It’s been more than 30 years since the first standardized “easy read” homeowners policies were developed, yet property/casualty policies continue to be among “the least-read best sellers,” as the saying goes.

Whether policies are read or not, state regulators have an abiding concern that they be written in plain, clear language understandable to the average person.

Today, 20 states have statutes or regulations mandating certain levels of “readability” in personal lines. Only five have them for commercial lines, but three of those five--Florida, Michigan, and New York--account for a large share of commercial lines business.

Even if most states don’t have readability standards, those that do effectively exercise countrywide impact, given that the policy forms developed by carriers and advisory organizations are built on a countrywide base. A stringent state standard can become, in effect, a national standard.

Moreover, the National Association of Insurance Commissioners (NAIC), maintains a working group on readability, and some states have their own counterpart working groups.

Larris Larsen, AAIS assistant vice president for compliance, was recently named a member of a P/C readability working group of the Wisconsin insurance department.

Objective

Thanks to readability standards, P/C policies are generally easier to read and understand today than they were 35 years ago, even as the properties and liabilities they insure have become more complicated and technical.

What’s clear to one person may not be clear to another, of course, and it’s not easy to come up with an objective standard for what makes a policy “readable.”

The standard typically used for readability guidelines in those states that have them is the “Flesch” score, a number between 0 and 100 derived primarily from the number and length of words in the sentences of a passage. The
higher the Flesch score, the easier a passage is to read, supposedly. (Flesch score calculators are available as features of Microsoft Word and other word processing programs.)

However, Larsen says that, “higher Flesch scores do not automatically result in more understandable policy language.”

“The scoring formula favors words of no more than two syllables and short sentences,” he says. “However, the use of short words and sentences does not ensure readability.”

To illustrate his point, Larsen shows that an exclusion in an AAIS agricultural form got a Flesch score more than double its original simply by changing the format of six words, with little overall impact on readability (see sidebar on page 5).

“Higher Flesch scores can be achieved without actually improving the understandability of the policy language,” Larsen says.

Content

That would come as no surprise to Thomas Mallin, president and CEO of the Property Loss Research Bureau, an organization that reviews policy forms and endorsements for clarity.

“It is easy,” he says, “to construct a document that scores high on a reading-ease formula but is composed entirely of properly punctuated nonsense syllables.”

More importantly, says Mallin, “reading-ease tests don’t take the content of the material into account.

“Insurance policies inherently deal with complicated legal concepts.”

The application and restriction of coverage has become increasingly complicated over the past decade, says Larsen, as insurers and advisory organizations have grappled with a growing number of concerns: mold, terrorism, electronic transmissions, new types of motorized vehicles, and more.

“It has become more important than ever to use very exacting language,” Larsen says. “Words of few syllables and short sentences are sometimes not sufficient for specifying the extent of coverage.”

Format

Rather than relying on readability scores, Larsen, Mallin, and others emphasize the format and organization of a policy as more important factors in making it comprehensible to readers.

In a 2006 paper, attorney Louis Long identified “conspicuity” of policy provisions as a critical factor in making policies understandable that was largely overlooked by regulators. (Long is with the Pittsburgh-based firm Pietragallo Bosick & Gordon LLP.)

“Conspicuity is a measure of the visual distinctiveness of a particular text,” he wrote. “It can be ascertained by evaluating the document design (e.g., format, typography,
graphic cues, layout) to identify how well they are orchestrated to render the text visibly present in the eye of a reader.

“Conspicuity plays a critical role in whether the reader notices the information deemed to be important.”

Exposure

Perceived problems with the organization of policies has led to some unanticipated exposures in recent years.

In 1999, the Oregon Supreme Court ruled that a pollution exclusion in a dwelling property form did not apply because, by including the exclusion in a section entitled “Perils Insured Against,” the policy did not meet statutory requirements for the placement and formatting of restrictions on coverage.

Ultimately, that ruling led to new regulations in Oregon mandating descriptive headings and complementary formatting. Formatting based on those regulations has been incorporated into forms provided for all states under the AAIS Boatowners, Businessowners, Homeowners, Inland Marine Guide, and filed inland marine programs.

The importance of policy formatting was reinforced in a 2004 case, Haynes vs. Farmers Insurance Exchange.

In that case, the California Supreme Court ruled that a lower limit for permissive users of an auto could not be enforced because it was not in a place where someone reading the policy would logically expect to find it.
In an April 2005 publication on the case, General Reinsurance proposes several guidelines for formatting policies to meet the “Haynes test”:

• An informational declarations page, including all coverage limits;
• Informational endorsement listings with descriptive titles, not just form numbers;
• Logical placement of provisions in the policy; and
• Coverage restrictions that are clearly identified and highlighted, with relevant terms explicitly defined.

Contrast

Reading ease formulas, the principle statutory guidelines for “readability,” do not account for the organization of a policy, however.

Stated conversely, Mallin says “there are no demerits under the formulas for scattering coverage limitations over several sections of a policy.”

“AAIS believes that understandability is more important than calculated ‘readability,’” says Larsen.

“While we understand that Flesch scores provide a supposedly objective standard, we believe other factors, such as the arrangement of provisions, are more important for making policies more understandable.”

As a member of the Wisconsin working group on readability, Larsen will be in a good position to promote a more comprehensive view of “readability” than simple reliance on readability scores.

Given that the Wisconsin commissioner sits on the NAIC’s readability working group, Larsen’s insights may resonate nationally.