Insurance represents an important but underappreciated part of our lives. Both individuals and corporations gain from purchasing coverage from insurers to manage and hedge their risks. It is a necessary mechanism in modern society to support innovation while ensuring that its unavoidable victims will be compensated. The innovation of emerging technologies alters the existing risk landscape, challenging insurance companies, innovators, and individuals' ability to manage their risks. The current emerging technology of Artificial Intelligence (AI) significantly emphasizes this trend. Insurance companies are grappling with the notion of AI. They are exploring different traditional and novel insurance products that they can offer both corporations and users to manage the risks associated with AI. In return, the market for AI coverage presents unprecedented growth and revenue opportunities. Insurance is set to play a pivotal role in AI's development and distribution, actively shaping risk mitigation strategies and regulatory frameworks for AI users and companies. This is not just an academic gap - it is a pressing regulatory issue with tangible, real-world implications. This paper examines the intersection of AI and insurance from an empirical perspective. It presents empirical findings from the insurance sector, delving into the operational dynamics of liability policies covering risks associated with AI. Through in-depth interviews with key industry stakeholders, including underwriters, brokers, and AI users navigating the uncharted risks AI presents, this paper offers a deeper understanding of three crucial questions. First, is there a need for a specialized AI insurance policy, and how should underwriting adapt to AI's unpredictable risks? Second, do existing liability policies, such as cyber insurance and product liability, adequately cover AI-related risks, or do they leave dangerous gaps that could expose both insurers and policyholders (known as "silent AI")? Third, what role should legislators play in crafting policies that equitably manage AI risks for all stakeholders? The findings reveal a rapidly evolving insurance market where underwriters, brokers, and AI users recognize the deep connection between anticipated AI regulation, substantial financial penalties, and the emergence of an AI-specific insurance sector. Bridging theory with practical applications is pivotal in academic and theoretical writing. This holds particular significance in the insurance realm, impacting AI users and innovators. Collaboration is necessary between those who discuss insurance for AI from a legal perspective and those who underwrite AI policies from an actuarial perspective, as new AI regulations and litigation are likely to create a new insurance market for AI.
Following the emergence of COVID-19 and resulting civil orders seeking to stop its spread, many businesses filed claims with their insurance providers for "business interruption" coverage, a type of insurance intended to compensate businesses for income lost during a temporary forced closure. When insurance companies roundly denied these claims, many small-business owners filed lawsuits in state courts. Insurance company defendants largely removed these cases to federal courts, and businessowner plaintiffs filed to remand back to state court. In one consolidated appeal heard by the Third Circuit, DiAnoia's Eatery, LLC v. Motorist Mutual Insurance Co., businessowner plaintiffs seeking remand to state court argued these claims involved novel state law issues. Although the district courts agreed, the Third Circuit reversed, and held federal courts in Pennsylvania and New Jersey could not use their statutorily granted discretion to remand the actions to state court. This Note asserts the Third Circuit's holding in DiAnoia's Eatery, LLC misinterpreted circuit precedent which, properly applied, permitted the district courts to remand the claims to state court under the Declaratory JudgmentAct. But the Note also argues that DiAnoia's Eatery, LLC is merely one example of a trend seen nationwide in which circuit courts issued decisions on this issue prior to the ultimate authority-state courts-ruling. It explains how federal courts instead turned inwards, relying not on binding state court precedent but rather on other federal court decisions; an approach which displaced state courts' proper role, and risked mass federal reversal by the U.S. Supreme Court. This Note provides an important building block in afield of scholarship which has generally, thus far, criticized federal courts' initial near-monopoly on business interruption claims, the influence they exerted on the development of this caselaw, and finally, the merits of their dismissal of COVID-19 business interruption claims. This Note goes further, arguing that in addition to those concerns, federal courts were the improper forum for these suits, and that remanding them to state courts under the Declaratory Judgment Act was, and is, the best approach.
