Insurance & Reinsurance 2023 Comparisons

State Insurance Law

Insurance within the USA is primarily regulated by the various states, rather than by the national, or federal, government. State legislatures enact insurance laws, which are implemented and enforced by state regulators primarily through adoption of rules and regulations governing the business of insurance and insurer conduct.

Each state has its own insurance laws and regulations and its own supervisory authority (usually called the state insurance department), headed by its own state official (usually called the state insurance commissioner) (see 2.1 Insurance and Reinsurance Regulatory Bodies and Legislative Guidance). Each state has broad authority and discretion to regulate insurance activity within its borders, including activities by insurers and insurance intermediaries (brokers and agents), claims adjusters, and rating organisations. There is considerable uniformity among the states when it comes to the underlying principles and there are a number of uniform insurance laws that the various states have adopted; however, specific rules can vary between states in important respects.

Federal Insurance Law

Although the states are the primary regulators of insurance, federal laws and regulations also target certain aspects of US insurance business. The federal role can take many forms – for example, all insurers with US operations are subject to federal regulation that affects businesses generally, such as investor protection rules under federal securities laws, rules relating to the disclosure and security of non-public personal information of customers and consumers, AML rules, and anti-bribery and trade sanction rules (see 2.1 Insurance and Reinsurance Regulatory Bodies and Legislative Guidance).

Common Law Precedent

State and federal courts play a significant role in the interpretation and enforcement of insurance law in the USA. State common law, in particular, is an important source of law for dispute resolution (such as the validity and enforceability of insurance contracts, and the settlement of claims). Courts also have significant roles in the enforcement (or restriction) of regulatory actions imposed by state insurance commissioners, as well as in proceedings involving financially distressed insurers.

State Regulation

The US state-based supervisory framework is generally designed to satisfy two principal objectives: consumer protection and insurer solvency. How this is expressed, the structure of mandates, and how clearly these general objectives are addressed can differ significantly among the states.

An officer in each state’s executive branch is designated as the chief supervisory official for implementation and enforcement of that state’s insurance laws and is called the insurance commissioner, insurance superintendent or insurance director. This official may be elected or appointed by the governor, depending on the state. The official presides over a regulatory agency that is generally referred to as the insurance department – although the exact name of the agency varies from state to state.

National Association of Insurance Commissioners

State regulation of the insurance industry is co-ordinated through the National Association of Insurance Commissioners (NAIC), a voluntary organisation whose membership comprises the chief insurance regulatory officials of each of the 50 states, the District of Columbia, and the five US territories. The NAIC provides a forum for the development and implementation of uniform policy. Its chief tools include:

• developing model laws and rules, which may or may not be enacted by each state or territory;
• developing standardised financial reporting and solvency ratios;
• co-ordinating information sharing among state insurance regulators; and
• co-ordinating insurer examinations.

Federal Regulation and Programmes

Although the states are the primary regulators of the insurance industry in the USA, the federal government also has a significant impact on insurers and the business of insurance. This role can take several forms, including:

• prudential regulation by the Federal Reserve of insurers that are designated for heightened supervision by the Financial Stability Oversight Council and banks or savings and loan holding companies that own insurance companies;
• the regulation of financial products or markets that include – but are not limited to – insurance, such as the SEC’s regulation of securities (including certain life insurance products), the Commodities Future Trading Commission’s regulation of derivatives, and the Department of Labor’s regulation of employee benefit plans;
• monitoring and reporting on the insurance industry, and developing federal policy on prudential aspects of international insurance matters through the Federal Insurance Office (FIO);
• taxation of insurers and their products through the Internal Revenue Service (IRS) under the US Department of the Treasury (“the Treasury”)’s supervision; and
• federal insurance programmes, including the Federal Emergency Management Agency’s administration of the National Flood Insurance Program and the Treasury’s administration of the Terrorism Risk Insurance Program.

Form of Insurer

Insurance companies operate under various forms of corporate or non-corporate organisation. Each insurer is organised and formed under the laws of a specific jurisdiction, known as the insurer’s state of domicile. The laws of the insurer’s state of domicile determine how the insurer is formed or organised and typically include rules regarding corporate governance, solvency, and similar matters. The most common forms of insurance companies are stock and mutual companies, although many other forms of organisational structure also exist under state insurance law.

Licensing

Licensed insurers (also called “admitted” insurers) are subject to various regulatory requirements in each of the states where they are licensed to transact insurance business. The first licence an insurer must obtain is the licence issued by the insurer’s state of domicile. Many insurance laws and regulations apply expressly only to companies organised under the laws of the insurer’s domestic state. In addition to satisfying the state’s requirements for corporate formation, corporate governance and capitalisation, the company must also satisfy the state’s requirements for insurance licensure.

Most states, as a condition to licensing an insurance company, require the submission of information regarding the ownership and control of the insurer. Generally, persons who “control” an insurance company – as well as the individuals who are directors and executive officers of the insurance company – must demonstrate that they are competent and fit and, in some states, that they are “trustworthy”.

A licence application typically would include information such as the following:

• a description of the insurer’s ownership structure and holding company system;
• information on – including biographical affidavits executed by – the insurer’s directors and executive officers;
• pro forma financial projections and a business plan for the insurer;
• a description of the lines of insurance business the insurer seeks to transact; and
• other additional information the individual state may require.

Certain requirements, such as capitalisation, vary based upon the licence type (for example, a property and casualty licence) and vary from state to state. 

The process of becoming licensed must be repeated in each new state in which the insurer seeks to transact insurance. Virtually all states now use an online uniform licensing process called the Uniform Certificate of Authority Application (UCAA), which permits an insurer to file copies of a single application in all “uniform states” where the insurer is seeking admission. Each state then performs its own independent review of the application.

