The Federalist Society

Kenneth S. Abraham

Abstract

Insurance coverage disputes are mostly about the correct interpretation of an insurance policy provision. But three myths confuse and confound thinking about the interpretation of insurance policies. The first myth is that an unambiguous insurance policy provision – a provision with a “plain” meaning – carries that meaning on its face. The second myth is that, if a policy provision has a plain meaning, then under the plain-meaning “rule, “sources of meaning outside the four corners of the insurance policy- sources “extrinsic” to the policy — are not admissible to aid in interpreting the provision. The third myth is that ambiguous policy provisions are necessarily construed against the drafter, which in insurance is almost always the insurer. In reality, all three myths seriously oversimplify how interpretation takes place. The problem, however, is not that, in acting in ways that are inconsistent with the simplifying myths, the courts are undermining desirable rules by quietly following other, undesirable rules. On the contrary, we do not need to change the rules or practices that govern insurance policy interpretation; Rather, we need more clarity and a deeper understanding of the sophisticated, complex rules and practices that are actually in force and are actually applied in practice. This Article aims to provide both.

Robert A. Whitney

James M. Fischer

Jay M. Feinman

Jeffrey W. Stempel & Erik S. Knutsen

Abstract

Automobile liability insurance is mandatory for drivers in all states, so as to provide for an available source of compensation for auto accident victims. Yet more than 20% of drivers in some states drive without valid, collectible automobile liability insurance. Another vast proportion of drivers have woefully inadequate financial limits of liability insurance that could not pay for even a modest percentage of a typical accident victim’s compensatory needs. An auto accident victim cannot choose which tortfeasor driver injures her in a collision. Without the at-fault tortfeasor driver’s liability insurance to act as a source of full compensation for her injuries, an injured accident victim risks having her compensation fall drastically short. In response to prodding, the insurance industry invented two types of insurance coverages to fill in the gaps created when an accident victim wants a higher level of potential accident compensation if injured by an uninsured or underinsured at-fault tortfeasor driver: uninsured motorist and underinsured motorist coverage (collectively “UM/UIM”). These two coverages allow prudent auto insurance policyholders to purchase insurance that takes over if the policyholder is injured by a tortfeasor driver who has no or insufficient insurance to cover the victim’s injury costs. UM/UIM coverage pays the policyholder, the first party, but acts in the context of third-party liability insurance because UM/UIM coverage is triggered only when the policyholder is in an accident and the at-fault tortfeasor driver has inadequate liability insurance to respond to the loss. UM/UIM coverage can be thought of as both first-party (purchased by the policyholder as part of a bilateral contract with the insurer, who is the second party) and third-party insurance in that it is designed to replace the liability insurance that in theory should have been purchased by the tortfeasor causing injury to the conscientious policyholder who purchased UM/UIM insurance. But courts and commentators have not definitively addressed the proper function of UM/UIM insurers in responding to policyholders’ claims. Despite its role as additional liability insurance for the inadequately insured tortfeasor, UM/UIM insurers routinely take the position that their standard of care is less demanding than that imposed on an ordinary third-party liability insurer and that UM/UIM carriers are not required to make the reasonable settlement decisions required of an ordinary liability insurer. UM/UIM insurers take the position that they may instead deny policyholder claims so long as there is any colorable basis for disputing the extent of injury, the volume of treatment, or medical billings. Insurers then routinely argue that they have a “fairly debatable” basis for valuing the amount of injury at a lower amount than that sought by the policyholder just as a true first-party insurer such as a property insurer might assess the worth of lost property at a lower amount than does a policyholder. The insurer does all this with a considerably reduced chance of incurring significant liability for even a recklessly wrong decision. This self-serving perspective of many UM/UIM insurers is wrong in light of the history, purpose and operation of UM/UIM coverage. It undermines the basic contractual and public policy goals of the UM/UIM policy feature which are to put the policyholder in a position equivalent to that it would have if suing an adequately insured tortfeasor. Under the firstparty UM/UIM perspective, the insurer’s own policyholder – the customer who prudently paid for protection – is treated worse than the third party the policyholder would sue. This occurs because the first-party construct preferred by insurers imposes weaker incentives on an insurer than the more stringent obligation of liability insurers to make reasonable settlement decisions in light of the range of results possible at trial and the duty to protect a policyholder from the risk of a judgment in excess of policy limits. As a result of the misunderstanding that many UM/UIM insurers hold about their duties to their policyholders, UM/UIM policyholders tend to receive harsher treatment than they would if suing a stranger tortfeasor and his liability insurer who, unlike the UM/UIM insurer, has never received a dime of premium from the claimant. In addition to harsher treatment of policyholders, who are injured victims, lowball offers, and reduced compensation, this situation causes unnecessary waste of social, economic, and judicial resources due to the reduced incentives UM/UIM insurers have for settlement. A proper understanding of the history, purpose, and function of UM/UIM coverage requires that the insurers fully assume their proper role: acting as if they were an additional form of a tortfeasor’s liability insurance. The liability insurer orientation more fairly, transparently and efficiently fits the contours of UM/UIM claims. It also makes a meaningful improvement to the public policy buttressing the automobile collision compensation system.

