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California has a wildfire crisis. Arguably, the entire Western United States has a wildfire crisis, but California’s crisis is of an entirely different magnitude.

Read the full piece here.

Abstract

Waiver contracts are agreements in which one party promises not to sue the other for injuries that occur during their contractual relationship. Waivers are controversial in the consumer context, especially when presented in standard form, take-it-or-leave-it contracts. The law on waivers appears muddled, with no consistent doctrine or policy among the courts on enforceability. The aim of this paper is to offer a consistent set of policies that can form the foundation of a consistent set of doctrines, leading ultimately to a more apparently consistent treatment of waivers in the courts. The most basic piece of this paper’s framework is a contract theoretic analysis of the wealth (or welfare) created by a contractual provision. In this framework, waivers should be enforceable when they are likely to increase the welfare of the contracting parties, and otherwise not enforceable. Waivers are likely to increase the welfare of the parties when litigation is likely to reduce their welfare. Litigation is wealth reducing when the social value of the deterrence created through litigation is low relative to the costs of litigation. The social value of deterrence is low, in turn, when the productivity of precaution, in terms of accident avoidance, is low – in other words, additional precaution has little or no “bang for the buck”. These general propositions send me on a search for the factual conditions associated with low productivity precaution. The most important ones are inherency of risk and the existence of multiple causal factors. I find the cases are consistent with this precautionary productivity thesis. The immediate implication is that waivers generally are not enforceable or unenforceable according to their language. Waivers are enforceable contextually, conditional on facts indicating inherency of risk or weak causation.

Abstract

We assess the capacity of the U.S. property-liability insurance industry and the efficiency of the state guaranty fund system in response to large scale loss events to assess the resilience of the current system to the growing challenges of climate change. We identify characteristics of the industry’s capital structure and the guaranty fund system that limit the ability to indemnify policyholders following extreme catastrophic losses. We also consider the sustainability of the system over time under assumptions of increasing loss frequency and severity. We find that some attributes of insurance guarantees present short-term problems for policyholders and create long-term challenges for competitive private insurance markets, particularly when a subset of insurers shoulders the burden for past losses.

Abstract

Why do some legal disputes fail to settle?  From a bird’s eye view, the literature offers two categories of reasons.  One consists of arguments based on informational disparities.  The other consists of psychological arguments.  This paper explores the psychological theory.  It presents a model of litigation driven by risk preferences and examines the model’s implications for trials and settlements.  The model suggests a foundation in Prospect Theory for the Mutual Optimism model of litigation.  The model’s implications for plaintiff win rates, settlement patterns, and informational asymmetry with respect to the degree of risk aversion are examined.

Abstract

We study the factors that predict medical malpractice (“med mal”) insurance premia, using national data from Medical Liability Monitor over 1990 to 2017. A number of core findings are not easily explained by standard economic theory. First, we estimate long run elasticities of premia to insurers’ direct cost (payouts plus defense costs), allowing for lags of up to four years, of only around +0.40, when one might expect elasticities near one. Second, state caps on malpractice damages predict a roughly 50% higher ratio of premia to direct costs even though, in competitive markets, a damages cap should affect premia primarily through effect on cost. A difference-in-differences analysis of the “new cap” states that adopted caps during the early 2000’s provides evidence supporting a causal link between cap adoption and the ratio of premium to direct cost. Third, the premium-to-cost ratio, which one might expect to be fairly constant over time, instead varies widely both across states at a given time and within states across time. Our results suggest that insurance companies do not fully adjust revenues to changes in direct costs even over long time periods. Insurers in new-cap states have been able to charge apparently supra-competitive prices for a sustained period.

Abstract

Using hazard analysis, we study whether various physician characteristics, including prior paid claim history, gender, specialty, years of experience, type of degree (M.D. versus D.O.), country of medical school attendance (U.S. versus non-U.S.), and gender) predict future paid medical malpractice (“med mal”) claims, using detailed data on all licensed physicians and all paid claims in Illinois over a 25-year period. This level of granularity is not available using national data. After controlling for other factors, physicians with a single prior paid claim have a four-fold higher risk of future claims than physicians with zero prior paid claims. Male gender, attending a non-U.S. medical school, and practicing in a high-malpractice-risk specialty all predict higher paid claim risk. Paid claim risk is also higher for physicians with 6-15 prior years of experience than for those who are either earlier or later in their careers. We find having an M.D. (rather than a D.O.) is associated with higher paid claim risk, but only in our multiple-failure models.

