Insurance law in the USA is governed overwhelmingly at the state level.

State Legislatures

In the first instance, this involves the state legislature, which promulgates laws related to insurance. These laws form legal frameworks within the state, regulating the development and sale of insurance products, and the conduct of people and businesses in the insurance industry. This body of laws is often compiled in and referred to as “codes”.

State Agencies

Typically, the legislated code delegates significant authority to state executive officials to develop the regulatory framework in the state. This authority is usually located in an agency or “insurance department”, the head of which is often titled the insurance “commissioner”. The commissioner and their regulators flesh out the legislative framework, enacting more detailed policies regarding, for example, the creation and sale of insurance products in the state. A state insurance department also plays a significant role in governing brokers, agents, adjusters and rating organisations, along with insurers themselves.

The regulation of insurance companies is focused on licensed companies, which are sometimes referred to as authorised or admitted companies and can include domestic companies, foreign insurers or alien insurers. Alien insurers are companies organised under the laws of a foreign jurisdiction and may be able to obtain a certificate of insurance as a licensed insurer, subject to certain trusteed asset and surplus requirements. Surplus lines insurers typically must be authorised in a domiciliary state or country and meet certain capital surplus requirements. A risk retention group is another form of potentially regulated entity. These are a type of captive insurer subject to limited regulation under state law.

Finally, some specific types of insurers may not be subject to all types of regulation, such as rate and policy form regulation, and exemptions would be identified in specific statutes in a state exempting such insurers from some laws. These may include farm mutual, county mutual, Lloyds, reciprocal exchanges and fraternal benefit societies.

The Courts and Common Law Precedent

In addition to legislative and executive actions, insurance law in the USA is heavily impacted by the judiciary, both state and federal, and by the common law precedent they produce that can control particular insurance issues and disputes. This includes the mechanics of a state’s regulatory scheme (the validity and scope of state legislation and regulatory actions), the validity and interpretation of particular policies, and the application of policies to the universe of factual disputes. It is important to note that jurisdictions will vary greatly from state to state, in terms of the amount and depth of developed case law available.

Federal Role

Finally, the federal government also touches many aspects of insurance law nationally. For example, in addition to the regulation of US entities generally (particularly securities regulations and disclosure requirements), unique federal insurance issues may arise in relation to certain interstate transportation or maritime operations.

As discussed in 1.1 Sources of Insurance and Reinsurance Law, the primary regulation of the business of insurance is by a state department of insurance. The commissioner of that department may be elected or appointed by the governor and subject to confirmation by the state legislature. The state department of insurance regulates the forms, rates and solvency of most types of policies in the state, including most types of property, casualty, life, accident and health, and long-term care insurance.

The state department will typically be subject to state legislative committees with jurisdiction over insurance issues. These may include the insurance committees and business and industry committees. Of course, the legislature also appropriates funds for the activities of these agencies.

Reinsurance credit and accounting for domestic insurers may be governed by separate legislation and regulations, including reinsurance assumed for reinsurers that meet accreditation and certification requirements, including certain standards adopted by the National Association of Insurance Commissioners and reciprocal jurisdictions in the case of a covered agreement between the United States and the European Union.

In some states, the state law enforcement official – for example, the attorney general – may have authority to enforce deceptive and unfair trade practices, as well as the authority to enforce through actions against unauthorised insurance. Usually, the state’s comptroller is responsible for the reporting, collection and auditing of all insurance taxes.

In many states, an authorised or licensed insurer must obtain a certificate of authority identifying the lines and types of insurance they are authorised to write. An applicant for such licence will need to demonstrate the competence, fitness and reputation of its officers, directors and other persons having control of an insurer, and its officers or directors may not be qualified if they have been convicted of a felony involving moral turpitude or a breach of fiduciary duty. Applicants for forming a new company or licence must typically demonstrate that proposed officers, directors or attorneys in fact have sufficient insurance experience, ability, standing and good record to make the success of a proposed company probable.

Minimum capital and surplus requirements are required and may vary by type of insurer (property/casualty, life and health, etc); a state’s commissioner may require larger amounts of capital and surplus, depending on the nature of the risks being underwritten or reinsured.

Insurance companies must pay premium taxes on premiums written on risks located in a given state, which can vary widely. Surplus lines taxes may be required to be collected and reported by licensed surplus lines agents, and independently procured insurance obtained by a business must be reported for tax purposes. In addition to premium taxes, a state may impose maintenance taxes, which will vary by line and type of insurance. Foreign insurers are commonly subject to retaliatory taxes for business written in the state, based on the tax rate in their state of domicile.

Alien insurers are able to provide reinsurance as accredited or certified reinsurers in most circumstances, and may also qualify as eligible surplus lines insurers. Overseas insurers may qualify for a licence to write business directly, typically by meeting trusteed asset and surplus requirements with assets in the United States. An exception to unauthorised insurance often exists for an insurance contract independently obtained from an unlicensed insurer, such as an overseas-based insurer, provided that all of the negotiations for such insurance occur outside of the state and applicable independently procured premium taxes are paid.