Reinsurers

Reinsurers licensed in the USA are generally subject to the same state-based regulation as licensed primary insurers, and licensed primary insurers are generally permitted to reinsure risk for which they would be permitted to write on a direct basis. Reinsurers that are not licensed in the USA can reinsure risks in the USA without being licensed or accredited; however, they generally must be licensed in a jurisdiction in which they establish offices to conduct business. Unless designated as a “certified” or “reciprocal” reinsurer (see 3. Overseas Firms Doing Business in the Jurisdiction and 13. Other Developments in Insurance Law), unlicensed and unaccredited reinsurers must provide qualifying collateral to ceding insurers in order for ceding insurers to receive financial statement credit for the ceded reinsurance. These collateral requirements serve as a substitute for financial regulation of unauthorised reinsurers under the current rules.

Every state imposes some form of premium tax on direct premium written by an insurer in the state. A small number of states also impose a tax on income. “Direct” premium refers to premium derived from policies issued directly to insureds – as distinct from reinsurance premium, which is premium on reinsurance contracts. States commonly impose a tax on the premiums derived from insurance on “property, subjects or risks located, resident to be performed” in the state.

All but a handful of states exempt annuities from the tax on premiums, either by statute or administrative position. Virtually all states impose a retaliatory tax, under which “foreign” insurers – that is, licensed insurers that are domiciled in another state – pay the taxing state the same level of tax that is imposed by the state of the foreign insurer’s domicile on insurers domiciled in the taxing state.

Insurers

As discussed in 2. Regulation of Insurance and Reinsurance, any person who “transacts” insurance within a state is required to obtain a licence from that state ‒ irrespective of whether that person is doing business from within or without that state (including outside the USA). States broadly define “transacting insurance”. Typically, any of the following acts in the state – whether done in person or effected by mail or telephone from outside the state or otherwise ‒ constitute transacting insurance business:

• making, or proposing to make, any insurance contract;
• issuance or delivery of a policy or contract of insurance;
• solicitation of applications for any such policies or contracts;
• collecting any premium or other consideration for any policy or contract of insurance; and
• doing anything else that is substantially equivalent to any of the above-mentioned in a manner designed to evade the provisions of the state’s insurance law.

The limited exceptions to the general prohibition against doing unauthorised insurance business include:

• lawful placements made under a state’s excess or surplus lines law;
• reinsurance;
• self-insurance; and
• marine, aviation and transportation/railroad exemptions.

In addition, certain large, sophisticated commercial buyers can access unauthorised insurers directly under limited circumstances. 

Reinsurers

Unauthorised reinsurers must provide qualifying collateral to ceding insurers in order for ceding insurers to receive financial statement credit for the ceded reinsurance. These collateral requirements serve as a substitute for financial regulation of unauthorised reinsurers under the current rules. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, collateral requirements are determined exclusively by the ceding insurer’s state of domicile.

Unauthorised reinsurers must generally provide qualifying collateral in an amount equal to 100% of the reinsurer’s gross liabilities to the ceding insurer for the ceding insurer to receive financial statement credit for the reinsurance. Exceptions exist for reinsurers that establish a trust in the USA for the benefit and protection of their US cedents (a “multi-beneficiary trust”) or reinsurers that have been designated “certified reinsurers” or “reciprocal reinsurers” under newly enacted legislation and rules.

Reinsurers can be “certified” by a state if they meet certain criteria concerning financial strength and reliability as indicated by their credit ratings and are domiciled in countries that are found to have strong systems of domestic insurance regulation. The amount of collateral a certified reinsurer is required to provide is reduced and is tied to the reinsurer’s financial strength ratings.

Reciprocal reinsurers are reinsurers with USD250 million in capital and surplus that meet certain other requirements and are domiciled in jurisdictions that have been designated by the cedent’s domicile state as a reciprocal jurisdiction. Jurisdictions that have entered into covered agreements with the USA are automatically designated reciprocal jurisdictions. This includes EU member states and the UK. Other jurisdictions (eg, Bermuda, Japan, and Switzerland) may be designated as reciprocal jurisdictions by the state insurance commissioners.

“Fronting” is a term that usually refers to an arrangement whereby an insurance company issues policies that are reinsured in their entirety (or nearly in their entirety) by a reinsurer. In many cases, the reinsurer or one of its affiliates is responsible for managing the business written by the insurance company. Fronting is typically used where the reinsurer lacks necessary licence(s) or rate and form approvals to write the insurance directly or lacks necessary credit quality acceptable to customers.

Some state insurance departments have taken the position that the licensed (or fronting) insurance company may be “aiding and abetting” the unlawful transaction of insurance by the unlicensed reinsurance company if the licensed company retains no part of the risk and does not conduct its own underwriting, thereby subjecting both the insurer and reinsurer to adverse action. To address issues of aiding and abetting, fronting arrangements are often designed so that the “fronting” insurance company retains at least some portion of the risk and other interests in the arrangement.

M&A activity relating to insurance companies can take a variety of forms. The acquisition can involve the purchase of an ownership interest in the insurance company through the acquisition of stock or, in the case of a mutual company, a sponsored demutualisation. Alternatively, it can involve the acquisition of a portion of the business of the insurer through reinsurance or other risk transfer mechanisms, a purchase of a portion of the insurer’s assets, or a purchase of renewal rights with regard to policies issued by the insurer.

Regulatory requirements applicable to M&A activity vary depending on the form of the transaction. If the acquisition involves a change of “control”, it is subject to the prior approval of the insurance department in the to-be acquired insurer’s domicile state. Control is generally defined by the states as the power to direct the management and policies of an insurer, and is presumed to exist if any person acquires voting securities representing 10% or more of the voting power of an insurer or its parent company (although a few states set the threshold at 5%). Acquisitions not involving a change of control do not typically require state approval; however, reinsurance transactions outside the ordinary course of business may be subject to requirements for prior notice and approval, depending on the type and size of the transaction.

After a period of sluggishness during the first part of the COVID-19 pandemic, M&A activity in the US picked up during the third quarter of 2020 and remained very active through 2021.

