Terms and Conditions in the Insurance Industry

Background

Before buying an insurance product, consumers need clear, comprehensive disclosures so they can understand its scope, nature, and cost. These disclosures should be easy to compare so consumers can evaluate policy benefits across providers (see Chapter 8, Long-Term Services and Supports—Private Long-Term Care Insurance). Too often, however, the complexity of insurance contracts places the average consumer at a disadvantage in the marketplace. This is especially evident in homeowners and automobile insurance.

Experience from recent natural disasters shows that many policyholders who expected their residential policy to cover most of the damage to their homes regardless of cause were surprised as to what was and was not covered. The need to purchase separate policies for various hazards (flood, wind, and others) and to deal with separate adjusters in the event of an incident was cumbersome and inefficient. The National Association of Insurance Commissioners has recommended that as part of a natural catastrophe risk plan, an all-perils policy be developed to reduce consumer confusion.

Auto insurance is essential for everyone who owns a car. Some policies, however, drastically raise premiums or drop coverage once policyholders reach a certain age, regardless of driving record. Coverage also can be very expensive even though it may be difficult to recover losses from accidents, particularly with “tort-based” auto insurance, which requires policyholders to go to court to recover claims if there is a dispute over fault. It can be difficult to find automobile insurance that is affordable, has some flexibility in coverage amounts, and is offered on fair, nondiscriminatory terms.

Terms and Conditions in the Insurance Industry: Policy

Insurance pricing

In this policy: State

States should require insurance companies to make their products available at fair and reasonable rates to people with disabilities, preexisting conditions, or chronic illnesses.

Understandable policy terms and language

In this policy: State

Insurance companies should be required to provide clear, informative outlines of coverage before customers purchase policies, and to reduce the complexity of consumer decisionmaking through such mechanisms as an all-perils homeowners policy. In particular, companies must be required to disclose fully the limitations and exclusions in their individual and group health plans and auto and homeowners policies.

State insurance departments and insurance companies should be required to issue, post, and/or disseminate—particularly on the Internet—objective, usable, and comparative consumer information on costs and coverage, and to provide postsale disclosure of paid-up life insurance options.

Insurance companies should be required to notify subscribers and explain cancellation decisions to them before cancellation occurs.

States should develop standard disclosures for the sale of dread disease insurance and other limited-benefit plans, clearly explaining the terms, including portability, before the sale.

Consumer education

In this policy: State

Consumers, as well as organizations, agencies, and small businesses, should be educated about insurance-related complaint procedures and on issues such as the need for loss control and risk management in the liability area.

States should establish and publicize government- or industry-funded hotlines that would answer consumers’ insurance questions.

States should study closed claims to establish how legal settlements and awards figure into insurance costs.

Long-term care

In this policy: State

Providers of long-term care insurance should fully disclose the benefits to be covered, as well as the terms and conditions regarding eligibility, renewability, preexisting conditions, nonduplication of coverage provisions, coverage of dependents, termination, continuation or conversion, limitations, exceptions, reductions, and elimination periods.

Insurers should disclose whether a policy provides coverage for less-than-skilled-nursing home care and the extent of home- and community-based care benefits.

The state insurance commissioner should also require insurers to include specific information on long-term care benefits under public and private insurance programs.

Automobile insurance

In this policy: State

Policyholders should be compensated for claims resulting from auto accidents, without having to litigate, except in unusual cases involving damages for pain and suffering or in which the driver’s conduct was extremely culpable.

True no-fault automobile insurance programs should be enacted, covering bodily injury and requiring reasonable survivor benefits, unlimited medical and rehabilitation benefits, and a threshold level high enough to minimize litigation.

States should promote the development of true group auto insurance coverage.

Insurance companies should be prohibited from canceling or failing to renew auto insurance policies or raising rates on the basis of age alone.

States should avoid enacting a “choice” automobile insurance law (which allows consumers to choose between no-fault coverage and traditional liability coverage) that would lower benefits or result in insufficient protection.

States should support reduced automobile liability insurance rates for drivers upon successful completion of state-approved driver improvement courses.

Mental health coverage

In this policy: State

Insurance companies should be encouraged to improve benefits and coverage for mental illness treated by a licensed mental health practitioner.

Liability insurance

In this policy: State

States should explore new options to guarantee the availability of liability insurance to those who need it. States should consider expanding beyond traditional insurance to create new forms of risk-sharing, such as market assistance plans and joint underwriting associations. If these prove insufficient, states should establish mandatory risk-sharing or assigned-risk programs. Legislation may be needed to authorize the formation of risk-sharing pools and captive insurance companies. These alternatives must be regulated as carefully as regular insurance companies are in order to protect policyholders.

The cancellation of liability policies before the expiration date should be allowed only for good cause, such as failure to pay premiums. Even then reasonable notice should be provided. Refusals to renew should require a written explanation and an even longer notice period. There must be protections against nonrenewals for certain types of insurance, such as medical malpractice.

Claims service

In this policy: State

States should require high standards for claims performance by all commercial and subscriber insurance service organizations.