Fronting (100% quota share reinsurance agreements) is commonly allowed as a type of reinsurance with domestic or licensed insurers. The reinsurer must be solvent and licensed or meet any accreditation or certification requirements in a given state. Approval for total assumption reinsurance agreements varies across the USA.

When determining whether to approve the acquisition of a domestic insurer, particular attention will be paid to any person that will own 10% or more of the stock or control of a domestic insurer, because of a presumption of control at that level. Investors in publicly held companies that acquire more than 5% stock of another publicly held company may be required to file notices with the Securities and Exchange Commission stating whether their investment is intended to be used for control. Passive investors that file a Schedule 13G filing and reference Rule 13d-1(b) may be able to overcome a presumption of control without filing a separate disclaimer of control.

Home office employees soliciting insurance will generally be required to be licensed agents. A licensed agency usually needs at least one officer, director or shareholder that is individually licensed for the type of licence being sought – ie, general lines property and casualty or general lines life and health. Managing general agents must be licensed and can represent insurers in the appointment and managing of soliciting agents, the handling of claims, and premiums. A separate licence is often required in order to act as a surplus lines agent. Commonly, banks or depository institutions may own a licensed insurance agency.

Other professionals that may be required to be licensed in a state include third-party administrators, reinsurance intermediaries and brokers, risk managers, adjusters and public adjusters. Non-resident agents and agencies could be subject to separate or additional licensing requirements.

An insurer will normally require the insured to complete an application, requesting all information the insurer believes it will need to evaluate and underwrite the risk. The insured has an obligation to provide full and complete answers to all the requests from the insurer. It is common for the application to be incorporated into and made a part of the insurance policy.

An insurer generally has no affirmative duty to proactively seek information but, in most instances, an insurer will have no ability to avoid coverage based on information in the possession of the insured but not requested by the insurer. This process applies to both consumer insurance contracts and commercial insurance contracts.

If the insured fails to disclose information requested by the insured during the negotiation of the policy, the insurer can simply decide not to offer a policy to the insured. If the nondisclosure by the insured of information requested by the insurer is not discovered until after the issuance of a policy, the insurer can seek to rescind the policy through a judicial proceeding but, in most jurisdictions, an insurer must show that the nondisclosure was material to the underwriting decision and that the insured intended to defraud on the insurer.

If the insurer does not become aware of the withheld information until after a claim is made against the insured and the withheld information is material to the risk that resulted in the claim, the insurer can seek rescission but usually must show intent to defraud on the part of the insurer. If the withheld information is not relevant to the claim, rescission is usually not available. Because the insurer’s scope of coverage is defined by the terms of the policy, any conditions, limitations or exclusions not set forth in the written policy cannot be enforced by the insurer.

In the consumer market (also known as the personal lines market and primarily involving home, auto, health and life insurance), an insurer may use an exclusive agent who is acting on behalf of the insurer, but the agent may also have duties of honesty and disclosure to the insured. In other consumer policies, the insured may use the services of an independent agent who may be acting on the part of the insurer in performing some duties but acting on behalf of the insured in performing other duties.

The duties of an agent vary from state to state but generally include a duty of honesty and an obligation to obtain the insurance requested by the insured or to explain to the insured why the coverage is not available. An agent for the insured usually does not have a duty to recommend coverage or explain policy terms to an insured. If an agent assumes those duties, he or she is obliged to perform them as a reasonably prudent agent would do.

In commercial policies, especially those involving non-admitted surplus lines carrier or London market entities, the common practice is for the insured to retain the services of a retail broker to act on its behalf, and for the insurer to retain a wholesale broker to act on its behalf. In commercial policy negotiations, there is little direct contact between the insurer and the insured or its retail broker, or between the insured and the insurer or its wholesale brokers.

The four essential elements of an insurance policy are:

• an insurable interest to be protected;
• an offer of coverage by an insurer;
• the acceptance of the offer by the insured; and
• the legal capacity and competence to enter into a binding agreement.

In the consumer market, policy terms are often regulated by state law, and a consumer policy must contain those terms. More generally, policies tend to include:

• a declarations page identifying the insured and the insurer, the policy period, the type of coverage provided, and policy limits (including per occurrence or event limits and aggregate limits) and sublimits;
• one or more coverage parts defining the scope of the risks insured;
• standard conditions, duties, definitions and exclusions; and
• one or more endorsements that are either required by applicable state law or negotiated between the insured and the insurer.

Endorsements may be added to the policy at the time of issuance or may be added to the policy upon the agreement of the parties after issuance. What constitutes an insurable interest may vary somewhat between the various states but can generally be defined as a sufficient interest in a thing or person if the loss, destruction or damage of such would cause the insured to suffer a financial loss, although other kinds of loss may be sufficient in some situations. An insurable interest is usually established by the insured’s ownership, possession, control or right to use a thing, or by a direct blood or marriage relationship to a person.

There are multiple ways in which someone other than the original insured can obtain rights under an insurance policy.

