Federalism, choice of law and insurance

An interesting post using an insurer conspiracy theory to explain why insurance policies are so incomprehensible, ht PoL.

PoL links two responses. First, from the Insurance Coverage Blog:

If I come along and start an honest insurance company* * * I will be able to charge higher prices and still dominate the market, because people know with me, they at least have a chance of getting a claim paid. * * * These things are written about as well as they can be written. Plain English doesn't work. The less that is said about a given thing, and the less technical the term, the more ambiguous you can make it out to be.

And then a comment to the original post:

As a former senior executive in the Insurance industry, I concur with your observation that insurance policies are incomprehensible. The root of the problem is the various state insurance departments which must approve the language of each and every policy. * * * The answer is federal regulation of the insurance industry (I hope my previous employer doesn't stop my pension for this bit of heresy). First of all, it would provide a uniformity in policies accross 50 states. Secondly, it would provide more professional oversight of the industry and it's policies.

Let me add my 2 cents. The problem would not be solved by having federal regulators instead of state regulators and trial lawyers write insurance contracts. (For an example of the clarity that comes from federal law, see the tax code.) All we would get is different sorts of perversity.

A better approach would be if insurers could include enforceable clauses in their contracts choosing the law of a particular state. See my article, From Efficiency to Politics in Contractual Choice of Law, 37 Ga. L. Rev. 363 (2003).  To avoid the 50 state regulator problem, federal law could ensure enforcement of the clauses.

I can already hear the response – the insurers would opt for the least regulation, so we'd have a race to the bottom. But the market forces alluded to above by the former insurance company executive would discipline this. If not, we could have minimum federal standards taking care of the worst problems.

This is not a perfect solution.  But could it be worse than what we have now?

Comments

[RiskProf]

Good point, we let credit card companies do this, why not insurance companies? In addition, consumers will find out which law benefits them and which law doesn't. Insurers will likely be able to charge different rates for different "quality" insurance contract provisions. There could be competition for different contract law. Some people want the cheapest possible insurance and some people want the gold plated contract. States with really "bad" law or states which can't find themselves willing to enforce contracts would be out of the running.