Lemonade has already upset the traditional insurance model with its ‘Giveback’ to charitable causes and record-setting speed for paying claims. Can the VC-backed startup revolutionize the way car insurance works?

Lemonade made quite a splash when it debuted its homeowners’ and renters’ insurance for New York residents in September, 2016. Since then, the radically transparent, upstart “B-corp” has expanded to a nearly nationwide presence, and the firm will soon be offering auto insurance, as well.

Can Lemonade auto insurance live up to the hype? And what’s all the hype actually about, anyway?

What Makes Lemonade Special?

Most insurance companies make their profits by taking more from customers in premiums than they pay out in claims. This creates an adversarial relationship between the company and its customers, and some big insurers have been charged with an unscrupulous strategy of Delay, Deny, and Defend (the “three D’s”).

Customers expecting to get the runaround from their insurers are more likely to exaggerate their claims, and insurers anticipating this from their customers become even more obstinate. Lemonade seeks to break this cycle of distrust by better aligning the incentives of everyone involved.

How can Lemonade do this?

1. Instead of relying on unpaid claims as the source of company profits, Lemonade takes a flat 20% fee – that’s it.
2. Individuals insured through Lemonade select a charitable cause for the company’s “Giveback” program. All customers pledging to a particular cause become part of a “peer group.”
3. Premiums collected above Lemonade’s 20% fee are pooled to pay claims – and whatever money’s left over at the end of the year goes to a charitable cause, not Lemonade’s bottom line.

Lemonade is banking on the idea that its customers will be less likely to cheat a good cause than a soulless corporation. That makes sense.

The Truth About Dishonesty

Lemonade also requires its customers to sign an Honesty Pledge. This may sound trivial, but Lemonade’s Chief Behavioral Officer Dan Ariely, best known for his Ted Talks and the CNBC documentary (Dis)Honesty: The Truth About Lies, has conducted experiments in which he reduced cheating to zero by simply asking folks to recall the Ten Commandments. Since none of the participants could actually name all ten, it’s unlikely they were an overly religious group – and yet, even being asked to think about morality caused them to act more morally.

Dishonesty is a big problem for the insurance industry – on both the customer and the corporate ends. Significantly reducing fraud, even if it can’t be eliminated, would allow insurers to offer much more attractive rates to their customers, and/or pay out legitimate claims with much less hassle. Lemonade has already set an (unofficial) world record by paying a customer’s claim in three seconds.

Will Lemonade’s Model Work for Auto Insurance?

Lemonade’s homeowners’ and renters’ insurance has been on the market for just over 100 days, but all indications are that the VC-backed firm is in excellent financial health. Nevertheless, selling auto-insurance could present challenges not evident in Lemonade’s existing markets.

For instance, 87% of Lemonade’s customers are first-time buyers of homeowners’ or renters’ insurance. This shows the company is reaching a market that traditional insurers have been unable to reach. But everyone has to buy auto insurance, making the market much larger – and more inclusive of “poor risks.” These poor risks may be more willing to exaggerate their claims, even if doing so takes away from a cause. Of course, Lemonade reserves the right to deny coverage to poor risks – and doing so should keep premiums low for the rest of its customers.

When Will Lemonade Offer Auto Insurance?

We don’t have a specific answer to this question yet, but Lemonade auto insurance should be coming soon – to at least some states.  Insurance is regulated at the state level in the U.S., and this means Lemonade will probably target a few states to begin with, just like they did with their homeowners’ and renters’ insurance.

The traditional insurance model has long been in need of a serious shake-up, and Lemonade is at the vanguard of reforming and improving the industry. It’s safe to assume that Lemonade’s auto product will have the same “Giveback” feature as its homeowners’ and renters’ packages, and a flat 20% fee to ensure the company will pay claims on the basis of merit, rather than Delaying, Denying, and Defending.

Once Lemonade auto is available, be sure to try out the comparison form available at the top of this page. When you do, be sure to consider more than just the monthly premiums: You may pay less with other insurers, but will they be as quick to pay out claims when they retain, as corporate profits, whatever they don’t pay?

Non-standard car insurance isn’t the lowest you can go.

Non-standard car insurance is not a good place to be, it’s not the worst place you can be, but it is not a good place. Non-standard insurance is the lowest level of acceptance in an insurance company before they just flat out tell you that they don’t want your business. This level is usually for those that have a number of car accidents, violations, and bad credit.  It can be a combination of two or more of these or just a really bad level of only one.