In early 2022, however, the pace of deal activity began to slow somewhat amid macroeconomic concerns. The concerns may continue to restrain activity in the near term, as higher interest rates have increased financing costs for buyers and raised target valuations in the life and annuity sector, while inflation has hurt the attractiveness of some property and casualty targets by increasing claim costs.

On the other hand, other factors could result in an uptick in activity in at least certain sectors of the market, including:

• the increased involvement of private equity firms in the insurance deal market, especially in the life and annuity business;
• a push for increased capital efficiency, propelling reinsurance deals; and
• a desire by companies to enhance their technological capabilities, including through the acquisition of “insurtech” companies.

Parties involved in the sale, marketing, negotiation or distribution of insurance products within the USA are primarily regulated by the various states, not the federal government. Insurance brokers and agents that serve as intermediaries between the customer and the insurer (collectively, “producers”) must be licensed to sell insurance and must comply with various state laws and regulations governing their activities. An insurance producer must be licensed in any state in which the producer sells, solicits or negotiates insurance. 

The type of licence (ie, agent, broker or producer) granted varies by state. A small number of states classify producers as either agents or brokers and require producers to be specifically licensed as agents or brokers. Other states recognise the distinct roles of agents and brokers but issue only producer licences.

Insurance Agents

States generally define an insurance agent as any individual or firm that sells, solicits or negotiates contracts of insurance on behalf of an insurance company. An insurance agent may not act as an agent of an insurer unless they have been licensed by the state insurance department and duly appointed by the insurance company the agent represents. An “appointment” by an insurer confers authority to a licensed agent to sell insurance on behalf of the insurer. An insurance agent may act as:

• an “independent agent” in selling insurance on behalf of several insurers; or
• a “captive agent” in selling insurance on behalf of only one insurer (or an affiliated group of insurers).

Insurance Brokers

States generally define an insurance broker as any individual or firm that sells, solicits or negotiates contracts of insurance and who aids in any manner in soliciting, negotiating or selling any insurance contract on behalf of an insurance buyer or the insured. An insurance broker is not appointed by an insurance company or other person or entity and acts as an independent insurance salesperson who works with many insurance companies to find the policies appropriate for their clients (ie, the insurance purchasers).

Corporate Entities

Every state permits a corporation to obtain a producer licence. In addition, most states also permit limited liability companies and limited liability partnerships to obtain a producer licence. A business entity licensee is typically permitted to engage in the insurance business only in the lines of business for which its individual licensees are authorised.

Lines of Business

A producer, agent or broker may receive qualification for an insurance licence in one or more classes of insurance, including (but not limited to):

• life insurance coverage on human lives;
• variable contracts;
• accident and health or sickness coverage;
• property insurance coverage for loss or damage to property;
• casualty insurance coverage against legal liability;
• personal lines property and casualty insurance coverage sold to individuals and families for non-commercial purposes;
• title insurance; or
• any other line of insurance permitted under state laws or regulations.

Surplus Line Brokers and Reinsurance Intermediaries

An excess and surplus lines broker is a specialty broker who is empowered to place insurance with surplus lines eligible insurers under the state’s surplus lines law but who must first obtain a surplus lines broker licence. Reinsurance intermediaries are the agents and brokers of the reinsurance market and are also subject to licensing.

Other Regulated Activities

Other providers of insurance- or reinsurance-related activities that may require a licence are:

• managing general agents (organisations that handle most or all of the functions of an insurance company but do not retain risk);
• insurance consultants (insurance professionals who specialise in assisting businesses and individuals in assessing their insurance needs and creating an insurance plan to meet those needs);
• claims adjusters (insurance professionals who specialise in investigating and negotiating insurance claims – a “public adjuster” represents the insured and an “independent adjuster” represents the insurer); and
• third-party administrators (organisations that handle the claims processing and employee benefits plans for the insurer).

Federal Registration

Producers who sell variable life insurance and annuities must be registered with the Financial Industry Regulatory Authority (FINRA), in addition to holding state insurance agent/broker licences. The agency or entity that supervises  those agents must be registered with the SEC.

An insured’s obligation(s) to disclose information about the risk as part of the application process is governed by state laws and regulations and the terms/provisions in the application and insurance contract. Generally, an applicant/insured has an affirmative obligation to truthfully disclose all material information requested by the insurer during the application process. In the application, the applicant/insured will typically attest that their statements and information provided about the risk are true, accurate, and complete and that the insurer can rely on the information to determine if an insurance contract may be issued. As a rule, an insurer does not have an affirmative obligation to investigate an applicant/insured at the time of the application and is entitled to believe what an applicant/insured claims to be true in the application. This applies equally to consumer and commercial insurance contracts.

The insurer will evaluate the information provided in the application in order to:

• assess whether or not the applicant/insured poses a significant risk under the insurer’s underwriting rules and guidelines; and/or
• determine whether the insurer may issue the insurance contract at a different schedule premium rate to account for the disclosed potential risks and/or hazards to be assumed by the insurer in the issuance of the insurance contract. 

The insurer has legal remedies available if it discovers that the applicant/insured made any false or fraudulent statements, material misrepresentations, or omissions in the application. The insurer can file a civil action against the applicant/insured in order to:

• rescind the insurance contract;
• return any premiums collected; and
• request that the court issue a declaratory judgment finding that the insurance contract is null and void.

The insurer would argue that it would not have issued the insurance contract or would have offered different coverage to account for the undisclosed risk(s)/hazard(s). The applicant/insured could be subject to civil and/or criminal prosecution if it is determined that the applicant/insured engaged in insurance fraud. 

If the insured/applicant fails to disclose information requested by the insurer during the application process for purposes of evaluating whether the risk is acceptable under the insurer’s underwriting rules and guidelines, the insurer has the right to deny the application and not issue the insurance contract to the insured. 