• First, either at the time of the negotiation of the policy or after the policy is issued, an insurer may agree to add additional persons or entities as named insureds under the policy. These named insureds generally have the same policy rights as the original insured.
• Second, a policy may allow for the protection of additional insureds, either by specifically naming the additional insured or by describing a class or group of additional insureds (such as an endorsement in a policy issued to a contractor extending coverage to all parties to whom the insured is contractually obligated to name as an additional insured, or a renter's policy that provides additional coverage to the owner). These additional insureds may not have the same scope of coverage as the named insured, depending on the scope of coverage contained in the policy naming or identifying the additional insured. As an example, a renter’s policy may limit the additional coverage to damage caused by the tenant but not to damage caused by the owner.

In homeowner, property or similar policies, a lender, mortgagor or lienholder may be protected through a loss payable clause that directs payment to the protected party instead of the named insured in some instances. In all those situations, the insurer may request information about the intended beneficiaries from the insured, and the insured is obliged to give full and complete answers.

Implied beneficiaries tend to be disfavoured and are not often allowed. An insured who wants to protect additional parties through a policy should make that intention clear to the insurer and make sure that said intent is reflected in the policy language.

Consumer policies tend to be more highly regulated than commercial contracts or reinsurance contracts, and many of the forms and provisions in a consumer policy are either mandated by or must be approved by the appropriate state regulatory party. Despite that, there is no appreciable difference between the rules applicable to additional beneficiaries under a consumer policy and the rules applicable to a commercial policy. There is insufficient precedent on additional beneficiaries under a reinsurance contract to draw general rules.

The USA insurance market includes the ART market, in which companies purchase coverage and transfer risk outside traditional commercial insurance mechanisms. This may include the following:

• risk retention groups (RRGs);
• insurance pools;
• captive insurers;
• risk-mitigation provided by wholly owned subsidiaries of a company;
• contingent capital;
• derivatives; and
• insurance-linked securities.

The ART market is primarily delineated between risk transfer through alternative products and risk transfer through alternative carriers.

See 7.1 ART Transactions.

The interpretation of an insurance policy is normally a question of law for the court to resolve. Insurance contracts are interpreted the same way as other contracts, with two exceptions. A reviewing court is to try to give effect to the intent of the parties as expressed in the contractual language. A court should examine the entire contract and try to interpret the policy in a way so that all the policy provisions are given effect and no policy provision becomes meaningless. The policy language is to be given its ordinary and generally accepted meaning, unless the policy shows that the words were meant to be used in a technical or specialised sense. Courts will sometimes rely on industry custom and practice in interpreting a word that has an established meaning in a certain industry or profession.

A court should not interpret a policy in a way that rewrites the policy by imposing an additional duty or obligation on either the insured or the insurer. Extrinsic evidence is not allowed to interpret or change clear and unambiguous policy terms. Despite these rules, many courts show a tendency to interpret a policy more favourably for the insured, under the theory that the insurer was the author of the document and should not benefit from any imprecision or inconsistency in the policy language.

A few jurisdictions require courts to interpret the policy with consideration for the reasonable expectations of the insured. One exception arises when there is an ambiguity in the policy language. If the insured can offer a reasonable interpretation of the ambiguous language, a court will generally adopt that interpretation even if the insurer can offer a more reasonable interpretation. Extrinsic evidence can be used to help resolve ambiguous language.

A second exception arises when a policy provision is against the public policy of the state whose substantive law controls the interpretation of a policy. As an example, some states will not allow an insured who is found liable for punitive damages to escape liability for its wrongdoing by passing the economic loss to the insurer, and will therefore not enforce a policy term purporting to cover punitive damage claims.

In liability claims, which form a substantial portion of insurance disputes in litigation, the applicable substantive law usually distinguishes between an insurer’s duty to defend its insured and its duty to indemnify its insured. The duty to defend is considered a broader duty and is based on analysing the factual allegations in the insured’s petition or complaint against the applicable policy terms and conditions. Traditionally, extrinsic evidence was not allowed and an insurer’s duty to defend was often resolved on a summary basis without trial. More recently, some jurisdictions have gone outside the language of the documents and have required an insurer to consider facts known to the insurer that would support the existence of a duty to defend. Specific jurisdictions may allow other extrinsic evidence in some circumstances.

The insurer’s duty to defend is based upon the actual facts, regardless of the insured’s allegations, and a determination of the duty to defend usually cannot be made until the underlying litigation between the insured and the third-party claimant has been resolved.

US courts have traditionally treated a warranty as a promise in the insurance policy by the insured to represent either that a fact is true or that the insured has agreed it will do or not do a specified act. Whether an obligation in a policy constitutes a warranty is determined by reading the policy as a whole, and the obligation does not have to be denominated as a warranty to be treated as a warranty. Instead, the focus is on whether the policy language as a whole shows that one party intended to rely upon the truth of a representation made by the other party.

The consequences of a breach of warranty vary, depending on the materiality of the representation to the loss or claim. The effect of a misrepresentation by an insured must be material to the claim or loss at issue. In extreme cases, breach of a warranty by an insured can relieve the insurer of any obligation under the policy.

