ROBERT SMITH, HOST:
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JACOB GOLDSTEIN, HOST:
My wife and I recently bought a house for the first time. And a few weeks after we moved in, we got this envelope in the mail. Inside the envelope was my homeowner's insurance policy. I've got it right here. It's a little booklet, 23 pages long, printed on this thin paper. And it says in little letters on the front, please read your policy carefully. So because, frankly, that's the kind of thing I'm into, I did. I read it. The policy blew my mind. I mean, it's a totally standard policy. Millions of other people have this exact same booklet. But the contents, the details, are amazing. It's like somebody took all of the bad things that could happen in the world and divided them into two buckets - stuff that is covered and stuff that is not covered.
For example, I'm covered for damage caused by riot or civil commotion. All right. I'm covered if a missile hits my house. I'll take it. But I am not covered if a missile hits my house in a war. Also, if that missile happens to be a nuclear missile, I'm not covered whether there is a war on or not. I live in Brooklyn, where, as far as I know, there are no volcanoes, but there is a volcano section of my policy. If a volcano shakes the ground and damages my building, I'm out of luck. But if a volcano spews lava onto my house, I'm covered - says it right here, additional coverages, paragraph 10 - volcanic action. Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.
SMITH: And I'm Robert Smith. Today on the show, settle in, we are going to read Jacob's insurance policy. It's the story behind all that fine print that, let's be honest, you never really read. OK, from the top. State Farm Insurance, Condominium Unit Owner's Policy, FP-7956.
GOLDSTEIN: That's my policy - FP-7956. And to understand what it means, where are all this stuff comes from, I needed to find a law professor, somebody who is really, really, really into insurance. As it happens, law professors like that, not that easy to find.
DANIEL SCHWARCZ: Law professors are obsessed with things like constitutional law and, you know, ethics and broad, sexy types of questions.
GOLDSTEIN: So, wait, are you telling me that insurance is not sexy?
SCHWARCZ: Well, it's sexy in the right light (laughter), but you might need a little bit of airbrushing, you know.
GOLDSTEIN: This is Daniel Schwarcz. He is, yes, an insurance expert and a law professor at the University of Minnesota. And to start out with, we talked about a simple one, the first thing my policy covers.
SMITH: Section One - losses insured. Paragraph one - fire or lightning.
GOLDSTEIN: That's it. There's no asterisks, no buts. If my house burns down, I'm covered.
SMITH: This paragraph, Schwarcz says, is interesting because it is where all homeowners insurance began. Before the 20th century, fire was the one huge overwhelming risk. Houses were made of wood and people cooked with fire. I think we can see the problem there.
GOLDSTEIN: And people in the U.S. were buying fire insurance all the way back in the 1700s, back before even public fire departments existed. So insurance companies basically created their own private fire departments. Schwarcz says when you bought a policy back then, you did not get 23 pages of policy printed in a little booklet. You got this metal sign, this shield to put up outside your house.
SCHWARCZ: The fire department would come and if you had the shield that said you were insured against, they would put out the fire.
GOLDSTEIN: And if you didn't?
SCHWARCZ: And if you didn't, they wouldn't.
GOLDSTEIN: Homeowners insurance as we know it, the 23 pages of fine print...
SMITH: Things like paragraph two - wind, storm or hail, paragraph three - explosion.
GOLDSTEIN: Yeah, these things come in in the middle of the 20th century, around the time of the GI Bill and of people moving to the suburbs and lots and lots of people getting mortgages. The banks behind those mortgages start to say, hey, we are not going to lend you all this money unless you buy solid insurance to protect the house against more than just fire.
SMITH: Things like paragraph four - riot or civil commotion, paragraph seven - smoke, paragraph eight - vandalism or malicious mischief.
GOLDSTEIN: So all of a sudden, insurance companies have to decide. We've got this whole universe of risks. What is in and what's out? What is covered and what is not covered?
SMITH: And so they created this big complicated section - losses not insured. And it's this section - all the stuff that insurance does not cover - this section tells you how insurance really works. We asked Schwarcz to help us decode it, and we started with paragraph two, subparagraph E - war.
GOLDSTEIN: War. I am not covered for war, including any undeclared war, civil war, insurrection, rebellion, revolution, warlike act by a military force or military personnel. What does that mean? I never even thought about it. But now that I know that I'm not covered for war, like, I'm kind of nervous.
SCHWARCZ: Well, when war occurs, lots and lots of property is destroyed. And when lots and lots of property is destroyed at the same time, it's very hard for insurers to actually cover that.
GOLDSTEIN: So if you're insuring London in 1939 and war is covered, you're essentially about to have to pay to rebuild all of London which is about to get blown up.
SCHWARCZ: Exactly. And not only that, but you will be unable to pay that and you will go bust, and many people will never get paid in the first place.
GOLDSTEIN: War is what insurers call a correlated risk. If, God forbid, my house gets blown up in a war, it is much more likely that, say, Robert, I'm sorry to say it, your house, 10 blocks away from mine, would also be blown up. It's much more likely that my sister's house in Florida would also get blown up. Correlated risks like these are really hard to insure against.
