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Insurance Law
University of South Carolina School of Law
Jedziniak, Lee P.

Jedziniak_Insurance_Spring_2010.docx
I.                    History of Insurance Law
a.       The Friendly Society
                                                               i.      Industrial Revolution
                                                             ii.      Contribution Societies
                                                            iii.      Neighbor-sharing; working class
                                                           iv.      1666
1.       London firm
2.       → fire company
b.      Charleston, South Carolina
                                                               i.      The Friendly Society for the Mutual Insurance of Houses Against Fire”
                                                             ii.      1st Insurance Company
c.       Benjamin Franklin
                                                               i.      Penn. Fire Co.
                                                             ii.      Mutual Ins. Co. – everyone is an owner
                                                            iii.      Replacement cost led to assessment of premiums
                                                           iv.      Conditions
1.       Front door underwriting
a.       Rating
                                                             v.      Written Contract → Policies
                                                           vi.      Premiums → Investments → Mortgage Loans
                                                         vii.      The following were developed by Benjamin Franklin and are similarly used today
1.       Underwriting
2.       Rating
3.       Investment of premiums
4.       Claims
5.       Contract – policy
6.       Loss mitigation
a.       Policy holder duties
d.      Franklin’s firm let to competition and sub-standard insurers – that is, they took the people who could not get insurance with Franklin – Niche Market Companies
e.      As the Insurance field grew, state government became involved
                                                               i.      Between the late 1700s and early 1800s the federal government left the regulation of insurance and consumer issues to state governments
                                                             ii.      However, insurance companies began to do business across state lines
1.       The insurance companies sought federal regulation as a means to uniform regulation, thus providing greater efficiency
2.       “State-based bureaucracies”
a.       No uniform rules; ins. Companies wanted federal regulation
f.        Insurable Interest
                                                               i.      Life Assurance Act [England]                                                              ii.      Must have an insurable interest, i.e. you must benefit from the person’s continued existence (financial)
                                                            iii.      Insurable Interest required only when life insurance policy entered into
1.       Contra: insurable interest required at time of lose for property and casualty insurance
 
II.                  Basics of Insurance
a.       Three Types
                                                               i.      Domestic: incorporated or organized under state laws
                                                             ii.      Foreign: incorporated or organized under another state’s laws
                                                            iii.      Alien: incorporated or organized in a Foreign Country
b.      Core Functions of Insurance Company
                                                               i.      Claims based on projected losses – replacement cost (led to a standardized policy form)
                                                             ii.      Underwriting – looking upfront to see what the risk is
                                                            iii.      Loss Mitigation Duties
                                                           iv.      Investing
1.       Must make sure that this remains stable so that the company won’t become insolvent and therefore fail to make good on their promise to pay
c.       Rates
                                                               i.      A rate is the algebraic formula which is used to calculate premiums
                                                             ii.      Director of Insurance must make sure that the rate is reasonable
1.       Key Phrases
a.       Reasonable Rate of Return
b.      Not Excessive
                                                                                                                                       i.      Prevent too much profit
c.       Not Unfairly Discriminatory
                                                                                                                                       i.      To insured presenting the same risk
d.      Not Inadequate
                                                                                                                                       i.      To pay claims and allow the insurer to make a reasonable profit
2.       That is, the end result must be a reasonable rate of return to investors; a reasonable rate of return is compared to other stock holdings
3.       Is the Rate Reasonable?
a.       Expenses (-)
                                                                                                                                       i.      Acquisition: agents’ compensation
                                                                                                                                     ii.      Underwriting: cost of underwriting
                                                                                                                                    iii.      General Business Costs
                                                                                                                                   iv.      Taxes, Licenses, & Fees
b.      Loss Costs (-)
                                                                                                                                       i.      Cost of adjusting claims
                                                                                                                                     ii.      Payout of Claims
c.       Profits (+)
                                                                                                                                       i.      Underwriting Profit: while most insurance companies lose money on policies, theoretically this would be the profit from premiums
                                                                                                                                     ii.      Investments
d.      Contingencies (+/-)
                                                                                                                                       i.      Potential for loss or gain
                                                            iii.      Rating Formula/Underwriting
1.       Physical Risk
a.       E.g. look to see if there are trees
b.      Most underwriting
c.       The physical damage probability
2.       Legal Risk
a.       How friendly are the state’s laws
3.       Morale Risk
a.       Characteristics of the person to determine the risk
b.      How are you taking care of the property
4.       Moral
a.       Propensity to commit a crime to defraud the insurance company
b.      SC is #1 State for fraud
5.       Risk/Hazard Factors
a.       Conditions that increase the frequency or severity of a loss
b.      Considered in the rating formula—hazard compounding
d.      Types of Cash Reserves
                                                               i.      Claims Reserves
1.       Anticipated amount of money needed to pay a claim which is set aside until actually paid
                                                             ii.      Unearned Premium Reserves
1.       Premiums which the insurance company has not yet earned
                                                            iii.      Reserve to Protect Policy Holders
1.       Disaster
2.       Surplus
e.      Mutual Insurance Company
                                                               i.      Owned and operated for the benefit of its members—no absolute need to make profit
                                                             ii.      Assessment based—if they need additional money they go to the members
III.                Commerce Clause and Insurance Regulation
a.       Summary
                                                               i.      In 1869 the United States Supreme Court held, in Paul v. Virginia, that insurance is not commerce, interstate or otherwise. The result was that Congress had no authority under the Commerce Clause of the U.S. Constitution [Art I § 8] to regulate insurance. Paul squelched an incipient effort (ironically, as it turns out, by the insurance industry itself) to encourage federal regulation rather than state regulation. When the Sherman Act was enacted in 1890, Paul had already made it clear that the Act’s antitrust prohibitions could not be applied to insurance.
                                                             ii.      The Supreme Court overruled Paul v. Virginia in United States v. South-Eastern Underwriters Association (1944). The case involved as indictment of a “rating bureau” and its member companies for violating the Sherman Act by agreeing to fix premium rates and boycott non-members. The Court held that insurance transactions such as this agreement are subject to federal regulation under the Commerce Clause. The Supreme Court’s decision threw the insurance industry into a near panic, for the Court held not only that Congress has the power to regulate insurance; in addition, the effect of the holding was that Congress had already regulated insurance by enacting the Sherman Act and any number of other statutes governing commerce among the states

