What Changes Does the Dodd-Frank Act Bring to the Insurance and Reinsurance Industry?
By Robert C. Leventhal
On July 15, 2010, the Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act). Title V of the Act is captioned “Insurance” and contains a number of provisions that directly impact insurance and reinsurance companies, which we have summarized below.
State-Based Insurance Reform
The Act provides for certain state-based insurance reforms. The two areas addressed are state laws regulating nonadmitted insurance and state laws regulating credit for reinsurance.
Provisions Regarding Nonadmitted Insurance
The Act provides that no state other than the home state1 of an insured may require any premium tax payment for nonadmitted insurance. States may enter into a compact or otherwise establish procedures to allocate among the states the premium taxes paid to the home state. Congress intends that each state shall adopt uniform requirements that provide for the reporting, payment, collection, and allocation of premium taxes for nonadmitted insurance. The Act provides that the NAIC may submit a report describing any agreement reached among the states for the allocation of premium tax.
The Act further provides that nonadmitted insurance (including the licensing of insurance brokers selling the nonadmitted insurance) shall be subject to regulation solely by the insured’s home state. This provision is not to be construed to preempt any state law, rule, or regulation that restricts the placement of workers’ compensation insurance or excess insurance for self-funded workers’ compensation plans with a nonadmitted insurer.
The Act encourages states to participate in the national insurance producer database of the NAIC (or any other equivalent uniform national database) for the licensure of surplus line brokers and the renewal of such licenses. Beginning two years after the enactment of the Act, states that do not participate in such a database are prohibited from collecting any fees relating to the licensure of surplus lines brokers.
The Act prohibits states from imposing eligibility requirements on nonadmitted insurers that are domiciled in a U.S. jurisdiction, except in conformance with 5A(2) and 5C(2)(a) of the Non-Admitted Insurance Model Act, unless the state has adopted nationwide uniform requirements, forms, and procedures in accordance with the Act. It also provides that a state may not prohibit a surplus lines broker from placing nonadmitted insurance with, or procuring nonadmitted insurance from, a nonadmitted insurer domiciled outside of the United States that is listed in the Quarterly Listing of Alien Insurers maintained by the NAIC.
The Act streamlines the purchase process for large insureds by providing that a surplus lines broker seeking to procure or place nonadmitted coverage for an exempt commercial purchaser2 shall not be required to make a due diligence search to determine whether the insurance could be obtained from admitted carriers if it has: (1) disclosed that the insurance might be available from an admitted carrier that might provide more protection with greater regulatory oversight; and (2) the exempt commercial purchaser has subsequently requested in writing that the broker procure the insurance from the nonadmitted insurer.
The Act requires the GAO, in consultation with the NAIC, to prepare a report on the nonadmitted insurance market and to complete the report within 30 months after the enactment of the Act. This report must address the effect of the Act on the size and market share of the nonadmitted market for coverage typically provided by the admitted market.
Regulation of Reinsurance
The Act provides that if the state of domicile of a ceding insurer is an NAIC-accredited state or has financial solvency requirements substantially similar to the requirements necessary for NAIC accreditation, and recognizes credit for reinsurance for an insurer’s ceded risk, then no other state may deny such credit. All laws, regulations, and other actions of a state that is not the domiciliary state of the ceding insurer, except those with respect to taxes and assessments on insurance companies or insurance income, are preempted to the extent that they:
The Act provides that if a state is an NAIC-accredited state, or has financial solvency requirements substantially similar to the requirements for NAIC accreditation, it has sole responsibility for regulating the financial solvency of reinsurers domiciled3 in the state. No other states may require the reinsurer to provide financial information other than the information that the reinsurer is required to file with the domiciliary state.
The Establishment of the Federal Insurance Office
The Act establishes a Federal Insurance Office within the Department of the Treasury. The Office has authority to:
The Federal Insurance Office has authority over all lines of insurance except:
Prior to collecting any information from an insurance company, the Office shall try to obtain the data from federal or state insurance regulators or from publicly available data sources and shall not seek information from insurance companies if it is timely available from these other sources.
