The United States insurance market is one of the largest financial markets in the world. In 2017, US insurers underwrote approximately US$1.37 trillion in life and non-life direct premiums, accounting for just over 28 per cent of the global insurance industry.2 To put that number in perspective, the US$1.37 trillion in underwriting amounted to roughly 7.07 per cent of the total US gross domestic product.3 Yet even these premiums fail to capture the full scale of the US insurance market. In 2017, the total cash and invested assets of US insurers reached US$5.48 trillion.4 As such, the US insurance market plays a significant role in the global economy.
In 2017, the US insurance market included US$597.1 billion in life and health insurance premiums, including annuities.5 This dynamic and highly competitive segment of the marketplace includes more than 1,000 insurance companies competing to underwrite a wide variety of products.6
The 2017 US insurance market also wrote US$558.2 billion in premiums in the property, casualty and specialty markets, including, among others, comprehensive general liability, directors' and officers' insurance, errors and omissions insurance, and workers compensation coverages.7 Competition within the highly fragmented property and casualty market is significant, with approximately 2,600 different insurance companies competing for business.8
The underwriting of US reinsurance is also robust, with net premiums written to unaffiliated reinsurers totalling approximately US$48.9 billion in 2017.9 Reflecting the heightened complexity of reinsurance offerings, lower demand for reinsurance products, and intense international competition, this market is concentrated in substantially fewer companies than the direct-side market.10
Given the scope of the US market, it should come as no surprise that legal advisers specialising in insurance and reinsurance law span a broad range of specialties including insurance litigation and counselling; claims handling; regulatory compliance; professional and management liability; insurer liquidation and insolvency; and reinsurance disputes. The following sections provide a basic introduction to the language and practice of insurance law within the US market.
Historically, US insurance and reinsurance companies were solely regulated at the state level. In 1944, however, a US Supreme Court decision raised doubts about state-level insurance regulation. In response, in 1945, the US Congress enacted the McCarran-Ferguson Act,11 which declared 'that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.'12 Since passage of the McCarran-Ferguson Act, regulation of insurance and reinsurance companies is primarily performed at the state level with additional federal regulation applying only to certain topics.13
i State-by-state regulation
State insurance departments and commissioners
In the US, insurance companies obtain their charter from one domiciliary state, which is the primary regulator of the solvency of the insurance company. However, in general, an insurance company must also obtain a licence in each state in which it intends to issue policies. (Non-admitted or 'surplus lines' insurers are an exception to that rule, and are addressed below.) An insurer's business practices, like marketing, are regulated separately by each state in which the insurer is licensed, and the laws and rules regarding these practices vary from state to state.
All 50 states have an insurance regulatory department, generally led by a chief insurance regulator. State insurance departments are generally funded by fees and taxes on insurance companies, including fees for licensing and examinations.
The National Association of Insurance Commissioners
The National Association of Insurance Commissioners (NAIC) operates to coordinate insurance regulatory efforts across the states. The NAIC is a private, voluntary association of chief insurance regulators from the 50 states, the District of Columbia and five US territories. The NAIC is funded by assessing fees for its services and publications. Although the NAIC lacks any actual regulatory authority, it is the leading voice with respect to the state-based insurance regulatory system in the US.
Issues subject to state regulation
Insurance regulations in the US are generally intended to protect both consumers and the public by regulating insurer business practices while monitoring their solvency. The goal is twofold; first, to regulate the terms of insurance contracts to maintain fairness between the insurance company and the consumer, and second, to assure that the insurance company will be available to pay the valid claims of consumers when they are presented.
In practice, these goals are met through regulations on a variety of topics, outlined below.
Insurance companies are generally required to obtain licences from state insurance regulatory authorities before transacting insurance in a given state.14 Once granted, the insurance licence specifies which lines of insurance the company is permitted to sell within the state. Because licensing is done on a state-by-state basis, approval by one state does not carry over into any other state. Licence applications submitted to states other than an insurance company's domicile generally are called 'expansion applications'.
Typically, states require certain minimum levels of capital and policyholder surplus in order to obtain a licence. The amount of capital and surplus will depend on the type and volume of business the insurance company intends to write. In addition to capital requirements, state regulators reviewing an insurance company licence applicant evaluate the company's management, business plan, and market conduct.
Individuals or companies that sell, solicit, or negotiate insurance in the US must be licensed as a 'producer' in each state in which the individual or company operates. This includes insurance agents and insurance brokers.
The requirements for licensing of producers vary from state to state, and producers typically have to meet separate licensing requirements for each state in which they sell insurance. In most states, the producer licensing process includes an examination and a background check. The process for licensing resident producers can be different from the process for licensing non-resident producers.