Qihao He & Chun-Yuan Chen

Abstract

The theoretical argument behind the “pro-insured” or “pro-insurer” debate contains elements of contract law, business law, and consumer law. This article reexamines the insurance misrepresentation rule under the RLLI, ands compares it to insurance law in China. This comparison demonstrates the struggle between preference for insured or insurer. We have reconsidered the subtopics of misrepresentation, including innocent misrepresentation, materiality, reliance, remedy, contribute-to-the-loss approach and others, from not only the perspective of either party of the insurance contract, but also the overall efficiency of the insurance market and society. For the structure and remedy of insurance misrepresentation, we recommend a reasonable rule, which allows rescission for any kind of misrepresentation, but this is not equivalent to a rule that an insurer can rescind contract for any mistake of a policyholder. Rather than presetting remedies for misrepresentations, this rule asks a court to decide the proper remedy according to any important circumstances of the case, including severity of misrepresentation, accountability of policyholder, factual causation and so on.

Kenneth S. Abraham

Abstract

This Article examines the ways in which insurance coverage is incomplete, and the reasons why coverage is incomplete. It argues that, because all insurance policies and all insurance coverage is incomplete, the notions of a “gap” in coverage and “incomplete” coverage typically are unhelpful. A better understanding of the reasons for incomplete coverage would enrich the interpretation of insurance policies and produce more informed resolution of coverage disputes. The Article seeks to provide that understanding.

Kimberly L. Wilson

Abstract

This article examines the underwriting criteria, practices, and tools of pet insurance companies. While companies that sell pet insurance policies are generally transparent about who their underwriting company is, underwriting rules are not as readily available and require consumers to navigate the System for Electronic Rates and Forms Filing (SERFF) online interface. Because pet “health” insurance is actually a form of property and casualty insurance, the underwriters are, as expected, typically property and casualty companies. This paper explores the current pet health insurance landscape and how pet insurance underwriters incorporate quasi-medical underwriting into their pet insurance policies.

Tyler W. Dueno

Abstract

This article examines the rapidly accelerating use of powerful artificial intelligence to make healthcare decisions. Artificial intelligence promises many benefits: affordable and accessible healthcare; diagnostic accuracy; and efficiently streamlining tasks related to prior authorization procedures. However, the perils involve proxy discrimination-an insidious form of a disparate impact claim-involving biases inadvertently coded into an algorithm disproportionately harming members ofa protected class. As most Americans have employer-provided health insurance governed by the Employee Retirement Income Security Act of 1974 (ERISA), this paper argues there are no adequate legal remedies for consumers injured by proxy discrimination. The history of health insurance explains why employer- provided health insurance has exploded, which has exacerbated our ability to fashion a suitable remedy. This paper concludes federal legislation is needed to bring our regulatory structure into the computational age.