This 2-part series is authored by Daniel Hale,  a real expert in the field of insurance. Hale is located in Michigan so some of the considerations relate specifically to Michigan law. It is important that the reader find out if the reader’s state law is different.

By Daniel Hale

In today’s online marketplace, the ability for consumers to purchase insurance over the Internet is greater than ever.  With the continued development of electronic security and online bill payment, online insurance transactions are become more and more common.

In 2007, the greatest growth in online insurance purchases was for personal auto policies. Some studies show that nearly 30 percent of auto insurance sales will take place online by 2011, compared with 10 percent of individual life insurance sales and over 50 percent of individual health insurance sales.   The number of auto insurance policies purchased online increased by 37 percent from 2006 to 2007.  So far in 2008 the number of quotes requested online has increased by 15 percent.

Despite the latest trends, consumers might want to consider the following pitfalls before committing to an online insurance program.

1. No Offices

    The most obvious problem with online insurance policies is the lack of a physical infrastructure.  In most cases, online insurance companies maintain their operations at a national headquarters or call center.  This means that most policyholders can only communicate with their insurance company via internet or telephone.  In the event of a catastrophe or other major loss, it may not be possible to communicate with your insurance carrier for an extended period of time.

    Independent agents on the other hand offer a local presence that is unmatched by any online website.  This allows the agent to personally respond to any emergency claims or simply meet with the policyholder face to face to discuss policy changes.

    Also, independent agents are usually authorized to accept “last minute” payments from the policyholder in order to prevent policy cancellation.  Some online insurance carriers are limited in their ability to accept late payments and in some circumstances may even charge a transaction fee.

    2. Not All Online Insurance Carriers Are Obligated To Provide Michigan Benefits

      In today’s highly mobile society, it is not unusual for an individual to change jobs five or in some cases even ten times over the course of a career.  Sometimes this entails a change in that individual’s domicile or state of residence.

      What most consumers don’t know is that insurance policies are state specific. In fact, the first question that most online insurance companies ask is the applicant’s zip code and/or state of residence. This in turn determines the state specific “underwriting company” and policy form.  Some carriers even use the consumer’s computer IP address to determine the applicable state coverages.

      One of the most unknown facts about the online insurance industry involves the use of underwriting companies. These are companies within the main insurance company that are under common ownership or control, and that sell insurance in a specific state.  Collectively, these entities are the “family of companies” and are operated under the main insurance company brand.  The details of these entities are usually found in the fine print of the Terms & Conditions for use of the website.  For example, assume a insurance buyer purchases a policy from the insurance company.  Even though the policy carries the logo, the actual coverages are provided through XYZ Insurance company as the underwriting company.

      The reason that online insurance carriers create state specific underwriting companies is that it allows the carrier to deny and or limit losses for certain out-of-state claims.  Section 500.3163 of Michigan Codified Law provides that an out-of-state insurer is only obligated to provide Michigan benefits to an out-of-state resident if that insurer has filed and maintained a written certification with Michigan’s Office of Financial and Insurance Services (“OFIS”).  As long as the insurer maintains separate underwriting companies and does not file certificates in any other states, that insurer can avoid out-of-state liability.

      Although this law governs the application of Michigan benefits for out-of-state residents injured in Michigan, similar rules apply in other states.   For example, if an Ohio resident was injured in Michigan, the Ohio insurance carrier is only obligated to pay for Michigan benefits if that insurance company had filed its certificate with the Michigan OFIS.  The savvy insurance company will avoid this at all costs.

      To consider another example, assume a California resident purchases a California automobile insurance policy through an online insurance company.  Three months later, the policyholder loses her California job and moves to Michigan to stay with a friend.  Two months after moving to Michigan, the policyholder is involved in an auto accident and is severely injured.  Since the California underwriting company did not write insurance policies in Michigan and had not filed a certificate with the OFIS, the insurer is not obligated to pay Michigan No Fault Benefits.  Moreover, it is likely the insurer will argue that MCL 500.3163 does not apply to this policyholder since she is arguably a Michigan resident and no longer a resident of the State of California.  Similar problems arise when policyholder live near state borders or work across state lines.

      3. Online Insurance Carriers Lack Special Relationships

        An independent insurance agent will review an insured’s list of assets, do in-home visits and offer advice for what types of insurance to buy. Insurance agents also make themselves available for updates and insurance policy reviews.

        On the other hand, after buying an online insurance policy, online customers are more than likely pushed off on to the insurance company’s customer service department or national call center where they will be one of a million customers (or even one of 6 million customers).  Policy reviews and updates are usually based on a call center “scripts” using boilerplate language or a series of predetermined questions.  These scripts may have very little to do with the insured’s insurance program and ever changing exposures.

        4. Insurance Company Phone Systems Can Be Both Complicated And Difficult To Navigate

          Most online insurance carriers offer some form of customer support through a national call center.   The problem here is that many phone systems are fully automated and designed to provide very little human interaction.  In fact, some online insurance companies will create a number of different 800 numbers in order to track the quantity of calls from different advertising channels or geographical areas.   Simply contacting a customer representative can be both challenging and time consuming to say the least.  Most independent agents on the other hand offer a direct line of communication between the policyholder and the individual with a personalized answer, the independent agent.

          For example, assume your child gets a job delivering pizzas and you want to know if your policy provides coverage.  You decide to contact your online insurance carrier (headquartered with its call center in Iowa) for more information.  Even if you are able to locate the correct number, determine what time it is in that time zone, and navigate the complex phone system you might not be connected to the person who can answer the question specific to your state.  A simple two-minute phone call to an independent agent would not only have answered the policyholder’s question but would have likely included additional risk management comments such as a hold harmless and indemnification agreement.

          Part II of this article will appear next week on

          “This Article was submitted by Daniel P. Hale, J.D., CPCU, CRM, ARM, CIC, AAI, LIC, AIC, AIS, API, AU.   Mr. Hale is vice president of Cambridge Property & Casualty and an attorney licensed to practice law in the State of Michigan.  He can be contacted at 734-525-2429,  [email protected] or via” .

          Photo Credit: Thanks to Ben Ostrowski at Sylvar’s Photostream (