Transparently Opaque: Understanding the Lack of Transparency in Insurance Consumer Protection

Consumer protection in most domains of financial regulation centers on transparency. Broadly construed, transparency involves making relevant information available to consumers as well as others who might act on their behalf, such as academics, journalists, newspapers, consumer organizations or other market watchdogs. By contrast, command and control regulation that affirmatively limits financial firms’ products or pricing is relatively uncommon. This Article describes a remarkable inversion of this pattern: while state insurance regulation frequently employs aggressive command and control consumer protection regulation, it typically does little or nothing to promote transparent markets. Rather, state lawmakers routinely either completely ignore transparency-oriented reforms or implement them in a self-evidently flawed manner. While acknowledging the limits of transparency-oriented consumer protection regulation, this Article argues that the lack of transparent insurance markets reflects a pervasive and unappreciated flaw in state insurance regulation. Despite their limitations, transparency-oriented regulatory strategies are an important complement to other more aggressive regulatory tools, as they can promote consumer choice, harness market discipline, and ensure regulatory accountability in ways that more aggressive regulatory tools often cannot. In order to promote more transparent insurance markets, the Article argues that the jurisdiction of the Consumer Financial Protection Bureau should be expanded to encompass consumer protection in insurance. Insurance, Consumer Protection, Transparency, Financial Regulatio

The Role of Courts in the Evolution of Standard Form Contracts: An Insurance Case Study

Standard form contracts are a pervasive feature of modern commercial life for ordinary consumers and big businesses alike. Yet remarkably little is currently known about how and when these contracts evolve in response to judicial decisions that interpret and apply them in individual disputes. Homeowners insurance policies offer a particularly fertile ground for studying this issue due to both the prominence of the insurance law doctrine that ambiguities are interpreted against the drafter and the historic standardization of insurance policies across different insurers. Utilizing a unique hand collected dataset, this Article empirically investigates the links between innovation in the dominant ISO HO3 homeowners policy and published caselaw interpreting that contract. The results demonstrate that judicial caselaw has indeed played a vital role in the evolution of homeowners insurance policies over the last fifty years, forcing insurers to spell out their obligations more precisely and clearly. Notably, judicially prompted changes to policy language have often expanded coverage, suggesting that judicial scrutiny can empower regulators and market intermediaries to secure drafting concessions in revisions to homeowners policies. Normatively, these results provide strong support for insurance law\u27s central doctrine that ambiguities are interpreted against the drafter. When considered in light of prior research demonstrating that some homeowners insurers have recently begun departing from the ISO HO3 policy in ways that systematically restrict cover age, this Article\u27s results also suggest that states should strongly consider requiring homeowners policies to provide coverage that is no less generous than the ISO HO3 policy. With respect to contract law more generally, the Article s findings suggest that contractual innovation, particularly when prompted by caselaw, operates quite differently in different market and regulatory settings

How Privilege Undermines Cybersecurity

In recent years, cyberattacks have cost firms countless billions of dollars, undermined consumer privacy, distorted world geopolitics, and even resulted in death and bodily harm. Rapidly accelerating cyberattacks have not, however, been bad news for many lawyers. On the contrary, lawyers that specialize in coordinating all elements of victims’ incident-response efforts are increasingly in demand. Lawyers’ dominant role in cyber-incident response is driven in part by their purported capacity to ensure that information produced during the breach response process remains confidential, particularly in any subsequent lawsuit. By interposing themselves between their clients and any third party consultants involved in incident response, lawyers can often shield any materials produced after a breach from discovery under either attorney-client privilege or work-product immunity. Moreover, by limiting and shaping the documentation produced by breached firms’ personnel and third-party consultants in the wake of a cyberattack, attorneys can limit the availability of potentially damaging information to plaintiffs’ attorneys, regulators, or media, even if their attorney-client privilege and work-product immunity arguments falter. Relying on over sixty interviews with a broad range of actors in the cybersecurity landscape — including lawyers, forensic investigators, insurers, and regulators — this Article shows how, in their efforts to preserve the confidentiality of incident-response efforts, lawyers may undermine the long-term cybersecurity of both their clients and society more broadly. We find that lawyers often direct forensic providers to refrain from making recommendations to clients about how to enhance their cyber defenses, restrict direct communications between cybersecurity firms and clients, insist upon hiring cybersecurity firms with limited familiarity with the client’s networks or internal processes, and strictly limit dissemination of the cybersecurity firm’s conclusions to the client’s internal personnel. To ensure their clients do not inadvertently waive any legal confidentiality protections, lawyers also frequently refuse to share any written documentation regarding a breach with third parties like insurers, regulators, and law enforcement. Even worse, we find that law firms overseeing breach investigations increasingly instruct cybersecurity firms not to craft any final report regarding a breach whatsoever. These practices, we find, may impair the ability of breached firms to learn from cybersecurity incidents and implement long-term remediation measures. Furthermore, such efforts to protect confidentiality inhibit insurers’ capacity to understand the efficacy of different security countermeasures and regulators’ power to investigate cybersecurity incidents. To reverse these trends, the Article suggests that materials produced during incident response should be entitled to confidentiality protections that are untethered from the provision of legal services. But such protections should be coupled with new requirements that firms impacted by a cyberattack disclose specific forensic evidence and analysis. By disentangling the incident-response process from the production of information that can hold firms accountable for failing to take appropriate and required precautions, the Article aims to remove barriers to effective incident response while preserving incentives for firms to take cybersecurity seriously

