Monday, February 8, 2010
Guest Blogger Kenneth Abraham: Four Conceptions of Insurance
As all torts scholars and teachers know, tort liability and insurance are intimately connected. Much of tort liability as we know it would not exist if liability insurance did not also exist, to provide plaintiffs a reliable source of recovery and to protect defendants against the potentially catastrophic impact of liability. And liability insurance as we know it might look very different if the U.S. tort system had a different character. Indeed, in a recent guest blog my colleague Jeffrey O’Connell argued that tort liability should be seen as social insurance.
Over the years I have noticed, in addition, that debates about the proper scope of insurance, whether third-party or first-party insurance, and about the proper interpretation of insurance policy language, often presuppose particular views about the purpose or purposes of insurance, and sometimes even presuppose a particular view of what the essence of insurance is. This has certainly been a feature of the recent national debate about health insurance reform. Arguments pro and con about pre-existing condition limitations on coverage, about a possible mandate that all individuals purchase insurance, and about many other components of the House and Senate Bills, reflected different views about what insurance should and should not do, and about what insurance actually is. These different views -- I will call them “conceptions” of insurance -- do much of the work of producing the result that a party to the debate or dispute favors.
Insurance, in short, is a contested concept. And in fact it is contested in more ways than one. We transfer and spread risk through an array of different private and public devices, only some of which are, strictly speaking, insurance. Exactly which such devices constitute insurance is a matter of dispute. For example, some observers have contended that the credit-default swaps that were at the heart of the AIG bailout were a form of insurance that should have been regulated by state insurance commissioners. This is a significant issue because our systems of regulation are set up to address insurance, and insurance companies, in different ways, and through different regulatory regimes, than non-insurance transactions by other financial intermediaries. Further, even when there is agreement that a transaction constitutes insurance and that one of the parties to the transaction is an insurance company, what follows from such designations depends on the particular conception of insurance that is invoked.
Contests over the meaning of a concept – here, the concept of “insurance” -- may take different forms. In this instance, the contest is among different ways of characterizing insurance in terms of something else. The contest, that is, is over competing metaphors and analogies. Four conceptions, either explicit or merely implicit or inchoate in the case law and scholarly literature, are sufficiently common to warrant extended examination. I am currently undertaking such an examination, but in the meantime, here is a brief summary of the four conceptions.
Contract conceptions understand insurance as a voluntary agreement between an individual policyholder and an insurer, subject to the constraints and rules of construction that are ordinarily placed on such agreements by the law of contracts. The challenge for contract conceptions of insurance, as it is for contract theory more generally, is to articulate a principle or set of principles that coherently distinguishes between the features of the insurance contract that are subject to market choice – that are contractually binding -- and the features that judicial and administrative regulation legitimately may trump.
Under public utility conceptions insurance is a regarded as an insufficiently competitive industry, selling a good so nearly essential that it requires government regulation in the public interest. Contract is only a convenient means of delivering insurance to those who need it, and contract terms are therefore mere starting points. Regulators should have authority to ensure that suitable insurance is delivered at a fair price to all comers.
Product conceptions see insurance as resembling a tangible good more than a promise to perform financial services, and therefore appropriately subject to rules analogous to those that govern defectively designed products. Regulators should ensure that insurance policies do not contain gaps that are unreasonably dangerous to those who suffer losses. Courts should not merely interpret policy language, but should subject that language to a defectiveness test and award damages (i.e., coverage) when policy language fails this test. Interestingly, this is a tort law conception of what insurance is, or at least of how the quality of insurance ought to be evaluated.
Finally, private government or mutuality conceptions view insurance as a product of consent on the part of policyholders to invest an insurer with authority to operate a risk-sharing arrangement for the mutual benefit of the policyholders. These circumstances create the opportunity for abuse of policyholders by the insurer to serve its own ends, and a risk of abuse of the minority of policyholders by the majority for the majority’s ends. Insurance law should therefore be structured to provide the necessary protections against both forms of private “governmental” abuse.
The proponents of these conceptions often tend to believe that they have different normative implications. And this may be partly correct, although much depends on the particular contours that are thought to comprise a given conception. More importantly, ultimately the principal value of the different conceptions is not that they have different normative implications, but that they stretch the imagination and thereby help us to clarify our views about the proper relationship between insurers and policyholders, and among policyholders themselves. We can’t simply change our conception of insurance and thereby avoid the hard but essential work of figuring out precisely what rights and obligations these parties ought to have. And as we do this work, inevitably our conclusions will not only affect insurance and insurance law, but tort law as well, in view of the enduring relation between tort liability and insurance.
--Kenneth S. Abraham
University of Virginia Law School