Topic 1: What is Insurance
· Insurance policies are contracts (offer, acceptance, consideration)
· Insurance is the business of transferring risk by means of a contract
· One of the most heavily regulated industries
o Why? – A semi-fiduciary duty exists
o Focused on the solvency of the insurance companies
o Companies don’t want to be considered to be offering insurance, because of the regulations
· Buying insurance for a promise in the future
· Usually governed by State law
· Insurance companies make money with lots of data analysis. Risk factors determine the premium
· Theory of Moral Hazard – Limited resources; deductibles make you want to reduce risk
Self-insurance pools do not constitute insurance either
3 categories of insurance
Insurance covering liability
Insurance covering property and economic losses
Insurance covering personal concerns including life and disability
Griffin Systems, Inc v. Ohio Dept of Insurance (Supreme Court of Ohio, 1991)
· Griffin, as a 3rd party sold extended warranties à not insurance
· A contract “substantially amounting to insurance” is one that promises to cover losses or damages over and above, or unrelated to, defects within the product itself
The court looked at 2 prior cases: Duffy and Herbert, and determined that a contract “substantially amounting to insurance” is one that promises to cover losses or damages over and above, or unrelated to, defects within the product itself.
In this case, there was a limited number of things covered by the warranty, so it did not amount to insurance
Griffin Systems v. Washburn (Illinois)
It appears that “insurance” can be characterized as involving:
a contract or agreement between an insurer and an insured which exists for a specific period of time;
an insurable interest (usually property) possessed by the insured;
consideration in the form of a premium paid by the insured to the insurer; and
the assumption of risk by the insurer whereby the insurer agrees to indemnify the insured for potential pecuniary loss to the insured’s property resulting from certain specified perils.
Truta v. Avis Rent a Car System (California Court of Appeal, 1st District, Div 2, 1987)
Rental car companies are not in the business of insurance à optional protection is not insurance
Rule: In analyzing whether a contract constitutes insurance it is advised that two inquiries be made:
“To what extent, in each case, did the specific transactions or the general line of business at issue involve one or more of the evils at which the regulatory statutes were aimed?
And were the elements of risk transference and risk distribution, characteristic of transactions at which the regulatory statutes were aimed, a central and relatively important element of the transactions or instead merely incidental to other elements that gave the transactions their distinctive character?”
Notes:
New York and many other states agree with this decision
Self-insurance pools do not constitute insurance either
Topic 2: Governmental Regulation of Insurance
Insurance provides security for policyholders and much regulation is focused on ensuring continuity of this security
Economic values underlie regulations for free access to the market, local protectionism, and use of investment funds
Insurance is a small world that reflects the purposes of the larger world outside it
State Department of Insurance headed by a commissioner
Power given to the commissioner by the legislature
Regulation accomplished by the insurance code, governed by the Commissioner and the Dept of Ins.
Varies state to state
Every single penny of the budget comes from the insurance industry
There is investigative authority, but the DAs prosecute
Insurance commissioners coordinate all the time
In California, the Commissioner must examine all applicants, who are required in turn to submit all sorts of financial documents every year
When a State requires a certain clause, and the policy does not include it, or has a clause that for example excludes certain users, that clause must be removed as invalid
Populism and Insurance Regulation
California has a voter initiative system that allows easy modification of laws by the voters
Proposition 103 in 1988 was one such initiative, which was written to reduce insurance rates, and place restrictions on insurance policy cancellations among other things
Insurers immediately went to court to challenge the newly passed initiative, and lost
There are still court cases surrounding Prop 13
What do Insurance Regulators do?
Make sure companies are adequately capitalized
Fraud investigation and protection
Approve form policies
Take over defunct insurance companies (they cannot go bankrupt)
Bring enforcement action against insurance companies
Monitor claims handling and underwriting practices
Rate regulation (control, approval) (excessive, inadequate discriminatory) (CA only)
Licensing of agents & brokers, & revocation of licenses (due process concerns)
McCarran-Ferguson Act
Allows states to regulate the business of insurance
Defers to states to regulate, unless a law expressly states that it is “specifically related to the business of insurance” à preemption of state law
Hartford Fire Insurance Co v. California – The act did not bar state antitrust prosecution of insurers’ conduct
Humana Inc v. Forsyth – The act does not preclude the application of RICO unless there is a direct conflict with state regulation, s
lan beneficiaries. who have been denied benefits-usually on the ground that the prescribed care is not medically necessary or is “experimental”-or dropped from coverage, often because they have lost their jobs due to the very illness for which care was denied.
Many consumer and health care advocates have called for a “restoration of the freedom of contract enforcement,” to the 75% of Americans insured under these work place group plans-in effect, a repeal of the ERISA pre-emption. Permitting these insured persons access to customary state remedies (98% of all civil disputes are resolved in state courts) would, they contend, result in a substantial reduction in arbitrary denial of care benefits, simultaneously alleviating a major burden on state Medicaid systems and clogged federal court dockets.
Case law:
UNUM Life Ins Co v. Ward (1999)
Supreme Ct held that ERISA’s savings clause exempts state insurance regulations from preemption
There was already strictly regulated insurance from California’s common law rules
HMOs treated as insurers and not health providers to their dismay
Pegram v. Herdrich
No preemption by ERISA
Treatment decisions made by an HMO, acting through its physician employees were not fiduciary acts within the meaning of ERISA
Positive effect for HMO’s physician profit-sharing scheme
Rush Prudential HMO v. Moran
Rush refused to pay for an out of network procedure despite it being medically necessary
They claimed ERISA preempted when Moran sued for payment
SCOTUS held that ERISA did not preempt Illinois’ statute mandating independent medical review of Rush’s to deny benefits because the statute regulated insurance, …
In contrast, under a Texas statute, there is preemption
Aetna Health v. Davila
Any state law cause of action that duplicates, supplements, or supplants the ERISA civil enforcement remedy conflicts w/ congressional intent, and is therefore preempted
Wilson v. All Service Insurance Corp.(Court of Appeal of California, 2nd District) (30)
An insurance broker owes no duty to its clients to investigate the financial condition of an insurer before placing insurance with it on their behalf. (The Commissioner has the duty to oversee financial conditions)