To alleviate the especially harsh consequences that may result from some types of breach of warranty, many states – either by statute or by judicial precedent – will not allow a breach of warranty by the insured to relieve the insurer of its duties unless the misrepresentation expanded the risk covered by the policy or unless the insurer can establish fraud on the part of the insured.

Historically, there has been some lack of consensus as to whether a policy provision should be treated as a warranty, a condition or a coverage term. The growing trend in US courts is to give greater weight to the substance of a policy term than to its title. Therefore, a policy provision may be contained in a conditions section, but a court may interpret that the provision is a warranty, a coverage term or an exclusion. Despite the label, implied warranties are disfavoured and are seldom recognised.

In consumer policies and some commercial policies, state statutes or state court judicial duties may impose duties on an insurer (such as a duty to perform a thorough investigation before making a claims decision or an obligation to pay within a certain time once coverage becomes reasonably clear), which act much like a warranty. The consequences of the breach of a condition vary due to a range of factors. In many jurisdictions, an insurer’s breach of what may be considered a condition precedent, such as a duty to give timely notice or to co-operate with the insurer’s investigation, may be excused if the insurer has not been prejudiced by the breach. Generally, conditions are enforced more strictly against an insurer than against an insured.

Insurance disputes of all kinds are usually resolved through litigation or arbitration. Because most reinsurance contracts or treaties contain mandatory arbitration provisions, litigation of a reinsurance dispute is unusual in most jurisdictions.

Litigation is commenced when either party to the policy files a complaint or petition in a court of competent jurisdiction and the other party is formally served with a copy of the pleading. The party who was sued then has a relatively short time to file a written answer to the other party’s allegations. The lawsuit must be filed within a specified time after the dispute arose. That time varies between states from as little as two years to as many as ten years. Statutes of limitations are enforced very strictly. Some policies include a contractual provision identifying the time in which suit must be brought, and courts will generally enforce those provisions if the contractual time period is not unreasonably short.

Any entity that is either a named insured or an additional insured (either expressly named or identified by group or class) can initiate a lawsuit to enforce its rights under an insurance policy. In most states, a party asserting a claim against an insured cannot file a lawsuit against the wrongdoer’s insurer until after the claimant has been awarded a judgment against an insured. However, Alabama, Arkansas, Louisiana, Minnesota, New York, Pennsylvania, Rhode Island and Wisconsin all recognise a claimant’s right to file a direct action against the wrongdoer’s insurer in some circumstances; those circumstances vary between those states.

Jurisdiction in US courts is composed of two elements: subject matter jurisdiction and personal jurisdiction.

Subject matter jurisdiction is created by the constitutional and statutory provisions of each individual jurisdiction. Because subject matter jurisdiction is a matter of state law, courts will not allow parties to a contract, including an insurance policy, to create jurisdiction in a court. Personal jurisdiction, which addresses a party’s amenability to being sued in a particular location, is not as strict so a party may consent to being sued in a jurisdiction as a matter of private agreement. Therefore, courts will typically enforce a forum selection clause to which the parties agreed if the court has subject matter jurisdiction.

The decision of what substantive law will govern an insurance dispute varies between jurisdictions. Some states have statutes concerning what substantive law will apply to certain types of disputes. In the absence of a statute, if an insurance policy contains a choice of law provision, a court will usually enforce that provision, although there may limited situations in which the law of the chosen jurisdiction is so opposed to the public policy of the forum state that one or more provisions of the other state’s law will not be applied. If there is no statute or contractual provision, the decision of what substantive law is a matter for the court to resolve.

In the past, many courts applied the law of the jurisdiction where the insurance policy was negotiated and delivered but as state lines have become less important in insurance transactions, most courts have adopted more flexible tests. The most prevalent is the “most significant relationship” test, in which the court considers various public and private interest factors involving the parties, the location where the claim arose, the nature of the claim, the interests held by states that have some connection to the dispute in the application of their respective laws, and other systems.

These factors are derived primarily from the Restatement (Second) of Conflict of Laws, which identifies the factors a court is to consider and includes a specific provision for choice of law in insurance disputes. The test is very subjective and can result in inconsistent decisions between jurisdictions and even between courts in a single jurisdiction. Decisions on jurisdiction, court selection and choice of law all involve legal matters that are resolved by the court.

The US court system is complex and often confusing. There is a federal court system consisting of federal district courts, a limited number of appellate courts and a single Supreme Court. The federal courts have limited jurisdiction and generally have jurisdiction over claims involving a federal statute or right and over disputes between citizens of different states or between a United States citizen and a foreign entity or person where the amount of controversy is in excess of USD75,000. There is a general feeling that a federal judge (who is appointed for life) may be less protective of local interests than a state judge (most of whom are elected), so insurers generally prefer federal court to state court.