Rate and product regulation
In the US, individual states regulate both the types of products certain insurance companies can offer and the rates those insurance companies can charge for their products. The level and specificity of product and rate regulation varies from state to state.
Generally, all states require that rates not be inadequate, excessive or unfairly discriminatory. On the whole, states do not set mandatory rates. Instead, insurance companies choose the rates they intend to use in a given state in which they are licensed, and then inform the state of the chosen rates, with justification.
For commercial lines within the property and casualty insurance market, states take a variety of approaches to regulating insurance rates. Some states require that rates be filed with the state and approved prior to use. Other states require only that rates be filed with the state. Finally, certain states have no filing requirements at all.
With respect to insurance product regulation, state regulators often require pre-approval of certain life and property and casualty insurance products offered in their individual state to assure that offered products can be readily understood by consumers. That pre-approval process includes, among other things, a review of policy forms and marketing materials.
Market conduct regulation
States also regulate the business of insurance by prohibiting insurance companies from engaging in unfair, deceptive, or anticompetitive conduct. To enforce these regulations, states perform market conduct examinations of licensed or admitted carriers and producers. States also use enforcement actions to compel insurance companies to adhere to specific standards with respect to the interactions between the companies and consumers or policyholders. In some states, enforcement actions may also be brought by the state attorney general under laws outside of insurance-specific regulations.
Solvency and accreditation
All 50 states and the District of Columbia have adopted financial reporting laws that require insurance companies to file quarterly and annual financial statements on the forms authored by the NAIC. Likewise, insurance companies must calculate their risk-based capital in accordance with procedures set by the NAIC.
These coordinated financial requirements are part of the NAIC's accreditation programme. Accreditation is a certification issued to a state insurance department once it has demonstrated that it has met and continues to meet a variety of legal, financial, and organisational standards as determined by the NAIC. Accreditation is necessary so that when an insurance company is domiciled in an accredited state, the other states in which the insurance company is licensed or writes business can be assured that the domiciliary state is adequately monitoring the financial solvency of that company. As at January 2019, all 50 states plus the District of Columbia and Puerto Rico are accredited.
Each of the 50 states and the District of Columbia require insurance companies operating within their state or territory to submit to a full financial examination at least once every five years. These examinations are designed to verify the companies' financial statements.
Uniform standards, including the NAIC Model Law on Examinations and the NAIC's Financial Condition Examiners Handbook, apply to financial examinations by almost all 50 states. These standards specify both when a financial examination is to be conducted and the guidelines and procedures to be used by the state in its conduct of the financial examination. Generally, states use a risk-focused approach to financial examinations. Insurance companies that operate in multiple states are subject to financial examination by each state. These multiple financial examinations, however, are coordinated to some extent for group examinations.
Credit for reinsurance and collateral requirements
Historically, most US states required unauthorised reinsurers (reinsurers not licensed or accredited in a ceding insurer's domicile) to post 100 per cent collateral for any reinsured liabilities in order for the ceding insurer to get full financial statement credit for its reinsurance placements. This allowed state-based insurance regulators to indirectly regulate transactions with reinsurers outside its jurisdiction.
In recent years, a number of states have reduced collateral requirements for certain approved non-admitted reinsurers. As at December 2018, 48 states have passed legislation to implement revised reinsurance collateral provisions focused on the solvency risk of reinsurers as opposed to their admitted status.15 Additionally, in September 2017, the US and the European Union announced that they had formally signed a bilateral covered agreement regarding the regulation of insurance. The agreement calls for an end to collateral and local presence requirements for EU and US reinsurers.16 It also affirms the US system of state regulation of insurance by effectively limiting the application of EU and US prudential measures to the worldwide operations of EU and US insurers.17
Under the terms of the agreement, US-based insurers are subject to the prudential supervision of the EU only to the extent of their operations in the EU, and vice versa.18 The agreement also eliminates collateral and local presence requirements for EU and US reinsurers.19 The agreement encourages supervisory authorities in the US and the EU to exchange information regarding insurers and reinsurers that operate in both markets. Over the 60-month implementation plan, the US and the EU will identify and roll back inconsistent or pre-empted legislation.20 Finally, the agreement establishes cross-conditionality between provisions as an enforcement mechanism, to ensure equal compliance and equal benefits.21
On 11 December 2018, the US and the UK announced that they had reached terms on a similar bilateral covered agreement, which includes the same material terms as the US and EU agreement, and follows the same implementation plan.22
Insurance company insolvencies are exempt from federal bankruptcy law. Instead, the rehabilitation and liquidation of insurance companies has been specifically delegated to the states. Thus, domiciliary state laws establish the process for the receivership or liquidation of an insolvent insurance company.
