LeeGT Insurance

In the bad old days, insurance was a way to smooth cash flows from improbable but large expenses: fire, health, auto mishaps. Through repetitious metonymy, 'health care insurance' and health care are now synonymous.

I was struck by Obama's mention last night that:
I will not go back to the days when health insurance companies had unchecked power to cancel your policy, deny your coverage, or charge women differently than men.

Emprically, women use more health care, they cost more, estimates are around 35%. Some of this is childbearing, but a lot of it comes from the simple fact they go to the doctor more often (notice women see their gynecologists rather regularly, whereas men have no comparable service). So now charging women more for something they use more of is illegal because it discriminates.

Interestingly, in the 1970's there was a law passed so that upon retirement, the annual payments to female retirees had to be the same as for male retirees even though women live longer, statistically. That is, the present value of their retirement packages, by law, are larger for women than men.

Government seems to be doing more and more to make it difficult to prevent 'pooling equilibria', cases where different types of applicants get into a pool, eventually pushing out the 'better' or 'lower cost' people who don't want to subsidize the other group. For example, due to legal rulings, it is now very difficult to give job applicants explicit aptitude tests, even though this would be very useful, and avoid the charade from those Microsoft/Google IQ tests given verbally. Interestingly, Nobel Laureate and prominent Big Government advocate Joe Stiglitz's most famous paper relates to an inefficiency from a pooling equilibrium, and his take-away was that markets were inefficient because of this problem. In practice, government encourages pooling equilibrium where it was never a problem before by preventing rational discrimination based on projected costs/benefits based on observable characteristics.

While the equilibrium efficiency loss in Stiglitz-Weiss is abstract, it usually creates something pretty simple, as if you can imagine what would happen to insurance if it could not price based on risk and allowed people to opt out: healthy people would leave in droves, which is why Obama-care made insurance mandatory. Think about the lawsuits on disparate impact for mortgage lending in the 1990s, where whites were rejected less often than blacks, and this was presumed discriminatory (in an evil way), and so the only way to make unequal groups equal is to stop making distinctions that differentiate them, which led to simply the idea that down payments and having a job were unnecessary underwriting criteria.

It's rather funny that Stiglitz's main theoretical contribution to the academic literature is so starkly in contrast to not just his politics but his obsession, which is increasing the size and scope of government which prioritizes preventing firms from rationally discriminating. Remember that in Stiglitz's model, like everything else in this literature (he didn't invent it), failure to discriminate types somewhat known by participants is what causes all the problems, the 'bad equilibria.' I guess that highlights no one takes these models very seriously--change one assumption here or there, different result.

If you and your insurer disagree about whether the insurer has a duty to defend or indemnify you, either you or your insurer can file a "declaratory judgment" lawsuit. It is called a "declaratory judgment" because the plaintiff (the person filing the lawsuit) is seeking a "declaration" by the court that the plaintiff's interpretation of the insurance policy is correct.

The current law in Massachusetts is that if an insured wins a declaratory judgment lawsuit regarding the duty to defend, the insurer has to pay the attorney's fees incurred by the insured in the declaratory judgment lawsuit. This is true whether the insurer or the insured is the plaintiff in the lawsuit. Even if the insured wins a lawsuit regarding the duty to indemnify, however, the insurer is not obligated to pay the insured's attorney's fees.

There are a number of questions that remain unresolved about attorney's fees. For example, it is unclear what happens if a declaratory judgment lawsuit seeks a declaration about both the duty to defend and the duty to indemnify. In other contexts, where a party is entitled to an award of attorney's fees for some claims but not for others in the same lawsuit, the court will attempt to divide up the attorney's fees between the claims. That is always a difficult undertaking, but it would be particularly hard to divide the time spent by the attorney between the duty to defend and the duty to indemnify, because the two issues are so interrelated.

Mike Tracy over at Rudolph Friedmann LLP, http://www.rflawyers.com/, an excellent insurance coverage litigator and a mentor to me over the last five years, has sent me a decision handed down yesterday by the Supreme Judicial Court of Massachusetts, Enterprise Rent-A-Car Co. of Boston, Inc. v. Arbella Mut. Ins. Co. In that case Joseph Navis rented a car from Enterprise. He was in an accident in which three of his passengers were injured. Enterprise was self-insured and paid the passengers a total of $16,171.60 in Personal Injury Protection ("PIP") benefits. Enterprise then sought to recover that amount in subrogation from Navis' own insurer, Metropolitan.

