Arbiters and Conflicts of Interest

An interesting story at Professional Liability Matters regarding an arbitration settlement that was voided because the arbitrator, in this case as judge, did not disclose an affiliation he had with one of the parties.  You can read the article here.  The interesting part comes in the legal theory to determine conflict; from the California Court of Appeals (emphasis added): 

On appeal, the California Court of Appeals noted that the standard for disclosure is not whether the judge was actually biased, but whether a reasonable person “could entertain a doubt that he could be impartial.”  Because the judge included one of the firm’s partners as a reference on his resume, the court determined that this standard was met.  Accordingly, the Court held that the judge had erred in failing to make the disclosure and vacated the arbitration award. 

This touches on a topic that insurance coverage lawyers have been dealing with for years. Namely, that an insured can state that a particular lawyer or firm, in a case where a determination of coverage impacts that insured, has a potential conflict of interest simply because they are panel counsel of the insurance carrier and thus the carrier has sway over their economic likelihood. I.e., it’s theorized a particular law could have an incentive to perform in the insurance carrier’s favor rather than in the insured’s favor.

An example would be a situation where an insured is brought up on potential fraud charges. The theory goes – and mind this is simplified and subject to jurisdictional law – that a carrier’s panel counsel has incentive to steer the decision toward a finding of fraud rather than negligence so that the insurance carrier will not have to pay an award. This would then encourage the carrier to use that particular counsel in the future. c.f. San Diego Navy Federal Credit Union, et al. v. Cumis Insurance Society, Inc.

States handle this matter differently – some state that a conflict doesn’t really exist or, if it does, the professional ethics and requirements put upon lawyers is sufficient to preclude “steering” cases in this manner. While an insured can still hire their own counsel in cases they believe they have conflict, many locales state it’s at their own cost.  However, other jurisdictions do require the carrier to pay for an insured’s independently chosen counsel if there’s a significant conflict.

In jurisdictions where “independent counsel” is mandated (California being one) an interesting question arises when an insurance contract has an arbitration clause. I’ll be honest in saying that I’m not familiar with California policies, but if their arbitration clauses read like others I’ve seen then an insurance contract can require insureds to submit to binding arbitration in matters of dispute. These clauses often specifically define the firm to be used. 

If such is in your contract, it seems like a potential “steering” problem, similar to that exists with lawyers, is created. After all if a state assumes that legal counsel will be influenced by volume of business, why wouldn’t an arbitration firm? I’ll admit it’s probably a harder argument to make, but certain jurisdictions consider a legal counsel conflict to be per se, so if the conflict is automatically presumed, it’s not that big of a stretch to apply it to other scenarios. 

And remember the article above – in the situation of this particular arbiter, all that was needed was for a “reasonable person” to “entertain doubt” of their impartiality. So while perhaps a difficult argument, the obstacles are still pretty low. And it would only take one court case to, essentially, invalidate any arbitration agreement in a particular jurisdiction when the insurance carrier was solely responsible for appointing the arbiter.

Insurance Agents Potentially Responsible to Non-Clients

This article from Professional Liability Matters summarizes a recent court decision over an action brought by the Cleveland Indians baseball team against an insurance broker for what was essentially failure to provide adequate professional services. The funny part is, this broker was not a person placing coverage for the Cleveland Indians but rather was a broker who had merely added the Cleveland Indians as an Additional Insured to their own client’s policy. 

Long story short is that the Cleveland Indians hired National Pastime Sports, LLC, an entertainment and games provider, to operate festivities before a game; these included an inflatable slide. National Pastime used an independent broker to secure General Liability coverage which included the Cleveland Indians as an “Additional Insured”. The broker did not secure inflatable coverage even though they were specifically told of the use of such beforehand. 