It is quite common for an insurer to file a claim in federal court seeking a declaration of rights and obligations under the policy when a disputed claim arises. If an insured files a suit in state court, the insurer has 30 days in which it can remove the case to federal court if the amount in controversy and the citizenship of the parties satisfies the minimum jurisdictional requirements of federal court. Because of that, the petition or complaint filed in smaller consumer claims will include statements about the citizenship of the parties or the amount in controversy, in an attempt to prevent the case from being removed to federal court.

The 50 states, the District of Columbia and US territories and dependencies each have their own judicial system, and the litigation processes can vary substantially. In broad strokes, once an insurance suit is filed, there will be an initial period where the defendant, either insurer or insured, can challenge the court’s jurisdiction or the legal sufficiency of the plaintiff’s pleading. If the case survives this phase, the parties will begin taking discovery. Many states now require the parties to exchange certain relevant information before additional discovery is undertaken. Discovery can consist of:

• depositions of witnesses (either orally or on written questions);
• interrogatories served upon the opposing party asking about facts known to the party and legal positions taken by the party;
• requests that the opposing party produce documents in its possession, custody or control that are relevant to the dispute;
• requests that the opposing party admit or deny certain facts;
• site inspections of property; and
• physical or mental examinations of a party if said party’s physical or mental health is in issue.

Additional discovery methods may be allowed in some jurisdictions. The discovery process often becomes very contentious in litigation, and the parties may seek judicial intervention to resolve the dispute, although must judges expect the parties to resolve these types of disputes amicably. The ability and the intention of judges to intervene in these disputes various greatly across the country.

One notable feature of the US litigation system is the widespread use of expert witnesses on a wide variety of subjects. Although experts are supposed to be used only when they have special training, expertise or experience on matters that are beyond the knowledge or understanding of a typical juror, parties to an insurance suit may often try to gain a tactical advantage through the use of experts who are known to be especially friendly to insureds or insurers.

At any time during the case (although it usually happens after substantial discovery has been done), a party may seek dismissal of the case through a procedure known as summary judgment, in which the party can try to convince the court that there are no material facts in dispute, that the applicable law is in favour of the moving party, and that the case should therefore be terminated. If the case is not resolved on summary judgment, it will proceed to trial on the merits.

In most jurisdictions, either party can request that the factual disputes in the case be presented to a jury for resolution. Insureds often request a jury on the assumption (sometimes well-founded) that the average jury will not be favourable to an insurer. After the trial, the parties will submit proposed judgments to the court, and the court will prepare and sign its judgment. The losing party will usually have the right to appeal the judgment to the first-level appellate court as a matter of right, but any higher appellate review is discretionary with the higher court. Keep in mind that procedures will vary substantially between the various states.

Every jurisdiction has its own statutes and rules for the enforcement of judgments. Judgments from another jurisdiction in the United States are entitled to enforcement under the Full Faith and Credit clause in the United States Constitution. To satisfy this obligation, most states (California and Vermont being the exceptions) have adopted all or part of the Uniform Enforcement of Foreign Judgments Act, under which a judgment from another state court or a federal court can be “domesticated” in the forum state and then enforced in that jurisdiction.

In some states this is as simple as filing an authentic copy of the out-of-state judgment in a state court of competent jurisdiction, providing notice to the judgment debtor. If the judgment debtor does not file an objection within 30 days, the judgment creditor can enforce the judgment in the state where it has become domesticated.

The exact methods of filing, giving notice and allowing the judgment debtor to object vary from one state to another. If the judgment debtor does object, it is usually not allowed to attempt to relitigate the merits of the dispute and is limited to arguing that there was some procedural or judicial irregularity that would make enforcement of the judgment fundamentally unfair.

There is no federal treaty for the enforcement of a judgment entered outside the United States but many of the individual states have adopted a variation of either the 1962 Uniform Foreign Money-Judgments Recognition Act or the 2005 Uniform Foreign-Country Money Judgments Recognition Act. In the few states that have not adopted either of those treaties, there are common law methods for enforcement of a non-US judgment, although they may be less efficient or effective.

The federal court system and all state court systems favour arbitration in commercial disputes and the enforcement of arbitration awards. Under the Federal Arbitration Act, which applies to the majority of arbitration awards, a party seeking to enforce an arbitration award must seek confirmation of the award in a court of competent jurisdiction within a year of the arbitration award.

A court can vacate an arbitration award only if the court determines that:

• the award was procured by corruption, fraud or undue means;
• there was evident partiality or corruption on the part of the arbitrators;
• the arbitrators were guilty of prejudicial misconduct during the course of the hearing; or
• the arbitrators exceeded their powers or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.

Some states have begun to prohibit or limit mandatory arbitration clauses in some types of consumer insurance policies.

Arbitration awards are routinely enforced in courts throughout the United States in commercial and reinsurance arrangements, but some states are starting to limit the enforcement of mandatory arbitration clauses in certain consumer transactions or statutory causes of action available to individuals. The United States is a signatory to both the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and the Inter-American Convention on International Commercial Arbitration (the Panama Convention), and US courts are very receptive to the enforcement of arbitration awards from outside the United States.

