Tom Baker, Eric Helland, & Jonathan Klick

Abstract

Recent work using Texas closed claim data finds that physicians are rarely required to use personal assets in medical malpractice settlements even when plaintiffs secure judgments above the physician’s insurance limits. In equilibrium, this should lead physicians to purchase less insurance. Qualitative research on the behavior of plaintiffs suggests that there is a norm under which plaintiffs agree not to pursue personal assets as long as defendants are not grossly underinsured. This norm operates as a soft constraint on physicians. All other things equal, while physicians want to lower their coverage, they do not want to violate the norm and trigger an attack on their personal assets. This constraint should be less effective when physicians have other ways to shield their assets, such as through large personal bankruptcy exemptions like those available in Texas. Settlement data from the National Practitioner Data Bank indicate that settlements in Texas are abnormally low, just as they are in other jurisdictions with unlimited homestead exemptions in bankruptcy. Consistent with theory, we find that more generous exemptions are also associated with lower insurance prices and lower levels of insurance coverage. These results suggest that the large “haircuts” and low insurance limits observed in the Texas data may be driven by Texas’s generous bankruptcy provisions. At a minimum, Texas is not generally representative of other jurisdictions, which weakens the case for extrapolating conclusions from Texas data to other jurisdictions.

John A. Turner

Abstract

A growing literature has documented the low quality of financial advice that many people receive because of conflicts of interest that many financial advisers have. The Council of Economic Advisers has found that bad advice from financial advisers concerning rollovers from 401(k) plans to IRAs costs U.S. workers $17 billion a year. When a similar situation occurred in the United Kingdom, the situation was termed the “pension mis-selling scandal.” British financial market regulators levied billions of pounds in fines on financial service providers to compensate pension participants for the bad advice they had received. This paper argues that a pension mis-selling scandal is occurring in the United States. Despite the fiduciary duty of financial advisers, and the task of the SEC to enforce that fiduciary responsibility, the SEC has taken no action to protect pension participants relating to advice to roll funds over from low-fee 401(k) plans to IRAs, which generally charge higher fees. Even in the case of advice to roll funds over from the extremely low-fee Thrift Savings Plan for federal government workers (which charges less than 3 basis points), the SEC has taken no action. This paper compares the pension mis-selling scandal in the United Kingdom to the situation in the United States concerning pension rollovers to IRAs. The paper then compares the regulatory response of financial market regulators in the United Kingdom to that of the SEC. The main findings of this paper are the apparent view of the SEC that fees in the context of pension rollovers are not an important issue, and the related finding that there has been a lack of action by the SEC concerning pension mis-selling in the United States. These findings are both consistent with the hypothesis of regulatory capture of the SEC. Because the fiduciary standard of the SEC is weak, extending it to broker-dealers will have limited effect.

Kathryn L. Moore

Maria O’Brien Hylton

Abstract

In its recent Harris v. Quinn opinion, the U.S. Supreme Court (in particular Justice Alito) seemed to welcome a future opportunity to reconsider the 1977 landmark Abood decision in which public sector closed shop employees were not required to join a union but could be subject to fees that cover the costs of “collective bargaining, contract administration, and grievance adjustment purposes.” Supporters of the Abood approach argue that it is a reasonable compromise that prevents non-members from free riding on the union’s efforts (i.e., enjoying the wages and benefits negotiated by the union without sharing the costs incurred). Detractors and the plaintiffs in Friedrichs argue that free riding concerns are insufficient to overcome serious First Amendment objections. The central idea is that all bargaining in the public sector is inherently political. Public sector pay, tenure, and benefits (especially expensive retiree health care and pension promises), it is claimed, now profoundly affect the ability of state and local governments to function in many jurisdictions. This article briefly reviews the major claim in Friedrichs—that public sector agency agreements violate the First Amendment—and considers the implications of a decision that, but for Justice Scalia’s unexpected death, almost certainly would have overturned Abood. What would this mean for financially strapped state and local governments? To understand what a victory for the Friedrichs plaintiffs would mean, this paper looks at recent data from Wisconsin, which dramatically constrained public sector agency agreements a few years ago and has seen public union membership, union revenue, and political power plunge as a result. If Friedrichs had overturned Abood during the 2016 term, we would now expect to see national patterns similar to those observed in Wisconsin. In many places around the country, a drop in public sector union political power would be expected to translate into a climate more supportive of reduced future expenditures on public pensions and health care.

