The Insurance and Reinsurance Law Review: USA

Introduction

The United States insurance market is one of the largest financial markets in the world. In 2020, US insurers underwrote approximately US$2.53 trillion in life and non-life direct premiums, accounting for 40.3 per cent of the global insurance industry.2 To put that number in perspective, the US$2.53 trillion in underwriting amounted to roughly 12 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 2020, the total cash and invested assets of US insurers reached US$9.7 trillion.4 As such, the US insurance market plays a significant role in the global economy.

In 2020, the US insurance market included US$624.0 billion in life and health insurance premiums, including annuities.5 This dynamic and highly competitive segment of the marketplace includes approximately 1,800 insurance companies competing to underwrite a wide variety of products.6

The 2020 US insurance market also wrote US$652.8 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$69.4 billion in 2020.9 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.

Regulation

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.

Company licensing

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 are usually called 'expansion applications'.

Typically, states require certain minimum levels of capital and policyholder surplus 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.

Producer licensing

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 must 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 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 2021, all 50 states plus the District of Columbia and Puerto Rico are accredited.

Financial examinations

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.

However, in September 2017, the United States 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 Additionally, the agreement 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 United Kingdom 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 Thereafter, in June 2019, the NAIC announced updates to its Credit for Reinsurance Model Law (#785) and Regulation (#786).22 States have until September 2022 to bring their credit for reinsurance laws into compliance with the covered agreements' zero reinsurance collateral provision or face potential federal pre-emption of their laws.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 As of January 2022, 47 states have adopted the NAIC Credit for Reinsurance Model Law (#785), while three states have pending legislation to enact the Model Law.25 Additionally, 30 states have adopted the accompanying Credit for Reinsurance Model Regulation (#786), with legislation to enact the regulation pending in 10 states.26

Insurance insolvency

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, even though 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.27 Examples of direct federal insurance involvement include terrorism risk insurance,28 flood insurance29 and crop insurance.30 As discussed further in Section V, in 2020 there were ultimately unsuccessful efforts to create a federal reinsurance programme for pandemic-related losses, though similar legislation was reintroduced in 2021 and remains pending before Congress.31

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 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 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 a 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.32

Non-admitted 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 out in the reinsurance contract itself. Finally, the exclusive authority to regulate the financial solvency of a reinsurer is in the reinsurer's domiciliary state.

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 to reinsurance agreements as well, 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', meaning arbitrators are 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.33

There are various 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.34

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.

v Claims

The laws regarding insurance and reinsurance claims issues vary from state to state. 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, meaning a claim may not be covered if there is not reasonably timely notice. For reinsurance claims, if timely notice is not a stated condition precedent in the reinsurance contract, some jurisdictions require a reinsurer to prove that it was economically prejudiced if it seeks to avoid a claim on account of late notice.

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 business-like, good faith, reasonable claim payments.

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, dispute resolution and choice of law. These can be included 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 particular 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.

ii Litigation

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.35 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.36 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 is not automatic in most cases; 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.

iii Arbitration

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 (ARIAS).

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.

iv Mediation

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.

Year in review

There were significant developments for the US insurance industry in 2021. 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 2022.

i Covid-19 and continued efforts to pass legislative reforms

As the covid-19 pandemic persisted throughout 2021, lawmakers faced continued pressure to pass reforms that would provide relief from the economic impact of pandemic-related losses. As noted last year, in early 2020 federal legislators introduced a bill that would establish a federal backstop for insurers offering policies with explicit business interruption coverage for losses attributed to an outbreak or pandemic that was declared a federal emergency.37 That legislation – known as the Pandemic Risk Insurance Act of 2020 – did not receive a vote during the 2020 legislative session and was cleared from the books.38 However, in November 2021, federal legislators introduced a new version of this proposal, called the Pandemic Risk Insurance Act of 2021.39

As with its 2020 predecessor, the 2021 version of the bill proposed to create a federal reinsurance programme that would serve as a backstop for pandemic-related losses.40 However, unlike the 2020 version – which would have been voluntary for insurers – the 2021 proposal would require insurance carriers to offer coverage for losses arising from a 'covered public health emergency' (as determined by the Secretary of the Department of Health and Human Services) in all of their property and casualty policies.41 Additionally, the bill would require all insurers to offer parametric, non-damages business interruption coverage in all commercial property insurance policies, providing coverage for up to 180 days of covered losses during a declared public health emergency.42

