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.

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