Why are major insurance companies selling insurance with "feel good" messages rather than explaining how many different types of accidents and catastrophes they will not cover? If they were honest, wouldn’t they explain to customers what is not covered before the purchase? Sandy Burnette wrote a comment to "Is the State Farm Policy Really Worth Anything?" As I indicated in yesterday’s "Some Public Adjuster and Insurance Attorney Concerns and My Blogging Mistakes," he made a valid criticism which I corrected and appreciate him calling to my attention.

In other portions of his comment, he implied that the exclusions in property insurance policies are basically the same, and only companies charging much more than State Farm can provide better coverage. He also implies that the policyholders should not rely on advertisements–only the policy language, when deciding what insurance company to purchase insurance from. At least, this is my interpretation of his comment:

"That tired old line you use about the "fine print" of a policy is not even true–there is no "fine print" in an insurance policy, as you well know. The insurance regulators make sure of that…

By the way, the exclusion in the California case you reference has been around for about 75 years…It is not a part of some new conspiratorial plot to sneak in language to exclude losses which were previously covered. There is nothing vague or ambiguous…as the court noted in its opinion. How could it be more clear? Your call for insurance companies to "advertise their exclusions" or "warn" prospective insureds that there are actually things in their policy which are not covered is the classic "not my fault" excuse whenever somebody is surprised …that a loss… is not covered.

How about the notion of actually reading the policy before you buy it? How about the idea that people should take responsibility for their own failure to read over their policy to find out what is covered and what is not? You made no mention of that in your post.

… blaming the insurance company when something which is clearly excluded and properly denied–and upheld by a court–is just wrong. All Risk is not "All Loss", as the courts have often noted.

…there are policies which provide more coverage than others. …They are usually far more expensive for reasons which are self-evident…"

Let’s review Burnette’s assertion that the water leak exclusion is common and has been in policies for 75 years. While the all-risk policy for homeowners coverage was first developed in the 1940’s, State Farm writes it own policy rather than use the Insurance Services Office (ISO) common form policy that many insurers, especially the smaller ones, use. Would the common form policy, used by many small independent companies, provide more coverage than the State Farm policy for that water leak?

The Fire, Casualty, and Surety (FC&S) publication of the National Underwriter certainly thinks so. In its May 2003 Question and Answer, an agent selling a standard form policy asked:

"Leaking Pipe and Wet Rot"

Unknown to him, our HO 00 03 …insured had a pipe leaking inside his kitchen wall for some time. Neither we nor our client knows exactly how long. That leak resulted in water damage to the interior of the walls and hidden damage to the cabinets. It also resulted in wet rot that was hidden within the walls . The insurer is denying all coverage because the loss occurred over a period of time. They are saying that it was not sudden and accidental. We don’t agree and would like your opinion."

The question was submitted by an agent from Indiana. Before giving the answer, I suggest that every adjuster, public adjuster, agent, risk manager and attorney subscribe to this publication. It will make you better at understanding coverage and how insurance policies are supposed to work. If you are a policyholder thinking of hiring an insurance professional, hire one that reads this publication.

This was the answer; it proves that other common insurers write standard policies that do no not include the draconian exclusionary language State Farm happily sells:

"The HO 00 03 excludes loss caused by wet rot. The exclusion reads as follows:

“We do not insure, however, for loss:

2. Caused by:

e. Any of the following:

(1) Wear and tear, marring, deterioration;(2) Inherent vice, latent defect, mechanical breakdown;(3) Smog, rust or other corrosion, mold, wet or dry rot,…”

By placing wet rot in this longer list of things that occur over a long period of time, it is clear that the policywriters’ intent was to exclude wet rot that happens over a long period of time—like on the underside of wooden steps leading down into a damp basement. In that case there has been no intervening peril—the wet rot just happened. And that’s what is meant to be excluded.

It is important not to confuse resulting wet rot damage with loss caused by wet rot. When a pipe breaks, gets the covered property wet, and wet rot then occurs, we have resulting wet rot damage, which is covered, because the peril that caused it is plumbing discharge. The HO 00 03 does not contain the exclusion for “repeated seepage or leakage,” nor does it state that a loss must be “sudden and accidental.”

In this case, the water damage, the wet rot damage, and the cost to tear out and replace the pipe are all covered. We should add, though, that had the insured seen signs of the leak—stained wallpaper, for example—and done nothing, the loss would not have been covered by virtue of the duty of the insured at the time of loss to protect the property and prevent further loss."

Burnette argues that policyholders should be able to pre-determine this result by by reading the exclusionary language before purchasing the State Farm policy. He suggests customers compare and comprehend the legal significance of each word, line by line, to determine their consequences and how they apply in a situation that has yet to occur.

