The “Insurance Hoax” — Insurers Paying Too Little and Too Late

Bloomberg recently published a hard-hitting piece decrying the property-casualty industry’s claims-handling practices. Insurers perceive that the article to punches below the belt, as this response from the Insurance Information Institute shows. The III piece is interesting to me because of its immoderate tone, something at odds with most of the writing that comes from III, which is a great source of financial statistics in particular on the performance of the P-C insurance industry. While the III is certainly right that insurers pay claims every day, the III and the rest of the industry need to recognize the wide-spread perception that at the point of claim insurers adopt an adversarial posture. Experienced, thoughtful observers of the industry have written about this at length (and the linked article is I think the most important thing ever written on the P-C industry), and the point of first-party insurance bad-faith law in part is to counterbalance the power imbalance that insurers hold over their insureds at the time of claim — at the time their insureds are most in need and dependent on their performance, which explains the emotional oomph that typifies through-the-eyes-of-insureds’ reporting on insurers’ claims-paying (or claims-denying) practices.
I agree with the III that the Bloomberg story is too facile, and it is inappropriate to leap from the observation that an insurer paying less than what the policyholder wanted ineluctably means that the insurer is paying less than what the policyholder deserved. I recently suffered a major homeowners’ loss when a (crazed) intruder broke into my home and caused huge amounts of damage; our insurer was fantastic in dispatching someone to board up a broken door, arrange for a contractor to do repair work, and reimburse us for other loss (including paying the vendor of our choice on some home electronics). So I know first hand that insurers can ride to the rescue, treat their customers with “good hands,” and live up to their advertising slogans. On the other hand, I bring suits against insurers on behalf of clients when I think amounts are owed and unpaid, and I am kept busy by wrongful denials by insurers inflicted against my corporate clients (both large and small). At a time when respected news outlets like Bloomberg (and CNN and PBS) feel comfortable producing pieces that seem well suited to the Fight Bad Faith Insurance Companies website, the insurance industry should look deep into its practices and understand the perceptions of consumers and businesses to ensure that insurers’ historic mission of helping their insureds, being “there” in the time of need, is embraced and, more importantly, put into practice every day in paying claims.

Now You See It, Now You Don’t: Payments Received from Insolvent Insurers

Insurers collect premiums, invest them, incur overhead, and pay claims. Sometimes this life cycle gets out of whack, leading to the voluntary or forced insolvency of an insurance company. Whenever an insolvency occurs, one job of the rehabilitator or liquidator is to equitably distribute whatever money is available to the policyholders with unpaid claims in the queue. And a policyholder that already received payment from the insurer may be required to disgorge those monies back to the estate if it is found that the claim payment constitutes a preference.

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Berkshire Hath A Way Out for Equitas and Lloyd’s

A long-rumoured transaction between Equitas and Warren Buffett’s Berkshire Hathaway has been announced. This will be a two-step transaction whereby (1) Equitas will be absorbed into a National Indemnity Company subsidiary in exchange for a cash payment and a promise of providing additional reinsurance and (2) a channeling injunction will be obtained cutting off the exposure of Equitas, Lloyd’s, names, and Berkshire beyond the money in the new vehicle. If consummated, the deal will achieve the long-sought finality for names (the individual investors on the responsible pre-1992 syndicate years of account) and for the current Lloyd’s enterprise.

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Equitas Financials — 2006 Version

As part of the Reconstruction and Renewal of Lloyd’s in 1996, various participants in the Lloyd’s enterprise established several companies for the purpose of reinsuring the then-open syndicate years of account and managing the runoff of claims under those and prior years’ insurance policies. In 1997, the liabilities of a Lloyds’ owned-entity called Lioncover were reinsured into Equitas too.
Equitas issues an annual report and accompanying press release that discusses its results to date. Some of the highlights this year:

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Taming the Lion(cover): Lioncover, Lloyd’s, Equitas, and the Central Fund(s)