Unfortunately, the inflatable slide collapsed and killed and attendee. The Cleveland Indians sought coverage under National Pastime’s policy as a Additional Insured but, as mentioned, there was no inflatable coverage so they were unable to collect. The Cleveland Indians brought suit against the broker which was upheld upon appeal. The court concluded that simply by virtue of being an Additional Insured on National Pastime’s policy, National Pastime’s broker owed them a certain level of care. 

In short, this means that insurance professionals could owe a duty not only to their clients but (theoretically) any other named party on their client’s policies including Additional Insureds, Mortgagees, etc. 

Without a Lexis Nexis account I can’t comment as to whether the duty owed to these additional interests is the same level of duty owed to direct clients. And, further, this particular case does seem to stand alone. However, we’ve all seen how liability and subsequent litigation always starts with a crack before the dam breaks. 

Following along this path leads to further questions, such as what happens when you have an adversarial relationship between the client and an Additional Interest. For example, it’s (usually) in your client’s best interest to limit the scope of Additional Insured status, say by using a newer “Designated Person or Organization” endorsement which tends to be more restrictive**. Are you obligated to notify the Additional Insured that they could get more comprehensive Additional Insured coverage even though it would (1) cost your client more and (2) mean any losses impact your client’s history? While perhaps it’s a stretch to make that argument, it’s still plausible. 

Note that Law 360 also states this case was denied for appeal.

NOTES: 

* Mortgagee and Loss Payable status usually provide certain benefits not otherwise found in Loss Payee-type clauses. These include promise of notification should the policy cancel or non-renew, as well as the ability to retain coverage when it’s otherwise voided by the Named Insured, such as if the insured commits arson. 

** Older endorsements (e.g. CG 20 10 11 85) don’t limit coverage to just ongoing operations, meaning the endorsement provides Products/Completed-Ops coverage. There are various other restrictions as well.

InsureTech is a Lie

InsureTech is a lie.

No, that’s not exactly right: Everything InsureTech says is a lie. A subtle but meaningful distinction.

1: There is no revolution, only iteration
Not applicable only to InsureTech but we need to have an honest conversation about what technology can do. Technology can enhance. Very rarely does it create an entirely new function, process, service, or what-have-you from whole cloth. Even things we think of as “revolutionary” today were iterations typically over decades – the internet started as a US defense program, Watt’s steam engine was an improved version of someone else’s design, and despite centuries of grade school education, Edison did not “invent” the light bulb.

This is not to diminish such contributions but to recognize how technology evolves: by iteration. Meaning there is an existent knowledge base and likely existent physical (or digital) constructs, and those are improved or tweaked in some fashion to make them more useful. This is done over and over again until a specific variant is mass adopted and we in 2024 refer to it as a singular “invention”.

2: InsureTech will not change what you do
Which means that what all these InsureTech companies are promising are just that – promises. And vapid ones at that. Lemonade is not going to “revolutionize” how we buy insurance, because we still need to underwrite, service, etc. Like yeah it’s neat that I can order my favorite food from GrubHub, but is hitting a few buttons corresponding to “Pepperoni Pizza” all that different from picking up the phone? The fundamental service of “ordering a pizza” hasn’t changed, merely how it’s routed.

So it is with insurance. Promises of “altering the fundamental relationship between consumer and insurer” is nonsense. How would you even change that relationship – you going to make it so policies are issued on vibes instead of underwriting? Going to make is so the insurance carrier is the one paying premium to the insured? Or are you going to retain the fundamental relationship of one party paying another to accept risk according to specified criteria and simply (hopefully) make it more efficient?

3: InsureTech is not coming for your job
I mentioned efficiency above, and one of the main “costs” (scare quotes intentional) of insurance companies and brokers alike is personnel. This means a lot of InsureTech is designed to remove that personnel from the equation – why pay several dollars per transaction when you can get a computer to do it for the cost of a lightbulb?

