Kelly B. Castriotta

Abstract

Insurers first developed property and casualty insurance policies prior to the internet, widespread computerization, the digital interconnectivity of electronic and mechanical devices, and the prolific use and transmission of electronic data. Many such insurance contracts did not expressly address cyber exposures at the time of their creation, leaving insurers and their customers to battle over contract interpretations for attritional cyber losses. In 2015, the Prudential Regulatory Authority (PRA) formally introduced a theoretical problem of “silent cyber” to the insurance industry, contemplating catastrophic cyber scenarios with not only a potentially powerful impact upon dedicated Cyber insurance portfolios, but also upon traditional insurance portfolios. The issue soon became a reality in the wake of the expansive insurance losses associated with the NotPetya attacks of 2017, as most insurable losses stemming from those attacks were ultimately recoverable under traditional insurance policies, as opposed to dedicated cyber insurance policies. In response to the requests made by the PRA to insurers to put into action a plan to manage silent cyber, Lloyd’s of London introduced a mandate to eliminate “silent cyber” on all Lloyds policies, charting a course for the transformation of insurers’ contractual wording to more appropriately address cyber risk. This article discusses the general concerns around “silent cyber” as presented by the PRA, the challenges of defining cyber risk across the insurance industry, and steps taken to rectify the silent cyber issue. The article then explores the idea that the silent cyber problem is at its core a semantic one rather than one of risk perception. The article concludes by offering solutions as to a semantic framework under which to analyze and address “silent cyber.”

Kenneth S. Abraham & Daniel Schwarcz

Chaim Saiman

Abstract

Even before its publication, the Restatement of the Law, Liability Insurance had been subjected to withering wholesale criticism that it creates aspirational and pro-policyholder insurance law. This view continues to be forcefully promoted by insurers and their advocates in the legal literature and by governors and state legislatures in the political areas. This Article finds these wholesale criticisms unwarranted. Liability insurance law is not a field where law is simply found and restated. In fact, settlement law offers the most vivid examples of why the Restatement of the Law, Liability Insurance is possible, useful, and justified. It is possible because there is sufficient agreement on core doctrines to be organized into a common framework. It is useful because, though courts have been handling these cases for more than a century, the basic analytical foundations of the rules associated with this specialized insurance law remain poorly understood and often unarticulated. It is justified, because the project locates insurance settlement law within the broader framework of modern contract, tort, and fiduciary law. Notwithstanding localized quibbles, because Restatements are charged with determining the legal rules that best fit within the broader body of law, the Restatement of the Law, Liability Insurance stands as a considerable achievement.

Timothy Fisher & Leah Smith

Cori Smith

Andrew Granato

Abstract

America’s lengthy income tax code and financial regulations are notoriously full of special treatment for the politically favored. Academics and policymakers argue the relative merits of different approaches to tax and regulatory policy. Given the complexity of economic life, should the law attempt to be highly tailored and specific? Or does the exacting approach risk getting lost in the weeds? This Article will showcase the limits of a highly technical approach to policy with the first analysis of an almost completely unnoticed sea change in life insurance tax law, one that engorges a tax shelter at a moment of great attention to laws that enable the wealthiest members of society to face lower effective tax rates than their secretaries. Life insurance has received extremely favorable tax treatment since the inception of the federal income tax. In the 1980s, in response to an increasing wave of policies smuggling traditional investment products into products calling themselves life insurance, Congress formalized a mathematical definition of life insurance policies directly into the Internal Revenue Code (§ 7702). Section 7702, a fully realized actuarial simulation, placed quantifiable limits on the degree to which policyholders could treat a life insurance policy like an investment (such as a mutual fund) rather than as insurance protection. For decades, the provision was left alone. However, buried in the 2020 COVID-19 omnibus relief bill, Congress included—with essentially no public debate—a change to a key actuarial assumption of the § 7702 test. The result was that § 7702 was made substantially more permissive, giving policyholders much greater leeway to use life insurance policies as conduits for tax-exempt wealth accumulation, rather than mere protection of beneficiaries in the event of the worst. After over thirty years of near-total absence of analysis of Congress’ life insurance definition in the legal literature, this paper resurrects the history, purpose, and structural limitations of § 7702 and the hyper-technical approach to tax policy it embodies. It further provides the first exhaustive analysis of the new world of life insurance after the stealth § 7702 amendment, one in which swathes of the industry are preparing to—as the Democratic Party eyes loophole crackdowns on the wealthy—leverage their extraordinary tax advantage into a new role at the center of high-end tax avoidance.

Jay M. Feinman

Harold Weston & Brenda Wells-Dietel

Peter Siegelman

Jay M. Feinman

Abstract

Markets need information, and better information produces better markets. Consumers need information about products’ features, price, and quality to shop effectively. When they have that information, their buying choices spur competition that produces better products with desirable features at lower prices. The market for homeowners insurance provides reasonable information on price but lacks basic information about the features of policies and company quality. Consumers have little access to information about the coverage terms of policies being offered or the quality of companies that are offering them, so they often make poor choices in purchasing homeowners insurance. The results can be catastrophic for them; homeowners insurance protects what is the largest asset many families have—their home. Limited coverage for a significant loss can have devastating financial and emotional consequences. The effects can spread throughout a community, particularly in the case of losses to many homeowners due to a catastrophe such as a wildfire. This article explores the information available in the homeowners insurance market and suggests potential improvements. It suggests that regulators improve information about coverage by publishing online the full text of policies and coverage summaries and that they improve information about quality by publishing claim statistics. In both cases, the Rutgers Center for Risk and Responsibility at Rutgers Law School has done the basic research, and the article includes templates to implement the coverage and claims quality summary. Even in the absence of regulatory action leading to the publication of the text of policies, a coverage summary, and claim statistics, and even if those proposals are adopted, there is room for independent, noncommercial intermediaries to intervene in the market to provide better information to consumers. Our Center also has taken a first step to similarly improving the market for homeowners insurance. RU InsureScore, discussed in Part IV, emulates Consumer Reports ratings in providing an evaluation of the coverage provided by eleven of the twenty largest homeowners insurers, using the familiar hundred-point, five-star scales.