SMITH: Yeah, what insurers really want to cover is the opposite - things like fires. Now, if my house burns down, that doesn't make it much more likely that Jacob's sister's house in Florida is going to burn down. And the number of homes damaged by fire really doesn't vary that much from year to year. That makes it easy for insurers to just basically do the math, figure out how many fires there's going to be and how much they're going to charge for fire coverage.
GOLDSTEIN: So when you see that long list of things your insurance company doesn't cover, a lot of that is stuff that just kind of breaks insurance, things that are so big that insurers just can't handle them. If they tried to cover those things, they would go bust. They could never pay all the claims.
SMITH: Things like paragraph two, subparagraph F - nuclear hazard or paragraph two, subparagraph C, item one - flood, surface water, waves, tidal water, tsunami, overflow of a body of water, spray from any of these, all weather driven by wind or not.
GOLDSTEIN: When things like this happen in the world, there are a lot of people who wish they had read all the fine print in their policy. Jeff Waddle, a State Farm agent in Greenwich Village, says nobody does that.
JEFF WADDLE: In reality, no. In six years, I've maybe had three people - three people who have actually read their policy or at least read part of it and, you know, highlighted parts that they wanted to talk about.
GOLDSTEIN: So that's three people out of about how many?
WADDLE: Well, I have 5,000 customers with homeowner policies. So, I mean, do the math.
GOLDSTEIN: This was a problem after Hurricane Sandy hit. Lower Manhattan was a complete disaster. People had to leave their homes. And they did what you do when you're hit by a disaster. They called their insurance agent. And Jeff had to tell them the bad news.
WADDLE: It was very difficult because down here where we're located, we didn't have power. The majority of my customers live down here. They didn't have power. Unfortunately, we had to explain the reason for the power outage was due to Sandy, which was flooding, and flooding's not covered. So their hotel stay, their expenses associated with not being able to live in their apartment were not covered under the policy.
GOLDSTEIN: OK, so now I understand the big exclusions - the floods, the missile during wartime. But there's this part of the policy that still just seems weird.
SMITH: OK, I've been waiting to read this one. Additional coverages, paragraph 10 - volcanic action.
GOLDSTEIN: Volcanic action, even in insurance world, is confusing. If you go to - what is it - page six of my policy.
SMITH: You know this thing so well at this point.
SMITH: Look at that.
GOLDSTEIN: It's well-thumbed. It - OK, page six. It says volcanic action - it basically tells me, don't worry about volcanoes. I am covered for lava flow or ash or volcanic blast. So, OK, I'm good I think. But then if I flip ahead to page 10, here under earth movement, I am not covered for earth movement whether it is caused by a volcano or a mudslide or, most importantly, an earthquake.
SMITH: And to be honest, although volcanoes are scary, the earthquake is the real concern here. Earthquakes are generally not covered by insurance companies for two main reasons. One is the thing we've already talked about, the correlation. For instance, after the Northridge earthquake hit LA in 1994, the LA Times reported that insurance claims on that earthquake were more than all of the earthquake premiums ever collected in California.
GOLDSTEIN: But Schwarcz says there is this other big fundamental thing that makes it hard to cover earthquakes.
SCHWARCZ: Insurers normally, when they sell you a policy, they want to make sure that they have roughly the same amount of information that you have as a policyholder or even more. Otherwise there's a possibility that only the really risky folks will purchase insurance.
SMITH: Normally, we try to avoid all the lingo, but this is a show about insurance, so let's just go for it. The fancy term for this is adverse selection. Insurance only works if all sorts of people buy the insurance, right? But who really wants earthquake insurance? People who live on top of a fault line, people in California, basically. Now who is not willing to pay extra? Everyone else. Jacob lives in Brooklyn. So when this happens, when the only people who buy insurance are the ones most likely to be hit by the problem, when this happens, insurance does not work.
GOLDSTEIN: So when my policy excludes earthquakes caused by a volcano or whatever, what the policy is really saying is if I want earthquake insurance, I'm going to have to pay extra. And for that matter, if I ask for earthquake insurance, the insurance company is going to send someone out to my house and make sure it's not, you know, some pile of rocks built on top of sand sitting over the San Andreas Fault.
SMITH: (Laughter) It is amazing how much of your policy finally makes sense when you know these two terms - correlated risk and adverse selection. But there's one last thing that puts a lot of sort of random stuff into the not covered bucket.
GOLDSTEIN: What are some of the other sort of big things that are not covered?
SCHWARCZ: Bed bugs (laughter). Lots of - you know, a couple years ago especially, when bed bugs was really prevalent in the news, a lot of customers were freaking out.
GOLDSTEIN: It's weird that bed bugs aren't covered because bed bugs, despite what you may have heard on the local news, are not like an earthquake or a flood. They're relatively isolated and they're not that expensive to deal with compared to some giant disaster.