Abstract

The right to be forgotten, which began as a part of European law, has found increasing acceptance in state privacy statutes recently enacted in the U.S. Commentators have largely analyzed the right to be forgotten as a clash between the privacy interests of data subjects and the free speech rights of those holding the data. Framing the issues as a clash of individual rights largely ignores the important scholarly literatures exploring how giving data subjects the ability to render certain information unobservable can give rise to systemic effects that can harm society as a whole. This Essay fills this gap by exploring what the right to be forgotten can learn from the literatures exploring the implications of adverse selection, moral hazard, and the emerging policy intervention know as ban the box.

Abstract

This paper investigates the case in which the benefits and the costs of prevention are subject to uncertainty. Prevention measures are taken after uncertainty has unraveled. The conventional policy prescribes that prevention measures are taken up to the point in which the realized marginal cost of prevention is equal to the realized marginal benefit (measured in terms of the Value of Statistical Lives saved). This policy imposes costly uncertainty on imperfectly insured parties. The optimal ex-ante policy mitigates this uncertainty. It deviates from the conventional policy by prescribing less prevention in those contingencies in which risk-preventers face high compliance costs and victims face a high probability of injury, and higher prevention in the opposite case. The optimal ex-ante policy supports the use of a VSL measure constant across contingencies. It dilutes the “dead-anyway” effect and it responds to the risk-preventers’ level of prudence.

With the March 11 scheduled close of its regular session fast approaching, the Florida Legislature remains so focused on putting the finishing touches on its various culture-war signaling bills that one might think Tallahassee hasn’t noticed that the state’s property insurance market is rapidly hurtling toward utter collapse.

The causes are multi-pronged: a uniquely challenging set of catastrophe risks, all increasingly magnified by the combination of rapid development and climate change; a litigation environment in which claims disputes drag on years beyond the events that initiated them; a reputed epidemic of questionable claims, many related to roofs; and a primary market that, more than a decade past its last major crisis, remains far too reliant on thinly capitalized domestic companies with insufficient geographic diversification.

All of this is, as they say, coming to a head. The latest in a series of concerning indicators came with the Feb. 25 order by Circuit Judge Angela Dempsey appointing the Florida Department of Financial Services as receiver for the Orlando-based St. Johns Insurance Co., which Insurance Commissioner David Altmaier had deemed insolvent. Dempsey subsequently issued a Feb. 28 order approving the transfer of 147,000 St. Johns policies to Slide Insurance Co.

St. Johns adds to the growing list of recent liquidations of Florida property insurers. The department last year ordered liquidations of both Gulfstream Property and Casualty Insurance Co. and American Capital Assurance Co. And several other domestic writers similarly evince signs of teetering on the brink of insolvency:

• As it previously did with St. Johns, ratings agency Demotech has pulled the rating for Avatar Property & Casualty Insurance Co.
• Tampa-based Lighthouse Property Insurance Corp. has ceased writing new Florida business, just a month after it had raised $65 million to recapitalize.
• While not yet pulling back on underwriting, Clearwater-based Southern Fidelity Insurance Co. is seeking rate increases of 85% and 111%, with CEO Bryon Wells warning that: “Without these increases we would have to have substantial amounts of capital.”
• Florida Farm Bureau Insurance has ceased writing new homeowners business.
• Deerfield Beach-based People’s Trust Insurance has ceased writing new business in eight South Florida and Central Florida counties.

TypTap Insurance Group, a home and flood-focused insurtech subsidiary of Tampa-based HCI Group, had been planning an initial public offering this year. That plan was scuttled in January, with the company citing unfavorable market conditions. TypTap has now likewise ceased writing new business in the state.

The ominous signs don’t end there. Progressive Insurance is non-renewing 56,000 Florida policies covering homes with roofs that are more than 15 years old. And United Insurance Holdings Corp.—the ninth largest homeowners insurer in Florida—announced last month that it also had ceased writing new homeowners business in the state as of Jan. 1.

