Don’t discuss business with competitors! Corporate legal officers continually repeat that admonition, fearful that claims of antitrust law violations may follow whenever their employees meet or talk with employees of a competitor. In most circumstances the admonition is sound advice. The antitrust laws impose stiff penalties for collusion among competitors: prison sentences and fines for the individuals involved, stiff fines for the company and private lawsuits seeking massive damages claims. Even if the company defends itself successfully, the defense of a price-fixing claim can be massively expensive and terribly disruptive. Steering clear of meetings and communications that might raise a suspicion of collusion generally is prudent advice.
For insurance companies following this advice can be difficult, because communication and collaboration among competitors is a regular facet of conducting an insurance business. Claims handling is one activity that regularly calls for consultation among insurers. For example, co-insurers or quota share reinsurers on the same layer might wish to discuss a particular loss. By sharing information, each insurer can make a more informed decision on coverage. They can save claims-handling costs by joining together to investigate the loss and if necessary, by jointly defending against the claim. Insurers or reinsurers on different layers may not have identical interests on a claim, but they nonetheless might also save claims handling costs by communicating and collaborating with one another.
Should insurance companies surrender these benefits from collaborative claims-handling out of a cautious regard for antitrust compliance? The answer is no. The antitrust risks are actually low for most discussions and collaborations among competitors on claims-handling matters. A better understanding of how the antitrust laws apply to these matters can give insurance companies more comfort in allowing their claims managers to cooperate with competitors in a manner that is both legal and helpful.
The legal setting
An insurer’s antitrust risks are diminished by the McCarran-Ferguson Act, 15 U.S.C. §§ 1012(b), 1013(b), which grants immunity from federal antitrust laws for the “business of insurance.” However, this immunity is subject to exceptions, its scope has been limited by court decisions, and it applies only to federal antitrust laws. Insurance companies remain vulnerable to the antitrust laws of most states, which generally prohibit the same conduct as the federal laws, with the same sanctions. So notwithstanding the McCarran-Ferguson Act, antitrust compliance is essential for insurance companies.
The relevant antitrust provision is Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and its state law counterparts. A mere conversation between competitors, by itself, does not violate the statute. The danger is that the communication can be taken as evidence of an illegal agreement among the competitors. Sherman Act § 1 prohibits, among other activities, agreements among competitors to fix their prices, restrict their output or limit the terms on with they will compete to sell their goods and services. Meetings and collaborations among competitors create antitrust risks when they suggest an anticompetitive agreement of this nature.
Claims-handling comes after competition
In the context of claims-handling, insurers need not worry that their communications and collaboration might suggest an agreement, because even an express agreement among different insurers on the handling and settlement of a claim would not violate the antitrust laws. By the time that a claim is presented, the competitive process is over. The insurance contract has been executed, and the premium and the extent and terms of the cover have been set. Collaboration among the insurers at this stage cannot lead to a higher premium, to less cover or to different terms.
This understanding of the antitrust laws is the basis for the court’s decision in the one published case involving an antitrust challenge to collaborative claims-handling. In UNR Industries, Inc. v. Continental Ins. Co., 607 F. Supp. 855 (N.D. Ill. 1984), the bankruptcy trustee for a policy-holder with asbestos-related claims sued insurers, alleging that they had all agreed to settle claims at a specified percentage of the policy-holder’s liability. The trustee claimed that the agreement was collusion among competitors, in violation of Sherman Act § 1, but the court dismissed the claim (id. at 860):
This is not a situation where defendants were competing to get or even keep UNR’s business – they already had UNR’s business. Defendants’ duties are therefore not derived from the antitrust laws’ vision of how competitors should behave; they are derived from the contracts each defendant had with UNR.
The issue has come up more frequently in an analogous context: where multiple lenders collaborate on collecting their loans, and the courts have consistently found that the lenders’ collaboration is not an antitrust violation. For example, in United Airlines, Inc. v. U.S. Bank N.A., 406 F.3d 918, 921 (7th Cir. 2005), the Court of Appeals wrote:
Competition comes at the time loans are made; cooperation in an effort to collect as much as possible of the amounts due under competitively determined contracts is not the sort of activity with which the antitrust laws are concerned.
See also CompuCredit Holdings Corp. v. Akanthos Capital Management, LLC, 661 F.3d 1312 (11th Cir. 2011); Sharon Steel Corp. v. Chase Manhattan Bank, N. A., 691 F.2d 1039, 1052-53 (2nd Cir. 1982); Falstaff Brewing Corp. v. New York Life Ins. Co., 513 F. Supp. 289, 293-94 (N.D. Cal. 1978).
Similarly, in the insurance industry, competition comes at the time when coverage is placed. At that stage, the antitrust laws expect insurers to compete by offering lower premiums, more extensive cover and better terms, in an effort to win business from insureds and reinsureds. When that competitive process is complete, as it is for insurers handling claims as well as for lenders collecting loans, the Sherman Act does not prohibit the erstwhile competitors from communicating with one another, or even from agreeing with one another.
Competition for future business
A recent case in New York presented a creative theory for antitrust liability in claims handling. The case involved the formation of Equitas, Ltd., the entity set up to assume the pre-1993 reinsurance liabilities of several Lloyd’s syndicates for asbestos, products liability and other long-tail claims. According to the allegations of the complaint, the individual syndicates historically had taken a lenient approach to settling claims in an effort to gain the cedents’ new and renewal business. The syndicates removed this competitive motivation, according to the complaint, by transferring their liabilities to Equitas, a single run-off entity.
These facts present a harder case than the typical claims-handing scenario, because the allegation is that the parties’ collaboration impaired competition not for existing policies and contracts, for which the competitive process is complete, but for future business. Nonetheless, New York’s highest court, the Court of Appeals, dismissed the claim. Global Reinsurance Corp. v. Equitas Ltd., NY Slip Op 02251 (N.Y. 2012). The Court applied an antitrust principle known as the “Rule of Reason” and held that collaboration among the syndicates would not violate antitrust laws unless it was shown to actually harm competition, meaning that it resulted in higher premiums and lower amounts of coverage in the overall market. The Lloyd’s syndicates had too low a share of the overall market, which in this was non-life retrocessional coverage, to have such an effect.
Given the vast size and the competitiveness of most insurance markets, it would be a rare case where the insurers collaborating on claims-handling could have a negative effect on market-wide competition for future business. In small, specialized niche markets, if all of the significant carriers develop a consistent practice of collaborating on claims-handling, a claim might be raised that their collaboration is impairing competition. Otherwise, the theory of liability advanced in Equitas rarely will be viable.
Keep it limited
The Equitas case does indicate where collaboration can raise antitrust risks. If insurers in the context of claims-handling reach agreements or understandings relating to future policies or contracts, including agreements relating to premiums, coverage limits, terms and the manner of claims handling for future business, they may well violate Sherman Act §1 or a state law counterpart. However, if the communication and collaboration is strictly retrospective, relating only to existing claims arising under covers already bound and terms already set, then the insurers should not face a serious antitrust risk.