Fighting Legalese with Digital, Personalized Contracts

Executive Summary

The cost of legalese in business contracts is high. Companies must hire expensive lawyers to compose it, and customers often miss important information because agreements are so long. And if those customers lose faith in those companies because they are surprised by what they missed, they can swiftly air their grievances on social media. The legal industry has been experimenting with shortened and more “human” contracts for years (for example, Creative Commons licenses). Now some insurers (whose industry suffers from this problem greatly) have developed digital, personalized policies that take these efforts to the next level.

Robot:PhotoAlto/Matthieu Spohn/Getty Images; Gavel: Hans Bjurling/Getty Images; Illustration: HBR Staff

The cost of legalese in business contracts is high. Companies must hire expensive lawyers to write the stuff. Their customers often miss important information because — really — when was the last time you read every word of one of those privacy agreements before clicking “Agree”? And if those customers lose faith in those companies because they are surprised by what they missed, they can swiftly air their grievances on social media.

The problem is widespread, affecting a broad swath of industries and functions including real estate financing, content licensing, consumer finance, residential leases, consumer warranties, and insurance.

For some decades, the most commonly touted solution has been the conversion of legalese into plain English. Unfortunately the magic wand with which to achieve this conversion has proved elusive;  companies are understandably reluctant to sacrifice legal certainty for clarity.  And there’s a reason for the trade-off.  As the linguist and cognitive psychologist Steven Pinker wrote in The Language Instinct, legal language often appears convoluted because it cannot assume the levels of trust and mutual understanding that inform most other types of communication.

But there are two problems with legalese that can be solved: length and lack of specificity. Most of these contracts are not tailored to the particular circumstances of the customer; they are, very largely, one-size-fits-all. Between specific references to the contracting parties lies a thicket of boilerplate, much of which does not apply to the particular relationship the contract sets out to capture.

By using technology to personalize and present contracts, businesses can dramatically cut their length and their abstract complexity, making it easier for customers to understand their rights and responsibilities – all without diminishing legal certainty. As a marketing executive, it’s encouraging to see my company – an insurer – among those beginning to introduce this technology. But it isn’t the only one.

A pioneer in this field is Creative Commons, the global nonprofit organization that empowers writers, artists, and other creators to build copyright licenses delineating specific approved uses for their works. The system makes available to consumers a “human-readable summary” of the license, which runs to less than a tenth of the length of the full “legal code” version. Since the publication of the first Creative Commons licenses in 2002, they have come to govern the sharing of more than a billion works via millions of websites.

More recently, the insurance industry has been warming to the idea of personalized digital policies designed for humans and lawyers alike, and two insurers, Lemonade and my company, Beazley, have begun issuing them. The insurance industry has a particularly acute problem with legalese because insurers are sometimes seen as trying to wriggle out of paying claims by citing language buried in the fine print of policies.  In reality, the language usually exists to preclude claims for risks that were never covered, and for which no premium has been charged.  But this is not how customers see it—precisely because these long contracts are so onerous to read.

Personalized digital insurance policies improve the situation in a number of ways. First, they strip out the reams of text relating to coverage the policyholder has not bought, making the policy substantially shorter. Navigation of the policy is also made simpler: with the interactive HTML web format, gone is the need to flip constantly back and forth to a lengthy section given over to definitions — which can instead be summoned up and dismissed by a click — or to critical information such as sums insured, deductibles, and dates — which are automatically embedded throughout the policy. The policy language also becomes far less abstract: “your sum insured” and “your deductible” become actual dollar sums and the “policy period” is bounded by actual dates. With the policy recast as a well-designed, mobile-responsive website, its length is less of an obstacle. The content is all there for a policyholder to browse, search, and read in a way that is much more intuitive.

These policies are designed to benefit all the participants in insurance transactions, from the insurer to the customer to the customer’s broker. For small business policies in particular, the broker can ill afford to spend time combing through policy language to answer a customer’s question: it’s easier just to call the insurer. It’s safer too – the broker can’t be held to blame for giving inaccurate advice. But the back and forth is a drain on everyone’s time.

The success of the new policy design has been reflected in our sales. In the months following the launch of the digital policy, we saw sales increase strongly, and we were also able to sell digital policies in a number of states where we hadn’t before.

We’re heartened to see others in the industry are taking this approach as well. Lemonade, a new insurer established in New York in 2016 to focus on renters and homeowners’ insurance, last year launched “policy 2.0,” a radically simplified, modernized, digital insurance policy. Their policy wording is also open source, enabling consumers to suggest coverage extensions and other changes.

All the advantages of moving to personalized digital contracts are available to businesses beyond the insurance industry. The creation of successful simplified digital contracts requires a hybrid team drawing upon three areas of expertise within a business: legal, IT and marketing. The technology required is not complex, but personalized contracts do have more moving parts than one-size-fits-all contracts. Above all, the design of the digital experience is critical and should be carefully tested with users.

Legalese and lengthy contracts will not be vanquished overnight, but personalization and digitalization can help. Over time, their wider adoption should protect a resource that is precious for any business: customer trust.

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