The insurer has legal remedies available if it discovers that the applicant/insured made any false or fraudulent statements, material misrepresentations, or omissions in the application (see 6.1 Obligations of the Insured and Insurer).

The role of an agent or broker can become blurred, particularly in the case of independent agents, and is usually determined by commercial considerations. Whereas it is understood that brokers place insurance on behalf of their customers, both brokers and agents often play an active direct role in the negotiation of insurance contracts on behalf of the applicant/insured – even though they may be appointed as agents of the insurer.

The full extent of an agent’s or broker’s duties as a representative of the insurer or the insured are generally determined by state common law; however, states do have specific disclosure requirements relating to compensation. One clear duty for both agents and brokers is to hold funds received as premiums in a fiduciary capacity, meaning they cannot be commingled with the agent’s or broker’s own funds or used for purposes other than remittance of the premium.

In general, in the USA, a contract of insurance is an agreement where one party (the insurer) agrees to confer a benefit of monetary value on another party (the insured) upon the happening of a specified event – which is beyond the control of either party – in return for receiving premium payments from the insured. In some states, the pooling and spreading of risk is also an essential component of insurance.

Insurable Interest

To procure insurance, the insured must have an insurable interest that would be adversely affected by the happening of the specified event. A person generally would only have an insurable interest, for instance, in any property that they own, that is in their possession, or that serves as security for repayment of a loan by them.

Policy Requirements

Typically, an insurance policy must be in writing and must identify:

• the insurer;
• the insured;
• any additional insureds;
• coverage terms and conditions (including the amount of insurance);
• the premium or rate charged for the insurance;
• the length of duration of the insurance;
• the specific subject insured (for example, the life of the insured person, property insured, liability exposures);
• requirements with regard to providing notice of a claim under the policy; and
• any exclusions that may apply to the coverage.

Rate and Form Approval

Under the current regulatory system in most states, insurance contracts covering risks in a state must meet state law requirements as regards content. Contract forms used by licensed insurers must be filed with the state insurance department for most lines of insurance and may be disapproved (some states require prior approval). Rates to be charged are subject to filing and disapproval or prior approval for some lines of insurance. Reinsurance contracts are generally not regulated when it comes to form and content.

Large-risk commercial lines can be non-regulated or deregulated, depending on the jurisdiction and the particular type of risk. Insurers for deregulated lines are not required to file policy or rate changes with the state, but they generally must adhere to substantive state laws as to coverage, terms and conditions. Insurance placed as excess and surplus lines is exempted from state rate and form-filing requirements. Reinsurance contracts are altogether exempted from state rate and form requirements.

Other Risk-Transfer Contracts

Certain derivative contracts, such as swaps, may confer the same economic benefits as insurance but are not considered to be insurance due to the absence of a contractual requirement that the holder have an insurable interest in the event(s) that triggers payment under the contract. They are not regulated as insurance as a result. The purchase and sale of derivatives nonetheless may be regulated as such by the Commodities and Futures Trading Commission (CFTC).

Generally, insureds or potential beneficiaries must possess an insurable interest under the insurance contract. In the context of property and casualty coverage, the insured(s) to an insurance contract, including mortgagees holding a security interest in the insured property, are identified in the insurance contract. Coverage does not automatically extend to other insureds or beneficiaries not specifically identified in the insurance contract. 

In the context of life insurance or retirement/pension benefits coverage, the insured or policyholder and the primary and/or contingent beneficiaries (if any) are typically identified in the insurance contract. The insured(s) can name one or more beneficiaries who will receive the death or retirement benefits payable upon the death of the insured(s). The “primary beneficiary” is the first in line to receive the death or retirement benefits. If the primary beneficiary is not available – that is, if they cannot be found or they are deceased – the secondary or contingent beneficiary is next in line to receive the death or retirement benefits.

If the insured(s) fails to designate a beneficiary prior to their death, the terms/provisions in the insurance contract – governed by the Employees Retirement Income Security Act of 1974, 29 U.S.C. Section 1001, et seq. (ERISA) – will determine the default order of payment of the disputed benefits, which may include payment of the benefits to the insured’s spouse, children, parents, and/or the insured’s estate. In the context of retirement/pension funds, if the insured(s) dies without a named beneficiary, the insured’s assets will likely be held in probate. 

The basic elements required for insurance contracts (including consumer and commercial contracts) and reinsurance contracts to be legally enforceable are substantially similar (see 6.1 Obligations of the Insured and Insurer). However, unlike primary insurance contracts, which impose upon the parties a simple duty of good faith and fair dealing, reinsurance contracts require ceding insurers to disclose all material facts about the risks being reinsured. The failure to do so renders the contract voidable. This duty of utmost good faith requires the cedent to disclose material facts, even if the reinsurer fails to expressly ask about it. The duty is ongoing – that is, it continues throughout the life of the contract.

US insurers are active users of insurance-linked securities (ILS) and industry loss warranty contracts as alternative risk transfer (ART) mechanisms. A majority of US ILS issuances involve the use of a special purpose Bermuda reinsurer that issues securities whose payout is linked to an indemnity reinsurance agreement entered into between the reinsurer and the US cedent. The securities placed with US investors are generally treated in the US as securities under federal and state securities laws. The reinsurance contract between the reinsurer and the cedent is generally treated in the US as a reinsurance contract under state insurance laws.

An industry loss warranty (ILW) can be written as either a derivative or an indemnity reinsurance contract. In both cases, the payout under an ILW is triggered only if industry losses in respect of an agreed risk event exceed an agreed threshold. However, if written as a reinsurance contract, to qualify as reinsurance under statutory accounting principles, the US ceding insurer must also suffer losses in the amount of the payout. If an ILW is written as a derivative and purchased by a US entity, it is generally subject to regulation as a swap under the Commodity Exchange Act and CFTC rules. If written as a reinsurance contract and purchased by a US insurer or reinsurer, it is generally regulated as reinsurance under state insurance laws.

