shop, so she rented a car and later loaned it to someone, who loaned it to someone else, who had an at-fault accident that killed a child and seriously injured other children. The claim against the operator and named insured was denied by the insurance company on the premise that the vehicle was not a “temporary substitute” and that the operator was not a “permissive” user, as defined in this insurer’s personal auto policy.

The son of a friend of an agency owner was street racing when he crashed, seriously injuring himself and his passenger. The claim was denied by the insurance company based on its interpretation of its personal auto policy’s “racing” exclusion.

A church allowed a member to park his car in its heated “bus barn.” While exiting, he wrecked the car, causing structural damage to the building. The claim was denied by the insurer, citing the “care, custody or control” exclusion in the personal auto policy.

What do these claims have in common, other than denial from the insurance company? Each of them would have been covered if the policyholder had purchased an “ISO-standard” personal auto policy rather than the policy in question.

With regard to the Florida claim, the ISO personal auto policy defines “temporary substitute” and “permissive use” much less restrictively than the policy that was in force. The named insured might have saved 15% in 15 minutes when she purchased her auto policy, but it proved to be a bad deal when she had to take her claim to the Florida Supreme Court to recover. The Supreme Court did reverse the Court of Appeals ruling that favored the insurer, but the rationale was less about the policy language and more about Florida’s unusual dangerous instrumentality doctrine.

In the street racing example, the ISO personal auto policy excludes injury that arises from accidents that take place “inside a facility designed for racing,” while the auto policy in question excluded almost any racing activity, including on a public street. Fortunately, the father of the injured child had a Trusted Choice independent agent to aggressively advocate on his behalf by pointing out to the insurer that the exclusion applies only to organized racing activities, not impromptu street racing. More than a dozen coverage opinions from the Big “I” Virtual University Ask an Expert service supported the agent’s efforts. Do you think someone who purchased insurance online from “a guy in khakis” would enjoy the same advocacy?

Like the ISO personal auto policy, the “bus barn” claim also involved a “care, custody or control” exclusion. But the ISO policy makes an exception for damage to a private garage. The policy in question has no such exception—not to mention the fact it’s unlikely that the barn was actually in the driver’s care, custody or control. So both the policy itself and the insurer’s interpretation of the exclusion were faulty from the insured’s perspective—rendering the carrier’s slogan, “same coverage, better value,” untruthful.

12 More Nails in the Coffin of the ‘Insurance Is a Commodity’ Myth

Here are a dozen auto insurance exclusions or limitations you won’t find in the “ISO-standard” personal auto policy:

  1. Undisclosed household residents are excluded.  How many families have “boomerang” kids living at home whom they have not told their auto insurer about? An exclusion of this type was just recently added to the auto policy of one of the major TV advertisers.
  2. Business use of autos you don’t own is excluded.  Have you ever borrowed a neighbor’s car or made a business stop in a dealer loaner or rental auto?
  3. Business use of ANY auto is excluded.  Do you ever run to Staples or the post office on business for your employer?
  4. Use of ANY auto you don’t own is excluded.  Better not drive anyone’s car but your own.
  5. Vehicles weighing more than 10,000 pounds are excluded.  Have you ever rented a U-Haul truck or an RV for personal use thinking your liability coverage extended to the rental? With an “ISO standard” policy, it does; with some auto insurance policies, it doesn’t.
  6. Any type of delivery is excluded.  Denied claims include pizza, newspapers, Mary Kay cosmetics and, yes, even the delivery of insurance policies to customers by an agency producer. Google pizza delivery auto accidents and take a look at the catastrophic nature of some of them. Was that $50 you saved to buy a policy a good deal?
  7. Permissive users only get minimum limits.  This can apply to people who borrow your car or even unlisted household drivers.
  8. “Street racing” is excluded.  Google “street racing” and see how often people are killed or critically injured in the process. Does the auto policy covering your testosterone-fueled teenage son cover street racing? The “ISO standard” auto policy does.
  9. Criminal acts are excluded or limits reduced.  DUIs or even speeding tickets may preclude coverage.
  10. Medical payments only include licensed physician fees.  One insured incurred a $25,000 “life flight” helicopter fee that would not be covered, even in part, by a policy with this exclusion.
  11. Theft without evidence of forced entry is excluded.  One insured had a four-figure vehicle theft loss denied because he left his keys in the car. No such exclusion exists in the “ISO standard” personal auto policy.
  12. Sales tax is not covered under loss settlement.  This cost one “You get the SAME COVERAGE, often for less” insured more than $2,000 out of pocket for sales tax on a replacement auto.

Do you still believe what you’re told on the TV ads that the auto policy you’re getting a quote on is just like every other auto policy in the marketplace?

Accept the Challenge and Dispel the Myth

The differences between auto insurance policies are many, varied and potentially catastrophic. As insurance educator John Eubank, CPCU, ARM, says, “The bitterness of no coverage is remembered long after the sweetness of low price has been forgotten.”

Don’t be sold a bill of goods by TV advertising and consumer articles that state or imply that the only material difference between insurance policies is the price. It is time for insurance professionals to dispel this destructive myth. Innocent consumers experience catastrophic uninsured losses every day because they bought into the illusory proposition that their risk exposures can be identified and addressed cheaply and within 7 ½ to 15 minutes.

Failure to get this message to the consuming public is likely to lead to increasingly stripped-down insurance products that enable competitive pricing. Arm yourself with the information necessary to educate your clients, and bust the myth that insurance is a commodity.

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About the Author

William C. Wilson, Jr., is the associate vice president of education and research and founder and director of the Virtual University of the Independent Insurance Agents and Brokers of America (IIABA), the country’s largest trade association of independent insurance agents.

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