At issue was whether a rental car agency (Enterprise) that made PIP payments to the renting driver's passengers can seek subrogation from the renting driver's own insurer (Metropolitan).

The SJC first held that the question of whether Enterprise was entitled to subrogation was not one that must be decided by an arbitrator. Although under the PIP statute insurers seeking subrogation from one another must arbitrate the issue of whose insured is at fault, fault was not at issue in this case. Rather, the case involved the interpretation of the PIP statute, which the courts were entitled to determine.

The SJC held that Enterprise was entitled to seek subrogation from Metropolitan. The SJC rejected the argument by Metropolitan that such a decision would relieve car rental companies from the obligation to provide PIP coverage to renting driver's passengers if the renting driver has insurance. The SJC stated that the argument overlooks the fact that a subrogation claim will only be successful if the renting driver was at fault, and that not all renting drivers have a Massachusetts insurance policy.

As I discussed in my last post, an insurer has two duties: the duty to defend and the duty to indemnify. The insurer may have a duty to defend but ultimately no duty to indemnify.

While the duty to defend is determined by what is alleged in the complaint, the duty to indemnify depends on the "true" facts as determined by a court. So, going back to the example in the last post, if you are insured for injuries caused by apples falling from your apple tree, your insurer will defend you if someone states in a complaint that he or she was injured by an apple falling from your apple tree.

The case eventually goes to trial. Maybe you win at trial altogether. Your attorney convinces the jury that the plaintiff was not injured; or was not injured by something falling out of your tree. The plaintiff does not appeal. You are all set. The insurance company has paid an attorney to represent you; no damages have been found against you; and the case is over. While you have been inconvenienced and undoubtedly stressed by the lawsuit, you have not suffered any monetary loss.

But if you lose at trial, the insurer, having reserved its rights at the beginning of the case, will make a decision about whether to pay your damages awarded by the court to the plaintiff or to deny coverage. If the facts at trial demonstrated that the plaintiff was hit by an apple that fell from your tree--the very thing that your insurance policy covers--the insurer will pay the damages.

If the facts at trial showed that the plaintiff was hit by a falling acorn, then the insurer will "disclaim coverage"--refuse to pay the claim. Unless you have other insurance that will cover the claim, you will be personally liable to pay the damages assessed.

In my last post I talked about "reservation of rights letters" and what they mean. You might be wondering why your insurer will agree to pay for an attorney to defend you in a lawsuit but will not agree to pay any judgment against you that will come at the end of the lawsuit.

A liability insurer has two duties: the "duty to defend" and "the duty to indemnify." The duty to defend is the duty to pay an attorney to defend you in a lawsuit that is brought against you. The duty to indemnify is the duty to pay a judgment against you.

Whether or not the insurer has a duty to defend is determined by the allegations of the complaint that the plaintiff files against you in court. The insurer reads the complaint and determines whether, regardless of whether everything (or anything) in the complaint is true, the facts stated in the complaint could be covered by the insurance policy. If so, the insurer has to defend you.

For example, let's say that you have an insurance policy that provides insurance only if a person is hurt by an apple falling from your apple tree. Someone sues you and says in the complaint that they were injured when they were hit by an apple that fell from your apple tree. Your insurance company will have to defend you in that lawsuit. It doesn't matter that the person is lying and was actually hit by a falling acorn--your insurer still must defend you.

You have been sued. You immediately notify your insurance carrier. An adjuster--an employee of the insurance company assigned to your claim--contacts you, asks you some questions, and says the insurer will get back to you.

A few weeks later you get a letter from the insurer that quotes a lot of gobbledygook from your insurance policy. Towards the end, the letter states that the insurer will "defend you" in the lawsuit, but is "reserving its rights to disclaim coverage." What does this mean and what should you do?

The insurer is telling you that it will pay for an attorney to defend you in the lawsuit. This is called defending the suit. However, at the end of the lawsuit, if you lose, the insurer may decide that it will not pay the judgment against you. This is called the insurer reserving its rights.

If you receive a reservation of rights letter you have some options.

• You can take the path of least resistance and hope for the best. The insurer will choose and pay for an attorney to defend you in the lawsuit. Maybe you will win, and if you lose maybe the insurer will pay the claim. (In a later post I will talk about when this may happen.)
• The insurer will probably not tell you this, but in most cases when you have received a reservation of rights letter you can insist that the insurer allow you to choose the attorney that will defend you and that the insurer pay that attorney's fees.
• You can agree to the attorney the insurer hires on your behalf, but you also hire and pay for your own attorney to monitor the lawsuit and make sure that your rights are being adequately protected.