Floridians have seen dramatically rising homeowners insurance premium increases over the past several years, with year-over-year increases of forty percent or more over multiple years. The problem grew so severe that the State legislature convened a special session in 2022 to address the problem, ultimately passing several efforts designed to moderate rates. This Article reviews the evidence of Florida's experience to interrogate why the State has suffered disparately high homeowners insurance premium increases. In light of this interrogation, I critically assess the prospects for the recent legislative efforts and other suggestions to address the underlying problems. Reform efforts predominantly address a perceived problem of excess litigation and insurance fraud, butI show how the available evidence suggests the bulk ofrecent rate increases may be due to other causes. Finding that recent legislative efforts offer only incomplete solutions as premiums continue to remain high, I provide additional possibilities for reform that target both potentially excessive litigation as well as other possible causes. Florida's successes and challenges with tackling increasing premiums is informative not just for Floridians, but also for other states that may have similar systems in place that may result in similar future premium increases unless preventative action is taken.
There is a well-known conflict of interest between liability insurers and policyholders with respect to the decision to settle or litigate a claim. This short note provides a simple graphical explanation for the problem and grounds it in the way the structure of the parties' payouts drives their attitudes towards risk. An optional appendix links the insights to the elementary mechanics of financial options.
This paper examines how the contractual framework of existing insurance products for consumers and small businesses can be adjusted to help them reduce their net GHG emissions, and thereby facilitate the transition to a sustainable net-zero economy (= Net-Zero Aligned Insurance Products; "NZAIPs"). NZAIPs could give rise to legal and regulatory issues, and this paper considers how these issues could be addressed to create a legal environment that provides safe and fair market conditions for NZAIPs.
From its early eighteenth-century beginnings, modern insurance law has been governed by what can be described as a "non-responsibility" requirement: the insured cannot recover for losses that it caused through its own misbehavior. Although this principle might seem intuitive-you should not be able intentionally to burn down your own home and then get paid for it-scholars continue to debate both the range of the principle's application and its underlying rationale. Current theories of the requirement tend to argue that instrumental goals, such as the minimization of moral hazard or the maximization of victim compensation, ought to determine whether an insured can get coverage for its own bad acts. Yet these approaches fail to describe insurance law as it currently exists. This Article advances a new framework that corrects this deficiency. The framework identifies two distinct elements of the "non-responsibility" requirement: (1) the insured must have had substantial control over the act that caused the loss; and (2) the insured's act must be something that is generally regarded as inherently wrong, rather than merely prohibited. When an insurer can demonstrate both elements, coverage is almost always disallowed. In making this argument, the Article aims to explore and articulate insurance law's internal logic, rather than study it from the perspective of an external discipline. There are multiple benefits to this approach. First, it more accurately describes insurance law as it exists today, as well as its historical evolution. Second, it provides a normatively attractive account of the "non-responsibility" requirement's central role in contemporary insurance law. Finally, the internalist theory of insurance law can help us better predict and justify extensions of private insurance-law concepts into vital policy areas such as healthcare and unemployment.
This article presents a novel data set describing the frequency of materially inadequate homeowner insurance in the event of a total loss. For decades, after a natural disaster, large percentages of homeowners who have lost their homes report suffering a second devastating loss-that, entirely to their surprise, they are vastly underinsured. These reports provocatively suggest that a large majority of all insured homes in the United States-not just homes destroyed by a natural disaster-might be profoundly, unknowingly, and unintentionally underinsured. Insurance companies reject this possibility. Insurers posit that underinsurance is rare, that other than after natural disasters it may be almost unheard of, and that no matter when it occurs, homeowners are at best complicit. Until now, there has not been robust data that could resolve insurers' and insureds' competing narratives. The novel data set presented in this article may end the ambiguity of data on the frequency of and predominant cause of underinsurance. The new data describes that the point-of-sale algorithms insurers ubiquitously use to estimate how much it would cost to rebuild the insured home, and homeowners then almost inevitably rely upon to identify adequate policy coverage, persistently understate costs. By clarifying the cause of underinsurance, the novel data set also explains why underinsurance persists despite the collective desire of homeowners, insurers, and regulators that homes be fully insured. The data exposing the algorithm error rate heretofore only has been visible to insurers. This heretofore has left insurers with an untenable choice. An insurer who unilaterally corrects for the error also must unilaterally raise coverage and premiums, and so will be at a competitive disadvantage. But antitrust laws put insurers in legal peril if they act collectively. This article, after presenting the data and its implications, ends by proposing a new jurisprudential paradigm allowing insurers to profitably and successfully compete while resolving the ubiquity of homeowners being unwittingly underinsured.