The proposed legislation prompted significant debate across the insurance industry, with strong reactions from both policyholder advocates (who generally viewed it favourably) and insurer advocates (who largely criticised the proposal). By the end of 2021 the legislation had stalled in committee and did not receive a vote. However, given the continuing impact of the covid-19 pandemic, the Pandemic Risk Insurance Act is something many in the US insurance industry are keeping an eye on in 2022.

ii 'Silent cyber' coverage for violations of the Biometric Information Privacy Act

There were several significant decisions in the world of cyber insurance coverage in 2021, including two notable decisions reaching opposite conclusions about whether violations of Illinois' Biometric Information Privacy Act (BIPA) are covered under general commercial liability policies that do not specifically provide cyber coverage – aka 'silent cyber' coverage.43

First, in May 2021, the Illinois Supreme Court found that an insurer had a duty to defend an insured tanning salon against a suit alleging that it had disclosed a customer's fingerprint data to a third-party vendor in violation of the BIPA.44 The policyholder sought coverage under the 'personal injury' provision of its business owners' liability policies, which provided coverage for 'injury other than “bodily injury”, arising out of . . . oral or written publication of material that violates a person's right of privacy'.45 The policyholder argued that the it was entitled to coverage because the suit alleged injuries stemming from the sharing – or 'publication' – of information with a third-party.46 However, the insurer argued that coverage was not available, because 'publication' means 'communication to the public at large', and not disclosure to a single party. Additionally, the insurer argued, the policyholder was not entitled to coverage because of the policy's exclusion for 'Distribution of Material in Violation of Statutes'.47

On review, the Illinois Supreme Court ruled for the policyholder, finding that (1) that the undefined phrase 'publication' was ambiguous, and thus must be construed against the insurer as a matter of Illinois law, and (2) that the exclusion did encompass violations of the BIPA, and thus did not bar coverage.48 Of particular note was the court's decision regarding the applicability of the exclusion, as the court focused heavily on both the title of the exclusion and the fact that the exclusion specifically identified two statutes that 'regulate methods of communication' before including a final 'other statute' catch-all provision. Noting that 'all items listed in the title are methods of communication', and that each of the statutes specifically mentioned in the exclusion are 'statutes that regulate methods of communication', the court held that 'under the doctrine of ejusdem generis and our rules of contract construction, we construe the violation of statutes exclusion to apply only to statutes like the TCAP and the CAN-SPAM Act, which regulate methods of communication'.49 Because the court found that the BIPA did not regulate methods of communication, but rather 'the collection, use, safeguarding, handling, storage, retention, and destruction of biometric identifiers and information', the court found that the exclusion did not bar coverage.50

Notably, a North Carolina federal court reached the opposite conclusion in a case with similar facts just months later.51 In that case, an insured logistics and warehousing service company sought a defence against claims that it violated the BIPA by scanning employees' fingerprints to track work hours without their consent.52 The insurers denied coverage, arguing inter alia that a 'recording and distribution of information' exclusion precluded coverage.53 Like the court in West Bend, the Massachusetts Bay court applied the principle of ejusdem generis, noting that 'general, catch-all language that directly follows a list of specific items is construed to include only things of the same kind, character and nature as those specifically enumerated'.54 However, unlike the court in West Bend, in this case the court found that the references to the TCPA and the CAN-SPAM Act did not limit the exclusion to statutes regulating methods of communication. Rather, the court found that the references to these statutes before the inclusion of a 'catch-all' provision meant that the exclusion 'applies to any statute that prohibits or limits the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information'.55 Because the court found that the BIPA regulated the collection and disclosure of biometric information, the court found that the exclusion barred coverage.56 In doing so, the court specifically considered (and disregarded) the Illinois Supreme Court's decision in West Bend, finding that the language of the exclusion in West Bend was different from that in this case, and noting that although both cases involved alleged violations of Illinois' BIPA, its decision was governed by North Carolina law, not Illinois law.57

These divergent decisions under similar fact patterns highlight the important role that governing law and policy language play in resolving insurance coverage disputes in the US.

iii Powers of the arbitration panel and arbitration awards

As noted above in Section IV.iii, in the US, great deference is given to arbitrators and their final awards are considered binding. Arbitration clauses typically specify that arbitrators are not bound by the strict rules of law or evidence, and arbitrators enjoy broad latitude to conduct hearings as they see fit. This is especially true where the parties' agreement contains an 'honourable engagement' clause, as addressed by the Seventh Circuit's decision in Continental Casualty Co. v. Certain Underwriters at Lloyd's of London.58