W. Mark Felt or Hal Holbrook playing him said to “follow the money,” which has proven difficult in the instance of Lloyd’s of London, and a task made all the more important as asbestos and environmental liabilities continue to fall upon corporate policyholders in the US that purchased broad insurance in the 1950s, 60s and 70s through the London market. While lawyers and policyholders may be familiar with Equitas, the reinsurance runoff and claims-handling vehicles set up in the late 1990s to deal with liabilities arising under historical Lloyd’s policies, I have long believed that a key for litigators is something called Lioncover, a reinsurance vehicle originally set up to bailout important players at Lloyd’s who were involved in Peter Cameron Webb “managed” syndicate years of account. Lioncover, which I understand to be a wholly owned subsidiary of the Corporation of Lloyd’s and which houses the PCW business, initially was not reinsured into Equitas when Equitas was set up as part of the “Reconstruction and Renewal” of the Lloyd’s operation. It was later poured into the Equitas structure but also is explicitly backed by the Lloyd’s enterprise itself. Lioncover is a lever one can use to uncover the financial vehicles backing old Lloyd’s policies (which contra to popular myth are not backed solely by the assets of Equitas or by the trust funds in the US). Lloyd’s annual report for 2005 contains a few interesting crumbs worthy of note for Lloyd’s/Equitas watchers.

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ACE’s “Plea Agreement” with Law Enforcement and Regulators

Law enforcement, insurance regulators, and insurance-industry participants continue to collide regarding “contingent commissions” and bid rigging that occurred in US insurance markets in the 1990s and ’00s. One insurer, Liberty Mutual, says it would rather fight than switch, and it has announced it will defend litigation brought by state attorneys general and insurance regulators. Most other insurers have sought to put the matter behind them.
For example, ACE Ltd. recently reached accord with the New York Attorney General’s office and New York’s insurance commissioner regarding its conduct principally regarding the broker Marsh and ACE’s effort to expand its excess general-liability insurance business. (Illinois and Connecticut signed on, too). In a document whose title is rich in irony — an “Assurance of Discontinuance and Voluntary Compliance” — ACE undertakes to set up a compensation fund and to conform its future business practices. Review of the “Assurance of Discontinuance” provides rich, indeed stunning, detail into how business was done at the expense of corporate policyholders in particular whose premiums were sufficiently large as to make bid-rigging, kickbacks, lying, and cheating lucrative for the participants — both the individuals whose bonuses and power reflected their success in business and the companies that employed them that generated large premiums from the widespread conspiracy and corruption endemic to the top-tier of the insurance brokerage industry and the insurers that paid them.

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The Risks of the Seas and of Federal Courts Seizing — or Being Seised of — Jurisdiction

Insurance contracts typically are creatures of state law. As a result, unlike other kinds of complex litigation, insurance-coverage disputes often are litigated in state, not federal, court. There are exceptions to this where there is diversity jurisdiction, though in complex, multiparty coverage cases it is often unusual for there to be complete diversity between and among all the parties.
Insurance disputes can end up in federal court under admiralty jurisdiction, which provides a jurisdictional hook to get into federal court where the insurance is maritime in character – or what is sometimes referred to as “salty.” There are traditional forms of maritime insurance that are subject to federal jurisdiction, such as hull, protection and indemnity, and cargo. Other forms of coverage may have a relationship to maritime risks, and parties may fight over getting into federal court and having federal admiralty law apply.

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AIG Settles NY State Charges and Buys Insurance Against Future Liability

AIG has settled New York state charges related to accounting, bid rigging, premium overcharges, and other improprieties. There are many components of this settlement, including admissions of wrongdoing by AIG. One component of interest to corporate policyholders is the $375 million fund being established for the benefit of policyholders that purchased or renewed AIG excess casualty policies between January 1, 2000, and September 30, 2004. Each policyholder within this class will receive a proportionate share of the settlement fund based on the ratio of the premiums it paid to the amount paid by all policyholders in the class.

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With Friends (Clients) Like These . . . .

Lawyers working for insurance companies have been exposed to significant pressures from their clients in recent years. While cost-containment billing guidelines and other measures have created significant tensions in those relationships, even the most creative, out-of-the-box management consultant for insurers is unlikely to have dreamt up the facts of a recent Mississippi Supreme Court case.

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Medical-Malpractice Liability and Insurance Myths — and Reality

Nearly 100,000 killed last year, the same rate as in the ongoing, repellent genocide in Darfur. But this figure is the estimate of the number of Americans who die annually due to medical-malpractice errors.
That’s one of the key points emphasized in the trenchant new book by Professor Tom Baker, The Medical Malpractice Myth (2005). Baker’s slim, accessible, engaging, and well-written volume argues that the prevailing myths concerning medical malpractice and doctors’ liability-insurance premiums are the stuff of urban legend.

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