An “Insurance Safe Harbour” under the Commodity Exchange Act provides a basis for exclusion from regulation as swaps for certain products that are regulated as insurance.

See 7.1 ART Transactions.

Interpretation of insurance contracts is subject to the general rules of contract interpretation under applicable state laws. Courts interpret insurance contracts in favour of providing coverage to the insured and implement only the objectively reasonable expectations of the insured at the time of contracting. This applies equally to consumer and commercial insurance contracts.

Generally, if the language of a provision in the insurance contract is clear and unambiguous, the courts will give effect to the plain meaning of the provision. If a court determines that a provision in the insurance contract is ambiguous or uncertain, that issue will be resolved in favour of the insured and against the drafter, which in insurance is almost always the insurer.

A policy provision will be considered ambiguous when it is capable of two or more reasonable constructions. An undefined term in the policy does not make it ambiguous. A court may consider evidence of custom and usage in a particular trade or industry to understand the context in which the parties have used a specialised term or “term of art” in the policy. Depending on the state’s laws, a court may consider extrinsic evidence (eg, evidence to support course of dealing or course of performance) to determine:

• whether or not a provision in the insurance contract is ambiguous; and/or
• the objectively reasonable expectations of the insured when they entered into the insurance contract.

Any exclusions and/or limitations regarding the extent of coverage provided in an insurance contract must be “conspicuous, plain, and clear” and clearly identified in the insurance contract because these terms may result in a denial of coverage to the insured when a loss occurs. 

A warranty in an insurance contract must be expressly included in the insurance contract.

A warranty must clearly show that the parties intended that the rights of the insured/insurer would depend on the truth of the statement or warranty contained in the insurance contract.

An insured’s failure to comply with a warranty could void the insurance contract and discharge the insurer from all liability under the insurance contract from the date of the breach. Some states protect insureds from cancellations due to misrepresented warranties and provide that no misrepresented warranty should void an insurance contract if the misrepresentation was not fraudulent and/or did not increase the risk covered in the insurance contract.

A condition precedent in an insurance contract must be expressly included in the insurance contract. All insurance contracts impose certain duties on the insured. In order to perfect an insurance claim and/or obtain insurance benefits, an insured must comply with the various duties contained in the insurance contract or establish that they were excused from compliance. 

Generally, as an initial matter, the insured’s insurance claim must satisfy the terms of the coverage – that is, the claim must fall within the policy’s coverage and not a specified exclusion. Insurance contracts impose on the insured additional conditions/requirements during the claims process, which include – but are not limited to – the following:

• a duty to notify the insurer of any casualty loss, third-party liability claim, or occurrence that could rise to a liability claim;
• a duty to co-operate with the insurer; and/or
• an obligation to obtain the insurer’s consent for any settlement of claims and/or waiver of subrogation rights.

The terms/provisions in the insurance contract and applicable state law will determine if an insured’s failure to comply with a condition precedent could discharge the insurer from its coverage obligations under the insurance contract. Most states (majority rule) require the insurer to prove that the insured’s failure to satisfy the condition precedent prejudiced the insurer in its ability to investigate the loss, defend a liability claim, or develop a defence to coverage. Other states (minority view) do not require a showing of prejudice to discharge the insurer from its coverage obligations.

Insurance coverage disputes in the US encompass a wide array of insurance policies and coverage, which include – but are not limited to – large-scale professional liability, employment practices liability, directors’ and officers’ liability, comprehensive general liability, employment benefits, fidelity, excess, and reinsurance. 

An insurer, insured, or beneficiary can address insurance coverage disputes by:

• filing a lawsuit in federal or state court; or
• submitting the dispute to arbitration or mediation by agreement of the parties. 

This applies equally to consumer and commercial insurance contracts.

The limitation period in which a party must bring a lawsuit to challenge an insurance coverage dispute is subject to:

• the contractual limitation period in the insurance contract (if any); and/or
• the statutory limitation period in the jurisdiction where a party intends to file a lawsuit. 

If a plaintiff fails to file a lawsuit in a timely manner within the contractual and/or statutory limitation period(s), the plaintiff risks forfeiting their rights to assert that claim.   

Many insurance contracts contain a choice-of-law provision in which the parties agree to use a particular state’s laws to govern the contract. However, these choice-of-law provisions are not always automatically enforceable. A court will not apply a state’s laws in a choice-of-law provision if:

• the choice-of-law provision conflicts with a state’s fundamental public policy; and/or
• another state/jurisdiction has a materially greater interest in the determination of the insurance dispute than the contractually chosen state.

Federal courts generally apply the forum state’s conflicts-of-law rules to determine what law should govern. State rules and laws vary from state to state. In many states, courts will apply the doctrine of lex loci contractus, under which a court will apply the substantive law of the state where the contract is made and/or is to be performed. Some states find that the insurance contract is “made” in the state where the policy is issued or delivered, whereas in other states it is where the contract is executed and the premiums paid.

In other states, courts apply the “most significant relationship” doctrine, under which a court will apply the law of the state that has the most significant contacts with the matter in dispute. In making this determination, the court takes into account the following:

• the place of contracting;
• the place of negotiating;
• the place of performance;
• the location of the subject matter of the contract;
• place of incorporation; and/or
• place of business of the parties.

Likewise, many insurance contracts contain a forum-selection clause in which the parties agree to a specific jurisdiction and/or court where a dispute should be brought. Whether or not a specific forum-selection clause will be enforced is subject to state law. Generally, a court will abide by the doctrine of forum non conveniens to determine whether the selected forum is proper or whether the forum is unreasonable/unfair to a party or counter to public policy.

The US judicial system comprises two different court systems in which a plaintiff could litigate an insurance coverage dispute: the federal court system and the state court system. Each system is different and subject to different rules and laws.

