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Ball of Confusion

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Ball of Confusion...
Bruce Palmer
8/26/2016
Insurance certainly can be confusing. 

​​Do any of you remember the words of the 1970 hit by The Temptations?  Some of you will not know what I mean and might be Googling it by now (wait, come back and read the rest of the article!).  And some of you will just assume I am talking about insurance again. ​

"Great googalooga, can't you hear me talking to you. Sayin'…ball of confusion. That's what the world is today, hey, hey…"

Insurance certainly can be confusing.  


A Short History o​f Confusion

Some of the confusion about insurance terminology comes from the legal implications of the words policies use and the history of court interpretations: I would never accuse our illustrious legal system of deliberately seeking ways to misinterpret or deny reasonable meaning to words, but it can seem that way sometimes. The insurance industry is generally quite risk adverse and once it knows how the courts will interpret a word or phrase – even if they do not like the interpretation – they tend to stick with that word and phrase.

Another source of confusion is the speed of change, and the tendency to modify what is already written instead of to writing something new. For example, coverage for goods being transported on land is called "Inland Marine Coverage": the industry simply took "Marine" coverage – for transportation of goods that moves over water (and one of the oldest types of insurance) – and added the word "inland in front of it. Very logical, right?    

Some of the consumer confusion is the inevitable result of jargon created by any group of people who toil day after day in the same relatively focused, small industry.

And some of it is because the insurance industry is really several related industries, and we tend to borrow phrases and words from each other, for example, "co-insurance" means one thing in North American health insurance and something different in North American property insurance.

​​“…we tend to borrow phrases and words from each other.

In Canada, we get a bit of added confusion because of our unique history of being both European and American. Although insurance can be traced back at least 5,000 years (groups of traders created insurance to share the risk of goods travelling to market by ship), most insurance policies written in the world today derives from the European policies that were developed throughout the 16th to 18th centuries. Places like Lloyds of London (originally a coffee shop where traders met – you guessed it – to share risk for goods travelling to market by ship) developed many of the concepts and words that still echo in our policies today. Except for those developed in the United States, which often took European concepts and words and then revised them to better match the character of the new nation being built, with words and phrases associated with the risks of exploring and settling unknown lands as opposed to the risks of trading and selling with established communities. 

To this day, most of the insurance industry looks either European or American, reflecting the local history of trade, conquest, friendship and development. Canada, being next door to the USA and sharing many of the same "new nation" development risks, borrowed heavily from America for some parts of our insurance business. But, especially in the late 19th and early 20th centuries when many of our early policies were written, we are still heavily influenced (and often owned and/or managed) by Europe, meaning we still used a lot of European wording in our core policies.

To make insurance even harder to understand, as the Canadian legal system began to pass judgements and precedence based on very specific phrases or combinations of phrases, the insurance industry – always wanting to avoid unknown risk – became quite entrenched in using the "legally proven" way to state something. Why risk what some unknown judge in the future might decide a new phrase means when we already know what they have decided an existing phrase means? As a result, policies often became full of "tried and true" legalese rather than evolving into plainer and simpler – but, to an insurance company, more risky -- language.

A final layer of confusion occurs when we try to take old wordings and coverages and make them fit new risks and situations. Not only do the words become confusing, but it can be hard sometimes to even understand the intent of the policy as we add endorsements onto exceptions to exclusions to covered perils.


Insur​ance Confusion Simplified …

It would be nice to totally unravel this Ball of Confusion.  Not sure we can do that totally, but we will try to explain some of the more confusing, harder to understand parts of insurance we have been asked about recently.​


1. Subrogatio​​n​   ​

A recent CBC article1 mentioned subrogation as it relates to travel insurance and, with all respect to CBC, its description of subrogation was a little bit – although not entirely – off.  Subrogation is the legal doctrine in which one person or entity can step into the shoes of another to exercise the other's rights. The best way to understand subrogation is through example.

Imagine a neighbour's decrepit tree – you know, the one you have been warning them about for a couple of years – finally falls down and lands on your house, causing damage. In the absence of insurance, you would sue your neighbour for damages and hopefully get a court award for them to repair your property (for this example, we assume you win the case.) With property insurance, you would not sue your neighbour: you would just go to your insurer and they would pay to repair your damage, perhaps subject to a deductible2: This method is faster and easier for you. Once they have settled your claim, your insurance company would like to recover from your neighbour who actually caused the loss, so they can keep their costs – and ultimately your premiums – as low as possible. The problem is, the insurance company cannot sue your neighbour because your neighbour caused no harm to them. Your neighbour only harmed you, so you are the only party who can sue. Subrogation allows the insurance company to act as if it was you, exercising your rights to collect from your neighbour. Subrogation allows your insurer to settle your claim far more quickly than having to use the legal system to settle things but still gives them the option to ultimately have the party responsible pay for the damage. 