Continental Casualty involved a dispute over whether an arbitration panel had the authority to decide not just the issue presented by the parties – a specific question about billing methodology – but also the consequences of that decision.59 On review of the ceding company's appeal, the court noted the important difference between court judgments and arbitration awards, opining that '[i]f our job were to assess the merits of Continental's position in the same way that we approach ordinary appeals, it is possible that we might come to a different conclusion' but that the court was 'constrained by the FAA, as interpreted by the Supreme Court'.60 After establishing the limited scope of its review, the court explained that 'an arbitral award must “draw its essence” from the contract'.61 Because of this, the court found that '[t]he scope of the agreement to arbitrate is critical, as the parties have the prerogative of giving either a broad or a narrow mandate to the arbitrators'.62 Looking to the terms of the parties' agreement, the court noted that the parties had authorised the panel to resolve disputes 'based on commercial realities, not just legal niceties' and had included an 'honourable-engagement clause' that 'expressly recognize[d] this fact'.63 In light of this, the court found that the panel had a broad mandate, and that it did not stray beyond the boundaries of its authority when it issued its supplemental clarifying award.64

With this decision, the Seventh Circuit joined both the First Circuit65 and Second Circuit66 in finding that an honourable engagement clause gives an arbitration panel broad discretion over the remedies it can award.

Outlook and conclusions

Despite the significant impact of the covid-19 pandemic on the global economy, the US insurance and reinsurance markets continued to grow and evolve in 2021. As this growth and evolution will no doubt continue in 2022 and beyond, industry executives, representatives and practitioners will need to stay abreast of these changes to respond in a timely manner to new and emerging issues.

Footnotes

1 William C O'Neill, Michael T Carolan and Thomas J Kinney are partners and Jenna N Tyrpak is an associate at Troutman Pepper Hamilton 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 4 February 2022).

3 ibid; see also, The World Bank, Data, GDP (current US$), available at http://data.worldbank.org/country/united-states?view=chart (last visited 4 February 2022).

4 Insurance Information Institute, Insurance Industry at a Glance, available at https://www.iii.org/fact-statistic/facts-statistics-industry-overview (last visited 4 February 2022).

5 ibid.

6 ibid.

7 ibid.

8 ibid.

9 Reinsurance Association of America, Reinsurance Underwriting Review: A Financial Review of US Reinsurers, 2020 Industry Results, at 1, 10 (2021) (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 USC § 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
https://www.insurancejournal.com/news/national/2017/09/22/465195.htm (last visited 4 February 2022).

16 ibid.; 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 4 February 2022).

17 'US and EU Sign Covered Agreement on Insurance Regulation' (see footnote 15).

18 ibid.

19 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 4 February 2022); see also Statement of the United States on the Covered Agreement with the European Union (see footnote 16) 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 https://home.treasury.gov/news/press-releases/sm570 (last visited 4 February 2022).

22 See The NAIC Credit for Reinsurance Model Law, available at https://content.naic.org/sites/default/files/government-affairs-brief-credit-reinsurance-model-law.pdf (last visited 4 February 2022).

23 ibid.

24 ibid. 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 https://content.naic.org/sites/default/files/committee_e_reinsurance_qualified_jurisdictions_list_2.pdf (last visited 4 February 2022).

25 'Implementation of the 2019 Revisions to the Credit for Reinsurance Model Law #785', available at https://content.naic.org/sites/default/files/committee-e-785786-state-adoption-maps.pdf (last visited 4 February 2022).

26 ibid.

27 The examples cited herein of direct US federal government participation in insurance markets are illustrative and not exhaustive.

28 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.

29 Originally enacted in 1968, the National Flood Insurance Program (codified at 42 USC § 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 2013, Pub. L. 113-89, was signed into law. Among other things, this 2013 law repealed and modified certain provisions of the Biggert-Waters Act.

30 The Federal Crop Insurance Corporation was initially created by the US Congress in 1938 (codified at 7 USC § 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.

31 The Pandemic Risk Insurance Act, HR 7011 (116th), was introduced in Congress in May of 2020 but did not receive a vote before the end of the legislative session. On 2 November 2021, the Pandemic Risk Insurance Act, HR 5823 (117th), was reintroduced in the House of Representatives and remains pending.

