The United States insurance market is one of the largest financial markets in the world. In 2018, US insurers underwrote approximately US$1.47 trillion in life and non-life direct premiums, accounting for 28.29 per cent of the global insurance industry.2 To put that number in perspective, the US$1.47 trillion in underwriting amounted to roughly 7.16 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 2018, the total cash and invested assets of US insurers reached US$8.5 trillion.4 As such, the US insurance market plays a significant role in the global economy.
In 2018, the US insurance market included US$604.6 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 2018 US insurance market also wrote US$612.6 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 2,500 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$63.2 billion in 2018.9 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.
Producer licensing requirements 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 prohibit rates that are inadequate, excessive or unfairly discriminatory. Individual states do not set mandatory rates. Instead, insurance companies choose the rates they intend to use in a particular 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 rate filing requirements whatsoever.
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 their 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 of January 2020, 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 what guidelines and procedures are to be used by the state when conducting 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. However, when multiple financial examinations are necessary, they are coordinated to some extent into 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.
Then 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 called for an end to collateral and local presence requirements for EU and US reinsurers.15 It also affirmed 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.16
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.17 The agreement also eliminates collateral and local presence requirements for EU and US reinsurers.18 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.19 Finally, the agreement establishes cross-conditionality between provisions as an enforcement mechanism, to ensure equal compliance and equal benefits.20
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.21
As of January 2019, 48 states had passed legislation to implement revised reinsurance collateral provisions focused on the solvency risk of reinsurers as opposed to their admitted status.22 Additionally, in June 2019, the NAIC announced updates to its Credit for Reinsurance Model Law and Regulation.23 These changes serve to conform the Model Law and Regulation to the terms of the US-EU and US-UK covered agreements and also enable reinsurers domiciled in NAIC-qualified jurisdictions other than within the EU to take advantage of similar reinsurance collateral reductions.24
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.25 Examples of direct federal insurance involvement include terrorism risk insurance,26 flood insurance27 and crop insurance.28
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.29
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 236,000 businesses licensed to provide insurance services in the US.30
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.31
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 2019. 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 2020.
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 was controversial. The controversy that surrounded the adoption of the Restatement continued in 2019, as courts considered whether to utilise and perhaps adopt Restatement provisions, and opponents pushed state legislatures, regulators and courts to ignore or overrule the provisions. Now, the National Conference of Insurance Legislators has spoken out against the Restatement, and several state legislators have similarly responded, both formally and informally.
Several states have reacted with formal measures to lodge objection or prevent use of the Restatement. Ohio recently amended the state insurance statute to provide that the Restatement 'does not constitute the public policy of this state and is not an appropriate subject of notice.' Tennessee also amended its insurance statute to add provisions advocating a 'plain meaning' approach to the determining insurer coverage and defence obligations. North Dakota also approved a bill instructing courts to disregard the Restatement. Finally, the Kentucky House of Representatives adopted a Resolution explicitly opposing the Restatement.
Several other states participated in less formal shows of opposition. This year, the governors of the states of South Carolina, Maine, Texas, Iowa, Nebraska and Utah submitted a joint letter to the ALI stating concern that the Restatement alters fundamental principles of insurance law. Similarly, the Insurance Commissioners of the states of Michigan, Idaho and Illinois wrote to the ALI to express concerns that the Restatement goes beyond the codification of the law and could adversely impact the insurance system.
US insurance professionals will be carefully monitoring responses to these measures over the next year.
ii Connecticut high court affirms decision 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.
Last year, we reported on divergent decisions from New York and New Jersey and noted that additional rulings might help resolve this question. 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.32 In Keyspan, 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'. In contrast, 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.33 The Honeywell 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'.34
In 2019 a decision from the Connecticut Supreme Court affirmed the 'unavailability of insurance' exception to time-on-risk pro rata allocation: RT Vanderbilt Company, Inc v. Hartford Accident and Indemnity Co.35 Vanderbilt also involved 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. Like the New Jersey Supreme Court in Honeywell, the Vanderbilt court affirmed the appellate decision, ruling that damages and defence costs should not be allocated to any period where insurance was unavailable in the market. In Vanderbilt, the court wholly adopted the reasoning of the 2017 appellate decision on this issue. Significantly, the court ruled that the policyholder bears the burden of proving that it was unable to obtain coverage at times when it was generally available in the marketplace. Moreover, the court recognised the potential for an 'equitable exception' to the unavailability rule. In the asbestos context presented by the Vanderbilt matter, such an exception could arise if the insured had continued to manufacture or distribute asbestos-containing products after it knew the products were hazardous. The court did not find such facts existed and denied the application of the exception and ultimately spread costs across only those periods in which insurance was available.
iii New York court requires non-parties to appear and produce documents before a reinsurance arbitration panel
In Washington National Insurance Co. v. Obex Group LLC,36 the US District Court for the Southern District of New York enforced two arbitration summonses issued by a reinsurance arbitration panel and ordered two non-parties to appear before the panel and produce documents required by the panel.
