Washington State Passes Consumer Protections for Pet Insurance

Washington State recently implemented model legislation from the National Association of Insurance Commissioners that regulates pet insurance.

Pet insurance is a relatively new product that has grown in popularity with the increasing prevalence of pet ownership in the United States. Industry statistics reflect an increase of over 2 million in the number of pets insured nationally since 2017.

Unfortunately, this emerging product line has been riddled with complaints of unfair business practices. Policyholders complain of insurers misrepresenting coverages, hiding exclusions, and failing to pay claims. These issues have led to significant regulatory enforcement from Washington’s Office of the Insurance Commissioner.

The new pet insurance statutes are an attempt to fix these problems. The new law establishes clear definitions for pet insurance terms like “chronic condition”, “preexisting condition”, and “veterinarian.” It requires policies using these terms to follow the statutory definition. This helps make sure consumers know what they are getting when they buy pet insurance.

The law also requires disclosure of important exclusions. Policies must state exclusions in specific language. They must explicitly identify limitations based on things like preexisting conditions or hereditary disorders. Agents selling pet insurance must also be appropriately licensed and trained

And the law gives consumers a 15 day “free look period” to change their mind and return the policy to get their money back.

Recertification Proposals Add to Confusion Over WA Long Term Care Payroll Tax Exceptions

We previously blogged about the WA Cares Act, a law creating a public long term care benefit for certain Washington employees. Under the law, employees pay a payroll tax in exchange for access to future long term care payments. Employees could opt out of the law by obtaining private long term care insurance coverage. The deadline to opt out expired December 31, 2022.

A federal court largely dismissed a lawsuit challenging the act in 2022, theoretically clearing the way for the law to go into effect.

But the Washington State legislature put the law on hold while it made some changes. The law softened the requirement that a person have paid the tax for ten years before becoming eligible for benefits. Persons born before January 1, 1968, can access limited benefits as long as they pay the tax for at least one year. This was done to avoid the unfair result of persons within ten years of retirement age the date the Act becomes effective being deprived benefits.

The updates also expand who can opt out of the Act. Now, certain veterans, spouses of military service members, persons who live outside Washington but work in Washington, and persons working temporarily in the United States can opt out of the act. Again, this was intended to avoid the unfair result of persons paying the tax without possibly of receiving the benefit.

These new exceptions are in addition to the existing exceptions for self-employed persons, tribal employees, certain union members, and government workers.

The law is currently scheduled to go into effect on July 1, 2023. Effective that date, employees who have not opted out will have .58% of their wages withheld to pay the payroll tax.

There are also more changes under consideration in the legislature. Probably the most important one relates to the possibility that employees who opted out by purchasing their own long term care insurance re-certify that they continue to maintain that insurance on a regular basis. As written, the Act doesn’t require this.

That means employees who opted out could cancel their private insurance the day after opting out and never pay the Act’s payroll tax despite not maintaining their own insurance. The probability that thousands of Washington workers purchased long term care insurance with the intent of canceling their coverage immediately after opting out from the Act is suspected to have driven insurers’ reluctance to sell these policies in the months leading up to the opt out deadline; insurers lose money if they go through the expense of underwriting and selling coverage that will be canceled almost immediately.

But the legislature is considering changing this. One proposal would require employees to regularly re-certify that they maintain their private coverage to keep their opt out status and avoid paying the payroll tax. Importantly, a proposal requires employees who cancel their private coverage after opting out to not only pay the payroll tax in the future, but pay back taxes for the period after canceling their private coverage—with interest.

This proposal is just a recommendation, for now. But the legislature may be moving in that direction.

As a practical matter, this means that employees who purchased private coverage for purposes of opting out of the Act might want to maintain that coverage until the legislature works out whether and how it will require recertification of private coverage to maintain the opt out.

Ninth Circuit Ruling Elevates Hidden Fine Print to Reduce ERISA Plan Benefit

If you were to poll the public on why lawyers or the legal system get a bad rap, the experience of getting surprised by something sneaky the other party buried in the fine print might rank high on the list. That was the outcome in Haddad v. SMG Long Term Disability Plan, decided February 10, 2023. There, the Ninth Circuit ruled that an ERISA plan could reduce a former employee’s benefit payments based on inconspicuous language hidden in the benefit plan documents.

Mr. Haddad, like many folks, had long-term disability coverage through his employer’s benefit plan. He became disabled and the plan paid him the benefits.

But the plan reduced his benefits. The insurance company administering the plan decided Mr. Haddad’s settlement with a third party amounted to “lost wages.” The terms of the benefit plan allowed disability benefits to be reduced if the disabled employee had been compensated for lost wages.

Mr. Haddad sued. He argued that the “lost wages” reduction was hidden in the benefit plan documents’ fine print. He pointed to earlier Ninth Circuit rulings that any limitations should be conspicuous and that employees shouldn’t “have to hunt for exclusions or limitations in the policy.”

The Ninth Circuit said this rule didn’t apply to Mr. Haddad. It ruled that reductions in benefit payments on the basis of an “offset” were different from reduced payments due to an “exclusion” or “limitation.” The opinion does not elaborate on whether the average non-lawyer would find the distinction meaningful.

The ruling is “unpublished”, meaning it shouldn’t be relied on as binding precedent for lower courts.

AI And Racial Bias In Insurance Claims

Stop me if you’ve heard this one before: an old-economy business gets sold an AI or computer algorithm promising to cut costs and improve business. Innovation! Big Data! Progress! What could go wrong? Unfortunately, we’re increasingly learning that AI incorporates the same biases, including racial biases, that have always existed, except that it makes those biases harder to challenge by wrapping them in a shiny package of technological legitimacy.