Subrogation is used in many insurance situations (and many other situations involving credit and financing). In practice, insurance companies usually only subrogate for large losses. The reality of the legal system is that it is costly – both in money and time – for your insurer to go after other parties but with large claims the effort is often worthwhile. Insurers will use subrogation to recover some of their costs, and the results mean that people are ultimately held responsible for the outcomes of their actions … or the outcomes of their property's actions in the case of the tree.

​​

​​​2. First Payer Clauses

First Payer Clauses are clauses in insurance policies that state the policy will only pay after any other valid insurance pays first. First payer clauses ultimately rely on subrogation to work since in practice these policies often pay the full claim and then seek to be repaid by the other insurance that is in place. This practice leads to faster claims payment for the policyholder – a good thing – but means the insurance company with the First Payer clause needs to act on your behalf (since you are the policy holder on the other policy, not them) to file a claim and recover the funds they can recover.

In the CBC article referenced above, a first payer clause was in the travel policy the couple purchased.3 First-payer clauses are very common in travel insurance: to the best of my knowledge, most stand-alone travel insurance products – including the current OMA Travel Insurance products – are subject to the same first payer rules. It is why they are relatively inexpensive and so widely available.

In the case in the CBC article, the First Payer clause meant that an incident out of province significantly impacted the health insurance coverage the couple had under their main policy, reducing their future coverage. Because their travel policy had a first payer clause and because their main policy had some very significant limits on lifetime coverage amounts, what the couple thought was giving them totally independent travel coverage turned out to be only a broadening of their existing insurance coverage.

The idea of First Payer clauses is to help reduce the costs of the secondary policy. As with subrogation, the First Payer clause is not always used by the insurer, as recovering money from an underlying policy costs time and money, so small claims might just be paid by the secondary company and they will not pursue it further.

To stick with the travel insurance example, if you have a health insurance policy with a $1 million out-of-province coverage feature and you buy a travel insurance policy with a $5 million limit, you only have a total of $5 million of coverage, not $1 million + $5 million = $6 million.  So if you have a large enough claim, the travel insurer will pay your claim and then, using the First Payer clause and the power of subrogation, will submit whatever expenses they can to your main health insurance policy.  It is unusual for the coverages in a travel policy to exactly match the underlying policy, so some costs will almost always go back to the travel company.

3. Coordination of Benefits

It is not unusual for situations to arise when more than one insurance policy covers a claim and for none of the insurance policies involved to have a First Payer clause.  Rather than try to decide how to split up each individual case, or to rely on Subrogation – as we have mentioned, this can be expensive and time-consuming – insurance companies rely on Coordination of Benefits. 

To make things easier, less expensive, faster and fairer the Canadian Life and Health Insurance Association Inc. (CLHIA) guidelineshelp determine how benefits get coordinated between policies in situations where more than one policy covers a claim. There are a number of other CLHIA benefit coordination rules covering policies.

The most common situation most people run into is coverage of children or dependents when both parents have group health or dental coverage. The CLHIA guidelines are that the parent with the birthday first in the year should use their coverage first, with any unpaid amounts then going to the next parent (the rules are different if one parent has single custody). The rationale for this procedure is purely administrative: it is easy and inexpensive, and uses information the insurer already has on file. Over a large enough population, it generally averages itself out (since there is no reason for any one insurer to have more or less people born at certain times of year, the costs should be neutral in the long-run).

Many people find Coordination of Benefits confusing or, at best, hard to understand because they do not understand the logic behind the rules. The logic often turns out to be simple practicality: it works and is not expensive, so let's do it.

These rules make the payment of insurance claims easier and faster, reducing rates from what they would be if insurers had to work out new rules between each other for every claim. They insure that the basic principle of indemnification – that a claimant be put back into the same financial situation they were before the claim (no more and no less, up to the policy limit) stays intact.5  Finally, they help avoid a situation where a client trying to make a claim is stuck between two (or more) insurers trying to figure out which one should pay first.