The Act preempts state insurance regulations only if the Director determines that the state regulation: (1) results in the less favorable treatment of a non-U.S. insurer domiciled in a foreign jurisdiction that is subject to a covered agreement than a U.S. insurer domiciled, licensed, or otherwise admitted in that state; and (2) is inconsistent with the covered agreement. Any preemption shall be limited to the subject matter covered in the protected agreement and shall achieve a level of protection for insurance or reinsurance customers that is substantially equivalent to the level of protection achieved under state insurance or reinsurance regulation. The Director’s determination that a state regulation is preempted is subject to the Administrative Procedure Act and to judicial review. If judicial review is requested, the court shall determine the matter de novo.
Nothing in the Act will preempt:
The Act does not provide the Office with general supervisory or regulatory authority over the business of insurance.
The Office is required to make certain reports to Congress and certain congressional committees, including:
The Director also is required to conduct a study within 18 months after the passage of the Act on how to modernize and improve the system of insurance regulation in the United States. The study is to explore the possibility of subjecting insurance (other than health insurance) to federal regulation and the impact that federal regulation could have on the operation of state guarantee funds, on policyholder protection, on the possible loss of life insurance special separate account status, and on the international competitiveness of insurance companies.
1 The “home state” of an insured is the state in which it has its principal place of business unless 100 percent of the insured risk is located outside of that state, in which case the home state is the state in which the greatest percentage of the insured’s taxable premium for the insurance policy is allocated. If more than one insured from an affiliated group are insureds under one policy, the home state of the member of the group that has the highest percentage of premium under the policy attributed to it is the home state for the entire policy.
2 An exempt commercial purchaser is an entity purchasing commercial insurance that: (1) employs a qualified risk manager to negotiate insurance coverage; (2) has paid aggregate national property and casualty premium in excess of $100,000 in the prior 12 months; (3) has a net worth in excess of $20 million, or has annual revenues in excess of $50 million, or employs more than 500 full-time employees, or is a member of an affiliated group employing more than 1,000 full-time employees, or is a not-for-profit organization generating annual budgeted expenditures of at least $30 million, or is a municipality with a population of at least 50,000.
4 “Covered agreements” are written bilateral or multilateral agreements that are entered into between the United States and one or more foreign governments, authorities, or regulatory agencies that relate to the recognition of prudential measures with respect to the business of insurance or reinsurance and achieve a level of protection for insurance or reinsurance consumers that is substantially equivalent to the level of protection achieved under state insurance or reinsurance regulation.
Florida 2010 Insurance Legislation: Ambitious Goals, Limited Success, and Gubernatorial Vetoes
By Thomas J. Maida and Leonard E. Schulte
When the Florida Legislature began its 2010 regular session on March 2, 2010, the insurance industry and its supporters hoped to achieve several ambitious goals. By the time the session ended on April 30, 2010, the industry was forced to settle for a few minor successes.
After Florida Governor Charlie Crist vetoed 2009 legislation that would have deregulated residential property insurance ratemaking for certain highly capitalized companies, proponents of deregulation hoped that in 2010 they would be able to pass a rate deregulation plan that addressed some of the governor's objections. Other insurers sought legislation to address the state's dramatic increase in auto insurance claims fraud. A legislative task force recommended a complete rewrite of the laws regulating title insurance. None of these initiatives succeeded.
The Legislature did, however, enact measures affecting solvency, regulatory authority over affiliates, property insurance claims, rate deregulation for commercial insurance, guaranty funds, and other important matters. Gov. Crist, who recently left the Republican Party and is running for election to the U.S. Senate as an unaffiliated candidate, vetoed two of these bills along with several other bills that were top priorities for the leaders of the Legislature’s Republican majority.
This article describes the highlights of these and other insurance-related enactments.
SB 2044 was vetoed by the governor on June 1, 2010, even though Insurance Commissioner Kevin M. McCarty had urged Gov. Crist to sign the bill. The bill was the product of negotiations between property insurers and the Florida Office of Insurance Regulation (OIR). Had it become law, it would have addressed several issues that were sought by the OIR, including increased surplus requirements and increased regulatory authority over managing general agents and other affiliates. The bill also contains provisions sought by insurers, including restrictions on public adjusters.