Reevaluating Standardized Insurance Policies

This Article empirically debunks the common claim that homeowners insurance policies do not vary across different insurance carriers. It demonstrates that different carriers\u27 homeowners policies differ radically with respect to numerous important coverage provisions. It also reports that a substantial majority of these deviations produce decreases in the amount of coverage relative to the presumptive industry standard, though some deviations increase coverage. Additionally, the Article describes the surprising absence of any mechanisms by which even informed and vigilant consumers could comparison shop among carriers on the basis of differences in coverage. It closes by reviewing various regulatory and judicial options for responding to this lack of transparency in homeowners insurance markets. It also considers the broader theoretical implications of the findings for regulatory theory and scholarship on standardized form contracts. Homeowners insurance, insurance, personal lines, transparency, state regulation, standard form contract

AI Tools for Lawyers: A Practical Guide

This Article provides practical and specific guidance on how to effectively use AI large language models (LLMs), like GPT-4, Bing Chat, and Bard, in legal research and writing. Focusing on GPT-4—the most advanced LLM that is widely available at the time of this writing—it emphasizes that lawyers can use traditional legal skills to refine and verify LLM legal analysis. In the process, lawyers and law students can effectively turn freely available LLMs into highly productive personal legal assistants

Coverage Information in Insurance Law

The central goal of insurance law is to clarify, produce, and disseminate information about the scope of insurers’ coverage obligations to policyholders. This Article examines how insurance law and regulation seek to achieve these objectives, and to what ends. To do so, it distinguishes among three different types of coverage information: (i) purchaser information, or coverage information that is communicated to policyholders at any time during the purchasing process; (ii) policy information, or coverage information that is contained within the four corners of the insurance policy; and (iii) judicial information, or coverage information that is ascertainable only after researching judicial opinions resolving coverage disputes. This Article shows how each of these three forms of coverage information can promote more efficient insurance markets, in ways that are frequently overlooked or under-appreciated by courts and commentators. For instance, improving policy information helps limit insurers’ discretion and curb their ability to engage in opportunistic behavior at the point of claim or sale. Such information can also enhance the unique process of state insurance regulators’ review and approval of policy forms. The Article’s framework not only helps illuminate the underlying structure of insurance law; it also sheds new light on various long-standing disputes in the field, which often require prioritization and trade-offs among the three different types of coverage information. For instance, this Article suggests that one important reason for embracing a sophisticated policyholder exception to the ambiguity rule is that doing so produces judicial information at the expense of policy information, a sensible tradeoff with respect to sophisticated policyholders. Similarly, this Article argues that, contrary to the ordinary rule, courts should generally refuse to admit extrinsic evidence to disambiguate policy language when it comes to consumer-oriented policies. Doing so can undermine the production of policy information when purchaser information is present, despite the fact that these two types of information serve very different purposes in the insurance context. More generally, this Article suggests that a substantial number of perennial disputes in insurance law can be helpfully analyzed by reference to their impact on purchaser information, policy information, and judicial information

The Risks of Shadow Insurance

Shadow banking - often defined as financial intermediation that provides maturity transformation outside of the formal confines of a bank\u27-played a central role in causing the 2008 financial crisis. For this reason, a 2013 report of the New York Department of Financial Services generated substantial controversy when it labeled some life insurers\u27 practices of reinsuring insurance policies with affiliated captive insurers as shadow insurance. Yet the moniker of shadow insurance was not without at least some justification. Like shadow banking, life insurers\u27 reinsurance of policies with affiliated captives is a form of regulatory arbitrage that moves traditional insurance risks from insurers\u27 balance sheets to the balance sheets of entities subject to more limited regulatory restrictions and scrutiny. Since New York\u27s 2013 report, numerous policymakers- including both the Federal Insurance Office and the Financial Stability Oversight Council-have expressed concern regarding shadow insurance. Meanwhile, an important empirical study has documented the staggering growth of shadow insurance, from $11 billion in ceded liabilities in 2002 to$364 billion in ceded liabilities in 2012.7 The study also concluded that, under plausible assumptions, the average insurer utilizing shadow insurance would experience a 53 percentage point reduction in risk-based capital and a 350% increase in default probability if the underlying transactions were reversed