I understand that Burnette has such a view because of what he does for a living– advocating for insurers that coverage does not exist after the loss happens. Yet, I have a hard time reading the insurance policy, and spend hours each week explaining legal interpretations of clauses to fairly sophisticated risk managers and public adjusters. I do not believe that my wife’s 85 year old high school educated grandfather, who worked as a mason until retirement, could accomplish the task Burnette suggests. Could anybody? I doubt most judges and insurance professionals could contemplate the significance of such small changes in advance of a loss. We cannot agree what it means after the loss occurs.

The point is that State Farm attorneys and underwriters understand that words of exclusions can mean whether a lot of money is paid, or not paid, to their customers. They wrote the additional modifications to exclude and limit recovery that other insurers pay.

Why? Obviously, so State Farm customers get less benefit than others after a loss occurs.

When have you ever seen a State Farm advertisement explaining that it has great rates because it will not cover your plumbing leaks, unlike other carriers?

Want another example of why Burnette is wrong? Read the Florida Supreme Court case, Fayad v Clarendon National Insurance Company, 899 So. 2d 1087 (Fla. 2005).

I wrote an amicus brief for United Policyholders in this case to help the policyholders overturn a wrongly decided appellate court decision. Our brief cited an insurance industry written publication to prove that the insurer was wrong. Attorneys for insurers do not like it when we point out their own industry does not support the position they creatively argue in front of judges.

Please note the Florida Supreme Court’s finding that the State Farm policy has broader exclusionary language and provides less coverage than Clarendon:

"The relevant parts of Clarendon’s policy read as follows:

SECTION I – EXCLUSIONS

1. We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.. . . .b. Earth Movement, meaning earthquake, including land shock waves or tremors before, during or after a volcanic eruption; landslide; mine subsidence; mudflow; earth sinking, rising or shifting; unless direct loss by:(1) Fire; or(2) Explosion …ensues and then we will pay only for the ensuing loss..

. . .COVERAGE C–PERSONAL PROPERTY We insure for direct physical loss to the property described in Coverage C caused by a peril listed below unless the loss is excluded in SECTION I –EXCLUSIONS.. . .3. Explosion.

At the hearing on the summary judgment motion, Clarendon relied on State Farm Fire & Casualty Co. v. Castillo, 829 So. 2d 242 (Fla. 3d DCA 2002), in which the Third District Court of Appeal held that the language of a lead-in provision and exclusion in a policy drafted by [State Farm] excluded coverage for any loss resulting from earth movement regardless of its cause. Based on the Third District’s holding in Castillo, the trial court entered summary judgment in favor of Clarendon, finding that coverage was precluded under the earth movement exclusion in Clarendon’s policy. On appeal, the Fayads argued that the trial court erred in granting summary judgment because the policy at issue in Castillo contained language in its earth movement exclusion that was materially different from the language in Clarendon’s earth movement exclusion. Although the Third District agreed that the exclusion at issue in Castillo was much broader than Clarendon’s exclusion, it concluded as a matter of law that "under the plain language of Clarendon’s earth movement exclusion provision, there is no coverage for the claimed losses in this case."

The Florida Supreme Court essentially overruled the lower appellate court because State Farm wrote a policy that did not cover for the same type of loss that Clarendon covered:

"In Castillo, the case upon which the trial court relied, the Third District was faced with the question of whether a State Farm earth movement exclusion unambiguously applied to both natural and man-made events…The State Farm exclusion defined "earth movement" as the sinking, rising, shifting, expanding or contracting of earth, all whether combined with water or not. Earth movement includes but is not limited to earthquake, landslide, mudflow, sinkhole, subsidence and erosion. Earth movement also includes volcanic explosion or lava flow . . . .

The State Farm exclusion also had a lead-in provision that provided:

We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these….

The Third District concluded that the exclusion, when read in conjunction with the lead-in provision, expanded the scope of the exclusion to exclude from coverage any loss resulting from earth movement regardless of the cause of the earth movement."

The bottom line–State Farm writes less coverage than other common insurance companies. It does so in words and phrases that only those in my line of work could appreciate.

The dirty secret is that many major personal lines and commercial insurers do not provide anything close to security or peace of mind in the product they sell. Do not rely on advertisements. Research what other insurers offer and ask you independent agent if better coverage is available.

If you happen to be insured with one of the major lines insurance companies over a decade, see if you can go back over your policies to review changes. Note how there are more limits of coverage and changes in exclusions. I suggest you get a second opinion from an independent agent to find better coverage for a price you can afford.

I agree with Burnette that his clients’ advertisements mean nothing, although many customers believe the insurance company’s statements and promises. Many advertisements are simply trying to provide brand recognition, so that customers first think of Allstate or State Farm when thinking about buying insurance. Please call other agents and understand that major insurers get away with this because there is little regulation in this area.