In the federal system, there are three levels of courts:

• the district courts, which are the federal trial courts;
• the interim appellate courts (also known as the circuit courts of appeal); and
• the US Supreme Court, which is the final appellate court.

Only two types of cases are heard in the federal system:

• cases dealing with issues of federal question; and
• cases between citizens of two different states or between a US citizen and a foreign entity, provided that the amount in dispute meets a USD75,000 minimum threshold.

Typically, state court systems are made up of two sets of trial courts: trial courts of limited jurisdiction and trial courts of general jurisdiction. All states have one final appellate state court or Supreme Court.

To commence a lawsuit to challenge an insurance coverage dispute, a plaintiff must file a complaint and serve the defendant with a copy of the complaint and summons pursuant to the rules of procedure. Once served with process, the defendant will then need to file a response to the complaint, which may include filing a motion to dismiss if the defendant believes that the complaint fails to allege sufficient facts to support a viable claim or file an answer to the complaint.

Once the defendant answers the complaint, the parties will engage in discovery that typically can last months (if not years) and may include written discovery and fact and expert depositions. At the end of discovery, the parties may file a motion(s) for summary judgment requesting that the court enter judgment in their favour arguing that no issue remains in dispute for a jury. If the court denies the motion(s) for summary judgment, the parties will then proceed to trial. 

In the US, recognition of a foreign judgment is governed by state or common law. Many ‒ but not all – of the states have adopted a version of the Uniform Foreign Money-Judgment Recognition Act (the 1962 or 2005 Model Act), which codifies the process for a US court to recognise/enforce a foreign judgment. The party seeking recognition/enforcement will need to file an action in a state or federal court that has a basis to exercise jurisdiction over the defendant.

The Uniform Foreign Money-Judgment Recognition Act is typically used to enforce a foreign judgment for a fixed sum of money, excluding judgments based on the penal law of the foreign jurisdiction (eg, fines, penalties, or taxes).

Enforcing a foreign judgment in a US court could be delayed if the foreign judgment is appealed in the foreign tribunal. A final and enforceable judgment is the starting point for a party to file an action in a state or federal court requesting that the court recognise/enforce the foreign judgment. US courts will often stay the litigation if the foreign judgment is on appeal.

The Federal Arbitration Act (FAA) mandates that all arbitration clauses be enforced by the courts, and pre-empts state legislatures from banning them. 

However, uncertainty regarding the enforceability of insurance policy arbitration clauses exists owing to the conflict between the US Constitution’s Supremacy Clause, which gives federal laws and international treaties pre-emptive authority over conflicting state law, and the McCarran-Ferguson Act, which gives state insurance laws “reverse pre-emptive” authority over federal statutes that interfere with state regulation of the insurance business.

As of December 2021, there are approximately 13 states that have banned mandatory arbitration clauses in insurance contracts and at least three states have restricted mandatory arbitration through regulation. 

This issue is still being litigated in federal courts and has caused a federal circuit split. Recent federal court decisions, however, support a trend towards the enforceability of insurance policy arbitration clauses – even if state law explicitly prohibits these provisions in insurance contracts. 

Pursuant to the Federal Arbitration Act (FAA), a party must initiate proceedings to confirm an arbitration award. This requires the party to file a petition/motion to confirm the award in a federal or state court. A party to an arbitration may apply for an order confirming the arbitration award within one year of the arbitrator making the award.

The party seeking confirmation of an arbitration award must file with the petition:

• the arbitration agreement;
• a copy of the arbitration award; and
• any documents a party submitted in connection with any application to modify/correct the award.

The process to confirm an arbitration award is a summary proceeding; therefore, the court does not need to hear argument, gather evidence, or hold a hearing with witnesses. If no party opposes the motion and the court finds no basis to vacate/modify the arbitration award, the court will confirm the arbitration award and enter a judgment.

Alternative dispute resolution can play a major role in resolving insurance coverage disputes – for example, the parties may agree in the insurance contract to submit the dispute to binding arbitration, including agreed-upon choice-of-law and/or jurisdiction.

If a party files a lawsuit in a federal or state court, the parties can participate in a court-ordered or private mediation session to attempt to resolve the claim before an impartial mediator or a retired judge/lawyer. The parties often decide to engage in mediation sessions to avoid incurring the excessive costs/fees involved in prosecuting or defending an insurance coverage dispute, which in some cases can span months or take years to get to trial – only for the parties to then risk having an adverse judgment entered against them.

Insurers have an obligation to act in good faith in the oversight and administration of the claims process. Typically, this obligation is governed by the states’ insurance codes and regulations that require all licensed insurers to promptly review and investigate claims and issue final determination(s) as to whether a claim/coverage should be approved or denied. Insurers have a duty to promptly investigate all claims and keep the claimant(s) apprised of any delays in the claims process, including requests by the insurer for additional time to make a determination on a claim.

A plaintiff has numerous options available to challenge or address an insurer’s delays and/or acts of bad faith. A plaintiff can:

• file a complaint against the insurer with the state insurance department and request that the state commence an investigation; and/or
• file a lawsuit against the insurer in a federal or state court.

Some states require that a plaintiff “exhaust its administrative remedies” and first file a complaint against the insurer with the state insurance department and have a decision issued by the state insurance department before filing a lawsuit in federal or state court. Depending on the jurisdiction, an insurer may be subject to damages in excess of policy limits for bad faith.

Under the doctrine of subrogation, an insurer that has paid its insured for a loss under an insurance contract can recoup the payment(s) from the responsible party/wrongdoer for the loss. In exercising its right of subrogation, an insurer “stands in the shoes” of its insured to enforce the insured’s rights against the responsible party/wrongdoer.

An insurer’s right of subrogation can be based upon:

• equitable subrogation under state law; or
• agreed-upon terms and provisions in the insurance contract.

