III. The Information Imbalance

III. The Information Imbalance

A. The Information Imbalance

Insurance companies take advantage of policyholder ignorance. Most policyholders do not understand how the insurance industry works. Only the insurance companies and some of the state insurance departments have a relatively complete understanding of the industry.

"Insurance is far from the market ideals of complete information," the Supreme Court of Delaware said in a recent case. The insurance industry is not competitive because Congress exempted the industry from anti-trust regulation in the McCarran-Ferguson Act. The move towards insurance industry exemption from anti-trust regulation began in 1944, when the United States Supreme Court rejected insurance company arguments that insurance was not commerce. The Court held that Congress could properly apply federal antitrust statutes to the insurance industry. As one noted commentator tells it:

This decision sent shivers down the spines of insurance company executives, who feared the prospect of federal agencies, particularly the Federal Trade Commission, interfering with the insurers' cozy relationships with the state insurance commissioners. The insurance industry devised an ingenious plan to head off federal regulation. It persuaded Congress to introduce legislation, known as the McCarran-Ferguson Act, which provided a three year moratorium on federal regulation of the insurance industry. At the expiration of the moratorium the federal regulators could then assert their authority only over those aspects of the insurance industry not regulated by the states. This moratorium gave the insurance commissioners the opportunity, through the National Association of Insurance Commissioners (NAIC), to draft model legislation intended to preempt the entire field of insurance industry regulation and thus protect the commissioners' turf from Federal Trade Commission encroachment. (footnotes omitted)

The "ingenious plan" has crippled policyholders ever since and represents a powerful victory for the insurance industry. The insurance industry's exemption from anti-trust regulation gives insurance companies a tremendous litigation and organizational advantage. Exemption from anti-trust regulation allows insurance companies to exchange vast amounts of allegedly confidential insurance industry information and documents. Policyholders are deprived of this same information and those same documents.

The information imbalance impacts the decisions of state regulatory agencies. For example, the New York State Insurance Department currently makes decisions and rulings from information provided solely by the insurance industry. Even if given the opportunity, policyholders do not have the resources to present a full actuarial or legal case to the New York State Insurance Department. There is no advocate for policyholders before the state insurance departments. Insurance companies, on the other hand, can and do hire staffs of attorneys, economists, researchers, and actuaries. In fact, insurance companies hire more attorneys than any other industry in the United States.

B. Contributors to the Information Imbalance

The insurance industry's public relations campaign, 'buying and lying,' and secrecy by arbitration are major insurance industry tactics which contribute to the information imbalance.

1. The Public Relations Campaign

The imbalance in information and resources between insurance companies and policyholders creates a disparity in the abilities of each side to organize effectively. For example, two of the largest trade associations representing insurance companies, the American Insurance Association ("AIA") and the Alliance of American Insurers ("AAI"), both regularly file "friend of the court" briefs on behalf of insurance companies in insurance litigation cases. Two other groups, the Insurance Services Office, Inc. ("ISO") and the National Association of Independent Insurers ("NAII") gather and analyze information for the insurance industry. The information provided by ISO and the NAII is available to insurance companies, but not to policyholders or the public.

There is no organization specifically devoted to representing policyholders' interests in insurance coverage actions. Yet there are major national organizations specifically devoted to the legal defense of insurance companies: the American Insurance Association, the Alliance of American Insurers, the Defense Research Institute, the Insurance Environmental Litigation Association and the Federation of Insurance and Corporate Counsel. While the American Bar Association has two committees largely committed to insurance coverage matters, both overwhelmingly dominated by insurance company lawyers. As discussed above, the insurance industry has no less than 34 groups focused on battling policyholders and claimants (in the name of preventing fraud). By contrast, policyholders -- aside from the FBI and the Justice Department, neither of which particularly "caters" to policyholders -- have none.

Further, the National Association of Insurance Commissioners ("NAIC") generally excludes policyholders from its meetings and studies. At NAIC conventions, there are thousands of insurance brokers and insurance company representatives but only four or five consumer-policyholder representatives. It is virtually impossible for a policyholder representative to get into an NAIC convention. The revolving door between the insurance industry and state insurance departments, and the ability of the insurance industry to influence legislators, worsens the information imbalance between policyholders and insurance companies and furthers the insurance industry public relations campaign.