Notably, the insolvency clause standard in almost all US reinsurance contracts may require the reinsurer to indemnify an insolvent insurer's estate for the full amount of any covered claim allowed in the proceeding, despite the fact that the estate in liquidation may actually pay only a fraction of the allowed amount to its policyholder.
ii Federal regulation of insurance
Although states are the primary source of insurance regulation in the US, the federal government also plays a role with respect to certain regulatory issues.
Direct federal programmes
In a number of hard-to-place insurance markets, the US federal government has stepped in to provide direct insurance or reinsurance support. Under these programmes, federal regulation either pre-empts or directly supports private insurance, supplanting the states' regulatory role for the specific insurance market.23 Examples of direct federal insurance involvement include terrorism risk insurance,24 flood insurance25 and crop insurance.26
Liability Risk Retention Act
In 1986, the US Congress enacted the Liability Risk Retention Act of 1986 (LRRA). The LRRA allowed for the formation of risk retention groups (RRGs), which are entities through which similar businesses with similar risk exposures create their own insurance company in order to self-insure their liability (but not property) risks. RRGs are only required to be licensed as an insurance company in one domiciliary state. Once licensed, an RRG is exempted from most insurance regulations for any other state in which the RRG operates.
Federal Insurance Office
The Federal Insurance Office (FIO), an organisation within the US Treasury Department, is responsible for monitoring all aspects of the insurance industry in order to identify issues or gaps in the regulation of insurance companies that could lead to a systemic crisis in the insurance industry or the US financial system. While the FIO does not have any express regulatory authority over the insurance industry, it is responsible for coordinating international insurance agreements, monitoring access to affordable insurance for traditionally underserved communities and reporting to the US Congress about vital issues in the insurance industry.
Financial Stability Oversight Council
The Financial Stability Oversight Council (FSOC) identifies and responds to risks to the financial stability of the US. The FSOC has the authority to subject a 'non-bank financial company', including an insurance company, to supervision by the Federal Reserve if it determines that the company is a 'systemically important financial institution' (SIFI) through a multistage determination process. Once a company is identified as an SIFI, it is subject to enhanced prudential standards, including specific reporting requirements, risk-based capital requirements, liquidity requirements, risk management requirements, leverage limits and credit exposure limits. The FSOC previously designated three insurers as SIFIs, but none of them remain subject to Federal Reserve supervision.27
Nonadmitted and Reinsurance Reform Act – surplus lines and reinsurance
All 50 states allow issuance of surplus lines business by unlicensed or non-admitted insurance carriers. Generally, consumers must use a specially licensed insurance broker and demonstrate that they are unable to find the specified coverage through the admitted market. Once the exceptional need is demonstrated, the risk can be placed with non-admitted carriers.
In situations where the risk placed with a surplus lines carrier is located in multiple states, the exclusive taxing authority with respect to surplus lines and non-admitted insurance policies is in a policyholder's 'home state'. In addition, surplus lines insurance is subject only to the regulatory requirements of the policyholder's home state (except for workers' compensation business) and large commercial insurance purchasers that meet certain conditions may directly access the surplus lines market.
With respect to reinsurance, if an insurer's domicile recognises credit for reinsurance for the insurer's ceded risk, then no other state may deny the credit for reinsurance, provided that the domiciliary state is NAIC-accredited, or has solvency requirements substantially similar to those required for NAIC accreditation. The laws and regulations of non-domiciliary states are also pre-empted to the extent that they (1) restrict or eliminate the right to resolve reinsurance disputes pursuant to reinsurance contractual arbitration provisions, (2) require that a certain state's law shall govern the reinsurance contract, or (3) attempt to enforce a reinsurance contract on terms different than those set forth in the reinsurance contract itself. Finally, the exclusive authority to regulate the financial solvency of a reinsurer is in the reinsurer's domiciliary state.
III INSURANCE and REINSURANCE LAW
i Sources of law
Each state has both statutory and common law applicable to insurance issues. State common law is a significant source of law for the purpose of resolving disputes. In broad terms, it applies to issues such as legal duties, the interpretation of contracts, procedure and damages. Individual state statutes applicable to insurance, though they vary in breadth and focus, generally regulate insurance companies operating within the state. Common state statutes include provisions requiring companies to be licensed or barring insurers from acting or marketing their products in a deceptive manner.