Mediation has been an integral part of litigation in the United States for several decades, including in insurance disputes. Most courts will either order mediation or strongly suggest that the parties consider mediation. Federal courts will sometimes make a magistrate judge available to serve as a mediator at no cost to the parties. In state court, mediation is usually available through a mediation service or a lawyer or retired judge. The cost can range from a few hundred to several thousands of dollars a day, and is divided among the parties.

An insured often attempts to impose extracontractual liability upon an insurer for alleged irregularities in claims handling. Most jurisdictions now have comprehensive statutory schemes imposing certain obligations on an insurer in handling and resolving a claim. A successful insured can recover amounts beyond the policy limits in some situations, but there is a great variance between the states on what extracontractual penalties can be imposed. In addition, most jurisdictions have statutory or regulatory timelines dictating when an insurer must make a claims decision and make payment to the insured. The amount of the penalty varies between states but can be as much as 18% per annum on the amount that was wrongfully withheld or was delayed in payment.

Most consumer and commercial policies expressly recognise an insurer’s right of subrogation against the wrongdoer once a claim is paid. Some jurisdictions also recognise common law subrogation rights in favour of the insurer, but those rights may be based on equitable or other considerations to a contractual subrogation right is preferred.

There are two important limitations on an insurer’s subrogation rights:

• first, in the absence of an express contractual provision, an insurer usually cannot exercise that right against its own insured because to do so would undercut the exact risk transfer, which is the purpose of insurance; and
• second, in many types of policies (such as construction liability policies), an insurer will be asked to waive its subrogation rights and a provision to that effect will be included in the policy, either as a term of the original policy or as an endorsement. The insurer may charge a higher provision for waiving subrogation.

Insurtech, or “the innovative use of technology in connection with insurance”, will unsurprisingly continue to be a topic at the forefront of the insurance industry's attention in the next year. Issues to monitor include:

• innovations in improved customer experiences, particularly among established insurance businesses;
• the consolidation and mixture of automation and analytics technologies; and
• data-driven ESG analysis and risk exposure.

These are in addition to trends identified in previous Practice Guides (embedded, insurance, accelerated learning, artificial intelligence generally), which will continue to play an important role going forward.

While it varies from state to state, regulators nationwide are naturally keeping a close eye on insurtech developments. Of course, this includes traditional concerns regarding consumer protection, capital and reserve requirements, and solvency evaluations, but it will also push these regulatory bodies further into new territories of digital data privacy, cybersecurity and artificial intelligence. For certain states, ESG considerations will also play an increasing role.

Data use and security and climate and natural disaster risk continue to be the leading risks and areas for concern in 2024. While many states, and the federal government in some cases, are taking an active role in guiding and developing protections or guardrails for these issues, many other jurisdictions are allowing more experimentation. The use of artificial intelligence in the classification, underwriting and rating of risks is one such area.

Regarding climate and natural disaster risks, insurers and related institutions appear to be experimenting with a variety of responses, including:

• reorganising or at least rethinking the way they are seen by many policyholders – ie, as “financial safety nets”;
• increasing reliance on technology for better evaluation of climate-related issues on classification, underwriting and rating of risks; and
• reorienting customer-facing services to take a more active role in risk prevention.

In addition, such risks may push a new demand for and increase in industry consolidation.

Florida Tort Reform

Perhaps one of the most notable changes affecting insurers writing policies in Florida moving forward is the significant tort reform enacted by the Florida Legislature in 2023. Florida is one of the most litigious jurisdictions in the US, and the tort reform was intended to quell some of that litigation by giving businesses and insurers greater protection against lawsuits. The legislation was directed at tort claims, as well as enactments directed at insurance bad faith. The legislation applies to causes of action accruing on or after 23 March 2023. Some of the changes are enumerated below.

One major change was to Florida’s comparative fault scheme. While Florida had traditionally been a “pure” comparative negligence state, the legislation now aligns Florida with the majority of other states having a “modified” scheme. Under the old scheme, a plaintiff was entitled to recover a percentage of damages proportionate to the degree of fault of the defendant. Now, if a plaintiff’s percentage of fault is more than the defendant’s percentage of fault, the plaintiff cannot recover. The change, however, does not apply to medical negligence.

Another noteworthy change is that the legislation reduced the limitation period for general negligence claims from four years to two years.

Possibly looking to the Texas statutory model, Florida modified the admissible evidence available to prove past and future medical expenses. Previously, a plaintiff could board the entire amount of the medical bills charged for the services rendered. Evidence of adjustments or reductions by healthcare insurers was prohibited. Now, generally, evidence presented to prove past damages for medical expenses is limited to the amounts actually paid, regardless of the source of payment. Admissible evidence varies with the existence of healthcare coverage, Medicare or Medicaid. Importantly, if past medical care was obtained under a letter of protection, evidence of what health insurance would have paid for the necessary treatment plus a plaintiff’s share of the expenses is now admissible. Moreover, a letter of protection must be disclosed, overruling Worley v Central Fla. YMCA, Inc., 228 So. 2d 18 (Fla. 2017).