America's lengthy income tax code and financial regulations are notoriously full of special treatment for the politically favored. Academics and policymakers argue the relative merits of different approaches to tax and regulatory policy. Given the complexity of economic life, should the law attempt to be highly tailored and specific? Or does the exacting approach risk getting lost in the weeds? This Article will showcase the limits of a highly technical approach to policy with the first analysis of an almost completely unnoticed sea change in life insurance tax law, one that engorges a tax shelter at a moment of great attention to laws that enable the wealthiest members of society to face lower effective tax rates than their secretaries. Life insurance has received extremely favorable tax treatment since the inception of the federal income tax. In the 1980s, in response to an increasing wave of policies smuggling traditional investment products into products calling themselves life insurance, Congress formalized a mathematical definition of life insurance policies directly into the Internal Revenue Code ( 7702). Section 7702, a fully realized actuarial simulation, placed quantifiable limits on the degree to which policyholders could treat a life insurance policy like an investment (such as a mutual fund) rather than as insurance protection. For decades, the provision was left alone. However, buried in the 2020 COVID-19 omnibus relief bill, Congress included-with essentially no public debate-a change to a key actuarial assumption of the 7702 test. The result was that 7702 was made substantially more permissive, giving policyholders much greater leeway to use life insurance policies as conduits for tax-exempt wealth accumulation, rather than mere protection of beneficiaries in the event of the worst. After over thirty years of near-total absence of analysis of Congress' life insurance definition in the legal literature, this paper resurrects the history, purpose, and structural limitations of 7702 and the hyper-technical approach to tax policy it embodies. It further provides the first exhaustive analysis of the new world of life insurance after the stealth 7702 amendment, one in which swathes of the industry are preparing to-as the Democratic Party eyes loophole crackdowns on the wealthy-leverage their extraordinary tax advantage into a new role at the center of high-end tax avoidance.
Even before its publication, the Restatement of the Law, Liability Insurance had been subjected to withering wholesale criticism that it creates aspirational and pro-policyholder insurance law. This view continues to be forcefully promoted by insurers and their advocates in the legal literature and by governors and state legislatures in the political areas. This Article finds these wholesale criticisms unwarranted. Liability insurance law is not a field where law is simply found and restated. In fact, settlement law offers the most vivid examples of why the Restatement of the Law, Liability Insurance is possible, useful, and justified. It is possible because there is sufficient agreement on core doctrines to be organized into a common framework. It is useful because, though courts have been handling these cases for more than a century, the basic analytical foundations of the rules associated with this specialized insurance law remain poorly understood and often unarticulated. It is justified, because the project locates insurance settlement law within the broader framework of modern contract, tort, and fiduciary law. Notwithstanding localized quibbles, because Restatements are charged with determining the legal rules that best fit within the broader body of law, the Restatement of the Law, Liability Insurance stands as a considerable achievement.
Ransomware attacks are becoming increasingly pervasive and disruptive. Not only are they shutting down (or at least “holding up”) businesses and local governments all around the country, they are disrupting institutions in many sectors of the U.S. economy — from school systems, to medical facilities, to critical elements of the U.S. energy infrastructure as well as the food supply chain. Ransomware attacks are also growing more frequent and the ransom demands more exorbitant. Those ransom payments are increasingly being covered by insurance. That insurance offers coverage for a variety of cyber-related losses, including many of the costs arising out of ransomware attacks, such as the costs of hiring expert negotiators, the costs of recovering data from backups, the legal liabilities for exposing sensitive customer information, and the ransom payments themselves. Some commentators have expressed concern with this market phenomenon. Specifically, the concern is that the presence of insurance is making the ransomware problem worse, on the following theory: Because there is ransomware insurance that covers ransom payments, and because paying the ransom is often far cheaper than paying the restoration costs and business interruption costs also covered under the policy, there is an increased tendency to pay the ransom — and a willingness to pay higher amounts. This fact, known by the criminals, increases their incentive to engage in ransomware attacks in the first place. And the demand for insurance increases; and the cycle continues. This Article demonstrates that the picture is not as simple as thi story would suggest. Insurance offers a variety of pre-breach and post-breach services that are aimed at reducing the likelihood and severity of a ransomware attack. Thus, over the long-term, cyber insurance has the potential to lower ransomware-related costs. But we are not there yet. This Article discusses ways to help ensure that ransomware insurance is a force for good. Among our suggestions are a limited ban on indemnity for ransomware payments with exceptions for cases involving threats to life and limb, coupled with a mandate that property/casualty insurers provide coverage for the other costs of ransomware attacks. We also explain how a government regulator could serve a coordinating function to help cyber insurers internalize the externalities associated with the insurers’ decisions to reimburse ransomware payments, a role that is played by reinsurers in the context of Kidnap-and-ransom insurance.