Allegations that AI and computer algorithms are used to perpetuate racial biases are nothing new. But a recent lawsuit indicates these practices are infiltrating the insurance business.

To explain how this works, it’s helpful if you understand two important things about how insurance companies think. The first is fraud. Big, consumer-facing insurers (the ones you see advertising on prime time TV with silly animal mascots or jingles), get claims made by thousands or millions of people every year. A small fraction of these (estimated to be ten percent by an industry group, which probably has an incentive to over-estimate) include fraud, i.e., people lying to get money they aren’t entitled to. Sometimes this is straightforward: people claiming to have been injured in car crashes that never happened, for example. Other times it’s more innocent: maybe someone mistakenly claims the couch that got destroyed in a house fire was brand new when it was actually a few years old.

Regardless, fraud is illegal, immoral, and (most relevant here) costs the insurance company money. So most insurance companies have a special department to screen out fraudulent claims. It’s usually called something like the “Special Investigations Unit” (SIU) and given a veneer of law enforcement. Sometimes the SIU finds claims that are genuinely fraudulent. Sometimes, the SIU gets accused of bullying legitimate claimants into dropping the claim through the implied threat that they’ll be found guilty of fraud. This can prey on policyholders perceived as more vulnerable, which typically translates to targeting poor, immigrant, or minority policyholders.

The second part of the insurance business that comes into play when we think about using AI to search for fraud is the intense pressure to cut costs. Insurance is a business like any other. It’s driven by the profit motive, and, as insurers increasingly become publicly-traded (a relatively new innovation spurred in part by the weakening of federal banking regulations in the late 1990’s), it’s driven by the need to please shareholders, and please them RIGHT NOW. The way to do that is show more profits in this quarter’s financial report.

Insurers have (basically) two ways to do this. The first is to charge more premiums. This is often a non-starter. Insurance consumers are very price-sensitive these days. In the past, your average American family might buy insurance from an agent with a brick and mortar office on the local Main Street that they’d known for years. They bought based on their personal relationship with that agent.

But, nowadays, those people probably buy coverage online. They have no human relationship with the company. So they do what we all do under these circumstances: hit up a few websites and buy from the cheapest company. Raising premiums by a few dollars drives these customers away. Fewer customers can mean angry shareholders.

So if the company can’t boost profits by charging more, it has to try to save money. This can mean paying employees less, spending less money and time investigating claims, paying fewer claims (and paying fewer dollars on those claims).

In this context, it can also mean turning the SIU’s fraud investigating functions over to an AI. Why pay an experienced investigator a handsome salary to spend thousands of hours combing through millions of claim files every year looking for evidence of fraud when you can pay an AI a few bucks to crunch all the data and flag the fraudulent claims? Everybody wins!

If that sounds too good to be true, it probably is, at least according to one lawsuit that alleges one major insurer used an AI to flag files for fraud based on what amounts to racial dog-whistles. If the allegations are to be believed, the AI works by (basically) assuming claims from policyholders living in poorer, Black-er neighborhoods are more likely to be fraudulent.

According to the lawsuit, which cites a study of 800 policyholders in the Midwest, the AI flags claims as potentially fraudulent based on a host of characteristics that boil down to a proxy for race:

The lawsuit was filed December 14, 2022. No judge or jury has decided if these allegations are true.

But it’s a fascinating look at how practices we think of as tech-industry-focused (using AI in questionable ways) can infect the insurance industry, an industry that is about as “old economy” as it gets.

Ninth Circuit Considers When Death By Drunk Driving Is “Accidental”

Is death “accidental” when a person gets in a fatal car crash while over the legal alcohol limit? Courts have had a hard time answering this question. A recent Ninth Circuit ruling provides some clarity.

In Wolf v. Life Insurance Company of North America, the Ninth Circuit held that death resulting from drunk driving was “accidental” for purposes of insurance policy coverage.

In that case, the insured died after driving 65 miles per hour going the wrong way on a one-way road with a 10 mile per hour speed limit. An autopsy found he had a blood-alcohol level of 0.20%.

His family made an insurance claim with Life Insurance Company of North America (LINA). LINA had sold the deceased an insurance policy covering “accidental” death.

LINA denied the claim. It determined that death under these circumstances was not “accidental” because it was foreseeable that driving with a 0.20% blood-alcohol level would result in death or serious injury.

The family filed a lawsuit contesting the denial under ERISA. The Seattle federal court sided with the family. The court ruled that the decedent’s behavior was “extremely reckless” but did not make death so certain as to render it not “accidental”. LINA appealed to the Ninth Circuit Court of Appeals.

The Ninth Circuit agreed with the lower court. It acknowledged that courts have applied different tests to determine whether death under these circumstances is “accidental.” It decided that the most appropriate question is whether death was “substantially certain” to occur: if death is substantially certain, it can’t be accidental.

Applying that test, the Ninth Circuit agreed that death was accidental. Although the insured’s behavior was reckless, it did not make death substantially certain. The court emphasized: “there is no doubt that drunk driving is ill-advised, dangerous, and easily avoidable.” But death was still accidental.

The court concluded with the truism that insurers who don’t want to cover death resulting from drunk driving should just add an explicit exclusion to their policies:

The solution for insurance companies like [LINA] is
simple: add an express exclusion in policies covering
accidental injuries for driving while under the influence of
alcohol, or for any other risky activity that the company
wishes to exclude….This would allow policyholders to form reasonable expectations about what type of coverage they are purchasing without having to make sense of conflicting bodies of caselaw that deal with obscure issues of contractual interpretation.