Under the US Constitution, federal statutes may pre-empt state statutes and laws where they overlap. Thus, a federal statute may pre-empt inconsistent state laws. Federal common law, while fairly narrow in scope, impacts insurance and reinsurance companies indirectly. One example is federal common law relating to the application of the Federal Arbitration Act, which guides decisions on whether policyholders or cedents are bound to arbitrate a dispute with insurers or reinsurers.
ii Making the contract
The requirements for the creation of an enforceable insurance or reinsurance contract mirror those of most written contracts – offer, acceptance, consideration, legal capacity and legal purpose. In practical terms, an application or submission and the tender of the initial premium represent the offer to contract. Acceptance is generally demonstrated through execution of the policy or agreement. Without an offer and acceptance, there is no meeting of the minds and no contract.
Insurance and reinsurance contracts are negotiated and placed both directly and through intermediaries. In either case, prospective policyholders or cedents provide the information requested by the insurance carrier or reinsurer for the placement. If necessary, the insurance carrier or reinsurer's underwriter can (but is not necessarily required to) seek more information. At all times, the prospective policyholder or reinsured generally is under an obligation to disclose all material information relating to the risk being covered.
Following the agreement on terms, the insurance or reinsurance contract is documented. In most individual consumer insurance markets, the insurance policy is initially crafted by the insurance company. In other instances, a manuscript policy may be negotiated.
iii Interpreting the contract
Because of variations among state laws, there are no overarching rules of insurance contract interpretation. In general, the rules of interpretation applicable to commercial contracts apply to insurance policies. State or federal courts that interpret contract provisions typically try to determine the objective intent of the parties. Unambiguous insurance policy provisions are generally enforceable. While these principles apply generally to reinsurance agreements as well, it is important to note that reinsurance disputes are typically viewed through the prism of industry custom and practice. Indeed, in reinsurance arbitrations the arbitrators' charge is often to view the parties' agreement as an 'honourable engagement' and they are often directed to interpret the contract without a need to follow strict rules of law and with a view to effecting the purpose of the contract in reaching their decision.
iv Intermediaries and the role of the broker
Insurance intermediaries, including agents and brokers, play a key role in the US insurance and reinsurance markets. Currently, there are more than 2 million individuals and more than 500,000 businesses licensed to provide insurance services in the US.28
There are a number of types of agents and brokers. Broadly speaking, a general insurance agent contractually represents the insurance company and is authorised to accept risks and issue policies, a soliciting agent has authority to seek insurance applicants, but has no authority to bind an insurance company, and a broker is a licensed, independent contractor who represents insurance applicants and ceding insurers in the negotiation and purchase of insurance or reinsurance.29
The conduct of insurance intermediaries is regulated through state statutes and laws. Typically, an agent or broker has a duty to faithfully carry out the instructions of its client. Depending upon the circumstances, a heightened 'fiduciary duty' may also apply.
The laws regarding insurance and reinsurance claims issues vary from state to state. The key issues include notice, good faith and dispute resolution.
With respect to notice, both insurance and reinsurance claims generally require that a policyholder or cedent provide reasonably timely notice of claims or other information. For insurance claims, timely notice is considered a condition precedent to coverage in many states and, in the absence of reasonably timely notice, a claim may not be covered. For reinsurance claims, in some jurisdictions, unless timely notice is stated to be a condition precedent in the reinsurance contract, a reinsurer seeking to avoid a claim on account of late notice must prove that it was economically prejudiced.
Both insurance and reinsurance claims may involve issues of good faith and fair dealing. Insurance companies, for their part, must respond to the claims of their policyholders consistent with contractual good faith and fair dealing requirements. In reinsurance, the duty of utmost good faith applies to both cedents and reinsurers. Thus, while cedents must fully disclose all material information about the ceded risk, for most lines of business reinsurers have a concomitant duty to 'follow the fortunes' of their cedents, which requires indemnifying cedents for all businesslike, good faith, reasonable claim payments.
IV DISPUTE RESOLUTION
i Jurisdiction, choice of law and arbitration clauses
A few key issues relating to insurance and reinsurance dispute resolution are (1) the forum in which a suit can or must be brought, (2) the law that will govern the dispute and (3) the dispute resolution process. In that regard, some insurance policies and most reinsurance contracts contain provisions relating to jurisdiction, choice of law or arbitration, either separately or together within a single dispute resolution clause. A typical forum clause, for example, requires any lawsuit related to the policy or contract to be filed in a given state or federal court. Similarly, a typical choice of law clause dictates which jurisdiction's laws 'shall' apply to disputes arising out of the contract. Finally, a typical arbitration clause states that all disputes regarding the contract shall be resolved by arbitration and, in most instances, spell out certain procedures applicable to the arbitration process.