Non-standard car insurance policies are also treated differently by insurance companies:

• They usually have different billing fees if you go with a payment plan
• They have larger down payments at the time of new business
• Different coverage options
• Less optional/additional coverages available to be added to the policy

If you do get a non-standard car insurance policy it would be in your best interest to not do anything to add to your number of accidents or violations or do anything to decrease your credit score. If you do get worse in the car insurance company’s eyes they will DNR (Do Not Renew) your policy and you will end up in the assigned risk pool.  The assigned risk pool is where the government forces insurance companies to take on a certain number of clients that are considered uninsurable. The rates in assigned risk are astronomical and will make you miss the rates you were paying in non-standard car insurance.

Comprehensive coverage is that confusing coverage that usually covers everything else that collision coverage doesn’t.

Comprehensive coverage is also know as “other than collision” coverage for a reason, it covers all of those “other” covered losses that cause damage to your car that are not collisions. For it to be covered under your collision coverage you have to actually collide with something, comprehensive covers things that happen to your vehicle like:

• Hitting an animal
• Hail damage
• Civil disturbances
• Theft of the vehicle (not of the contents, this is covered under your home policy)
• Your car catching on fire
• Vandalism
• Falling Objects
• Rocks falling from another vehicle while you are both driving
• Windshield damage
• Sandstorm damage

This list, of course, is just a small example of this different things that are covered under your comprehensive coverage on your car insurance policy. What comprehensive does not cover are things like normal wear and tear to your vehicle, maintenance issues or mechanical problems. If your car breaks down, your insurance company will not cover that.

Your insurance adjuster will usually tell you what your damages will fall under and hearing that your damages fall under comprehensive coverage is a good thing, as most car insurance companies don’t rate comprehensive claims as high as collision claims. In fact, some comprehensive claims aren’t even counted against you, at all.

As always, contact your car insurance agent if you have any questions about if a particular type of damage would fall under your collision or comprehensive coverage.

Comprehensive car insurance coverage

From our friends at Allstate.

Q: Was hit at a traffic light by a woman making an illegal left turn in a no-fault state. Had the right-away- will the insurance rates increase?

A: Every claim you file on your insurance policy has the potential to raise your rates, regardless of fault. A not-at-fault accident will have considerably less impact than an at-fault but still, will have the potential to impact.

There are a lot of factors that come into play when an accident goes on your car insurance policy and how an insurance company ultimately will rate for them. They look at who is at fault for the accident, what kind of accident it was, and how much is paid out. How much an accident will affect your rate will also depend on your age, your credit/insurance score, and what type of vehicle your drive.

Insurance is not an easy market to predict increases in because of how many factors go into determining how much you should pay for your car insurance. For example, a 20-year-old driver and a 40 year-old-driver could be in the exact same type of accident and drive the exact same vehicle, however, the 20-year-old will see a much larger increase than the 40-year-old. The reason for the difference is because of a formula that the insurance companies use to determine who or what is a higher risk and will have the most likelihood of the insurance company having to pay out a claim for them. They then charge the higher risk higher car insurance rates.

Another factor as to if your car insurance rates will increase is if your company offers an accident forgiveness program.

Q: Hello, I was wondering do you ha e to have full coverage insurance to drive thru Canada or can you have liability?? I heard you gotta have a thousand dollars on you to drive thru Canada is this true??

A: Well, not sure where you heard that you have to carry that much cash in Canada, but I am pretty sure that much is not true.  I have yet to be asked how much cash I have on me by the border guards as I am making my way across into Canada. I would be curious as to where you heard this and the rationale behind it.

As for your insurance, you have to have car insurance in Canada just like here in the U.S.. However, you DON’T have to have “full coverage”, you only need the required liability insurance.

In the past you used to need special car insurance cards to be able to drive in Canada, today all you need is your American car insurance cards. If you have any additional questions, best to ask your car insurance agent.

Now, if you were visiting our neighbors to the south (Mexico) that’s a different story. In Mexico, you have to have car insurance sold in Mexico. Your American car insurance will work for a certain number of miles in Mexico, but if anything happens it is really up to the Mexican authorities whether or not they are going to accept your car insurance, even if your car insurance company says they would cover you.

If they refuse to accept your car insurance, you could do jail time.