SMITH: Insurance companies won't pay for bed bugs or any other kind of bugs or vermin for a different reason. They don't want to give you an excuse to be an idiot. I mean, think about it. If I had bed bug insurance, I would furnish my entire apartment from random things I find on the street in Brooklyn. What's the worst that could happen? I have bed bug insurance.
GOLDSTEIN: This excuse to be an idiot problem, the formal name is moral hazard.
SCHWARCZ: Moral hazard essentially involves being less careful because you have insurance. And so if you have insurance, you have less reason to be careful and you have less reason to take care of losses when they are occurring because the insurer will pay for it. And so there's not much reason for you to take care. And especially if the care itself costs money or is difficult or is not fun, you'll just be less careful.
GOLDSTEIN: My policy is actually full of language trying to deal with moral hazard, trying to make sure I don't become just a slacker and assume insurance will solve all my problems. If there's a leaky pipe and I don't fix it, I'm not covered. If I leave my apartment vacant and it gets vandalized, I'm not covered. Moral hazard even explains one of the most mysterious details in my policy.
SMITH: Losses insured, paragraph 10 - falling objects.
GOLDSTEIN: I am covered for damage from falling objects - a tree or a satellite or whatever - but only if the falling object first damages the roof or an exterior wall of my building. And I read this and I kept thinking, what other damage could I have from a falling object? Schwarcz explained.
SCHWARCZ: This coverage excludes scenarios in which there's some falling object in your home, right, that's not caused by an external force.
GOLDSTEIN: Oh, right (laughter).
SCHWARCZ: That's caused - right. So, you know, let's say that your television, you know, you put up your favorite bowling ball, right, you know, on your shelf and the bowling ball falls and smashes into your television. Well, that's not going to be covered because probably you should have been more careful about where you put your favorite bowling ball.
SMITH: We've been spending a lot of time over the last week discussing Jacob's insurance policy and chasing down all these inclusions and exclusions and trying to figure them out. And the whole time we just kept wondering, like, who is writing this stuff? Who sits in a room all day long and comes out at 4:45 and says boys, I have solved the bowling ball problem?
JOHN KADOUS: My name is John Kadous. And I am vice president of personal lines for AAIS, the American Association of Insurance Services.
SMITH: AAIS helps insurers figure out what can go wrong and then helps them put it into dry legal language. And that really is the key to understanding all of this. Like, the policy is sent to you. But the real audience of all this language is a judge somewhere down the line who has to decide legally if my brand new kitchen was damaged by lava or by a lava-induced earthquake.
GOLDSTEIN: Kadous and people like him are constantly watching the news, looking for court cases that can give insurance companies a peek into what they might have to deal with.
He told us about this one case, Barbara Tracy vs USAA Casualty Insurance Company. Barbara Tracy lives in Hawaii, where medical marijuana is legal. She bought homeowners insurance. Her insurance policy says it covers loss to, quote, "trees, shrubs and other plants." So when somebody stole 12 marijuana plants from her property, she filed a claim with her insurance company.
KADOUS: Really the question is, OK, so is it covered when it's something that by federal law is illegal? State law says it's legal. Federal law says it's illegal.
SMITH: The court found in favor of the insurance company, said they did not have to pay for something that's illegal under federal law. But this sort of ambiguity, this having to go through a whole court case, this is exactly the kind of thing that insurance companies want to avoid.
GOLDSTEIN: You think people with homeowners policies like mine might start seeing language about marijuana in their policies?
KADOUS: I think they could. I think they could. Yeah, it wouldn't surprise me if there was additional language in there addressing that kind of exposure to really clarify the intent of, you know, is there coverage or is there not coverage.
GOLDSTEIN: Right. Or maybe you'd buy extra weed insurance, or whatever.
KADOUS: (Laughter) Something like that, yes.
GOLDSTEIN: So maybe next time I get my new policy in the mail, it will be 24 pages long instead of 23.
SMITH: That could be writing it right now. Speculative subparagraph W, policy does not cover theft, removal or vandalism of plants or plant products outlawed by federal statute, including but not limited to cannabis sativa, hashish, kief, the chronic, etc.
(SOUNDBITE OF SONG, "FIRE")
KINGSTON WALL: (Singing) All right. Now dig this, baby.
GOLDSTEIN: You can email us at email@example.com. You can also find us on Facebook and Twitter.
SMITH: This week we've got a special request. NPR's Snap Judgment is raising money on Kickstarter. If Snap Judgment is one of your favorite podcasts, if you want to support it you can make a contribution now at snapjudgment.org. Our producer today is Fia Bennin. We had help from Planet Money intern Aparna Alurie (ph). I'm Robert Smith.
GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.
(SOUNDBITE OF SONG, "FIRE")
KINGSTON WALL: Listen here, baby. Stop acting so crazy. You say your mom ain't home, and it's my turn. Just come play with me and you won't get burned. I have only one itching desire. Let me stand next to your fire. Let me stand next to your fire. Let me stand next to your fire...
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