Fair Access To Insurance Requirements: Do Fair Property Insurance Premiums For Individual Coastal Property Owners In Massachusetts Equate With Fairness To The Greater Market?

Abstract

The insurance industry is one of the oldest industries in the world, with some accounts dating it as far back as the Code of Hammurabi (Code)–the first known set of codified laws that were promulgated by the famed Babylonian king. The practice of bottomry, “one of the earliest forms of insurance . . . used throughout the ancient world,” can conservatively be traced to the Code, which was created in the eighteenth century B.C. There is further evidence suggesting that, prior to the establishment of the Code, the Babylonians entered into primitive insurance contracts as far back as the fourth millennium B.C. The modern insurance industry has its roots in the well-known insurance company Lloyd’s of London, which began underwriting marine insurance policies in English coffee houses in 1688. Underwriting is the process by which insurers determine whether, and at what cost, to insure against a given risk. The United States currently has the world’s largest insurance market. As of 2005, the American insurance industry “employ[ed] about 2.3 million people, and insurance gross premiums totaled $1.15 trillion.” In 2006, insurance gross premiums totaled$1.4 trillion, an increase of nine percent over the 2005 totals, and there were 7660 domestic insurers in the United States. Yet, despite the prevalence and importance of insurance, the industry remains almost entirely regulated by state law. The primary federal statute dealing with insurance, the McCarran-Ferguson Act, declares that “the continued regulation and taxation by the several States of the business of insurance is in the public interest” and that “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance . . . .” With the ubiquity of insurance in our society, the industry affects nearly everyone and influences a vast array of relationships; however, many are unaware of the ways in which insurance impacts their lives until something goes wrong. There are myriad social institutions that shape the lives of individuals, and it would be cumbersome to contemplate each one on a daily basis. For many, “[i]t is enough that they work and that we know how to use them.” This Comment seeks to address an issue of primary importance for many homeowners in coastal Massachusetts—the inability to purchase property insurance through the voluntary market. In many areas of the Massachusetts seacoast, private insurers have completely withdrawn coverage. The only means through which many of these homeowners can obtain property insurance is through the Massachusetts Property Insurance Underwriters Association (MPIUA), a state agency organized under the Massachusetts Fair Access to Insurance Requirements (FAIR) statute. The MPIUA is intended to act as an “insurer of last resort,” allowing homeowners otherwise unable to buy property insurance through the private market to obtain property insurance through the government sponsored program. While the MPIUA was meant to be an insurer of last resort, it has quickly become the primary insurer in several Massachusetts coastal markets. While the MPIUA is laudatory in its goals, this Comment addresses serious flaws inherent in the MPIUA and its potential shortcomings in the event of a catastrophe. Part II of this Comment discusses key factors that have led to a coastal property insurance meltdown. Chief amongst these factors is an increase in the frequency and severity of catastrophic events (most particularly hurricanes) which has led to increased exposure and liability for insurance companies in vulnerable markets. Part II also introduces the concept of FAIR Plans (both in Massachusetts, and, briefly, in other markets) and analyzes how the MPIUA became the primary insurer for many Massachusetts coastal property owners. Part III concentrates on the statute that enabled the creation of the MPIUA, the statutory authority and limitations imposed on the MPIUA (as well as its potential shortcomings), and a study of a legal dispute between the Massachusetts Attorney General and the Massachusetts Commissioner of Insurance concerning the appropriate interpretation and application of the statutory authority granted to the MPIUA. Finally, Part IV examines why FAIR Plans are typically ill-suited to act as primary insurers, and contains a discussion of different approaches which could be taken to remedy the coastal property insurance conundrum