Can earthquake insurance companies legally ask about "Other Insurance"?

Question

California Earthquake Authority. §8 on Other Insurance says

a. If there is other insurance that covers earthquake loss to the dwelling or other property covered under this policy,we will pay our share of the covered loss or damage. Our share is the proportion that the applicable limit of insurance under this policy bears to the combined limits of insurance of all policies that cover the same property.

This reduces the value of my insurance policy (but not its cost to me) only because I have another policy, potentially with a competitor. It seems to have no purpose other than monopolism. Can it be an antitrust violation?

More competitive forms of insurance, such as life insurance, put options, credit default swaps, etc., do not have clauses of this sort. For example, a $1M life insurance policy does not lose value merely because you have a second one. And you can get as many as you like (for example, you get one with each new job, and you can generally keep it way past your time of employment). Obviously these life insurance companies, commodity derivatives, etc. companies can't write clauses like the CEA clause above -- they don't have monopolies and so they would go out of business if they did this. Is there anything legally non-monopolistic about the CEA clause quoted above?

Specifically, would CEA be in violation of anti-trust law if they suspended a claim because I either declined to discuss "Other Insurance", or because they found out about "Other Insurance" through some form of anti-competitive collusion?

Answer 1

Is there anything legally non-monopolistic about the CEA clause quoted above?

Yes. The clause is not monopolistic at all, since it is not prohibiting you to purchase or retain policies from elsewhere. All it does is notify you about a limitation of CEA's liability to you in the event of losses covered by multiple insurance policies.

Note that the clause is not in terms of "other insurers" or "insurance providers" but of "other insurance" (that is, regardless of there being one or multiple insurance providers involved). The clause addresses scenarios of coverage overlap, which has nothing to do with monopolistic practices.

In fact, section 10089.26(b) of the California Insurance Code provides that

Nothing in this section shall prohibit a participating or nonparticipating insurer from offering a condominium earthquake loss assessment policy for different amounts of coverage other than those offered by the authority.

As explained above, the clause you reproduce is compatible with that provision.

This reduces the value of my insurance policy (but not its cost to me)

Some context is missing in your description, but you might want to inquire of the CEA about your premium on the basis of section 10089.26(a)(2):

It is the intent of the Legislature, to the extent practicable, that rates charged by the authority to condominium loss assessment policyholders and residential property owner policyholders are treated equitably, and that a proportionate share of premiums is paid for potential exposure to loss, to the authority.

Perhaps the CEA's reason for asking you about your other insurance policies is precisely to adjust/lower your premium. The clause you reproduce simply informs you that withholding that information in no event can result in you obtaining compensation that exceeds the loss you incurred.

would CEA be in violation of anti-trust law if they suspended a claim because I either declined to discuss "Other Insurance", or because they found out about "Other Insurance" through some form of anti-competitive collusion?

No. The terms of your insurance policy might entitle the insurer to void the policy or deny coverage in the event of intentional misrepresentations. That would have nothing to do with anti-trust legislation, but with your breach of contract: your concealment of information that can be material to the insurer's assessment of risk.

If you can prove that concealing your other insurance is not a material breach, or not a breach at all, then the insurer's denial of a legitimate claim would put the insurer in breach of contract (not of anti-trust laws).

Answer 2

Insurance is not gambling

Insurance covers your loss. Insuring with multiple insurers does not entitle you to make a profit.

This has been a fundamental part of general insurance law from the beginning, when there are co-insurers (including the owner if they underinsured) they share liability up to the amount of the loss. This provision in the contract is simply stating the default position at law.

Answer 3

It's not unusual that something is insured twice. If I travel to a holiday by car and get into an accident, my suitcases and their contents might easily be covered by my travel insurance, my car insurance, and my household insurance. Collecting money two or three times would be illegal. But since the amount is quite small, any of the three insurances would handle my claim most likely without complaining; in this case I would probably have to claim with the car insurance and the travel insurance anyway, and add the suitcases to one of the claims.

Having your home insured twice is unusual, but can happen when you switch insurance and forget to cancel the old one. And the amount of money in a claim is most likely huge. I would assume that each insurance has to pay what they would pay if they were the only insurance, but with the total payout limited to your actual damage. The insurances would have to sort out between them who pays what, that shouldn't be your problem. But each insurance definitely has a very reasonable interest to know about the other insurance, one to prevent fraud, and two to reduce what they have to pay.

So paying for two home insurances is most likely a waste of your money, but your first insurance won't stop you from doing it. It's actually in their best interest. If your $400,000 home is insured twice for $400,000, and gets completely destroyed, each insurance collects the full premium but only pays half the damage.

Answer 4

To summarize some of the points made in the comments...

CEA is, most likely, charging more for over-insurance because it costs them more. The reasons are quite specific to the earthquake insurance business and evidently not obvious even to those of us who have thought about the issue for a while. Starting with the most significant:

1. Moral hazard. Not in the same sense as fire insurance, since you can't cause an earthquake. But if you have two policies on your home, then you have a strong incentive to underestimate your property value or construction costs. So in each policy you insure a 1M home for 500K. In smaller earthquakes, this home is likely to have substantially more damage than a 500K home, so the insurance company loses money.

2. They lose some market segmentation control. While market segmentation can be monopolistic, it is often not, as in highly competitive products like CPUs. (Or maybe it's totally monopolistic, but is still legal, as in university financial aid -- where they can condition the deal on your sworn testimony of how much money you have. I have no idea why that's legal). This loss of legitimate, or at least legal, pricing ability can be significant.

3. Coverage overlap. This is probably not significant for individual homes with 2X insurance, since insurance companies are likely already insuring many more than 2 homes in the same zip code. But it could create logistical issues if they want to, say, divide their portfolio into tranches of whole policies, where each tranche has no more than 1M in each zip code. And then at some point, maybe with 100X insurance on one guy's home, the overlap does become costly, so maybe they have to draw the line somewhere.