Ever since his beach house was destroyed by Hurricane Katrina and his insurer won’t pay his claim, Sen. Trent Lott has found a new appreciation for the rhetoric of Ralph Nader. Now, according to this story in the Insurance Journal, Lott is "shocked" to discover the existence of the McCarran-Ferguson Act (which has been around since 1945) and its limited anti-trust exemption for insurers. He believes insurers could "actually collude" in claims handling, presumably to deny claims like those of Sen. Lott.
Some, including Sen. Lott himself recently, have advocated repeal of the McCarran-Ferguson Act. I haven’t been impressed by the arguments in favor of repeal, including this statement by the American Bar Association that seems a tad short on proof that insurance prices are higher because states, rather than the federal government, regulate insurance. Be that as it may, as RiskProf points out, it doesn’t make sense that collusion would occur in denying claims, rather than price-fixing. Most states have statutes that allow policyholders to collect attorney fees if an insurer denies a claim and the policyholder sues and wins. In many jurisdictions, if the denial has no reasonable basis in law or fact, the policyholder can collect extra bad faith damages.
These laws exist because of the inherent conflict with an entity being both responsible for paying a claim and judging the merits of the claim. The fact that the conflict is inherent means, by definition, that it exists in each individual insurer, so it is not created by collusion. Nor would collusion enhance its appeal. If, by denying a certain number of claims, I would gain money and make my company more profitable, what incentive would I have to collude with another firm to get them to deny claims and equal my increased profitability? On the contrary, I would want them to pay out more and be less profitable. By colluding, I would merely be colluding against myself. In the area of claims handling, then, state statutes already address the problem, which is far different from the one Sen. Lott presents.