Where those issues are not spelled out in the applicable contract, state and federal courts use a variety of legal rules for determining whether the chosen forum for a lawsuit is appropriate and choosing which state's law will apply. Arbitration, however, is a matter of contract or agreement; thus, a party that did not or has not agreed in its contract to arbitrate a dispute typically cannot be forced to do so.
The judicial system is made up of two different court systems: the federal court system and the state court systems.
In the federal system, there are three levels of courts: the district courts, which are the federal trial courts; the interim appellate courts, called the circuit courts of appeal; and the US Supreme Court, the final appellate court. Only two types of cases are heard in the federal system. The first is cases dealing with issues of federal law. The second is cases between citizens of two different states or between a US citizen and a foreign entity, provided the amount in dispute meets a minimum threshold. In total, there are 94 US district courts throughout the 50 states. There are 13 US circuit courts of appeal, each with separate jurisdictional coverage. There is one Supreme Court. Notably, the right to appeal to the Supreme Court typically is not automatic; the Supreme Court must agree to hear the case.
Typically, state court systems are made up of two sets of trial courts: trial courts of limited jurisdiction (probate, family, traffic, etc.) and trial courts of general jurisdiction (main trial-level courts). Most states also have intermediate appellate courts. All states have one final appellate state court.
Each state has its own rules of evidence for cases tried in its courts. Each state likewise has its own rules of procedure for cases progressing through its court system. The federal district courts, however, have a unified set of evidence rules and a unified set of rules of procedure.
Except in certain limited circumstances, the general rule in the US is that each party pays its own costs of litigation.
The most widely used alternative dispute resolution process is arbitration. There are numerous types of insurance and reinsurance arbitrations. The differences between each type generally relate to the following: the number of arbitrators; arbitrator selection procedures; arbitrator neutrality; and the arbitration hearing procedure.
Generally, US insurance and reinsurance arbitrations are conducted before either one arbitrator or three arbitrators. The selection process varies; in some instances, there is a process managed by an independent third party for selection of the entire panel, in other instances, the parties choose and organise the selection process. Two prominent and independent groups that certify arbitrators and in varying degrees organise insurance and reinsurance arbitrations in the US are the American Arbitration Association and the AIDA Reinsurance and Insurance Arbitration Society.
Typically, in the single-arbitrator process, the arbitrator is neutral and often has expertise in the particular type of dispute. Where the arbitration panel consists of three arbitrators, the general process is that arbitrators are either all neutral, or the parties each appoint a single arbitrator and follow a process for selection of a neutral umpire. In the latter process, it is common for both parties to be able to communicate with their appointed arbitrator prior to the hearing, but in the end, party-appointed arbitrators are expected to rule based on their view of the merits of the dispute. Although there are grounds to vacate or modify an arbitration award under the Federal Arbitration Act (or similar state statutes) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention), unless there is a prior agreement otherwise, arbitration decisions are considered binding.
In most instances, arbitrators are not bound by strict rules of evidence during the hearing. It is also common for witnesses appearing at an arbitration hearing to be questioned by the presenting party's attorney, the opposing party's attorney and the arbitration panel.
Finally, the general rule is that each party pays its own costs for insurance and reinsurance arbitrations. However, insurance and reinsurance contracts may specify otherwise.
Most state and all federal courts have adopted mediation processes designed to encourage dispute resolution without a trial. In general, the process is voluntary and the mediator is an independent third party without court affiliation. However, in a number of states, parties in commercial disputes are required to participate in at least one mediation or settlement conference prior to moving forward with trial. In addition, parties to an insurance dispute will often agree to retain a private mediator to help resolve one or more issues.
v Alternative dispute resolution
A range of dispute resolution techniques are used. Beyond arbitration and mediation, alternative dispute resolution procedures include early neutral evaluations, peer review and mini-trials. A number of industries – including the construction, maritime, and securities industries – have adopted these procedures to handle intra-industry claims.
V YEAR IN REVIEW
There were significant developments for the US insurance industry in 2018. While a comprehensive review of developments in the industry exceeds the scope of this chapter, the following is a sampling of the key emerging issues and events that will be on the minds of insurers throughout 2019.
i American Law Institute adopts the first Restatement of the Law, Liability Insurance
In May 2018, the American Law Institute (ALI) approved a final draft of the first-ever Restatement of the Law, Liability Insurance. The Restatement describes itself as a set of guidelines designed to help courts navigate liability insurance law issues. While the ALI has historically published Restatements covering many different areas of the law, the Liability Insurance Restatement is controversial.