An insured can waive the subrogation clause in an insurance contract explicitly prohibiting the insurer from seeking to recoup payment(s) form the responsible party/wrongdoer; this may subject the insured to higher premium rates. Typically, an insurer does not have a right of subrogation against its insured because the insurer can simply deny coverage for a loss caused by the insured’s intentional acts. However, if an insurer pays a claim to a third-party for a loss caused by its insured’s intentional acts, the insurer may then seek recovery from the insured under the doctrine of subrogation. 

Further, the doctrine of subrogation ensures that an insured who suffered a loss cannot claim recovery of benefits/damages twice via a claim payment issued by the insurer and the filing of a lawsuit against the responsible party/wrongdoer to recover damages.

The FIO defines insurtech simply as “the innovative use of technology in connection with insurance”. In that context, the term may be used to describe new market entrants and new products or technologies employed by others in the industry.

Insurtech Start-Ups

Insurtech start-ups can generally be classified as one of following types of entities:

• technology service providers, which provide innovative services to insurers or other insurance regulated entities (often pertaining to product design, marketing, underwriting or claims management);
• licensed insurance producers (see 5.1 Distribution of Insurance and Reinsurance Products) that distribute innovative products to consumers, but partner with licensed insurance companies to handle most other functions;
• managing general agents (see 5.1 Distribution of Insurance and Reinsurance Products) that handle most or all of the functions of an insurance company, apart from assuming the risk and liability for claims; and
• “full stack” – that is, fully licensed insurance companies that underwrite their own policies, assume the risk, and typically also manage the claims process.

Insurtech Products and Services

Insurtech companies are being employed by insurers and other regulated insurance entities across the insurance value chain. Some of the more prominent cases of insurtech use include the following.

Embedded insurance

Insurance is offered or included as an add-on with another non-insurance product ‒ for example, offering insurance in conjunction with the purchase of a phone or vehicle. 

Accelerated underwriting

Predictive models or machine learning algorithms are used to analyse data pertaining to life insurance applicants. Such data includes both traditional and non-traditional underwriting data provided by the applicant directly, as well as data obtained through external sources (see 10.2 Regulatory Response).

Sensors and telematics

In the context of auto insurance, “usage-based insurance” programmes collect telematics data about an insured’s usage, driving habits and behaviours in real time – typically through the insured’s phone or vehicle in order to effectively price risk.

In the context of property insurance, insurers are offering new loss prevention devices that indicate and mitigate risk in equipment and appliances, such as leak detectors that can shut off water to prevent flooding (see 10.2 Regulatory Response).

Insurtech Start-Ups

State insurance regulators’ receptiveness to insurtech start-ups varies from state to state. A small number of states have passed legislation to create regulatory “sandboxes” to permit insurers and other regulated entities to develop and test new products, or employ AI or machine learning processes, in exchange for additional regulatory oversight and guardrails. Certain state insurance departments work closely with insurtech accelerators and incubators to provide regulatory guidance and assistance to new market entrants. In addition, through the NAIC, state insurance regulators have established a directory of insurtech contacts at each state’s insurance department who serve as a first point of contact for those with insurtech-related questions.

Accelerated Underwriting

In 2022, state insurance regulators finalised a non-binding “educational report” that addressed certain issues associated with accelerated underwriting and proposed recommendations and best practices on the use of external data and data analytics in life underwriting. Regulators’ work regarding accelerated underwriting remains ongoing. Among the issues regulators are expected to address with regard to algorithmic underwriting are:

• whether the underlying traditional and non-traditional data provide a reliable basis for making underwriting decisions;
• how algorithms in accelerated underwriting can be tested for unfair bias and mitigation;
• whether the factors used in algorithmic underwriting serve as proxies for other prohibited factors that propagate historic inequities; and
• whether AI systems can be transparent and maintain consumer privacy.

Artificial Intelligence

The growth of AI across the industry has led to regulatory focus on the hidden risks in AI systems, with a focus on the fair and ethical use of trustworthy AI. In 2019, state insurance regulators – through the NAIC – drafted a set of Principles for the Use of Artificial Intelligence in the Insurance Industry (“the Principles”). The non-binding Principles expect AI actors to:

• engage proactively in responsible stewardship of trustworthy AI in pursuit of beneficial outcomes for consumers and the avoidance of unfair discrimination against protected classes; and
• engage in a systematic risk management approach to each phase of AI to address risks of AI, including privacy, digital security and unfair discrimination as defined by applicable laws and regulations.

In 2022, the NAIC established a dedicated workstream to consider how to implement the expectations raised in the Principles. 

Sensors and Telematics

In 2021, state insurance regulators – through the NAIC – initiated the process of modernising the anti-rebating laws in force in nearly all states in order to permit insurers to provide certain “value-added” products and services, as long as they are related to the insurance coverage and satisfy one or more specified conditions, such as mitigating loss, reducing claim costs, enhancing health, or assisting the administration of employee benefits. The amendments could permit, for example, property insurers to provide policyholders with flood detection devices, and life insurers to provide health sensors (including smart watches) to policyholders. Although a minority of states have adopted the amendments, they remain pending in most states.

Data Use

Insurers and third-party providers collect and store massive amounts of consumer data and are likely to have access to and, in some instances, acquire an even greater amount of data as innovation continues. New analytics technology (including those leveraging AI) – in conjunction with access to new, more granular data (see 10. Insurtech) – present opportunities for greater efficiencies and more precise underwriting techniques. However, additional data points and technologies have prompted a number of questions from state insurance regulators, including: 

• how to strike the proper balance of an improved customer experience with policyholder protection;
• whether insurance departments have the necessary resources to evaluate complex models; and
• the ability of regulators and insurers to supervise models that evolve based on their own operations.

Additional Emerging Risks

Data security

Owing to the amount of data they retain, insurance stakeholders – including insurers, regulators, and third-party vendors – continue to be potential targets for cyber-incidents. 

