The past several decades have muddied what once was a clear relationship between policyholders and their insurers. For pre-1987 occurrence-based policies in particular, policyholders face an increasingly familiar scenario: one day, they learn they are no longer dealing with the insurer that sold them insurance. A stranger has crept into the relationship.
The stranger is generally a product of an insurer Loss Portfolio Transfer (LPT). These are complex corporate transactions through which one insurer moves legacy insurance business off its books onto the books of a new insurer that agrees to pay claims, usually under a defined group of legacy policies up to an agreed limit of liability. The arrangement is sometimes described as “retroactive reinsurance,” because the policies included in the portfolio often were issued decades earlier but now are being “reinsured” by a different insurer (not in privity with the policyholder). In return for accepting the legacy risk, the new insurer receives a “premium,” often consisting of the amounts the original insurer has reserved to pay expected claims under the old policies plus some additional agreed sum that the transacting parties agree will be necessary to pay claims up to the agreed limit of the reinsurance. For the insurer offloading risk, LPTs are attractive because they allow the insurer to instantaneously improve its balance sheet (even though it cannot permanently transfer ultimate responsibility without a policyholder-approved novation). Meanwhile, the insurer accepting the new risk benefits from an influx of cash—a hefty premium—which it can invest. This “float” can earn the new insurer investment returns until the premium it received is exhausted by claim payments.
The transfers of legacy liability insurance portfolios (or “run-off” portfolios) may have a long history among insurers, but it loomed large on policyholder horizons in 1996 with the formation of Equitas Reinsurance Limited, an entity created to reinsure the massive pre-1993 legacy liability of the syndicates of Lloyd’s of London. In 2007, Equitas entered into an LPT with National Indemnity Insurance Company (NICO), a Berkshire Hathaway subsidiary. Berkshire Hathaway then employed Resolute Management Inc. to act as the claims administrator for NICO’s reinsurance of the Equitas legacy claims. Over the past 15 years, NICO and Resolute Management have entered into numerous additional LPT arrangements with several large, well-known insurance companies such as AIG, CNA, OneBeacon, Hartford and Liberty Mutual. Also, AIG recently appears to have entered into an LPT arrangement with a reinsurer based in Bermuda called the Fortitude Re Group, which has now been spun out as an independent company and has absorbed AIG’s internal legacy claim handling division.
Importantly, after an LPT, the new insurer accepts responsibility to investigate and pay claims under the transferred policies. The obvious problem for policyholders is the entity now responsible to pay claims is a stranger to the insurance relationship—one with a financial interest that is different from an insurer with an ongoing commercial relationship with its original policyholder.
Cynically, the new insurer’s primary goal would seem to be to assure that the LPT is economically successful, which is different than the incentive of an insurer with a genuine commercial relationship seeking to earn renewal or other additional business. Importantly, the LPT does not oblige the new insurer to handle the inherited claims itself. Ordinarily, they do not. They use third-party administrators (TPAs).
TPAs have been a common feature of insurance claims for a long time, often managing the payment of medical and workers’ compensation claims. The TPA contracts with an insurance company to manage claim investigation and make claim payments on behalf of the insurer. TPAs, while themselves not parties to insurance contracts, purport to act as agents for insurers. But TPAs may also be independently subject to certain duties and best practices. There is a growing trend to impose liability on TPAs to prevent them from acting unscrupulously, such as by failing to adequately investigate a claim, delaying claim payments, taking outlandish coverage positions that the original insurer would never have taken, improperly allocating claim payments to reduce coverage for future claims they are responsible to pay, and raising a host of other coverage positions apparently designed to hold onto the premium paid. This growing trend includes recognition of a tort cause of action against TPAs for violating a general duty of ordinary care to policyholders; liberally interpreting bad faith statutes to include TPAs because they are engaged in the “business of insurance”; finding that the insurer-TPA relationship amounts to a joint venture that justifies the imposition of the duty of good faith on the TPA; and finding a special relationship is formed between a policyholder and a TPA when the TPA has acted “sufficiently like” an insurer and assumed duties, risks and benefits of the insurer.
As courts and legislators across the country continue to see the wisdom of holding TPAs accountable for their conduct, policyholders will no doubt continue to seek redress for the claims handling abuses of stranger insurers and their TPAs.