14, known as the Federal Trade Commission Act [15 U.S.C. 41 et seq.], and the Act of June 19, 1936, known as the Robinson-Patman Anti-Discrimination Act, shall not apply to the business of insurance or to acts in the conduct thereof.
b.      (b) Nothing contained in this chapter shall render the said Sherman Act inapplicable to any agreement to boycott, coerce, or intimidate, or act of boycott, coercion, or intimidation.
                                                             ii.      Class Notes
1.       Federal legislation that does not specifically relate to the business of insurance does not preempt state regulation
2.       Where the states have exercised their regulatory authority which the removal of any implied preemption accords them, the federal antitrust laws shall not apply to the business of insurance except that the exceptions of §3 apply
3.       Recognizes that Congress has right to regulate commerce, so some antitrust laws apply
4.       Insurance is commerce; states get to regulate if Congress does not; did bring in the antitrust acts; gives power back to the states
5.       Class Notes from Week 6:
a.       Reverse pre-emption framework—a conflicting Federal statute yields to the state statute]????
b.      Recognizes Congressional power to regulate insurance, but
c.       Notes that, under normal situations, Congress with allow the states to regulate the business of insurance, and
d.      Preserves the antitrust law’s goals of promoting competition, promoting a free market, promoting marketplace efficiencies and preventing anti-competitive conduct, through:
                                                                                                                                       i.      Allowing the states to pass effective anti-trust laws, or, if a state does not take advantage of that allowance, then
                                                                                                                                     ii.      Invoking Federal antitrust law by clause saving the Federal Sherman Antitrust Act, Federal Clayton Antitrust Act, and Federal Trade Commission Act, and
                                                                                                                                    iii.      Prohibiting ANY agreement to boycott, coerce, or intimidate and ANY act of boycott, coercion, or intimidation
f.        “Business of Insurance”
                                                               i.      USDOT v. Fabe [Review Case] 1.       The “business of insurance,” under current precedent, is defined as:
a.       A practice that has the effect of transferring or spreading policyholder risk;
b.      A practice that is an integral part of the policy relationship between the insurer and the insured; and
c.       A practice that is limited to entities within the insurance industry
IV.                Antitrust Issues and Insurance Regulation
a.       If the insurance action:
                                                               i.      Is not concerted activity that imposes an unreasonable restraint on trade under a state’s law, and
                                                             ii.      Does not involve either an agreement to boycott, coerce, or intimidate, or an act of boycott, coercion, or intimidation
                                                            iii.      It is the business of insurance, and
                                                           iv.      It is specifically allowable under state law, and
                                                             v.      The insurance action can be regulated or controlled and allowed by a state
b.      Antitrust laws require that companies abstain from concerted activity; but states allow concerted activity and insurance companies do act in concert
c.       Allowable Concerted Activity within Insurance Industry
                                                               i.      Aggregate Claims Data
1.       Learn trends
Good for co