Lemonade–A Fairy Tale with an Unhappy Ending?

By now you’ve probably heard of Lemonade, the so-called “peer-to-peer” insurance company offering home, condo and renter’s insurance in New York. It rolled out recently, touting itself as a new brand of insurance company designed to take the typical insurance company and turn it into a new hybrid that is highly automated, competitively priced and able to allow policyholders to work together to keep losses down so excess profits can be donated to a charity of their choice. By squeezing out all the negative things inherent in most traditional insurance companies, Lemonade professes to offer a new sweet solution that will quench consumers’ thirst for a better way to buy insurance. Why does a company with such a noble objective need to hire as its “Chief Behavioral Officer” a best-selling author and professor of psychology and behavioral economics from Duke University? Is it possible the company’s promises of being different and better aren’t as accurate as Lemonade is leading consumers to believe? Let’s examine some of the facts regarding Lemonade.

• Lemonade flaunts itself as a B Corp, meaning it is a for-profit company certified by the non-profit B label to meet “rigorous standards” of social and environmental performance, accountability and transparency. Such a designation is important to younger consumers looking to do business with socially conscious companies. While Lemonade’s parent company might be a B Corp, its insurance company is a standard stock insurance company.
• Lemonade does offer very competitive rates, as confirmed by a former IIABNY Chair of the Board. However, the company provides a standard ISO 2010 edition of the HO-3, HO-4 and HO-6 policy form that very likely is not providing consumers with the breadth of coverage they expect and want for the exposures they have.
• Lemonade indicates it doesn’t transact business with a traditional agent; however the company actually owns a licensed insurance agency (Lemonade Insurance Agency LLC) to which it pays a 20 percent flat fee.
• The Giveback clause is where Lemonade determines how much money it has remaining after all fees, claims, reserves, required surplus and reinsurance are paid. The company then “gives back” what is left to the policyholder’s common cause. Unfortunately, the end of that clause says: “Giveback is Lemonade’s policy and expression of intent, but it is not a contractual obligation to you, nor the cause you selected. We reserve the right to suspend or amend the Giveback policy from time to time.”
• Lemonade has a Digital Assistant meant to provide consumers with helpful information on selecting coverage. Unfortunately, the Terms of Service say: “The information provided by Lemonade’s Digital Assistant is not and should not be construed as insurance advice. Lemonade is not liable for any inaccurate, missing or misconstrued information and makes no guarantee as to the quality and precision of the content. Any insurance purchasing conclusions and decisions such as coverage amounts, limits and deductibles are completely and solely the responsibility of the insured.”
• The most important part of any insurance program is how claims are handled. The only way policyholders can truly determine the quality of the protection they purchased is by whether a claim is paid and how it is handled.

That’s more important than the cost of coverage. How will Lemonade handle a claim? Based on its terms of service, that’s hard to say. Only time will tell. It’s possible to believe the process may not be an easy one based on its focus on taking interaction with people out of its business model. In the Terms of Service, Lemonade states: “A claim representative may be communicating with you regarding your claim.” The first few words of the Claims Submission section of the Terms of Service offers a clue to its feelings about claims. It says, “If you elect to report an insurance claim,” implying that a policyholder who has suffered a loss may not wish to report a claim. I wonder how many policyholders Lemonade believes will have a loss, even a small loss, and not seek to get paid under their policy. The most important claim concern for Lemonade policyholders should be whether the basic coverage they are purchasing is going to protect them the way they expect.

Earlier in this column, I mentioned the Chief Behavioral Officer and his credentials. He is the real threat to you as an independent agent. He has helped carefully craft a story about Lemonade designed to draw consumers in using his knowledge of psychology and human behavior. Lemonade’s story is that it has taken a broken and bloated industry and fixed all the inherent problems. “Technology drives everything at Lemonade” is a direct quote from Shai Wininger, president and cofounder. Lemonade stresses it provides consumers an experience that is mobile, simple and remarkably fast. It’s all about artificial intelligence and bots, according to the company. Using technology allows it to cut costs, making its products more affordable. Lemonade goes on to tell consumers how it intends to give back underwriting profits to a charity they designate.

All of Lemonade’s messages are carefully crafted to focus consumers on feelings and beliefs that advance the company’s message, and away from the major issues of professional expertise and interaction that assure consumers receive proper coverage and quality customer service.

The vison is alluring to consumers as it has been crafted by an expert in psychology and behavioral economics. But we know plenty of promises are being made that may never come to pass. We also know basic homeowners, renters and condominium coverage do not always meet the protection needs of most consumers. Our job is to protect consumers from drinking in what Lemonade is offering that ultimately could leave them with a very unpleasant and sour experience.