Climate Disasters Blamed for Increased Insurance Premiums and Claims Underpayments

Insurers are fleeing markets and raising rates to compensate for increased disaster losses. Farmers recently stopped insuring homes in Florida. This will result in cancelation of about 100,000 policies as those policies expire. Insurers are also withdrawing from California and Louisiana.

These states have a lot of differences, but they share one thing in common: increased natural disasters attributed to climate change. Warming oceans have been blamed for increasingly bad hurricane seasons in Florida and Louisiana. In 2022, 42 percent of Florida insurance claims were hurricane-related. In California, increasing wildfires are thought to relate to hotter, drier summers.

The carriers exiting these markets have been vague about their reasons, citing the need to protect trade secrets. But several reference these increasing disasters. State Farm pointed to “growing catastrophe exposure” as one reason for withdrawing from the California market. Farmers similarly identified “severe weather events” as a reason from stopping selling policies in California.

Even homeowners whose insurers remain in these markets feel the effects of increased disaster losses. Premiums in disaster-prone areas are increasing. For instance, homeowners living in hurricane-prone Florida pay an average of $6,000 annually for insurance compared to the national average of $1,700. Florida premiums have increased 100 percent over the past three years. And, when hurricane losses occur, consumers are increasingly complaining about underpaid claims that don’t fund repairs.

State insurance regulators are expressing concern about the effects on consumers from these companies withdrawing from their states. Some experts argue that a driving force behind these increases is the failure to regulate the reinsurance companies that provide insurers with extra coverage to pay for years with a high number of claims, like particularly bad hurricane or wildfire seasons. Unlike regular insurance companies, reinsurers are largely unregulated. They’ve raised rates sharply in recent years, and these costs get passed on to consumers. Part of the reason for this is the reinsurance market is global. So a bad hurricane season in Florida or monsoons in India both make insurance more costly for the rest of the planet.

Other experts blame the increase on consumers’ failure to come to terms with increased disaster risks. People keep building expensive houses on the Florida coast and in wildfire-prone areas of California even though they know there’s a large risk these properties get destroyed in disasters.

Because of this, some industry groups say the solution is to let insurers charge extra in disaster prone areas. The theory is that if it costs, say, ten times as much to insure a home on the Florida coast than inland, people will stop rebuilding in areas vulnerable to hurricanes. Other say this would perpetuate the problem by allowing wealthy homeowners to keep rebuilding while doing nothing to address the underlying problems.

Ninth Circuit Helps Clarify Meaning of “Earnings” In Disability Insurance

Calculating earnings can be really important to disability insurance. Most disability insurance policies define “disability” in relation to how much the insured earned before they became disabled. For instance, a policy might say “we will pay you the insurance benefits if an injury keeps you from being able to earn 60% of what you earned while healthy.” And a person’s earnings often determine the amount of insurance benefits. Many disability policies will pay a person who becomes disabled a certain percentage of what they earned while working.

Calculating these amounts is simple where a person earns a basic salary. But where the insured earned things like bonuses, stock options, or fringe benefits, it can get complicated.

A recent Ninth Circuit Court of Appeals decision provides some guidance on this. In Neumiller v. Hartford Life and Accident Insurance Company, the Ninth Circuit addressed a dispute over how to calculate earnings in a case where the way earnings were calculated made the difference between the insured receiving ongoing disability benefits versus those benefits being terminated.

Neumiller had a disability insurance policy with Hartford. The policy paid benefits if she became disabled. The benefits ended if she earned more than 60% of what she made before becoming disabled.

Hartford decided Neumiller had earned more than that and terminated her benefits. Neumiller disagreed and filed a lawsuit under ERISA. The lower court agreed with Hartford. Neumiller appealed.

The Ninth Circuit focused on the insurance policy’s definition of “Current Monthly Earnings” to determine whether Neumiller had earned more than the 60% pre-disability earnings threshold that allowed Hartford to terminate her insurance benefits. The policy defined Current Monthly Earnings to mean money Neumiller received from any employment while disabled.

Neumiller argued that pre-tax deductions from her paycheck and certain bonuses fell outside this definition. The Ninth Circuit mostly disagreed.

The court looked to the dictionary definition of “earnings”, which meant any revenue gained from labor or services. It decided this definition was simple enough that it didn’t need to further consider what the term “earnings” might mean. Under this definition, the fact that bonuses weren’t explicitly listed in the insurance policy did not mean bonuses weren’t “earnings.”

And Neumiller’s pre-tax deductions were “earnings” too. Even though the deductions didn’t wind up in her paycheck, the Ninth Circuit reasoned that these funds went into her 401(k) because of her voluntary election. They were therefore “earned.”

But the Ninth Circuit did agree with Neumiller that bonuses paid out every four months were not “monthly” earnings under the insurance policy’s use of the term “Current Monthly Earnings.” These bonuses were paid for work performed over a four-month period. The lower court had nevertheless treated the entire amount of each bonus as earned in the month it was received.

The Ninth Circuit found that logic dictated the bonuses should be averaged over the four-month period in which they were earned for purposes of calculating Neumiller’s “monthly” earnings, especially given other parts of the insurance policy explicitly stated that bonuses would be averaged over the period in which they were earned.

This ruling is unpublished, meaning it can’t be relied on as binding precedent, but still provides helpful clarity on the calculation of earnings under disability insurance policies.

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.