Insurers like to invoke the phrase “the regulator permitted this language” as if it have been a magical incantation that transforms each coverage time period into a good, affordable, and democratically blessed command. It’s a acquainted chorus in insurance coverage protection disputes, particularly when an exclusion or limitation results in an consequence that might make any affordable policyholder assume the insurer bought a hole promise. However the assumption that regulatory approval equals significant evaluation is often fragile at finest.
Insurance coverage regulation professor Daniel Schwarcz’s article, Narrowing the Body: Client Insurance coverage Insurance policies and the Limits of the Restatement of Client Contracts, 1 revealed by the Harvard Enterprise Regulation Overview this summer season, supplies a passage that stopped my studying whereas I contemplated my experiences concerning insurance coverage regulators approving with none query or problem adjustments to insurance coverage firm insurance policies. He writes:
Third, whereas the extent of ex-ante state regulatory oversight is essential in figuring out the appropriateness of ex-post judicial regulation of insurance coverage insurance policies, courts face vital challenges in precisely evaluating the effectiveness of this oversight. If state insurance coverage regulators have particularly assessed the reasonableness of a specific protection time period, then there’s little justification for courts to invalidate such phrases utilizing doctrines like affordable expectations or unconscionability. Regulators possess better experience concerning insurance coverage markets than judges and are sometimes extra democratically accountable. But courts have restricted perception into the robustness of such regulatory oversight, significantly with respect as to whether state approval of an insurance coverage coverage accounted for a particular kind of protection dispute earlier than the courtroom. Missing such data, it might be affordable for courts to presume that state oversight operates successfully, and to depend on democratic mechanisms to deal with any regulatory shortcomings.
There are, after all, many compelling arguments pointing in the other way, suggesting that courts ought to aggressively police the phrases of shopper insurance coverage insurance policies. For instance, these contracts are unusually opaque: insurers usually fail to make them readily accessible on-line, and the insurance policies are considerably extra advanced than most shopper contracts. Moreover, the historic standardization of insurance coverage insurance policies has led to regulatory mechanisms and market establishments which are structured across the faulty assumption that competing insurers’ protection phrases are uniform.
Schwarcz is correct to determine this rigidity. However the real-world drawback runs deeper than educational nuance. Professors and judges might cautiously presume regulatory oversight is efficient. These of us who’ve labored and spoken with state regulators know higher.
In lots of jurisdictions, a single reviewer could also be chargeable for a whole lot of kind filings, with neither the time nor the staffing to dissect trendy property coverage language. Regulators usually come from the very trade they oversee and very often return to it, creating the quiet however highly effective gravitational pull of the revolving door. Some State departments of insurance coverage might have experience in life, well being, and auto insurance policies however little with respect to property insurance coverage insurance policies. Lastly, even in the perfect circumstances, regulators evaluation kinds at a excessive degree, not by way of the lens of the precise loss situations that result in litigation.
I believe that is the place Professor Jeffrey Stempel’s perception that an insurance coverage coverage is a product and never merely a contract turns into essential, as famous in my earlier two articles, The Insurance coverage Coverage as a “Factor” – Why Jeffrey Stempel Nonetheless Has the Insurance coverage World Pondering, and A “Vacant” Constructing Isn’t Vacant at All: What Stempel Teaches Us About Actual-World Insurance coverage Guarantees.
Not often do regulators take a look at the product in real-world circumstances primarily based on hypothetical challenges and query insurers proposing coverage wording adjustments. They don’t mannequin reality patterns. They don’t consider how a emptiness clause performs out when a constructing is mid-renovation or how an anti-concurrent causation clause impacts a household after a windstorm breaks their house open to rain. Courts do. Courts see the defect in operation, not simply the schematic drawing.
When insurers insist that courts defer to regulatory approval, they’re successfully asking judges to imagine that an inspector inspected the product, even when the inspector might have solely glanced on the packaging. Many states by no means ask whether or not the coverage language truly works in observe. They don’t ask whether or not it aligns with shopper expectations, whether or not the drafting is deceptive, and even whether or not the submitting deviates materially from long-standing trade norms. Approval is commonly nothing greater than an administrative acknowledgement that the submitting arrived on time and satisfies formatting guidelines.
Ought to courts reject insurer arguments that regulatory approval is dispositive until the regulator truly evaluated the situation earlier than the courtroom? Completely. Something much less offers insurers an unwarranted defend and strips courts of their important position in guaranteeing the insurance coverage product performs as marketed. Courts should insist on proof that the regulator evaluated not solely the phrases however the operate of the availability. And the place the regulator didn’t or couldn’t carry out that activity, courts should interpret the coverage as a functioning risk-transfer product, not merely a set of permitted clauses.
This isn’t judicial activism. It’s judicial duty. Courts exist to make sure guarantees are honored, particularly when the promise is bought as safety and the customer has no capacity to discount over its phrases. Regulators serve an essential position, however they don’t absolve courts of theirs. The judiciary is the final line of protection when the engineered product of insurance coverage fails within the area.
I admire that at present’s weblog is for these profoundly troubled with “property insurance coverage protection nerd syndrome.” 2 It’s not usually we query deeply the place coverage language comes from and the regulatory approval course of. The Thanksgiving vacation can definitely spark deeper reflection on concepts and life.
Hope everybody had a beautiful and significant Thanksgiving.
Cheers!
Thought For The Day
“It’s the responsibility of the courts to be watchful for the constitutional rights of the citizen, and towards any stealthy encroachments thereon.”
Justice John Marshall Harlan, Supreme Court docket of america, Boyd v. United States (1886)
1 1 Daniel Benjamin Schwarcz, Narrowing the Body: Client Insurance coverage Insurance policies and the Limits of the Restatement of Client Contracts, 15 Harv. Bus. L. Rev. 439 (2025).
2 Property Insurance coverage Protection Nerd Syndrome: A persistent and incurable situation marked by involuntary pleasure upon discovering new coverage language, spontaneous debates about anti-concurrent causation, compulsive rereading of endorsements “simply to make sure,” and a disturbing tendency to learn ISO circulars the best way regular people learn seaside novels. Signs might embrace arguing about insurance coverage at dinner, correcting adjusters for sport, hoarding previous coverage kinds like advantageous wines, and the shortcoming to see a broken constructing with out diagnosing protection points out loud. Whereas not often deadly, the syndrome is understood to destroy weekends, bewilder spouses, and make the troubled inexplicably glad each time a brand new property protection dispute arises.