Lemonade: Homeowners & Rental Insurance With No Incentive To Deny Your Claim?

lemon_logoRight or wrong, many people view insurance companies with suspicion. Even though you pay them money every month for protection, you’re not really sure if they are truly on your side (despite what the commercial says). The problem is that with most insurance companies, any money they don’t pay you ends up in their pocket. The incentives are not aligned. Will they find a reason to deny your claim? Recall the Insuricare scene from the movie The Incredibles.

Lemonade is a new insurance company that takes a flat cut upfront, and the rest is put aside to payout claims. They are starting out with homeowner’s and renter’s insurance. The specific breakdown is below.

  • 20% to Lemonade.
  • 40% into a pool to pay out for claims (or charity).
  • 40% to reinsurance in case that pool is exhausted (catastrophic cases).

Reinsurance is basically what is sounds like – insurance for insurance companies. This provides additional safety that there will be money to pay out your claim in cases of catastrophic losses (i.e. certain natural disasters). Examples of reinsurance companies are Lloyd’s of London and Berkshire Hathaway.

If there are fewer claims than expected, Lemonade will donate the money to a charity of your choice. Therefore, they have no direct incentive to deny a valid claim. In turn, hopefully their customers will also not make false claims because they will only be taking money away from charities and not the big bad insurance company. When signing up, you even take a “honesty pledge”.

Here’s how behavioral economist Dan Ariely, who is their “Chief Behavioral Officer”, puts it:

Knowing that every dollar denied to you in claims is a dollar more to your insurer, brings out the worst in us all… Since we don’t pocket unclaimed money, we can be trusted to pay claims fast and hassle-free. As for our customers, knowing fraud harms a cause they believe in, rather than an insurance company they don’t, brings out their better nature too. Everyone wins.

Lemonade is also structured as a Public Benefit Corporation (B-Corp), which makes it the “World’s Only Public Benefit Insurance Company”.

Lemonade also saves money with the usual tech start-up tricks. No human salespeople. No brokers. No physical branches. Apply online. File your claim online. Use the website or slick smartphone app (iOS and Android). The app has a chat-based AI interface, just like all the current cool kids. If you have to file a claim, you can take a video of the damage using your smartphone explaining the situation.

As of right now, Lemonade is only available in the states of New York and Illinois. However, they have filed for insurance licenses in 45 additional states (the remaining 3 states have statutory wait times). If you live in the state of New York or Illinois, get a free quote from Lemonade for homeowner’s insurance for as little as $35 a month and renter’s insurance starting at $5 a month.


  1. That sounds like an awesome premise – I suppose it’s too much to ask that we get to claim the tax deduction on the charitable donation as well but I love the idea anyway. 🙂 I hope they’re successful and make it out to California.

  2. This is similar to Usaa but instead of charity they give you a rebate

  3. I’m not sure those rates are very competitive – but I guess you are saying it is only for New York. In the Midwest, rates are much better than their “lows”.

    • I live in NYC and just checked the rates and mine is still better. Although I Geico (which uses Assurant) and maybe I get a multi-policy discount.

  4. Thanks for sharing – I like their feature that they will alert you when they are in your area. They say they expect to be able to cover 97% of Americans by 2017 which is pretty bold.

  5. Sounds good in theory, but even Lemonade will likely be forced to “review with suspicion” any claim made in order to prevent the initial pool from being exhausted pre-hazardous claim pool – otherwise their reinsurance rates would be through the roof.

    Every insurance company, whether Lemonade or some other one, will evaluate a claim made first with whether it should be denied.

  6. Brad Ford says:

    While it is a nice marketing story, Mutual Insurance Companies (ex: State Farm) exist for the sole purpose of serving their customers. Any “profit” generated is used for two purposes (1) dividends to policyholders (aka the owners) or (2) building up capital to ensure they have enough money to pay claims. State insurance departments strictly regulate capital levels.

    Lemonade is simply using the reinsurance to reduce the amount of “capital” that they would need to write business.

    Furthermore, the idea that they have eliminated the incentive to underpay claims is false.
    1) if their loss ratio exceeds 80%, they are going to lose money
    2) if their loss ratio is > than expected, their reinsurance costs will skyrocket.

    Finally, companies like State Farm, USAA, and Nationwide benefit from economies of scale and decades of experience. Lemonade will struggle to keep expenses down.

  7. I am not an insurance expert, but which mutual insurance companies provide dividends for homeowner’s and renter’s insurance? I know some car insurance companies do, but the from a quick Google search, the last time State Farm paid auto insurance dividends was 2007. I’ve had State Farm homeowner’s insurance for the last decade and don’t remember any dividend checks. It appears that USAA has a better record of paying out dividends for car insurance, but I also couldn’t find any announcements about home insurance.

    If there are mutual fund companies that pay out dividends on homeowner’s and renter’s insurance, it would be interesting to see the numbers.

  8. I have been using them for 4 months now in long island city, nyc. cheaper rates than i could find elsewhere, state farm, nationwide, assurant, travelers. they have been very prompt on responses to all my questions thus far. more competition cant be a bad thing for the consumer

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