Critics of the project argue that the Restatement sought to change the law rather than describe the current law.30 For example, during the drafting process, directors of insurance departments from Idaho, Illinois, and Michigan each wrote to the ALI and expressed concern that the proposed Restatement did not reflect the laws of their jurisdictions, or the laws of insurance as they generally understood it. Similarly, in April 2018 the governors of South Carolina, Maine, Texas, Iowa, Nebraska and Utah wrote to the ALI and expressed the view that the proposed Restatement departed from established legal principles governing liability insurance contracts and disputes. In May 2018, however, the project was approved by the ALI membership.
Following the project's approval, certain state insurance regulators have continued to express their concern. The National Conference of Insurance Legislators, for example, objected that the Restatement intruded upon the 'constitutionally protected legislative prerogatives' of the states to regulate insurance.31 In July 2018, the state of Ohio formally rejected the Restatement of the Law, Liability Insurance, stating in legislation that it 'does not constitute the public policy of this state and is not an appropriate subject of notice'.32
US insurance professionals will be carefully monitoring how other jurisdictions and courts of law react to the Restatement over the next year.
ii New York and New Jersey reach divergent conclusions on the 'unavailability exception' to pro rata allocation
The appropriate manner for allocating losses arising from long-tail liabilities, such as environmental contamination or asbestos bodily injuries, is a contested insurance coverage issue. Generally, US courts have recognised two distinct methods for allocating loss. Under the 'all sums' allocation method, policyholders can seek coverage for all of their losses under any triggered insurance policy. Under the pro rata allocation method – which is based on the fact that some liability policies provide coverage for loss occurring 'during the policy period' – losses that span multiple policy periods are allocated based on each insurer's relative time on the risk.
In 2017, the highest courts of three states – New York, New Jersey and Connecticut – were asked to address the extent to which pro rata allocation requires policyholders to bear the costs associated with periods where they could not have obtained insurance to cover their liabilities because it was unavailable. In 2018, the highest courts in New York and New Jersey handed down their decisions, reaching different conclusions. In March 2018, the New York Court of Appeals closed the door on the 'unavailability exception' to pro rata allocation in Keyspan Gas East Corporation v. Munich Reinsurance America, Inc.33 In that case, the insured sought coverage for clean-up costs associated with environmental contamination at five natural gas plants under its control that occurred gradually over many decades beginning in the early 1900s. The insurers argued that their liability was limited to their pro rata share of the damage based on their respective time on the risk, but the insured argued that the insurers should also bear the costs associated with any policy periods when insurance coverage for environmental contamination was generally 'unavailable'. The New York Court of Appeals sided with the insurers, unanimously finding that 'because “the very essence of pro rata allocation is that the insurance policy language limits indemnification to losses and occurrences during the policy period” the unavailability rule cannot be reconciled with the pro rata approach'.
However, in June 2018, the New Jersey Supreme Court affirmed New Jersey's unavailability exception to pro rata allocation in Continental Insurance Co et al v. Honeywell International Inc.34 The case arose from Honeywell's production of asbestos-containing products for more than 60 years, from 1940 until 2001. The insurance policies providing coverage from 1940 to 1986 did not contain exclusions for asbestos-related liabilities, but the policies from 1986 until 2001 did. Under New Jersey law, the policies were subject to pro rata allocation, but the parties disagreed over how the court should treat the periods where asbestos-related liabilities were excluded. The majority found that the unavailability exception was a matter of established law in New Jersey, and that while it 'would not hesitate to revisit' this approach if it proved inefficient or unrealistic, this case 'does not present a compelling vehicle to reconsider our precedent on allocation'.35
Insurance professionals in the US will now monitor how the Connecticut Supreme Court decides RT Vanderbilt Company, Inc v. Hartford Accident and Indemnity Co,36 a case that also involves long-tail liabilities subject to pro rata allocation and the question of how to treat periods where insurance was purportedly unavailable to cover the risk. A decision is expected in 2019.
