Ambiguity and incomprehensibility seem to be the favorite tools of the insurance profession in drafting policies. Most are a virtually impenetrable thicket of incomprehensible verbosity. It seems that insurers usually try to convince the customer when selling the policy that everything is covered and to convince the court when making a claim that nothing is covered. The miracle of all this is that the English language can be subjected to such abuse and still remain an instrument of communication. — Universal Underwriters Ins. Co. c. Travelers Ins. Co. (Ky ct. App., 1970)
My career in the insurance industry began in 1969, when it was not uncommon to see policies on the market based on a two-page form affectionately called the “165 lines”. This form was the 1943 New York Standard Fire Insurance Policy (SFP). Declarations, Insurance Agreements, Conditions and Exclusions (DICE) were included and, in its early days, a property could be fully insured by 165 lines of numbered insurance contract language on the front and back of a single sheet of paper.
Over time, longer explanatory forms were added to detail and clarify what was covered and what was not. If you were insuring damage to a home, you have attached a home form. Commercial buildings used a general form of ownership. If you wanted to insure risks other than fire and lightning, such as windstorms, hail, riots, etc., you needed an Extended Coverage (EC) endorsement. Then, forms began to combine property and liability coverages in one policy and, to make them more marketable, additional forms were developed with various options. Before we knew it, the pages of common policies had spread, as legendary insurance educator Chris Amrhein would say, “like mold in a damp forest.”
As a result of this evolution (or devolution in some minds), a seven-page policy morphed into a 70-page policy within a few decades and the quest to determine whether or not a loss was covered and for how much became a “Where is Waldo? search. The question is, why? The answer is somewhat complicated, but not as complicated as modern politics itself.
The first and, I believe, main reason is litigation. A denial of a claim often leads to a search for ambiguity in policy language or an imaginary cause of loss purportedly not specifically excluded in a policy. For example, what is a “flood”? As Inigo Montoya said in The Princess Bride, “You keep using that word. I don’t think that means what you think it means.
When Hurricane Katrina hit the Gulf Coast in 2005, there was massive flooding in parts of New Orleans. Without flood insurance, most insurers denied claims under property policies due to the flood exclusion. In the ensuing litigation with the policyholders, the lawyers argued that a concurrent or proximate cause of loss was the failure of the levees and not the flooding per se. As a result, ISO and insurers have revised the water damage exclusions to include reference to levees, dams, levees, etc.
In ISO’s 1973 CGL policy, the pollution exclusion consisted of a 66-word sentence. Today, the current exclusion from the ISO CGL policy spans more than one page, consisting of nearly 800 words. Why? Dispute.
The 1973 exclusion only applied to sudden and accidental losses, but dozens of court cases have sought to torture every pollution incident imaginable until it confesses to being sudden and accidental. In our litigious society, no matter how understandable you think the language of the insurance contract is, someone will refute it and sometimes the courts will agree with them. As a result, insurers’ attorneys are overseeing an expansion of form language in an effort to clarify intent.
The second reason is regulation. When ISO or an insurer issues a revised policy form nationwide, it must be filed with the country’s regulators. Some may approve the form only with further revisions. Others may approve the original or revised form, but this may take several years. One insurer may still be using the ISO 1991 forms for owners today, while others are using the 2000 or 2011 editions and still others are preparing to upgrade to the latest 2022 version.
As I wrote before, when answering a policyholder’s question: “If I hurt someone while using my riding mower? — is not a simple task. In the aforementioned ISO editions for owners, the coverage expands and contracts considerably from one edition date to the next, not to mention the differences found in the non-ISO forms. As for variations by state, one company had locations in 37 states. Their insurance package included four different property forms, three different business income forms and four different CGL forms, together comprising hundreds of pages. Therefore, what is covered in one nearly identical place of business may not be covered in another.
The third reason is that society and loss exposures are changing, and it becomes necessary to update policy forms to reflect these changes. This sometimes translates into additional coverage or more restrictive language in a policy, or the drafting of new endorsements that may be mandatory or optional depending on the rates and regulations filed by insurers.
Forms writers are reluctant to change the wording of time-tested and court-tested insurance contracts. This could lead to unintended consequences. Worse still, in a situation such as revising the flood exclusion language to include levee failure, the test bar can argue that the change is evidence that previous editions of this DID form covered flooding. due to dike failures.
The Challenge of Policy Writing
The fourth reason is simply that it is difficult to put into words whether and for how much an almost infinite number of possible causes of loss are covered. When I retired from the Big “I” and started my own consulting firm, one of the first offers I received was from a captive who asked me to write forms of real estate font from scratch. I suggested they just use the ISO forms, but they insisted that was too expensive. I replied that if they thought it was expensive, wait until they get my proposal to write forms from scratch.
The reality is that there are poorly written and borderline misunderstanding policy forms on the market. I encourage insurers to contract with experts in this field such as ISO. However, they still seem to prefer the unknown costs of litigation to the widely known cost of expert writing. The result is sometimes odd shapes like Berkely’s “Three” policy or a lemonade draft of a tenant’s policy that covers the “stuff” of the insured.
I recently read an article that quoted a policyholder attorney as saying, “Insurance companies write dense, unreadable policies to allow them to deny coverage as often as possible. Nonsense. No respectable insurer engages in intentional ambiguity. As long as legal action arises when this perspective is applied to claim denials, insurance contracts will be written to pass the court muster. Although we can and should do better, too often the result is overly long and complicated insurance contracts.