The underlying dispute involved Washington National Insurance Company's allegation that it was fraudulently induced into a reinsurance agreement with Beechwood Re. In support of evidence sought by Washington National, the arbitration panel issued non-party subpoenas to Obex Group and Randall Katzenstein, requiring them to appear as witnesses at a hearing and to produce documents. Although Obex Group and Katzenstein produced some documents, Washington National asserted that they failed to produce others and the arbitration panel issued two summonses requiring Obex Group and Katzenstein to appear at a hearing in New York City and to bring additional documents, finding that the documents and information sought 'are relevant' to the issues in the arbitration and that the summonses 'should be enforced by a Court of appropriate jurisdiction'. Washington National then filed a petition to enforce the summonses.
Obex Group and Katzenstein moved to dismiss and to quash the subpoenas, arguing in part that the summonses were impermissible pre-hearing discovery and that only the Court, not the arbitration panel, had the power to rule on the merits of their objections. The Court disagreed, noting that the question of whether a summons seeks impermissible pre-hearing discovery is governed by three factors: (1) whether the witnesses 'were ordered to appear for depositions . . . outside the presence of the arbitrators'; (2) whether the arbitrators 'heard testimony directly from the witnesses and ruled on evidentiary issues'; and (3) whether the testimony 'became part of the arbitration record' such that the arbitration panel used it in determining the dispute. Concluding that the summonses at issue were 'proper' under Section 7 of the Federal Arbitration Act, the Court explained: 'The panel summoned respondents to a hearing before the arbitrators – not to a deposition' and that the panel's order 'stated that the panel was prepared to receive testimony and documentary evidence . . . and the panel was prepared to rule on evidentiary issues,' with a court reporter 'ready to record the hearing' so it would be part of the arbitration record used by the Panel. While Obex Group and Katzenstein argued that Washington National's willingness to waive the hearing and just receive documents meant that the arbitration panel's hearing order 'evidences a subterfuge', the Court disagreed, averring that it would not 'prejudice [the] petitioner for its sensible willingness to negotiate.'
Finally, the Court held that even if it had the authority to 'independently assess' the materiality of the summonses, courts in the Second Circuit generally declined to exercise that authority and instead deferred to the arbitrators, and that it would do the same. It was enough for the Court that the arbitration panel 'stated the evidence was relevant and that the summonses should be enforced by a court of appropriate jurisdiction.'
iv Georgia Supreme Court rules that an insurer can't be sued for failing to settle within policy limits unless it receives a valid settlement offer
In a highly watched case by counsel and insurers following trends in bad faith litigation, the Georgia Supreme Court ruled that an insurer is not responsible for excess coverage or bad faith damages for failing to settle a claim against its policyholder unless it first receives a valid settlement offer.
The case – First Acceptance Insurance Co. of Georgia Inc. v. Hughes – involved a vehicle crash that killed one man and injured six others.37 The responsible driver's insurance policy had liability limits of US$25,000 per person and US$50,000 per accident. The plaintiff's attorney sent a demand for payment of policy limits, but did not set a deadline by which the insurer was required to respond to the offer, which was required. The matter went to trial and resulted in an award of US$5.3 million. The plaintiff sought recovery from the insurer for the liability in excess of its policy limits due to its alleged bad faith failure to settle. The Georgia Supreme Court denied the claim and, in a unanimous opinion, found that the insurer did not act negligently or in bad faith when failing to settle. The Court held that 'an insurer's duty to settle arises only when the injured party presents a valid offer to settle within the insured's policy limits.' Specifically, the Court reasoned that because the offer in this case did not include a time limit, there was no valid offer.
Insurers hope that this decision will curtail the practice by some plaintiff attorneys of submitting untenable settlement offers, presuming insurers will not accept the offer, in order to later allege that the insurer failed to settle and seek damages for bad faith.
