The past few decades have blurred what was once a clear relationship between policyholders and their insurers. For pre-1987 event-based policies in particular, policyholders are faced with an increasingly familiar scenario: one day they learn that they no longer do business with the insurer that sold them the insurance. A stranger has crept into the relationship.
Abroad is usually a product of a Loss Portfolio Transfer (LPT) insurer. These are complex corporate transactions whereby an insurer transfers its legacy insurance business from its books to the books of a new insurer who agrees to pay claims, usually under a defined group of policies. inherited up to an agreed limit of liability. The arrangement is sometimes described as “retroactive reinsurance”, as the policies included in the portfolio were often issued decades earlier, but are now “reinsured” by a different insurer (unrelated to the policyholder). In exchange for accepting the inherited risk, the new insurer receives a “premium”, often consisting of the amounts the original insurer has set aside to pay expected claims under the old policies, plus an agreed additional sum that the contracting parties agree that it will be necessary to pay. claims up to the agreed reinsurance limit. For the insurer offloading risk, LPTs are attractive because they allow the insurer to instantly improve its balance sheet (even if it cannot permanently transfer ultimate liability without a novation approved by the insured). During this time, the insurer who accepts the new risk benefits from an influx of cash – a substantial premium – which he can invest. This “float” can earn the new insurer returns on investment until the premium it has received is exhausted by claims payments.
Transfers of old liability insurance portfolios (or “in liquidation” portfolios) may have a long history among insurers, but they loomed large on policyholders’ horizons in 1996 with the formation of Equitas Reinsurance Limited, an entity created to reinsure the huge provident. 1993 liability inherited from Lloyd’s of London unions. In 2007, Equitas entered into an LPT with National Indemnity Insurance Company (NICO), a subsidiary of Berkshire Hathaway. Berkshire Hathaway then employed Resolute Management Inc. to act as claims administrator for NICO’s reinsurance of claims inherited from Equitas. Over the past 15 years, NICO and Resolute Management have entered into numerous additional LPT agreements with several large, well-known insurance companies such as AIG, CNA, OneBeacon, Hartford and Liberty Mutual. Additionally, AIG appears to have recently entered into an LPT agreement with a Bermuda-based reinsurer called Fortitude Re Group, which has now become an independent company and absorbed AIG’s in-house legacy claims handling division.
It is important to note that after an LPT, the new insurer accepts responsibility for investigating and paying claims under transferred policies. The obvious problem for policyholders is that the entity now responsible for paying claims is outside the insurance relationship, with a different financial interest than an insurer maintaining an ongoing commercial relationship with its original policyholder.
Cynically, the main objective of the new insurer would seem to be to ensure the economic success of the LPT, which is different from the incentive of an insurer with a genuine business relationship seeking to win renewal or other additional business. It is important to note that the LPT does not require the new insurer to manage legacy claims itself. Usually they don’t. They use third-party administrators (TPA).
TPAs have long been a common feature of insurance claims, often managing the payment of medical and workers’ compensation claims. The APT contracts with an insurance company to handle the investigation of claims and make claims payments on behalf of the insurer. APTs, while not themselves parties to insurance contracts, purport to act as agents for insurers. But TPAs may also be independently subject to certain obligations and best practices. There is a growing trend to impose liability on APTs to prevent them from acting unscrupulously, for example by failing to investigate a claim adequately, delaying the payment of claims, taking outlandish hedging positions that the original insurer would never have taken, inappropriately allocating claim payments to reduce coverage for future claims they are responsible to pay, and lifting a host of other seemingly designed coverage positions to keep the premium paid. This growing trend includes the recognition of a tort cause of action against TPAs for breach of a general duty of ordinary care owed to policyholders; liberally interpreting bad faith laws to include TPAs because they are engaged in the “insurance business”; noting that the insurer-TPA relationship is similar to a joint venture justifying the imposition of a duty of good faith on the TPA; and to find that a special relationship is established between a policyholder and a TPA when the TPA has acted “sufficiently like” an insurer and has assumed the functions, risks and benefits of the insurer.
As courts and legislators across the country continue to see the wisdom in holding TPAs accountable for their conduct, policyholders will no doubt continue to seek redress for the claims-handling abuses of foreign insurers and their TPAs.[View source.]