NAIC Takes on Readability of Insurance Policies

The National Association of Insurance Commissioners launched an initiative to study the ability of insurance consumers to understand their policies with a public hearing at its spring national meeting.

The Consumer Connections Working Group heard testimony from consumers, insurers and regulators on insurance contract readability standards. The NAIC/Consumer Liaison Committee also addressed the subject. Topics under the working group's mandate include: to what lines of insurance readability standards should apply, whether the entire contract should be scored, and what tools should be used in measuring readability.

Disclosure laws have been good for consumers, but do not replace the need to make policy information comprehensible to most readers, said Daniel Schwarcz, an associate professor at the University of Minnesota Law School. "Very little energy has been put into making the policy clear," Schwarcz, a consumer liaison, said at the committee meeting.

Policy language should be transparent, Schwarcz said, so that a consumer can not only understand an insurance company's claims decision but be better equipped to challenge it if necessary. Often it is so opaque that "many general-purpose attorneys are incapable of that," he said.

Acting Maryland Insurance Commissioner Elizabeth Sammis said her own staff had trouble deciphering water-damage provisions in homeowners insurance contracts. "That's a pretty sad state of affairs," she said.

More than half of U.S. states have long had readability standards, some based on an NAIC model, but those standards remain well above the comprehension level of most consumers, some regulators and consumer advocates said. A few states including Colorado, Rhode Island and Wisconsin have recently established new standards or have regulations or legislation under consideration.

In Colorado, proposed legislation would require insurance carriers to write automobile and certain health policies at the 10th-grade level and use at least a 10-point font. The state Division of Insurance reported receiving 800 calls in 2008 from consumers unable to understand their policies.

Beginning in August 2010, Rhode Island will become the first state to impose a readability requirement for all health insurance policies, according to testimony from John Aloysius Cogan Jr., executive counsel to the state's Office of Health Insurance Commissioner. "While readability formulas have been a mainstay of insurance regulation since the 1970s, most states have established a readability requirement well above the reading level of the average American adult," he said.

Some 34 states have objective readability standards that are based on the Flesch Reading Ease Formula, which measures average sentence length and the average number of syllables per word. Minimum scores range from 50 to 40, equal to 10th- to 13th-grade reading levels -- two to five grade levels above the reading level of the average American adult, Cogan said.

Insurance industry representatives urged regulators to tread carefully in changing readability standards. They said doing so could lead to unintended consequences such as igniting new litigation.

Current laws contain some exemptions for commercial lines, and these should remain, said David Snyder, vice president and associate general counsel for the American Insurance Association. "Commercial lines insurance purchasers are sophisticated buyers, in business for themselves, and know what they want and what they don’t want. They often have risk managers on staff, use brokers with risk management expertise and/or consult attorneys," he said.

In recent years, health insurers have increased their efforts to address health literacy, according to testimony from Martin Mitchell, a director of product policy at America's Health Insurance Plans. Nearly 70% of health plans focus on the issue as part of disparities-reduction and/or quality improvement efforts and 87% have adopted a targeted reading level for written consumer communications, he said.

Working Group Chairman and North Carolina Insurance Commissioner Wayne Goodwin said the public hearing was a starting point. "The current economic downturn makes it increasingly important that consumers are able to understand their insurance policies so they are not at a financial disadvantage and can make well-informed decisions about their insurance needs," he said in a statement.

(By Sean P. Carr, Washington Correspondent: sean.carr@ambest.com)