Climate/natural catastrophe risk

Owing to its exposure to property risks and investment volatility, the insurance industry faces significant impacts from the escalating effects of climate change. US property and casualty insurers, for example, face increasing physical risks from extreme weather, including hurricanes, droughts and wildfires, as well as long-term changes in climatic patterns.

Data Use

State insurance regulators have recently undertaken a number of initiatives concerning insurers’ use of public and private data, including:

• the addition of a new NAIC committee dedicated to AI, innovation, and cybersecurity as part of insurance regulators’ strategic focus on studying developments related to innovation and emerging technology in insurance and cybersecurity;
• the adoption of an educational report concerning accelerated underwriting and the use of external data and data analytics in life underwriting (see 10.2 Regulatory Response); and
• the adoption of guiding principles on AI in insurance emphasising the importance of accountability, compliance and transparency, as well as safe, secure and robust outputs (see 10.2 Regulatory Response).

In addition, in 2021, Colorado enacted a new law that is intended to ensure that Colorado insurers use external data sources in a responsible manner and protect consumers from unfair discrimination. Among other things, the new law requires insurers to stress test “big data” systems and take corrective action to address consumer harms. The law applies to:

• personal and certain commercial policies with annual premiums of less than USD10,000; and
• a number of insurer business functions, including marketing, underwriting, pricing, utilisation management, premium reimbursement, and claims management.

The law also requires the Colorado Division of Insurance to issue regulations on how insurers will be required to demonstrate compliance with the new law. Stakeholder meetings between the Colorado Division of Insurance and interested parties (which are required to be held prior to adopting rules under the law) remain ongoing. It is unclear at this time when the new law will ultimately go into effect.

Data Security

In 2017, state insurance regulators – through the NAIC – adopted the Insurance Data Security Model Law, which addresses:

• insurer implementation of information security programmes;
• the investigation of cybersecurity events (including risk assessment and risk management);
• oversight of third-party service providers; and
• notification to state insurance regulators about cybersecurity events.

To date, just under half of the states have enacted the Insurance Data Security Model Law.

Climate/Natural Catastrophe Risk

State regulators, investors, and consumer advocates are increasingly focused on climate risk disclosures, as the following examples demonstrate.

• In May 2021, President Biden issued an Executive Order on Climate-Related Financial Risk that, among other items, directs the FIO to assess climate-related issues or gaps in the supervision and regulation of insurers. These include the potential for major disruptions of private insurance coverage in regions of the country particularly vulnerable to climate change-related events. In August 2021, the FIO issued a Request for Information to solicit public comments on FIO’s future work relating to the insurance sector and climate-related financial risks. Finally, in October 2022, the FIO issued a request for public comment regarding a proposed collection of data from property and casualty insurers to assess climate-related financial risk across the USA. The New York State Department of Financial Services (DFS) recently issued final guidance for New York domestic insurers on managing financial risks from climate change. The DFS also announced the creation of a new Climate Risk Division tasked with integrating climate risks into its supervision of regulated entities and supporting the industry’s growth in managing climate risks.
• Fourteen states and the District of Columbia now mandate insurer environmental reporting using either an NAIC-developed survey or the Task Force on Climate-Related Financial Disclosures (TCFD) survey. The majority of these states implemented the requirement in 2021.

Federal Surety Bonds

Insurers seeking to underwrite or reinsure US federal surety bond obligations are required to obtain a certificate of authority from the Treasury and comply with federal regulations governing the corporate federal surety bond programme. The Treasury’s guidance for such insurers, known as “T-Listed” insurers, covers a wide range of issues, including:

• application requirements;
• annual reporting requirements;
• liabilities;
• rules governing the valuation of assets; and
• rules governing credit for reinsurance.

One of the most notable requirements provides that no T-Listed insurer may underwrite any risk on any bond or policy that is greater than 10% of the insurer’s paid-up capital and surplus. Another requirement provides that T-Listed insurers are only allowed credit for reinsurance ceded to another T-Listed insurer (for federal bonds) or reinsurers that are otherwise authorised by Treasury (for all risk other than federal bonds).

In March 2022, the Bureau of the Fiscal Service published a Notice of Proposed Rulemaking (“Proposed Rule”) that would permit T-Listed insurers to take credit for reinsurance on certain transactions for which credit for reinsurance may already be taken under state insurance laws. Specifically, the Proposed Rule that would permit T-Listed insurers to obtain credit for reinsurance on business ceded to reinsurers in either of two new categories of approved reinsurers without the need for such reinsurer to post collateral. Comments on the Proposed Rule were due in May 2022. The Treasury has yet to finalise the Proposed Rule as of the date of this publication (January 2023).

Group Capital Calculation

In 2020, the NAIC adopted amendments that (when adopted by states) will require the ultimate controlling person of an insurance holding company system to file an annual Group Capital Calculation (GCC) with the group’s lead state, unless the ultimate controlling person or its insurance holding company system is exempt from the filing requirement. The GCC is designed to assist state insurance regulators in understanding:

• the financial condition of non-insurance entities that are part of an insurance holding company system; and
• the degree to which insurance companies are supporting those non-insurance entities by aggregating the existing regulatory capital calculations for all entities within a holding company group, including US and non-US insurers and non-regulated entities.

The 2020 GCC amendments are expected to become an NAIC accreditation standard (which is, in effect, a requirement) for all states on 1 January 2026.

Reinsurance Collateral

In June 2019, the NAIC approved changes to US reinsurance collateral requirements that (when adopted by the states) will eliminate collateral requirements imposed by US regulators on certain non-US reinsurers domiciled in the EU, the UK, and NAIC reciprocal jurisdictions such as Bermuda, Japan and Switzerland. States had until September 2022 to adopt these changes to avoid pre-emption by the federal government. At time of writing, all states have adopted the legislative and regulatory changes necessary to avoid federal pre-emption; however, a small number of states may still need to make “technical” changes to avert pre-emption altogether.