Premises liability claims involving negligent security also received attention. Under the new legislation, a jury can now consider the fault of all persons contributing to an injury, including a non-party who injured the plaintiff by committing a crime on the defendant’s property.

The Florida legislation also addressed insurer bad faith. Significantly, a claimant, an insured and their representatives have the duty to act in good faith in providing information to insurers, making demands, setting deadlines and making settlement attempts, and a fact finder may consider that any bad faith should reduce the damages awarded. Also, the legislation clarified that mere negligence cannot support a finding of bad faith against an insurer. An insured’s statutory entitlement to recover attorneys’ fees upon prevailing against an insurer has been eliminated except in declaratory judgment actions to determine coverage. The use of non-contingency multipliers to calculate attorneys’ fees is now prohibited.

While the effects of these enactments must make their way through the Florida courts, the number of baseless lawsuits in the bodily injury arena should decrease. For those suits that go forward, insurers and defendants should have a more level playing field.

Litigation Funding

Litigation funding (LF) has also caught the eye of legislatures and courts alike. LF is used frequently by plaintiffs’ attorneys, is on the rise and is often unbeknownst to defendants. Conservative estimates put the industry at USD2.3 billion, although a Swiss Re Institute suggests it is much higher. The loans can be provided to litigants or attorneys. The Government Administration Office defines LF as “an arrangement in which a funder that is not a party to a lawsuit agrees to provide nonrecourse funding to a litigant or law firm in exchange for an interest in the potential recovery of the lawsuit”. Telltale signs of LF include:

• unusually high medical specials (especially in soft tissue injuries);
• medical treatment for seemingly unrelated conditions;
• treatment by providers outside of their specialties;
• accelerated medical treatment; and
• the location of medical treatment.

LF investors include private equity groups. The non-recourse nature of the funding is what distinguishes LF from a traditional loan. Interest, not surprisingly, is attached to the recovery. LF exists in commercial/corporate contexts (IP, antitrust, asset recovery, fraud, class actions on behalf of large corporations) and is used by large law firms, as well as in the large personal injury/mass tort arena. LF also exists in the consumer arena, but the loans are typically small and used by plaintiffs to fund living expenses or medical treatment, as opposed to funding the litigation. The consumer recipients have drawn the most attention from state legislatures due to the greater potential for abuse.

The downsides to LF include the following:

• with no personal stake in a case, the “money down” makes the funding deal a bet at a casino;
• LF could put plaintiffs in a position whereby a reasonable offer to settle cannot be accepted because the financial obligations of the loan cannot be met;
• accidents should not be investment opportunities because it perverts the justice system;
• LF can promote and prolong litigation because defence counsel are forced to divert additional time and money away from the productive defence of the case;
• if the funder holds the purse strings, the funder may exert control over the litigation strategy to the plaintiffs’ disadvantage;
• a defendant should be entitled to know whether unnecessary medical procedures are being promoted by a funder to increase case value; and
• a defendant wants to know whether a lien exists to be satisfied.

Not surprisingly, the proponents of LF contend that:

• LF should not be disclosed because it is unnecessary and irrelevant;
• LF shifts the risk of adverse litigation outcomes and, because it is non-recourse, the funders’ and plaintiff’s interests are aligned;
• LF to a law firm benefits the client by providing the resources necessary to provide the best experts, etc, needed for the case; and
• a plaintiff could benefit by not settling early because the attorney cannot afford a lengthy, expensive lawsuit.

Other issues of concern are the potential conflict of interest between a client and their attorney if the attorney puts the funder’s interests ahead of the client’s interests. Maintaining independent professional judgement by the attorney is an additional consideration.

On the federal level, the Litigation Funding Transparency Act was presented to Congress in both 2018 and 2021, both times not passing. Under the proposed act, disclosure of LF and the agreement itself were required in federal class actions and multi-district litigation.

Nevertheless, some federal courts have taken notice and require disclosure of LF (but not the agreement behind it) by local rule: D. Arizona; C.D. and N.D. California; M.D. Florida; N.D. and S.D. Georgia; N.D. and S.D. Iowa; D. Maryland; E.D. and W.D. Michigan; D. Nebraska; D. Nevada; E.D., M.D. and W.D. North Carolina; E.D., W.D, and N.D. Oklahoma; M.D. Tennessee; N.D. and W.D. Texas; W.D. Virginia; and W.D. Wisconsin. Some federal appellate courts also have adopted local rules: 3rd, 4th, 5th, 10th and 11th Circuits.

While state legislatures primarily seek to protect consumers, the courts have a differing perspective. The existence of LF alerts the court to issues best addressed in pre-trial conferences; aids in compliance in the matter of financial disclosures and recusal obligations; highlights potential conflicts of interest; and addresses who should participate in settlement conferences due to potential resolution issues.