VI OUTLOOK AND CONCLUSIONS
The US insurance and reinsurance markets continued to grow and evolve in 2019. As this growth and evolution will no doubt continue in 2020 and beyond, industry executives, representatives and practitioners will need to stay abreast of these changes in order to respond in a timely manner to new and emerging issues.
1 Michael T Carolan, William C O'Neill and Martha E Conlin are partners and Thomas J Kinney is an associate at Troutman Sanders LLP.
2 Insurance Information Institute, World Insurance Marketplace, available at www.iii.org/publications/insurance-handbook/economic-and-financial-data/world-insurance-marketplace (last visited 23 February 2020).
3 The World Bank, Data, GDP (current US$), available at www.data.worldbank.org/country/united-states?view=chart (last visited 23 February 2020).
4 Insurance Information Institute, Insurance Industry at a Glance, available at www.iii.org/fact-statistic/facts-statistics-industry-overview (last visited 23 February 2020).
9 Reinsurance Association of America, Reinsurance Underwriting Review: A Financial Review of US Reinsurers, 2018 Industry Results, at 1, 10 (2019) (based on results of US reinsurance organisations with over US$50 million of unaffiliated reinsurance premium and US$250 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 'US and EU Sign Covered Agreement on Insurance Regulation', Insurance Journal, available at
www.insurancejournal.com/news/national/2017/09/22/465195.htm (last visited 23 February 2020).
16 id.; see also, Statement of the United States on the Covered Agreement with the European Union (22 September 2017), available at www.treasury.gov/initiatives/fio/reports-and-notices/Documents/US_Covered_Agreement_Policy_Statement_Issued_September_2017.pdf (last visited 23 February 2020).
19 See Gloria Gonzalez, 'US-EU covered agreement adds clarity but will take time to implement', Business Insurance (19 October 2017), available at www.businessinsurance.com/article/20171019/NEWS06/912316622/US-EU-covered-agreement-adds-clarity-but-will-take-time-to-implement (last visited 23 February 2020); see also Statement of the United States on the Covered Agreement with the European Union, at 1.
20 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.
21 See 'Treasury, USTR Finalize Bilateral Agreement with the UK on Prudential Measures Regarding Insurance and Reinsurance', United States Department of Treasury, available at www.home.treasury.gov/news/press-releases/sm570 (last visited 15 January 2019).
22 NAIC Statement on Covered Agreement on Reinsurance Consumer Protection Collateral, available at www.naic.org/cipr_topics/topic_covered_agreement.htm (last visited 23 February 2020). The NAIC has approved seven countries as qualified jurisdictions: Bermuda, Germany, Switzerland, the 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 www.naic.org/documents/committees_e_reinsurance_qualified_jurisdictions_list.pdf (last visited 23 February 2020).
23 See NAIC Updates to Credit for Reinsurance Model Law and Regulation, available at www.naic.org/Releases/2019_docs/credit_reinsurance_model.htm (last visited 23 February 2020).
25 The examples cited herein of direct US federal government participation in insurance markets are illustrative and not exhaustive.
26 Initially enacted in 2002, the Terrorism Risk Insurance Act of 2002 (TRIA), Pub. L. 107–297, 116 Stat. 2322, was reauthorised in 2007 and 2015, and was most recently extended by the Terrorism Risk Insurance Program Reauthorization Act of 2019. The programme is now authorised to run through the year 2027.
27 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.
28 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.
29 See Andrew G Simpson, 'Treasury Erases 'Too-Big-to-Fail' Label on Prudential', Insurance Journal (18 October 2018), available at www.insurancejournal.com/news/national/2018/10/18/504916.htm (last visited 23 February 2020).
30 Producer Licensing and NARAB II, NAIC (12 June 2017), available at www.naic.org/cipr_topics/topic_producer_licensing_narab_II.htm (last visited 23 February 2020).
31 Depending upon the facts, a broker may also act for the insurance company or reinsurer.
32 Keyspan Gas East Corporation v. Munich Reinsurance America, Inc, et al, APL-2016-00236 (NY).
33 Continental Insurance Co v. Honeywell International Inc, 234 N.J. 23, 188 A.3d 297 (2018).
34 id. at 61.
35 RT Vanderbilt Company, Inc v. Hartford Accident and Indemnity Co, et al, PSC-16-0445 (CT).
36 Washington National Ins. Co. v. Obex Group LLC, 2019 U.S. Dist. LEXIS 9300 (S.D.N.Y. Jan. 18, 2019).
37 First Acceptance Insurance Co. of Georgia Inc. v. Hughes 305 Ga. 849 (2019).