2. Buying And Lying

A significant force in perpetuating the information imbalance is the ability of insurance companies to simply buy away adverse legal decisions. Through the frequent use of vacatur, depublication and decertification, insurance companies have been able to erase case law contrary to their interests. This allows insurance companies to shape insurance law even after losing important cases. According to one insurance industry source, fifty percent of the pro-policyholder judicial decisions are wiped off the law books by the insurance industry. Insurance companies have repeatedly offered settlements with policyholders conditioned upon the courts vacating and withdrawing earlier rulings. These mechanisms eradicate pro-policyholder case law. As such, reported court decisions do not accurately reflect insurance law. Contrary to insurance company assertions, the true "majority of the courts" is not on the law books. Anderson Kill has a Web-site devoted to publication of judicial decisions that have been wiped off the books.

Judges are simply unable to contend with the insurance industry practice of wiping the common law off the books. In one recent example, a Texas court imposed a $2 million sanction on AIG for its "systematic and pervasive discovery abuses," finding that AIG had violated two court orders requiring the insurance company to produce (1) claims files; (2) claims manuals; (3) policy forms; (4) drafting history; (5) "lost" insurance policies; (6) diaries and notes of claims handlers, and; (7) company produced training manuals. One week later, the order was vacated, forever erasing any trace of AIG's misconduct. In another variation of buying and lying, the same insurance company, AIG, was found liable for punitive damages for failing to pay its defense counsel after a case had been settled:

By threatening unwarranted fee disputes, carriers such as National Union try first to pressure law firms to violate their duty of undivided loyalty to their clients, the insureds, and thus to interfere with the insureds right to control the litigation. Whether or not that works, such carriers build up payables to the law firms, knowing the firms cannot reasonably withdraw, and then, using economic leverage and the 'indemnify the client' device, seek to get a big discount.

3. Arbitration

Also furthering the information imbalance is the insurance industry preference to arbitrate insurance coverage disputes. Because arbitrations are closed proceedings (unlike court cases, which are public, for the most part) the insurance companies are able to exchange information about arbitration proceedings with each other. The policyholder has no such ability to do so. In court cases as well, insurance companies frequently request, and obtain, secrecy orders.

Insurance companies, but not policyholders, can keep track of arbitrators' decisions -- and arbitrators know it. A pro-policyholder arbitrator can easily be "blackballed" by insurance companies. Arbitrators are in the business of arbitrating. They know that the insurance industry is their major source of business. To keep the business coming, arbitrators must maintain a pro-insurance company position a high percentage of the time.

Arbitration provisions are enforceable -- even those contained in insurance policies which are contracts of adhesion. Many states, including Pennsylvania, Ohio, and West Virginia strongly favor arbitration as a matter of public policy. "[C]ontracts providing for . . . arbitration[] `are valid, enforceable and irrevocable, save upon such grounds as exist in law or in equity for the revocation of any other type of contract." Indeed, under Pennsylvania law, "arbitrators are the final judges of law and fact and their award will not be disturbed for mistake of either."

Very few recent cases have broken away from the near universal enforcement of arbitration clauses. The California Court of Appeals recently held that an arbitration clause, in a "contract of adhesion" was unconscionable and unenforceable. The court's holding is quite favorable to the proposition that arbitration clauses contained in contracts of adhesion, such as insurance policies, should not be enforced.

In Thiokol Corporation v. Certain Underwriters at Lloyds of London, a Utah federal district court refused to enforce the arbitration clause found in a Lloyds policy. The court held that the arbitration clause conflicted with a service of suit clause within the same policy which required the underwriters to submit to any jurisdiction of the policyholder's choosing in the United States. The court found the arbitration clause ambiguous and resolved the conflict by enforcing the more specific service of suit clause, which allows policyholders to file claims in courts of law in the United States.

Arbitration, in general, is a very unfavorable forum for policyholders.

BAD FAITH IN INSURANCE COVERAGE DISPUTES AND THE PUBLIC NATURE OF INSURANCE -- UNDERSTANDING THE RECOVERY TOOLS AVAILABLE TO POLICYHOLDERS

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