iii New York Court of Appeal's guidance impacts review of facultative reinsurance certificates
A contested reinsurance issue in US courts is whether the 'reinsurance accepted' section in a facultative reinsurance certificate unambiguously caps the amount the reinsurer is obligated to pay for both loss and expenses incurred by the ceding company. In December 2017, the New York Court of Appeals ruled that '[u]nder New York law generally . . . there is neither a rule of construction nor a presumption that a per occurrence liability limitation in a reinsurance contract caps all obligations of the reinsurer, such as payments made to reimburse the reinsured's defense costs.'37 The Court further explained that under New York law, a court must not 'disregard the precise terminology that the parties used and simply assume . . . that any clause bearing the generic marker of a “limitation of liability” or “reinsurance accepted” clause was intended to be cost-inclusive'.38 Instead, reviewing courts should interpret certificates by 'look[ing] to the language of the [certificate] above all else', and that 'even modest variations on the face of a written agreement can alter the meaning of a critical term'.39
In 2018, the United States Court of Appeals for the Second Circuit twice applied this rule to interpret facultative reinsurance certificates. First, in the May 2018 case of Global Reinsurance Corp v. Century Indemnity, the Second Circuit remanded a case involving a facultative reinsurance certificate back to the lower court 'for consideration in the first instance of the contract terms at issue, employing standard principles of contract interpretation'.40 Quoting the New York Court of Appeals, the Second Circuit stated that the district court 'should “construe each reinsurance policy solely in light of its language and, to the extent helpful, specific context”'.41
Second, in the September 2018 case of Utica Mutual Ins Co v. Clearwater Ins Co, the Second Circuit referenced the New York Court of Appeal's decision and held that a 'naked' limitation on liability or reinsurance accepted clause – that is, one that does not say that the reinsurer's obligations are 'subject to' the amount of liability – 'does not inherently cap the reinsurer's liability' and 'says nothing about whether that liability cap is expense-supplemental or inclusive'.42 However, because the reinsurance certificates had a 'follow-the-form' clause, the court found that the reinsurer's obligations 'must track' the cedent's obligations on the underlying policies.43 Since the underlying policies at issue were 'expense-supplemental', the court ruled that 'the . . . certificates likewise are expense-supplemental'.44
VI OUTLOOK AND CONCLUSIONS
The US insurance and reinsurance markets continued to grow and evolve in 2018. As this growth and evolution will no doubt continue in 2019 and beyond, industry executives, representatives and practitioners will need to stay abreast of these changes in order to respond in a timely manner to new and emerging issues.
1 Michael T Carolan and William C O'Neill are partners, and Thomas J Kinney is an associate, at Troutman Sanders LLP.
2 Insurance Information Institute, World Insurance Marketplace, available at https://www.iii.org/publications/insurance-handbook/economic-and-financial-data/world-insurance-marketplace (last visited 11 January 2019).
3 The World Bank, Data, GDP (current US$), available at http://data.worldbank.org/country/united-states?view=chart (last visited 25 February 2018).
4 Insurance Information Institute, Insurance Industry at a Glance, available at https://www.iii.org/fact-statistic/facts-statistics-industry-overview (last visited 11 January 2019).
9 Reinsurance Association of America, Reinsurance Underwriting Review: A Financial Review of US Reinsurers, 2017 Industry Results, at 1, 10 (2018) (based on results of US reinsurance organisations with over US$10 million of unaffiliated reinsurance premium and US$50 million of policyholder surplus).
10 id. at 10.
11 15 U.S.C. § 1011 et seq.
12 id. § 1011.
13 This chapter does not address the US health insurance market. That market is primarily regulated by the federal government. For example, in 1965, the US Congress passed the comprehensive health insurance plans known as Medicare and Medicaid; in 1974, the US Congress passed the Employee Retirement Income Security Act, which placed employee benefit plans (including health plans) primarily under federal jurisdiction, and the HMO Act, which set standards for federally qualified health maintenance organisations; in 1996, the US Congress passed the Health Insurance Portability and Accountability Act, which established minimum federal standards for the availability and renewability of health insurance; lastly, in 2009, the US Congress passed the Affordable Care Act, a set of comprehensive health insurance market reforms.
14 The most important exception is for surplus lines.
15 NAIC Statement on Covered Agreement on Reinsurance Consumer Protection Collateral, available at https://www.naic.org/cipr_topics/topic_covered_agreement.htm (last visited 15 January 2019). The NAIC has approved seven countries as qualified jurisdictions: Bermuda, Germany, Switzerland, United Kingdom, France, Ireland and Japan. Reinsurers that are licensed and domiciled in these jurisdictions are eligible for reduced reinsurance collateral requirements. id.; see also NAIC List of Qualified Jurisdictions, available at http://www.naic.org/documents/committees_e_reinsurance_qualified_jurisdictions_list.pdf (last visited 15 January 2019).
16 'US and EU Sign Covered Agreement on Insurance Regulation', Insurance Journal, available at
https://www.insurancejournal.com/news/national/2017/09/22/465195.htm (last visited 27 February 2018).
17 Id; see also, Statement of the United States on the Covered Agreement with the European Union (22 September 2017), available at https://www.treasury.gov/initiatives/fio/reports-and-notices/Documents/US_Covered_Agreement_Policy_Statement_Issued_September_2017.pdf (last visited 15 January 2019).