Yet insurance is a highly complex phenomenon. It requires deep understanding, it requires explanation, it requires awareness of regional differences, of case law, of changes, etc. Thus it should come as no surprise that the majority of “disruptor” companies focus on personal lines insurance (home/auto) – by virtue of being tightly regulated those lines of coverage are relatively simple compared to other types of insurance. Yet even then the “SourYellowFruit” companies of the world haven’t delivered much beyond “pre-screening questionnaire that directs to a human”.

I’m not joking here, I recently had an adventure with a handful of such companies while looking for a relatively “easy” type of commercial insurance policy for a small business. And that was the solution when I used each one of them – I answered a handful of questions and waited on a callback from a human.

Remember how one used to be able to call an 800 number and talk to someone who could help us? And now we have to go through all the menus before we find out our option isn’t listed and have to be transferred to a person? That’s the disruption insurance professionals can expect from InsureTech – metaphorically yelling “REPRESENTATIVE!” into the phone every time we need help. Heck, call any number of “Agent Lines” now at major insurers and that’s what you get.

4: Temper expectations with what InsureTech can deliver
Let’s be real: the tech industry, as a whole, produces some pretty negative outcomes. There’s even a word for this phenomenon which I won’t repeat here. This isn’t relegated only to Tech, but I would say it’s hyper-apparent in the tech industry.

Being a bit of a cynic here, think about the technology over the past 10+ years and how it has or has not improved. I now have to reboot my TV every week because its apps screw up. I get advertisements to rent a movie I both own physically and have available through a streaming service. Rewinding in [insert TV App here] causes the program to skip, or commercials to repeat. And DO NOT EVEN GET ME STARTED ON PARAMOUNT+. All in less time than it took for Blockbuster to go out of business.

What else we got? The iPhone still won’t let you transfer music to your device without using iTunes. Social media gave us the largest communication platforms the world has ever seen and turned them into toxic dumps. Your neighbor’s refrigerator is DDOSing you while Alexa figures out what products fit your algorithm.

Add to this the fact that the incentives for most “startups” is to sell, that value often lies in patent wars rather than product, that services are laden with costs and fees, etc. etc. Is all of that really the formula that will help you, personally, execute better?

I told you I’m being cynical. And it is folly to say there aren’t benefits here – hey being able to watch MacGuyver 24/7 is pretty rad – but the point is that what the industry purports to deliver ought to be scrutinized with the actual results produced, because they are often wildly different.

OK smart guy, I guess it’s back to candles and quills
Despite the diatribe, I’m no Luddite. But I am a realist. Think about the technology you do use on a daily basis and, outside e-mail, I’d bet dollars-to-donuts the most important one would be Excel. I’ve seen billions of dollars of assets get insured based on an Excel file. I know world-famous companies that allocate their global budgets in Excel. I’ve seen multi-million dollar sales and $20 purchases alike be determined by the results of a few cells in a spreadsheet.

Excel, while not perfect, is imperative to what we do because it is highly functional, has both a low skill floor and a high skill ceiling, is adaptive, intuitive, and – really the thing that matters – useful.

So that’s how the insurance industry can embrace InsureTech: figure out how it can be useful to you, today. Not how it can “revolutionize” your pipeline, not how it can cut a gajillion in costs, not how it can work in some hypothetical perfect once you’ve bought 4 other products in the ecosystem. Ask yourself “What am I doing right now and what kind of tool could help me?” Ask how InsureTech can help you, not how you can “buy in” to it.

The answer is going to be boring. So boring. It’s going to be something like, “automate filling in these form fields,” or “provide a report of all similar clients,” or “automatically run this analysis”. Because regardless of any revolution that happens those functions still need to be done and are precursors in and of themselves; we’re filling in those fields and running those reports for greater purpose. We need to gauge eligibility, compare costs, find a coverage gap, overturn claim denials, and 10,000 other things which are abstract, highly complex, nuanced problems that require decades of knowledge and effort to solve.

InsureTech, while it will provide a helping hand, will not fundamentally change that.

This article is presently a draft; it may be split into multiple parts in the future