Do reinsurers commit antitrust violations when they collaborate in handling claims? Possibly, according to New York’s intermediate appellate court, which on January 11 allowed a suit to proceed charging numerous Lloyds’ syndicates with violating New York’s antitrust statute by transferring the handling of their pre-1993 claims to Equitas. Global Reinsurance Corp. – U.S. Branch v. Equitas, Ltd., 2011 N.Y. Slip. Op. 88 (N.Y App. Div. 1st Dept. Jan. 11, 2011). Read narrowly, the decision may affect only the peculiar circumstances of Equitas, but a broader reading could call into question the legality of a wide range of practices where reinsurers collaborate on handling claims.
The Global Re litigation
Equitas, Ltd. was established in 1996 to relieve Lloyds’ underwriters from the potentially ruinous financial burden of such long-tail liabilities as asbestos, products liability and environmental claims. To accomplish this goal, the underwriters reinsured their pre-1993 liabilities with Equitas and assigned to Equitas exclusive authority to handle and settle these claims.
The theory of liability in the Global Re litigation is that this arrangement impaired competition in the Lloyds’ market for non-life retrocessional coverage. The plaintiff alleges that syndicates had traditionally taken a lenient approach to claims handling, foregoing opportunities to deny or delay claims. An individual syndicate was discouraged from taking a harder line on claims out of fear of losing new business to syndicates that continued to adhere to the culture of leniency. The syndicates removed this competitive pressure for lenient claims-handling, according to the plaintiff, by agreeing with one another to transfer claims handling authority to Equitas. Equitas has been able to take a harder line on these claims, denying more and paying later, because it does not face the same competitive motivations as individual syndicates.
The appellate court found these allegations sufficient to state a claim under New York’s antitrust statute, the Donnelly Act. The Act makes illegal every “contract, agreement, arrangement or combination . . . whereby Competition or the free exercise of any activity in the conduct of any business, trade or commerce . . . is or may be restrained.” N.Y. Gen. Business Law § 340(1). According to the appellate court, “Plaintiff alleges that through Equitas, the Names ‘created a horizontal restraint – an agreement among competitors on the way in which they will compete with one another.” Unless this decision is overturned by New York’s highest court, the Court of Appeals, the case will proceed at least through discovery, and potentially to trial and verdict.
A Potential New Antitrust Risk
Previously, no U.S. court had found that collaboration among insurers or reinsurers on claims handling could be grounds for antitrust liability. The issue rarely arose, primarily due to the McCarran-Ferguson Act, 15 U.S.C. §§ 1012(b), 1013(b), which grants immunity, with some exceptions from federal antitrust laws for the “business of insurance.” The Global Re suit avoids this barrier by asserting its claim only under New York’s Donnelly Act, and not under the federal Sherman Antitrust Act. Reinsurers and insurers that are not subject to rate regulation in New York enjoy no immunity from the Donnelly Act.
Reinsurers and their counsel now need to ask what this decision means for other forms of collaboration on claims-handling practices, such as: joint appointments of auditors; information sharing; and joint defense arrangements in arbitration and litigation. Do practices such as these now expose reinsurers to antitrust claims under the Donnelly Act and the antitrust statutes of other states that might follow this precedent? Must reinsurers now fear antitrust litigation, with its extraordinary expense and burden and with the potential for treble damages?
Where is the Antitrust Risk?
To answer these questions, we must remember that not all forms of collaboration among competitors are antitrust violations, in New York and elsewhere in the United States. The New York Court of Appeals has interpreted Donnelly Act § 340(1), like Section 1 of the federal Sherman Act on which it is modeled, to “prohibit only ‘unreasonable’ restraints of trade.” Anheuser-Busch, Inc. v. Abrams, 71 N.Y.2d 327, 333. 520 N.E.2d 535 (1988). Under this “rule of reason,” courts will find an agreement among competitors illegal only if its impact on balance is to impair the competitive process and lead to higher prices and lower output. Under this standard, reinsurers should not face serious antirust risks for most of their claims handling practices, even when they are cooperating openly and extensively with their competitors.
