Washington, D.C. – A new article published in the Virginia Law Review reveals that consumers often struggle to understand what homeowners insurance policies cover, even when they are given the relevant policy language to read.
The article, Read But Not Understood? An Empirical Analysis of Consumer Comprehension in Homeowners Insurance, was authored by Daniel Schwarcz of the University of Minnesota Law School, Brenda Cude of the University of Georgia, Kyle Logue of the University of Michigan Law School, and German Marquez Alcala of the University of Michigan Law School. The authors conducted survey-based experiments with approximately 2,500 U.S. homeowners who had been involved in buying or renewing homeowners insurance.
The study’s key finding is striking: giving consumers the actual policy language sometimes improved their understanding of whether a loss was covered, but in other cases it made them less accurate. In three of seven coverage scenarios, consumers who received the relevant policy language were less accurate than those who did not. In another scenario, the policy language had no meaningful effect.
“Contract law and insurance regulation often assume that consumers can protect themselves by reading the policy,” said Daniel Schwarcz, one of the co-authors of the article. “Our findings suggest that this assumption is badly incomplete. The problem is not simply that consumers do not read. It is that even consumers who do read can misunderstand the language, especially when coverage is granted in one part of a policy and then limited or taken away in another.”
Reading Policy Language Sometimes Made Consumers Less Accurate
The study tested consumers’ understanding of common homeowners insurance coverage questions involving earthquakes, slip-and-fall liability, deck collapses, and electrical fires. Some respondents answered based on their general understanding of homeowners insurance. Others were shown excerpts from a standard homeowners insurance policy before answering.
In three scenarios, providing the policy language improved accuracy. But even in those scenarios, more than one-quarter of respondents still misunderstood whether the policy covered the loss.
In three other scenarios, providing policy language affirmatively reduced accuracy. For example, the policy language decreased accuracy by about 25 percentage points in an earthquake coverage scenario and by about 32 percentage points in an electrical fire scenario.
The authors suggest that consumers may be experiencing a “partial-reading” or “partial-understanding” problem. In some situations, consumers appear to focus on language that initially seems to provide coverage, while missing later provisions that restrict or eliminate that coverage. This is especially important because insurance policies commonly use this structure: they first grant broad coverage, then narrow it through exclusions, limitations, and exceptions.
Consumers Became More Confident Even When They Were Wrong
The article also found that consumers who reviewed policy language reported greater confidence in their coverage assessments. But that confidence did not necessarily mean they were correct.
“This combination is particularly troubling,” said Schwarcz. “Consumers may come away from reading their policy feeling more confident about their rights, while actually being mistaken about whether they are covered. That can affect whether they file claims, dispute denials, seek help, or shop for better insurance.”
The study also found that comprehension problems were not limited to less sophisticated or lower-income consumers. Insurance sophistication, income, and race did not meaningfully explain who understood the policy language. According to the authors, the difficulty of understanding homeowners insurance policies appears to be widespread.
Implications for Regulators, Courts, and Consumers
The article argues that making insurance policies easier to read is not enough. Policymakers should focus on whether consumers actually understand policy language, not merely whether the words are technically readable.
The authors suggest several possible reforms, including stronger readability standards, targeted warnings for especially misleading provisions, AI-powered tools that help consumers summarize and understand insurance contracts, and judicial limits on enforcing terms that consumers widely misunderstand.
“Consumers should not be expected to decode dense and technical policy language on their own,” said Schwarcz. “Insurance policies are supposed to define one of the most important financial protections families have. If the language cannot reliably communicate what is and is not covered, regulators and courts should treat that as a consumer protection problem.”
“Thus, advice to consumers to ‘read their policies’ will likely fall on deaf ears,” said Cude, a co-author. “Many consumers do not even know how to locate their policies or which specific sections of the policy might answer their questions.”
Advice to Consumers
Consumers should not assume that reading a few lines of a homeowners policy will provide a reliable answer about coverage. Policyholders with questions about coverage should ask their insurance agent or company for a clear written explanation and should specifically ask whether any exclusions or limitations apply.
Consumers who experience a significant loss should also consider getting help before accepting a claim denial. Because policy language can be difficult to interpret, a denial that appears correct may still be worth questioning. Your state’s insurance department can often be helpful.