The year 2020 was a wake-up call, for the world and specifically for the cyber insurance ecosystem. The COVID-19 global pandemic reminded insurers, observers, and policymakers that actual or newly plausible attacks-including catastrophic cyberattacks-could pose existential threats to the cyber insurance ecosystem. This article examines this risk through a hypothetical catastrophic cyberattack, interviews with sixty participants across the cyber insurance ecosystem, and recent scholarly work. We find that the risk of a catastrophic cyberattack to the solvency of the global insurance ecosystem is real and that cyber insurers have not, as yet, fulfilled their promise to meaningfully improve our collective cyber hygiene. We examine several key reasons for these findings, including both a lack of data and of stability in the cyber insurance market, problems of attribution in cyberspace, and increasing uncertainty about the enforcement of war exclusions in cyber insurance coverage disputes. We offer a prioritized and interconnected set of proposals to shore up the cyber insurance ecosystem and incentivize needed improvements to our overall cyber hygiene. Specifically, we propose the "Catastrophic Cyberattack Resilience Act," which would create a federally-funded financial backstop for the cyber insurance ecosystem. In order to be eligible for such backstopping, insurers would be required to: comply with new data and infrastructure security and cyber incident reporting requirements; accept United States Government certifications of attribution as conclusive; and forego enforcement of war exclusions in stand-alone cyber policies. Although scholars have explored aspects of the topics covered in this article, we believe ours is the first article to rely on in-depth interviews across the cyber insurance ecosystem, to specifically incorporate key findings and recommendations of the Cyberspace Solarium Commission and recent guidance from one of the first U.S. state financial regulators to address these issues in cyber coverage, and to provide a draft legislative solution addressing these reform needs, with specific implementing language. We offer these proposals not as a "silver bullet" but as part of an urgently needed debate to spur meaningful action before-not after-the catastrophe(s) likely to come, particularly in the absence of such reforms.
The study of the interaction between law and technology is more critical today than ever before. Advancements in artificial intelligence, information communications, biological and chemical engineering, and space-faring technologies, to name but a few examples, are forcing us to reexamine our traditional understanding of basic concepts in torts and insurance law. Yet, few insurance professionals and scholars will identify themselves as working in the field of "law-and-technology." For many of them, technology is "just a fact about the world like any other," as Ryan Calo once put it, not one that always merits "special care."(1) This short paper is an attempt to build a first-of-its-kind bridge between these two scholarly silos. Directed at an insurance audience, the paper attempts to draw attention to a body of law-and-technology scholarship that has so far gone mostly unnoticed by insurance professionals. The paper is built on the premise that insurance lawyers, whose business model depends on the mitigation of losses from technological harm, are not dramatically dissimilar from their law-and-technology counterparts. Both are fascinated by the same set of questions: if, when, and how, might private and public regulation mitigate losses resulting from technological risk. The paper draws key concepts from the law-and-technology literature to explore the effectiveness and utility of regulation in mitigating risks from emerging, evolving, and disruptive technologies. The paper further identifies the different phases in technology's life cycle and discusses the challenges that each of these phases introduces on the insurance market. Relying on cyber insurance as its primary case study, the paper concludes by applying these insights to an assessment of a recent state-wide regulation, the New York Cyber Insurance Risk Framework, the first of its kind in the country. The paper demonstrates the promise and pitfalls of this type of regulation, taking into account broader trends in the cyber insurance market.