Consider the example of a broker approaching two reinsurers to place a new risk. At this point, the two reinsurers are in competition with one another. An offer by one of a lower premium or more favorable contract terms could win the business over the other. However, by the time that claims are submitted, this competition is over. Collaboration on claims cannot result in higher premiums or less favorable contract terms, because those matters have already been agreed.
At the claims stage, the cedent or its broker cannot induce reinsurers to bid against one another on how they will handle the claim. Even if two reinsurers have taken a share of the same risk, their liability for claims is several, not joint. That means that one reinsurer’s settlement of a claim does not affect the liability of the other. One reinsurer cannot, by taking a more lenient approach to settling claims, win a bigger share of that risk from any other reinsurer.
Competition among reinsurers affects claims handling only indirectly. As noted by the New York court, reinsurers might conclude that a more accommodating approach on claims handling can earn them good will with the cedents involved, and might help them win new business with those cedents. They might also conclude that a generally lenient approach to claims handling might earn them a market-wide reputation that helps win business from other cedents. Conceivably, if reinsurers collaborate on claims, they can lessen these competitive incentives for lenient claims handling.
In reality, this impairment of competition will almost always be more theoretical than real. Most reinsurance markets feature intense competition among a very large number of reinsurers. If any cedents or brokers value a good reputation for claims handling, they almost certainly will be able to find reinsurers offering that reputation. They will not be frustrated by the fact that some reinsurers have seen their reputations decline as a result of collaborative claims-handling practices. Furthermore, claims-handling practices have no impact on the primary factors in the competition for new reinsurance business: premium rates; coverage terms; and financial condition.
It would be highly unusual for collaboration among reinsurers on claims handling to have any significant impact on competition for new business. For example, an agreement among most of the reinsurers in a market not to pay a wide range of claims, regardless of the coverage terms of a contract, might be found to impair competition, but the more typical forms of collaboration on claims-handling would not have any such effect.
On the other side of the balance, collaboration can enhance competition by allowing reinsurers to handle claims more efficiently. Reinsurers can lower their costs by jointly retaining an auditor or a lawyer or by avoiding duplication in the gathering and development of claims information. In the case of large claims raising serious coverage issues, these savings can be substantial. Unlike any threat of harm to competition, these savings usually are more real than theoretical. Overall, collaboration among competitors ordinarily does more to enhance competition than to impair it, and under the rule of reason, it does not violate the antitrust laws.
Is Global Re a Special Case?
The facts of the Global Re litigation present a peculiar situation. The collaboration on claims was unusually wide-spread, with almost all of the Lloyds Names with these long-tail liabilities on their books participating in the formation of Equitas. And their collaboration was complete: they have transferred all responsibility for pre-1993 liabilities to Equitas. These facts could indicate a threat to competition that is not found in the typical case where a few reinsurers collaborate and share information on an ad hoc basis.
However, the case also presents peculiar facts on the other side of the balance. The plaintiff, Global Re, has been in run-off since before the formation of Equitas. No Lloyds syndicate’s claims decisions would be affected by the incentive of new or renewal business with this cedent. This cedent is not writing any new or renewal business. Also relevant is the main objective in forming Equitas, which was to relieve these underwriters from the financial burden of their pre-1993 long-tail claims. With these claims off their books, the underwriters emerged as much stronger competitors.
It is not clear whether these peculiar facts indicate that the formation of Equitas did more to impair or to enhance competition. That issue can only be determined by the trial court. The problem presented by the appellate court’s decision is that it did not present the issue as one of a difficult application of the rule of reason to an unusual set of facts. The court stated the issue in terms of collaboration in a broad and general sense: “According to plaintiff, Equitas engaged in claims payment behavior – i.e., denying claims and when they were not denied, paying less and later – that [reinsurers] subject to competitive constraints could not have engaged in . . . .”
That statement could apply to most cases where reinsurers collaborate on claims. If subsequent courts, in New York and in other states with similar antitrust statutes, read this ruling in such a broad manner, then ordinary and beneficial claims handling practices could expose reinsurers to antitrust litigation. The better outcome, for reinsurers and for the efficient operation of reinsurance markets, would be for courts to recognize that Global Re rests on a special set of facts and that an antitrust complaint based upon more common forms of collaboration and information sharing on claims should not be allowed to proceed.