Jay M. Feinman

Brendan S. Maher

Abstract

The fate of the Affordable Care Act is uncertain. Moreover, the nation is in an unusual state of political turmoil and may have no appetite for anything other than revolutionary changes to the ACA, if not its outright repeal. But press reports suggest even Republican officials formerly committed to its extirpation are now thinking instead about a measured path forward. If so, one fact about the ACA should not escape the attention of serious reformers: the legislation has already accomplished the difficult task of laying the ground work for a move away from employment-based (EB) insurance, a move scholars have urged for years. That said, not all features of employment-based insurance are undesirable, and certain reforms to the ACA could preserve those desirable features while nonetheless guiding the nation away from a flawed system. For largely (but not entirely) political reasons, the ACA made it difficult for those receiving or providing EB insurance to migrate to the individual exchanges the Act took great pains to create. Yet if there is political will to modify the employer mandate and adjust the tax treatment of insurance purchases, access to the individual exchanges could be cautiously “unlocked,” and millions could migrate from EB insurance to individual, exchange-based insurance. With certain additional reforms, there is reason to believe that migration will lead to stronger, healthier exchanges; to a reduced regulatory burden on employers; to a clearer stakeholder understanding of the relationship between health insurance and wages; and perhaps a diminished need to rely on the controversial individual mandate, with individual States making that final assessment.

Steven Plitt & Jordan R. Plitt

Tom Baker & Rick Swedloff

Abstract

Top law firms are notoriously competitive, fighting for prime clients and matters. But some of the most elite firms are also deeply cooperative, willingly sharing key details about their finances and strategy with their rivals. More surprisingly, they pay handsomely to do so. Nearly half of the AmLaw100 and 200 belong to mutual insurance organizations that require member firms to provide capital; partner time; and important information about their governance, balance sheets, risk management, strategic plans, and malpractice liability. To answer why these firms do so when there are commercial insurers willing to provide coverage with fewer burdens, we talked to dozens of people in large law firms and the insurance industry, including those at the notoriously secretive mutual insurers. We developed a unique, qualitative data set that sheds important, new light on the legal industry, insurance markets, and the mutual insurers that protect many large law firms from malpractice risks. We show that many of the most elite firms prefer the mutuals,inpart, because they help solve traditional insurance market failures like adverse selection, moral hazard, and long-term contracting. But this only tells part of the story. We also provide an important and novel autonomy explanation. Many lawyers prefer mutual insurance because they perceive that it promotes professional independence in the face of the social control imposed by liability and insurance. Our data also reframes the traditional understanding of organizational forms in the commercial insurance market. Most prior literature describes mutual and stock insurers as competitors. We show that stock and mutual insurers play complementary and symbiotic roles. Mutuals help manage access to the powerful risk-distributing potential of stock insurance through reinsurance and excess coverage, thus creating mutual stock hybrids. Further, we provide evidence that suggest that even outside of this relationship, mutuals favorably affect the behavior of stock insurers, indicating that these mutual arrangements produce positive externalities that benefit other lawyers and law firms in similar practice contexts.

Shaun P. Martin

Qihao He & Michael Faure

Abstract

Under the influence of climate-related extremes, the world is exposed to more and more catastrophe risks. Increasingly it is held that the government alone may not be able to adequately prevent disaster risks; a combination of public and private regulation is therefore warranted. Regulation via insurance may help to realize the goal of disaster risk reduction and to mitigate the corresponding losses. In this article we identify five regulatory tools — risk-based pricing, contract design, loss prevention services, claim management, and refusal to insure — that can be used by catastrophe insurers with the aim of disaster risk reduction. Subsequently, we explore how these tools are used in practice by insurers in five countries: United Kingdom, United States, France, Japan, and Turkey. In doing so, we find that regulation through catastrophe insurance could have a positive effect on disaster risk reduction. However, the possibilities to regulate by insurance are in many countries de facto limited as a result of state intervention. Finally, we discuss the possibility and feasibility of regulation by catastrophe insurance in China, where it is not yet utilized.