32 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 4 February 2022).

33 Producer Licensing and NARAB II, NAIC (12 June 2017), available at https://content.naic.org/cipr_topics/topic_producer_licensing.htm (last visited 4 February 2021).

34 Depending upon the facts, a broker may also act for the insurance company or reinsurer.

35 28 USC § 1331 et seq.

36 28 USC § 1332 et seq.

37 See Jeff Sistrunk, 'Insurance Legislation & Regulation To Watch In 2021', Law360 (3 January 2021) available at https://www.law360.com/articles/1330266/insurance-legislation-regulation-to-watch-in-2021 (last visited 15 February 2022).

38 See Civic Impulse, LLC, 'H.R. 7011 (116th): Pandemic Risk Insurance Act of 2020', govtrack (26 May 2020) available at https://www.govtrack.us/congress/bills/116/hr7011 (last visited 15 February 2022).

39 See Angela Childers, 'Lawmaker Reintroduces Pandemic Risk Insurance Act', Law360 (3 Nov 2021) available at https://www.law360.com/insurance-authority/articles/1437372/lawmaker-reintroduces-pandemic-risk-insurance-act (last visited 15 February 2022).

40 See Civic Impulse, LLC 'H.R. 5823 (117th): Pandemic Risk Insurance Act of 2021', govtrack (2 Nov 2021) available at https://www.govtrack.us/congress/bills/117/hr5823 (last visited 15 February 2022).

41 id. at Sec. 4(c)(1).

42 id. at Sec. 4(c)(2).

43 See Alex Wright, 'Silent Cyber Will Sabotage Your Insurance Policy if You Don't Watch Out. Here's What Risk Manages Should Keep Top of Mind', Risk & Insurance (6 August 2021) available at https://riskandinsurance.com/silent-cyber-will-sabotage-your-insurance-policy-if-you-dont-watch-out-heres-what-risk-managers-should-keep-top-of-mind (last visited 15 February 2022).

44 See West Bend Mutual Ins. Co. v. Krishna Schaumburg Tan, Inc., et al., 2021 IL 125978 (IL. 2021).

45 id. at *1.

46 id. at *3.

47 id.at *3. In relevant part, the exclusion precluded coverage for personal injury 'arising directly or indirectly out of any action or omission that violates or is alleged to violate: (1) The Telephone Consumer Protection Act (TCPA) … (2) The CAN-SPAM Act of 2003 … or (3) Any statute, ordinance or regulation, other than the TCPA or CAN-SPAM Act of 2003, that prohibits or limits the sending, transmitting, communication or distribution of material or information.'

48 id. at *10.

49 id.

50 id.

51 See Massachusetts Bay Ins. Co. v. Impact Fulfillment Services, 1:20-CV-926 (M.D.N.C. 21 September 2021).

52 id. at *5.

53 id. at *15. The exclusion provided, in relevant part, that 'This insurance does not apply to: . . . “Personal and advertising injury” arising directly or indirectly out of any action or omission that violates or is alleged to violate: (1) The Telephone Consumer Protection Act (TCPA) . . . (2) The Can-SPAM Act of 2003 . . . (3) The Fair Credit Report Act (FCRA) . . . or (4) Any federal, state or local statute, ordinance or regulation, other than the TCPA, CAN-SPAM Act of 2003 or FCRA and their amendments and additions, that addresses, prohibits, or limits the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information.' id. at *3–4.

54 id.at *17-18.

55 id. at *18.

56 id. at *21.

57 id. at *19, fn. 2.

58 10 F.4th 814 (7th Cir. 2021).

59 id.at 816.

60 id.

61 id. at 819.

62 id.

63 id. at 819.

64 id. at 823.

65 See First State Ins. Co. v. Nat'l Cas. Co., 781 F.3d 7, 12 (1st Cir. 2015) (finding honourable engagement clauses 'empower [] arbitrators to grant forms of relief, such as equitable remedies, not explicitly mentioned in the underlying agreement.')

66 See Banco de Seguros del Estado v. Mut. Marine Off., Inc., 344 F.3d 255, 261 (2d Cir. 2003) ('Courts have read such [honourable engagement] clauses generously, consistently finding that arbitrators have wide discretion to order remedies they deem appropriate.')

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