Israel Goldowitz

Abstract

Public pensions can be poorly funded, and, if recent events are any guide, benefit promises may be impaired in municipal bankruptcies. Experience with private-sector pension plans suggests that responsible funding is the best protection against default risk. Studebaker’s default on promised pensions inspired the 1974 federal pension reform act, ERISA. The company’s pension plan was substantially underfunded when the company failed, despite periodic contributions under pre-ERISA standards. The plan’s assets first paid retirees’ benefits, leaving 7,000 younger workers with little to nothing in retirement. ERISA addressed this default risk through funding rules and PBGC insurance. ERISA’s minimum funding rules have not prevented pension plan failure; to the contrary, the PBGC and plan participants have absorbed some large losses. However, the funding rules remain the primary protection against default risk.

Jonathan Barry Forman

Abstract

Longevity risk—the risk of outliving one’s retirement savings—is probably the greatest risk facing current and future retirees in the United States. At present, for example, a 65-year-old man has a 50 percent chance of living to age 82 and a 20 percent chance of living to age 89, and a 65-year-old woman has a 50 percent chance of living to age 85 and a 20 percent chance of living to age 92. The joint life expectancy of a 65-year-old couple is even more remarkable: there is a 50 percent chance that at least one 65-year-old spouse will live to age 88 and a 30 percent chance that at least one will live to 92. In short, many individuals and couples will need to plan for the possibility of retirements that can last for 30 years or more. There were 48.6 million retirees in the United States in 2014, but there are expected to be 66.4 million retirees in 2025 and 82.1 million in 2040.

John E. Marthinsen

Abstract

Residential homes are the largest, most leveraged assets in most U.S. families’ portfolios. Home equity protection (HEP) contracts offer opportunities to safeguard these real estate interests. In the United States, each state decides if a HEP contract is financial guarantee insurance (FGI) and, therefore, regulated by the state laws and insurance commission rules, or non-insurance financial protection (NIFP), which may escape state and federal regulations. Because HEP contracts have the potential to provide substantial benefits to homeowners, their regulation should be designed to protect state residents and encourage the development of safe alternatives. This article explains HEP contracts, their development, and why states should treat those that require material interests as FGI. Particular focus is put on: (1) the advantages and disadvantages of HEP contracts that are linked to home price indices, (2) why linking these contracts to price indices should not disqualify them as FGI, and (3) how HEP companies engage in regulatory arbitrage by linking their policies to home price indices and claiming NIFP status.

Beth Olsen

Abstract

Since 1999, prosecutors have increasingly utilized deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs) to resolve investigations into corporate criminal conduct. Corporations are often eager to enter into such agreements in order to avoid indictment, believing that the consequences set forth in the terms of the DPA or NPA are less harmful than are the consequences of a corporate indictment. However, the impact that a DPA or NPA may have on a corporation’s insurance coverage may not be readily apparent or even contemplated when the corporation elects to enter into the agreement. This Note analyzes the ways in which corporate insurance coverage interacts with and is impacted by white-collar criminal investigations and the resolution of such investigations through the use of NPAs and DPAs. Specifically, this Note discusses situations in which corporations have lost insurance coverage as a result of entrance into a DPA or NPA and identifies ways in which such consequences could be avoided. Finally, this Note anticipates the impact that the Department of Justice’s (DOJ) new emphasis on individual prosecution for white-collar crimes will have on corporate insurance availability and policies.

Zhen Jing

Abstract

Chinese Insurance Law imposes on the insured a duty to disclose material information prior to the formation of the contract. This duty is limited to the scope and extent of the insurer’s inquiry and to the insured’s actual knowledge. The insurer may rescind the contract if the insured fails to disclose a material fact, either intentionally or by gross negligence. This article considers the remedies for breach of this duty, examines the way in which Chinese courts determine whether a breach occurs intentionally or by gross negligence, and discusses deficiencies of the available remedies. Finally, this article recommends adopting the doctrine of proportionality for insurers’ liability for losses.

Qihao He