Daniel Schwarcz

Abstract

Insurance regulation is ostensibly the primary domain of the states. In practice, however, the most important and powerful entity in insurance regulation is not a state at all, but a non-profit corporation known as the National Association of Insurance Commissioners, or NAIC. Much of the NAIC’s power lies in its production of various “handbooks” and “manuals” that have the force of law because they are incorporated by reference in state insurance codes. Under this statutory scheme, when the NAIC updates or changes its various manuals, handbooks, or accounting forms, it also changes state insurance regulation. Because the NAIC is a private entity, it produces these various materials that have the force of law without being bound by any safeguards that ordinarily accompany the production of regulation, whether at the state or federal level. Moreover, the NAIC uses its unique accreditation program to directly pressure state legislatures to delegate this authority to it. This Article argues that this scheme violates basic separation of powers and non-delegation principles embedded in every state Constitution. Under any reasonable version of these principles, the delegation of state regulatory authority to a private entity that directly pressures legislatures to make this delegation and whose actions are not reviewable through any formal judicial or administrative process is unconstitutional. Recognizing this conclusion has the potential to improve state insurance regulation by increasing the accountability of state regulators and the NAIC. But it also carries the risk of undermining state insurance regulation by frustrating efforts to promote uniform national standards. However, this Article suggests that state legislatures can enact reforms that simultaneously remedy the unconstitutional structure of state insurance regulation while preserving the many practical benefits that flow from delegating production of regulatory standards to a single, national entity like the NAIC. In particular, they can establish an entity through an interstate compact that is truly independent from state insurance regulators and that is empowered to review the NAIC’s production of regulatory materials that have the force of law.

Jay M. Feinman

Abstract

This article offers a new perspective on insurance law by examining and combining two basic features of insurance and insurance law: the nature of the insurance contract and the fact that most insurance law issues concern a disputed claim. Insurance law scholars are fond of reconceptualizing their subject. Insurance policies and insurance law have been likened to a means of public utility regulation, a product warranty, a social institution, or, perhaps mostly simply, a thing. This article represents another conceptualization of the subject, and one that may be less foreign to the subject and closer to the reality of the formation and performance of insurance relationships. Every insurance policy is a contract between the policyholder and the insurer. Fundamentally, however, almost every insurance law problem, dispute, or doctrine is really about paying or not paying claims. These two features—contract and claim—are at the heart of most insurance law disputes. The significance of insurance as contract is generally recognized, but the centrality of claims, less so. The article examines each of them separately and then combines them. Doing so provides a perspective on a large number of insurance law issues, and that perspective should change the courts’ approach to a number of issues and doctrines. The focus is on personal lines, particularly first-party insurance, but the analysis also has implications in other settings. The article first presents the contract and claim analysis. It then applies the analysis to several common issues in insurance law. The illustrations come from three different points in the life of an insurance policy. The first concerns a formation issue: when an insurer may use misstatements by a policyholder in the application process to avoid coverage. The second, and most general, addresses interpretation issues that concern the insurer’s performance of the insurance contract. The third concerns issues of policyholder and insurer performance after a claim is filed—the false swearing rule and the law of insurance bad faith. All three reinforce the insight that every doctrinal issue involves a conception of the insurance contract and arises because of a disputed claim. The discussion demonstrates that courts sometimes use similar analysis, describes those tendencies, suggests why they are incomplete, and uses the contract and claim analysis to make them explicit and more comprehensive. Other courts take quite different approaches; contrasting those approaches with the contract and claim analysis demonstrates what they get wrong. The result is both a demonstration of the usefulness of the article’s analysis and a beginning catalog of how it can reshape insurance law doctrine.

Yehonatan Shiman

Kenneth S. Klein

Abstract

A significant majority of homeowners in the United States unwittingly have less insurance than necessary to rebuild their home in the event of a complete loss. This persistent, multibillion-dollar protection gap first emerged in the 1990s and has never resolved despite a desire by most homeowners to contract for full replacement coverage. While a great deal of academic and industry literature has addressed the issue of underinsurance, the work has been done without reference to two sources that unlock the conundrum. The first is the 1550 page administrative rulemaking file of the California Department of Insurance collected in the wake of wildfires in 2007. The second is a deep understanding of the software insurers use to determine the adequacy of coverage limits when a homeowner purchases full replacement coverage. In addition to these two sources, this Article documents the problem of underinsurance and its causes by synthesizing both prior scholarship and primary source documents, including SEC filings, patents, industry websites, and interviews with trade organization representatives. After establishing the existence of widespread underinsurance, this Article demonstrates how the law’s treatment of risk allocation in the wake of inadequate insurance coverage encourages inaccurate coverage limits by uncoupling the risk created by inaccurately calculated coverage limits from the responsibility for the consequences of error. This Article concludes with a proposed regulation that would recouple risk and responsibility while still providing the insurance industry and consumers with the freedom to contract for alternative coverage limits.