Decoding the Complexity: Why Insurance Policies Are Impossible to Read

Insurance policies are notorious for their convoluted language and overwhelming complexity. They often leave policyholders scratching their heads and struggling to comprehend the terms and conditions of coverage. This is intentional.  If you start from the premise that insurance companies do not make money by paying claims, then things start to become clearer.  In this blog post, we explore the reasons behind the incomprehensibility of insurance contracts, examine the impact on policyholders, and provide insights into navigating these perplexing documents.

Insurance policies are deliberately constructed to be difficult to understand.  Insurance companies employ teams of lawyers to draft the terms and conditions of each policy meticulously. The verbiage is carefully chosen to protect the company’s interests in case of litigation – it is not designed to protect your interests! 

When looking at an insurance policy, whether it is a property policy or a liability policy, the first thing you may notice is that there are very few paragraphs that are dedicated to what the insurance policies actually cover, and often multiple pages detailing the things the policy does not cover – known as “exclusions.”  Further, when reading the policy, you are often required to jump from page-to-page in order to hopefully find and understand the full scope of the coverage.  And then, when you finally think you have figured it out, that is when you have to look to the endorsements on the policy, as the endorsements also change the amount of coverage and even who is covered under the policy!  

The best way to figure this all out, is to take a step-by-step approach and focus on one specific issue at a time.  First, understand what the policy covers and determine whether the loss/issue falls under that coverage.  Next, look at the exclusions to see whether the loss is excluded by the policy.  Then look to see if there are any exceptions to the exclusions, putting the coverage for the loss back in place.  And finally, check to see if there are any endorsements to the policy either adding or limiting the coverage. Going step-by-step gives you a chance of getting through the maze that is an insurance policy.

Over time, insurance contracts have become more and more dense and hard to comprehend due to increased litigation, new rules and regulations, and various court decisions interpreting what the policy covers.  In fact, it is typical that when a court rules against an insurance company on a particular type of coverage or exclusion, the following year the policy will be changed to reverse what the court had decided.  As an example, in New Jersey, when the Courts started ruling that there was coverage under a general liability policy for the cleanup of environmental contamination even though the insurance policies contained the “sudden and accidental” pollution exclusion, the insurance companies then changed the language in the policy and created an “absolute pollution exclusion” in order to bar pollution coverage completely.  Of course, after barring coverage for pollution, the insurance carriers created a new type of policy that they could sell to the public that would cover certain types of pollution claims.  

Again, insurance companies make money by receiving premiums, not by paying claims.

Lawyers well-versed in analyzing insurance policies recognize the nuances and complexities inherent in the policy language and can decipher what is covered and what is excluded. Below are some tips to assist policyholders in understanding the coverage that they actually have.

Tips for Understanding Insurance Policies

Many customers make the mistake of failing to review their insurance contracts before purchasing coverage. To help you navigate the dense language and complex terms, here are some valuable tips:

1. Seek professional assistance: Insurance brokers/agents deal with insurance policy language on a daily basis and are required to understand and decipher the intricacies of insurance contracts. When receiving your policy, it is always a good idea to ask questions of your insurance broker/agent about what is and isn’t covered.  Further, at each renewal of the policy, you should ask your insurance broker/agent if there are any changes to the policy.  It is not unusual for an insurance carrier to change the scope of coverage at renewal time and depending on the type of policy, sometimes these changes are made without any notice to the customer!  When you get a renewal, ask your insurance broker/agent, in writing, what changes were made to the policy..
2. Pay attention to capitalized words: The devil is often in the details, and in insurance policies, capitalized words carry specific meanings that can significantly impact the coverage provided. We advise that readers closely scrutinize these capitalized terms. Often, the way you would define a particular word is not how the word is defined under the insurance policy and may impact the amount or availability of coverage under the insurance policy.  
3. Get a second opinion: If your insurance agent cannot answer your questions or if you struggle to understand the extent of your coverage, it is a good idea to seek advice from other insurance experts or even insurance attorneys.   While you may have to spend some money getting a better understanding of the coverage, the few hundred dollars you spend now, may save you thousands (or more) in the future if a claim or loss occurs. 

Remember, before committing to an insurance policy, take the time to thoroughly read and comprehend the terms. If necessary, seek assistance from your insurance broker, oinsurance experts and/or attorneys to ensure you understand the coverage you are purchasing, as well as any limitations or exclusions that may apply. 

At the Milun Law Firm, we assist policyholders navigate the complexities of insurance policies every day, and can answer the questions you may have about your insurance coverage.  Being well-informed will help you make the right decisions and avoid surprises in the future.

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