Berkshire-Hathaway’s new commercial lines THREE policy provides coverage for property, auto liability, general liability, errors and omissions, cyber losses and workers compensation in just three pages. What should you know about it?
What does Buffet see in a three-page policy?
By Joseph S. Harrington, CPCU
What is Warren Buffett thinking?
The Oracle of Omaha is being widely criticized by insurance policy form experts for promoting Berkshire-Hathaway’s new commercial lines THREE policy, so-named because it provides coverage for property, auto liability, general liability, errors and omissions, cyber losses and workers compensation in just three pages.
To Buffett, a simplified three-page policy is a boon to small business owners baffled by the complex language and structure of traditional forms. But it didn’t take long for policy form analysts to weigh in.
“One would think that Mr. Buffett would know better, but apparently his knowledge and expertise do not extend to the policy level,” wrote Bill Wilson, former head of the IIABA’s “Virtual University.” Christopher Boggs, Wilson’s successor in that post, opined that “this is a policy with holes and problems.” Readers can easily find detailed critiques by Wilson, Boggs, and others online.
Today, small business owners must at least consider purchasing the types of coverage provided in THREE, and thus face the challenge of selecting premiums, deductibles, and limits for several policies.
For our purposes here, we’ll summarize the criticisms to say that they apply mostly to specific exposures that are not explicitly addressed in the simplified policy. These include debris removal, non-owned/hired auto, newly acquired autos or buildings, property of others in the insured’s care/custody/control, medical payments, employers’ liability, contingent business income, and many others.
With these omissions, plus absolute pollution and contractual liability exclusions and a potentially restrictive definition of insured, THREE can appear to be an ominous prospect for agents and insureds.
So, what, indeed, are Warren Buffett and his team thinking?
Small biz buying
Any reading of THREE must start with an appreciation of the rapid transformation of small business insurance in the 21st century.
For decades, most small businesses purchased standard businessowners policies or commercial packages, plus auto and excess liability policies when applicable. There wasn’t much more that they needed or could get. That’s history. Today, small business owners must at least consider purchasing the types of coverage provided in THREE, and thus face the challenge of selecting premiums, deductibles, and limits for several policies.
Perhaps Buffett and Berkshire Hathaway are betting that a simplified product, combined with rigorous underwriting, precise pricing, and streamlined claims management, can be a viable and successful product for small commercial accounts.
It’s important to note that many of the “omissions” in THREE (as compared to traditional policies) would actually expand coverage for the carrier; in some cases, quite substantially. For example:
- There is no exclusion for losses due to flood, earthquake, terrorism, or war;
- There is no anti-concurrent causation provision; and
- The liability coverage responds to an insured’s legal liability generally, without specifying bodily injury, property damage, or personal-advertising injury; it thus avoids the restrictive effect of individually defining covered causes of liability loss.
Product developers at Berkshire Hathaway certainly know that THREE, like any other insurance policy, is a contract of adhesion and, as such, anything in it that is not clear will be interpreted in favor of the insured.
Debris removal is not mentioned? Then the carrier must be prepared to accept the possibility that debris removal will be included in the cost of reconstruction. No appraisal or arbitration clause? Well, if there is a dispute, it’s going to be settled somehow. Berkshire-Hathaway apparently thinks it can get by without prescribing the process beforehand in the policy.
If THREE is approved by states in its essentials (some states are requiring amendatory endorsements), there are two basic approaches Berkshire-Hathaway can take:
- It can absorb losses that commercial insurers typically exclude, betting that an expanded pool of risks, sound underwriting, and reduced claims handling costs will make it profitable; or
- It can take a hard line on claims, challenging those that are explicitly covered in other policies, but not mentioned in THREE. This would strike at the heart of the customer-friendly rationale for the product and ignite a backlash. It’s hard to envision the company taking that approach.
All this is not an endorsement of THREE. In particular, it matters little how easy it is for an insured to read a policy in its entirety. What matters most is what it says at the time of a claim. At that moment of truth, THREE doesn’t have a whole lot to say—and the insured may end up benefiting.