Pet insurance is becoming a popular choice for pet owners, fueled by an increase in pet ownership during the pandemic, advancements in veterinary medicine, and a growing recognition that pets (or “companion animals”) are members of the family. Although the pet insurance industry is accelerating at a record pace, many owners have been irritated by the claims process and the surprising lack of sufficient coverage. To address some of these concerns, the National Association of Insurance Commissioners (NAIC) is working on a proposed model law that may offer better protection to owners and ensure a consistent regulatory framework among states.
The basics of pet insurance coverage
Pet insurance is a unique product. Although it contains many elements of human health insurance, it is considered a type of property and casualty insurance. On the marketplace, an owner generally has three coverage options: (1) accident only, (2) accident and illness (the most popular), or (3) accident, illness, and wellness (preventive).
The first pet insurance policy in the United States was issued by Veterinary Pet Insurance (now Nationwide) in 1982 for the famous TV dog, Lassie. Nearly 40 years later in 2021, the North American Pet Health Insurance Association (NAPHIA) reported that pet insurers collected 2.6 billion in premiums – 88% of which came from policies insuring dogs. And, insurers are not just collecting; they are paying some significant claims. The highest paid claim in 2021 was 50,602 for a 5-year old terrier mix in New York who was hit by a car.
The biggest drawback of currently available policies is that they all exclude coverage for “pre-existing conditions.” This exclusion may mean that conditions diagnosed or treated in a particular coverage period would be excluded in a subsequent policy period, to the surprise of many owners. For example, one insurer denied a claim for a dog’s hospitalization after swallowing a stuffed animal, citing the dog’s “pre-existing condition” for eating objects. Policies also generally exclude coverage for hereditary conditions and may require a month-long waiting period before coverage even kicks in.
Some pet insurers have also been the subject of consumer fraud claims. One pet insurance broker was the subject of a class action lawsuit in 2020 for its violation of various states’ consumer protection laws because it allegedly misrepresented the basis for changes to an insured’s monthly premiums – some of which increased nearly 200% over a certain period. In addition, the Office of the Insurance Commissioner in Washington found that two insurers, ACE American Insurance Company and Indemnity Insurance Company of North America (Chubb), overcharged consumers through rate increases and did not disclose the increases to their customers. It ordered the companies to repay 4.7 million – including interest – to policyholders.
California’s pet insurance regulations
To address some of these concerns, California became the first state to specifically regulate pet insurance. Enacted as part of its insurance code, the law defines certain terms, specifies certain disclosures a pet insurer is required to make to consumers, requires an insurer to disclose whether the policy excludes pre-existing conditions, hereditary or congenital disorders, and also requires that policies have a “free look” cancellation period of at least 30 days. Cal. Ins. Code §§ 12880-12880.6. Unfortunately for policyholders, the Governor vetoed a version of the bill that prevented insurers from excluding claims arising from pre-existing conditions.
NAIC’s Pet Insurance Model Act
Following California’s lead, in April 2019, the NAIC began working on a Pet Insurance Model Act, which aims to provide a uniform standard of insurance laws for each of the 50 states. Although the Pet Insurance Working Group adopted the Model Act in October 2021, the Property and Casualty Insurance Committee recently adopted an extension for revisions to research and address concerns regarding pet insurance producer licensing.
The current draft of the Model Act requires certain disclosures related to policy exclusions, waiting periods, premium increases, and underwriting company information. It also requires the insurer to disclose how it will reimburse the owner, since some policies reimburse claims based on a benefit schedule or “usual and customary fees,” which do not reflect actual costs incurred. The proposed Model Act also prohibits waiting periods for accidents and provides an option for the insured to complete a medical examination in order to waive the waiting period for illnesses. It also addresses sales practices for wellness programs, prohibiting the marketing of such programs as “insurance” and requiring the costs of these programs to be separate from any accident and illness policy.
Maine’s Pet Insurance Act
Maine did not wait for the NAIC to finalize the Model Act. Effective January 1, 2023, Maine’s Pet Insurance Act “establishes requirements for the sale, solicitation, negotiation or offer of pet insurance” and much like the Model Act, it standardizes defined terms, requires certain disclosures, and regulates the sale of non-insurance. “Wellness programs.” Me. Ins. Code §§ 3151-3161. Importantly for policyholders, it requires the insurer to bear the burden of proving that a pre-existing condition exclusion applies.
When a pet suffers an accident or sudden illness, the humans closest to that pet suffer alongside them and want to do everything possible to bring their pet back to health. But, not every owner is able to cover the costs of an emergency veterinary visit, which can run many thousands of dollars. In these unfortunate situations, pet insurance provides a very real and tangible level of comfort for owners. Consequently, if an insurer denies a claim due to some surprise that could have otherwise been avoided, the owner’s trauma is doubled.
The Pet Insurance Model Act is a starting point to ensure that pet owners receive sufficient coverage and that their claims are not unexpectedly denied. The Model Act’s definition of “pre-existing condition” and its disclosure requirements regarding hereditary disorders leans in favor of the owner. It also regulates the two most important aspects of pet insurance – the application and underwriting processes.
As many owners have experienced, the hereditary disorder and pre-existing condition exclusions can be the biggest barrier to coverage. And, given that the majority of dogs are not obtained directly from a breeder and are instead adopted from shelters or from family and friends, most owners do not know some or all of their pet’s health history.
To avoid potential pitfalls, during the application process, the owner should take the extra step to have the pet undergo a full veterinary exam, which they should then submit to the insurer. If the exam uncovers a pre-existing condition, then the owner knows before coverage is placed that any issues related to such condition will likely be excluded. Alternatively, the owner could wait until the pet has a clean bill of health before purchasing insurance and use a health exam result to negotiate an endorsement affirming that the now-resolved condition will not be excluded from coverage.
Additionally, the owner should confirm which hereditary disorders are excluded from coverage. If the exam shows the pet possesses a gene making it more probable the pet will have a particular excluded hereditary disorder, then the owner knows prior to obtaining coverage that claims related to that condition will likely be denied.