4. Paperwork

Why is there so much paperwork associated with insurance, especially in claims? Some insurance claims processes seem designed to support the Canadian pulp and paper industry. Paperwork is everywhere. This is not true of every claim, of course – getting your car windshield replaced can be remarkably free of paperwork, and life insurance claims are often quite straightforward – but it is certainly still true with disability insurance claims and, for policies like the OMA Insurance Professional Overhead Expense policy, it can be true for claims going over six months in length.  Paperwork can be so difficult to deal with that it can actually make it hard to collect on your insurance.6

​ Why is there so much paperwork involved with insurance, especially in claims?​

For disability claims in particular, the profusion of paperwork comes from a number of sources.

  • First, the concept of indemnity means that insurers want to ensure that they are not paying more to a person on disability insurance than the person was earning before getting injured or ill.  As a result, insurers need to see proof of income.
  • Second, for many of us the calculation of how much we earn is not a simple story. For an employed person with a single T4, it is pretty straightforward; but for a physician with multiple expenses, possibly multiple sources of income (some may be earned income – covered by disability – and some may be unearned income such as rental income from properties that is not covered by disability insurance), and likely a professional medical corporation … well, confusion seems to be an understatement.  More paperwork, often including tax information, is the result.
  • Third, physicians may have multiple policies with multiple carriers who have different terms, conditions, and definitions – and who will all definitely want copies of everything!  Not only are you now dealing with multiple copies of the same paperwork, but now you are dealing with different interpretations, different claims processes, and possibly different timing for payments.

Quite plainly, this is confusing and, coming at a point in time when you are likely the least open to dealing with this hassle, it can be a bit of a nightmare.


That's what the world is toda​y, hey, hey.

This line comes right near the end of the song Ball of Confusion, and maybe that is a good sign, perhaps the world today is just near the end of this Ball of Confusion that we currently experience within insurance. Today's insurance world can sometimes be a bit overwhelming and complicated, but it does not have to be for tomorrow, and our continued commitment is to make it easier and simpler: "As simple as possible but no more", if I can quote Einstein in the same paragraph as The Temptations.

At OMA Insurance, we cannot completely stop the causes of confusion all by ourselves – which is why we are working with our partners to help streamline things – and we know we can help you navigate your way through the maze. 

Over the past few years, we have made progress on POE and prescription drugs, the insurance industry has made huge progress on automobile insurance claims, and we are continuing to work on disability, health and dental.  We have streamlined underwriting and claims processes, we have continuously updated our website, we have introduced new rate calculators and we even have an online application process, with much more to come.

We are spending increasing amounts of energy focused on the insurance experience for our members and in how we create value for you. We are looking at the risks affecting your lifestyle, assets, and businesses and examining how we can better help you prepare for and manage these risks.

How are we doing?  Are parts of what we do overly confusing to you? We would truly like to know, and welcome all feedback. To once again borrow from the song, "Let me hear ya, let me hear ya, let me hear ya …"

OMA Insurance. Not for Prof​it. All for Doctors.​


​​1 See http://www.cbc.ca/news/business/buy-travel-health-insurance-end-up-with-less-coverage-a-couple-s-hard-lesson-1.3495864  

2 This example does assume you have a policy that covers objects falling onto your property, and it assumes that there are no unusual circumstances.  I hope it is obvious that every claim is a unique case and my example is not intended to predict or guarantee an outcome in any claim you might have.

Please read the article to get the full story, but briefly:  a couple bought stand-alone travel insurance. While out of country, she became ill and the bill came to more than US$200,000. The cost was paid by their travel insurance and their travel insurance subsequently subrogated against their own group insurance plan, recovering about C$98,000.  The challenge is that their group plan has a lifetime maximum is $500,000.  The couple suffers from diabetes and multiple sclerosis, with combined monthly drug costs of approximately $4,000 per month, and now their available coverage is reduced by about 25%: better than being reduced by US$200,000 but not what they were expecting.

See https://www.clhia.ca/domino/html/clhia/clhia_lp4w_lnd_webstation.nsf/resources/consumer+brochures/$file/brochure_guide_to_coordinationbenefits_eng.pdf if you want to know more.

5 Indemnify: to make compensation to an entity, person, or insured for incurred injury, loss, or damage. https://www.irmi.com/online/insurance-glossary/terms/i/indemnify.aspx

6 See "When doctors have problems collecting on disability insurance," Ann Graham Walker, March 15, 2016 edition of The Medical Post, available online through http://www.canadianhealthcarenetwork.ca/