20 See Gloria Gonzalez, 'US-EU covered agreement adds clarity but will take time to implement', Business Insurance (19 October 2017), available at http://www.businessinsurance.com/article/20171019/NEWS06/912316622/US-EU-covered-agreement-adds-clarity-but-will-take-time-to-implement (last visited 15 January 2019); see also Statement of the United States on the Covered Agreement with the European Union, at 1.
21 See Bilateral Agreement between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance – Fact Sheet, US Treasury Department, at 4.
22 See 'Treasury, USTR Finalize Bilateral Agreement with the UK on Prudential Measures Regarding Insurance and Reinsurance', United States Department of Treasury, available at https://home.treasury.gov/news/press-releases/sm570 (last visited 15 January 2019).
23 The examples cited herein of direct US federal government participation in insurance markets are illustrative and not exhaustive.
24 Initially enacted in 2002, the Terrorism Risk Insurance Act of 2002 (TRIA), Pub. L. 107–297, 116 Stat. 2322, was reauthorised in 2007 and expired on 31 December 2014. On 12 January 2015, HR 26, the 'Terrorism Risk Insurance Program Reauthorization Act of 2015' was signed into law. This legislation extended the federal terrorism reinsurance program established by the TRIA until 31 December 2020.
25 Originally enacted in 1968, the National Flood Insurance Program (codified at 42 U.S.C. § 4011) was reauthorised and reformed in 2012 through the Biggert-Waters Flood Insurance Reform Act of 2012, Pub. L. 112–141. On 21 March 2014, the Homeowner Flood Insurance Affordability Act of 2014 was signed into law. Among other things, this 2014 law repealed and modified certain provisions of the Biggert-Waters Act.
26 The Federal Crop Insurance Corporation was initially created by the US Congress in 1938 (codified at 7 U.S.C. § 1501) in response to the economic difficulties brought to the US farming industry by the Great Depression. In 1980, the programme was expanded through the Federal Crop Insurance Act, Pub. L. 96-365.
27 See Andrew G Simpson, 'Treasury Erases 'Too-Big-to-Fail' Label on Prudential', Insurance Journal (18 October 2018), available at https://www.insurancejournal.com/news/national/2018/10/18/504916.htm (last visited 15 January 2019).
28 Producer Licensing and NARAB II, NAIC (12 June 2017), available at https://www.naic.org/cipr_topics/topic_producer_licensing_narab_II.htm (last visited 15 January 2019).
29 Depending upon the facts, a broker may also act for the insurance company or reinsurer.
30 See, e.g., Glenn G Lammi, 'Restate Or Rewrite?: Stark Choice Faces ALI Leaders On Liability Insurance Law Project' Forbes (16 January 2018), available at https://www.forbes.com/sites/wlf/2018/01/16/restate-or-rewrite-stark-choice-faces-ali-leaders-on-liability-insurance-law-project/#1107fae16b5b (last visited 28 January 2019).
31 See National Conference of Insurance Legislators CEO Statement on ALI 'Restatement' of Liability Insurance Law, available at http://ncoil.org/2018/05/25/ncoil-statement-on-ali-restatement-of-liability-insurance-law/ (last visited 15 January 2019).
32 See Kim Marrkand, 'Why Ohio Nixed the New Liability Insurance Law Restatement' Law360 (August 2018), available at https://www.law360.com/articles/1071830/why-ohio-nixed-the-new-liability-insurance-law-restatement (last visited 15 January 2019).
33 Keyspan Gas East Corporation v. Munich Reinsurance America, Inc, et al, APL-2016-00236 (NY).
34 Continental Insurance Co v. Honeywell International Inc, 234 N.J. 23, 188 A.3d 297 (2018).
35 id. at 61.
36 RT Vanderbilt Company, Inc v. Hartford Accident and Indemnity Co, et al, PSC-16-0445 (CT).
37 Global Reinsurance Corp of America v. Century Indem Co, 30 N.Y3d 508, 2017 WL 6374281, at *1 (2017).
38 id. at *6.
39 id. at *5 (citation and quotation marks omitted).
40 Global Reins Corp of Am v. Century Indem Co, 890 F.3d 74, 77 (2d Cir. 2018).
41 id. (citation omitted).
42 id. at *14. However, the Second Circuit also stated if the facultative certificate does say that the reinsurance is 'subject to' the amount of liability, then the reinsurer's obligations 'would be expense-inclusive and would therefore be capped at' the stated limit. id. at 13.
43 id. at *15.