As mentioned above, some states have addressed LF by statute or common law with mixed results, including Delaware, Illinois, Kentucky, Maryland, Minnesota, New Jersey, North Carolina, Ohio, Pennsylvania, Texas, Utah, West Virginia and Wisconsin. Even the United States Tax Court has jumped in, holding that LF payments are structured as loans but that including the non-recourse payments makes them “income” rather than a “loan” for tax purposes. Therefore, it is a good idea for attorneys to consider tax and accounting implications for their clients.

Insurers should expect LF to continue in one form or another. Some states may refrain from legislation, but courts will likely start implementing their own local rules to address issues surrounding the disclosure of LF and possibly even the LF agreement itself. In addition, courts may issue opinions where statutes or the existence of LF at least raise issues of fairness for defendants to understand what factors may be at play in order to further resolution.

The Illinois Supreme Court Turned the Tables for Construction Defect Coverage

For more than 20 years, Illinois courts have interpreted the standard commercial general liability definitions of “occurrence” and “property damage” to refuse coverage for faulty construction. But a new day has arrived for contractors, owners and developers, to the detriment of insurers; see Acuity v M/I Homes of Chicago, LLC, No. 129087, __N.E.2d__ (Ill. Nov. 30, 2023). Previously, Illinois courts generally found coverage only in the event of damage to other real property or to the personal property of owners.

The underlying lawsuit was filed by a townhome owners’ association for breaches of contract and the implied warranty of habitability against the general contractor/successor developer/seller of the townhomes. The association generally alleged that the general contractor’s subcontractors used defective materials, caused faulty workmanship and failed to comply with building codes. The damage alleged was uncontrolled water leakage and moisture in locations of the buildings where it was not “intended or expected” and caused resulting property damage to the townhomes and other property, such as windows and patio doors, as well as damage to the interior of the units.

The general contractor tendered its defence as an additional insured under a subcontractor’s policy, which denied and filed a declaratory judgment action. The general contractor argued that the association merely alleged “the natural and ordinary consequence of defectively performed work”, which was not an accident, and therefore not an “occurrence”. The insurer further urged that the association only sought economic loss – the cost of repairing and replacing the defective construction work, which was not “property damage”. The association countered that damage to “other property” was alleged beyond the repair and replacement of the faulty work, meaning that “property damage” caused by an “occurrence” existed and implicating the insurer’s duty to defend.

The trial court found in favour of the insurer, concluding that property damage resulting from faulty work was not an “occurrence” because it was a natural and ordinary consequence of the construction project and not an accident as required under the policy. While the trial court agreed that damage to other property was sufficient to implicate coverage, it found that that was not the case before it, which focused on recovering for damage to the townhomes and not damage to other property.

On appeal, the parties agreed that Illinois law found coverage only in the event of damage to other real property or the personal property of owners. The appellate court agreed with the parties’ interpretation of Illinois law but criticised and questioned that approach because it focused on the courts’ analyses driven by broad policy considerations and not by policy language. Nevertheless, the appellate court was duty-bound by precedent but reversed the trial court, concluding that the association had sufficiently pleaded damage to other property, triggering a duty to defend.

The Illinois Supreme Court granted leave to appeal, noting upfront that it had “not yet analyzed the specific coverage provisions at issue here in the context of a construction defect case, but the issue has been the subject of much litigation in the appellate court”. Like the intermediate court, the supreme court recognised the multitude of opinions in which the issues of “occurrence” and “property damage” were decided and the various reasons for their holdings, while acknowledging that the opinions were based on policy considerations rather than contract construction. Accordingly, the court reasoned that it would not begin with analysing the parties’ premises but would return first to legal principles to bring clarity and provide a disciplined legal framework.

Following a discussion of Illinois law on the duty to defend and the construction of policy language, the court turned to the insuring agreement. The court gave little discussion to the meaning of “property damage”, pointing out that tangible property suffers a “physical injury” if the property is “altered in appearance, shape, color or in other material dimension”. Since the allegations against the general contractor sufficiently alleged “property damage” to the interior of the units by leaks and moisture damage, the requirement was met.

With respect to an “accident”, the court indicated that no opinions had interpreted its meaning in the context of construction defects. In accordance with contract construction law, the first court reviewed the interpretation of “accident” by courts in other contexts, followed by the dictionary definition. The court then held that “the term ‘accident’ in the policies at issue reasonably encompasses the unintended and unexpected harm caused by negligent conduct”.

Applying that definition to the construction defect allegations before it, the Supreme Court noted that the association did not allege intentionally performed substandard work. Instead, according to the court, the allegations reflected inadvertent construction defects. The court’s conclusion was in spite of the insurer’s assertion that any portion of a completed project caused by faulty work can never be an accident because it is always the natural and probable risk of doing business. The court addressed that assertion by pointing out that the notions of business risk are specifically expressed in the exclusions of the policy. Therefore, the court held that the duty to defend was implicated and remanded the case to the trial court to address the effect of the exclusions on the duty to defend.

The importance of this new opinion to insurers writing general liability coverage in Illinois is that it is probably certain to increase the number of construction defect lawsuits in which the insurers must defend. What should be surprising to insurers is that, in a state like Illinois, no Supreme Court precedent existed in such a commonplace claim until now.