The real reason insurance companies want to give you free 'smart' home devices

When your “smart” home is hacked, who is to blame — and importantly — who pays for it?

As connected items in our homes move beyond laptops and mobile phones to baby monitors, refrigerators, door locks, intruder alarms and thermostats, insurance companies are evolving along with them.

The insurance industry is increasingly incorporating these devices into home coverage. According to new figures from research firm Accenture, insurance pilot projects for connected homes increased from 9% in 2014 to 22% in 2015.

“There is a significant movement within the insurance industry now to see how they can leverage some of these connected devices to make people more insurable,” Eric Cernak, vice president and cyber practice leader for insurance group Munich Resaid. “Whether through subsidizing devices or providing better terms and conditions on these policies, there are a number of ways various companies are looking at encouraging these technologies.”

Some of those companies, like State Farm, pay for the installation of certain security services and offer customers discounted insurance coverage if they take measures like automating light and energy management from an app or use smart fire and water monitors. State Farm spokesperson Rachael Risinger said these measures are to help consumers prevent losses. One study showed that these measures can help insurance companies too: The installation of a smart fire detector, for instance, could save companies an average of $35,000 in insurance payouts.

“Research indicates home control and monitoring products help provide protection to the home,” she said. “State Farm envisions an intelligent home that increases policyholders’ awareness of what happens in their homes and empowers them to control and protect their family and possessions.”

These protective measures are becoming increasingly invasive: the provider’s “Connected Care” policy encourages the use of sensors to “make sure loved ones are going about their normal routine,” reminders to take medication, and fall-detection technology for elderly family members.

Although these products are being promoted, and even subsidized by insurance companies, they also come with their own risks. Many smart products are extremely susceptible to security flaws, leaving customer information vulnerable to hackers. Companies are working to encourage the adoption of these devices but have done little to address what will happen to customers if a security breach occurs, Cernak said.

“We have not necessarily evolved that far as an industry — we are seeing companies incentivize smart homes but what isn’t being addressed is the vulnerabilities of those devices,” he said. “A lot of these policies were written before the connected home was a concept, so the question is whether the language on the page covers what a current exposure would be.”

Cyber liability insurance is a growing area of coverage that is expected to triple by 2020. It is largely used by businesses and individuals with highly valuable data, particularly startups, but Christopher Dore, a partner at privacy law firm Edelson PC, said there is a demand for such coverage to be built into home insurance for the average consumer.

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“There is monetary value assigned to data and it is personal property and the loss of which should be compensated — that is not something that has gained enough traction to move over to the very strict world of insurance,” he said.

Connected devices are also making home invasions less physically obvious, and therefore potentially harder to prove in the claims process. In the past, there was often evidence of a break in, whether it is broken glass or a busted-in door, but today the insidiously subtle process of a break-in could be hard for consumers to prove. Smart home owners filing insurance claims may face a struggle similar to victims of identity theft, who have to prove seemingly routine actions like withdrawing money from a bank account were not actually carried out by them.

The home monitoring devices that benefit insurance companies may ultimately hurt consumers when data tracking is used to identify trends and habits, Cernak said. Customers could be penalized for risky behavior like leaving a stove on and tracked to ensure they are using the smart devices they say they are.

“You could get to a point where insurance companies are saying they know you have a security system on your home, but you aren’t turning it on so they won’t give you a discount,” he said. “The convenience that comes with all of these devices also means they are capturing your day-to-day lives behind closed doors, and people forget about the value of that.”