Given these cascading dominoes, one’s concern must turn to Citizens Property Insurance Corp., Florida’s state-run insurer-of-last-resort. In the month of January alone, Citizens grew by 17,485 policies. Its Jan. 31 count of 776,790 policies in-force was up 75% from the 443,228 policies that were in-force Jan. 31, 2020. At the current pace of growth, Citizens would top 1 million policies—a level it hasn’t seen since January 2014—by the end of 2022.

Which brings us back to the Legislature, which certainly has not given these issues the priority they would seem to merit. But a pair of property-insurance-reform measures—S.B. 1728 and S.B. 186—have slowly been winding their way through the state Senate, and both share a provision that could gain some attention amid the prevailing zeitgeist, even if only in a limited way.

What the bills share is that both would clarify that Citizens’ statutory “glidepath” applies only to an insured’s primary residence. Initially implemented in 2009, the glidepath had limited Citizens’ annual premium increases to 10%. S.B. 76, passed last year, calls for a series of gradual increases in the cap, which was raised to 11% this year and will continue to rise by one percentage point each year until ultimately hitting 15% in 2026.

By limiting the glidepath to primary residences, the legislation currently before the Senate would allow Citizens to immediately charge risk-based rates to the many second homes and vacation homes currently covered by the state-run insurer. The change would serve both to improve Citizens’ financial position and, at the margin, to discourage some policyholders from turning to Citizens who might otherwise be able to obtain private coverage.

Those include, of course, some properties—many of them in Miami-Dade and southern Broward County—owned by the very so-called “oligarchs” that the Biden administration and many Western governments are currently in the process of sanctioning following Russia’s unprovoked invasion of Ukraine. As is well-known, South Florida has been one of the favored spots for wealthy Russians over the past decade or two. Over that time, Sunny Isles Beach has gained the nickname of “Little Moscow,” while spots like tony Fisher Island have similarly drawn interest from Russian billionaires.

Of course, wealthy Russian nationals (much less the smaller group who could be called “oligarchs”) constitute only a small portion of the non-primary residences currently insured by Citizens. And removing vacation homes from the Citizens glidepath, while certainly a step in the right direction, would not be nearly enough to fix problems of this magnitude. Fortunately, the two Senate bills do not stop there.

S.B. 186, sponsored by Sen. Jeff Brandes (R-St. Petersburg), would make several changes to Citizens, including:

• Allowing surplus lines insurers (who, notably, do not participate in the Florida Insurance Guaranty Association) to participate in Citizens depopulation programs, so long as the insurer’s policy count remains above 700,000;
• Increasing the maximum surcharges that can be levied on Citizens policyholders in the event of a projected deficit to any of its three accounts (personal lines, commercial lines, and coastal accounts), with surcharges rising to 20% if Citizens passes one million policies and 25% if it passes 1.5 million;
• Requiring that a policy absorbed by Citizens from an insurer deemed unsound be assessed the higher of either the old premium or the premium that Citizens would normally assess for that given property; and
• Providing that a residential Citizens policyholder is not eligible for renewal if an authorized insurer provides them with a coverage offer that is no more than 20% greater than the Citizens renewal premium.

S.B. 1728, sponsored by Senate Banking and Insurance Committee Chair Jim Boyd (R-Bradenton), shares some features with S.B. 186, including removing non-primary residences from the Citizens glidepath and disallowing renewals for policyholders who receive coverage offers that are no more than 20% greater than their Citizens premium.

It also looks to address the recent explosion of roof claims by allowing insurers to only cover the depreciated actual cash value of roofs that are more than 10 years old. Roofs that are less than 10 years old or that were damaged by named hurricanes or in total loss events would still have to be covered for full replacement costs.

The Brandes bill is currently before the Senate Appropriations Committee, having previously cleared the Senate Banking and Insurance Committee and an Appropriations subcommittee. Boyd’s bill has moved one step further, having cleared both the Insurance and Appropriations committees. It does, however, potentially face challenges in the Legislature’s other chamber, as House Speaker Chris Sprowls (R-Palm Harbor) has expressed opposition.

So, what does this all have to do with Russian oligarchs? Very, very little. But if that framing can help get this Legislature’s attention, it’s worth a try.