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.

Gabriel L. Johnson

Abstract

Following the emergence of COVID-19 and resulting civil orders seeking to stop its spread, many businesses filed claims with their insurance providers for “business interruption” coverage, a type of insurance intended to compensate businesses for income lost during a temporary forced closure. When insurance companies roundly denied these claims, many small-business owners filed lawsuits in state courts. Insurance company defendants largely removed these cases to federal courts, and businessowner plaintiffs filed to remand back to state court. In one consolidated appeal heard by the Third Circuit, DiAnoia’s Eatery, LLC v. Motorist Mutual Insurance Co., businessowner plaintiffs seeking remand to state court argued these claims involved novel state law issues. Although the district courts agreed, the Third Circuit reversed, and held federal courts in Pennsylvania and New Jersey could not use their statutorily granted discretion to remand the actions to state court. This Note asserts the Third Circuit’s holding in DiAnoia’s Eatery, LLC misinterpreted circuit precedent which, properly applied, permitted the district courts to remand the claims to state court under the Declaratory Judgment Act. But the Note also argues that DiAnoia’s Eatery, LLC is merely one example of a trend seen nationwide in which circuit courts issued decisions on this issue prior to the ultimate authority—state courts—ruling. It explains how federal courts instead turned inwards, relying not on binding state court precedent but rather on other federal court decisions; an approach which displaced state courts’ proper role, and risked mass federal reversal by the U.S. Supreme Court. This Note provides an important building block in a field of scholarship which has generally, thus far, criticized federal courts’ initial near-monopoly on business interruption claims, the influence they exerted on the development of this caselaw, and finally, the merits of their dismissal of COVID19 business interruption claims. This Note goes further, arguing that in addition to those concerns, federal courts were the improper forum for these suits, and that remanding them to state courts under the Declaratory Judgment Act was, and is, the best approach.

Katherine Hempstead

The Insurance Law Review is excited to announce the appointment of the Advisory Committee. More information on the Committee and its members can be found on the Advisory Committee section of the website.

ILR is so proud of our graduating members including Lauren Kidd, Andrea Catania, Allan Quade, Alexandria Abacherli, Eric Benoit, Hannah Livezey, Erin Dennehy, Benjamin Godley, Andrew Higgins, Michael Nanfito, Esangubong Udoh, Ian Sheldon, Kiana Laude, Autumn Siegel, Radhika Bhagat, Anthony Lozier, Spencer Buckley, and Matt Nanci. We are so grateful for all of your hard work and dedication. These members work spans issues 28.1, 28.2, 29.1, 29.2, 30.1, and 30.2. Their contributions have been invaluable, and publication would not have been possible without them.  We know you will be successful in all that you do, and we wish you the best of luck in all of your future endeavors. Congratulations!