Major changes proposed in the bill included:
SB 1460 revises the Florida Hurricane Catastrophe Fund contract year. The 2010 bill was enacted in response to the unintended consequences of 2009 legislation that changed the start date of the fund's contract year from June 1 to January 1 and provided for a contract period of seven months, beginning on June 1, 2010 and ending on December 31, 2010, to provide for a transitional period. The accounting consequences of the transitional contract “year” resulted in a reduction to insurers' surplus. SB 1460 restores the June 1 – May 31 contract year and does away with the transitional period.
The bill also provides that insurers must execute their contracts with the Catastrophe Fund three months before the contracts' June 1 effective date (and before the start of the annual legislative session). The purpose of this change is to enhance stability and improve insurers' ability to procure reinsurance economically by providing insurers with early notice of the terms and conditions of their Catastrophe Fund contracts.
The bill limits the size of the “basic” layer of the fund to $17 billion for the contract year until the State Board of Administration determines that the fund has sufficient claims-paying capacity to cover two $17 billion contract years. This provision replaces a provision that tied growth in the fund to growth in exposure.
SB 1460 was approved by the governor on April 15, 2010 and took effect on that date.
HB 7217 amends a provision relating to Catastrophe Fund emergency assessments. Under current law, medical malpractice insurance premiums are exempt from assessment, but the exemption expires on May 31, 2010. HB 7127 extends the exemption for an additional three years. SB 2044 also includes this three-year extension of the exemption.
HB 7127 was signed by the governor on May 27, 2010 and took effect on that date.
Commercial Insurance Ratemaking and Warranty Associations
SB 2176 deregulates ratemaking for most forms of commercial insurance other than workers' compensation. The bill also includes provisions addressing several other areas, including warranty associations, workers' compensation, health insurance, and life insurance. The workers' compensation, health insurance, and life insurance aspects of the bill are discussed below under those respective headings.
The bill allows an insurer to implement rates for most forms of commercial insurance without the approval of the OIR, provided that the insurer notifies the regulator of any rate changes no later than 30 days after the effective date of the change. The regulator may subsequently review the rates to determine whether they are excessive, inadequate, or unfairly discriminatory. The affected lines of insurance include commercial motor vehicle insurance covering a fleet of 20 or more self-propelled vehicles, excess or umbrella coverage, surety and fidelity, boiler and machinery, errors and omissions, directors and officers, intellectual property liability, advertising and Internet liability, property risks rated under a highly protected risks rating plan, and other similar commercial lines as determined by the OIR.
SB 2176 also substantially revises laws governing motor vehicle service agreement companies, home warranty associations, and service warranty associations. Among other things, the bill eliminates required rate and form filings for all three types of warranty associations, excludes non-consumer commercial motor vehicle service agreements from regulation, provides misdemeanor penalties for unlicensed activities, reduces the number of required financial reports, and makes examinations of warranty associations discretionary rather than mandatory.
SB 2176 was signed by the governor on June 1, 2010, and the provisions relating to warranty associations took effect on that date. The provisions relating to commercial insurance rates will take effect January 1, 2011.
HB 5603 was vetoed by the governor on May 28, 2010. The bill was a top priority for workers’ compensation carriers and also had the support of state CFO Alex Sink, the leading Democratic candidate for governor. Among other things, it addressed an issue that some workers' compensation carriers had identified as a major cost driver. According to the carriers, some pharmaceutical providers repackage or relabel drugs in an effort to avoid fee schedules. HB 5603 provided that statutory limitations on reimbursement for prescription drugs apply regardless of the location or provider from which the claimant receives the medication. The bill specifies a formula for calculating the reimbursement amount for a drug that has been repackaged or relabeled and provides that the maximum price for relabeled or repackaged drugs is the amount that would have been otherwise payable had the drugs not been repackaged or relabeled.
SB 2176 includes several provisions relating to workers' compensation coverage of law enforcement officers. It makes correctional probation officers eligible for the same in-the-line-of-duty presumption relating to tuberculosis, heart disease, and hypertension that currently apply to law enforcement officers, correctional officers, and firefighters. The bill also revises the presumption to provide that the employee is presumed not to have incurred these diseases in the line of duty, if he or she materially departed from the prescribed course of treatment, and to provide that law enforcement officers, correctional officers, and correctional probation officers are not entitled to the presumption regarding that tuberculosis, heart disease, or hypertension were incurred in the line of duty unless a claim for benefits is made no later than 180 days after leaving employment.
These provisions will take effect January 1, 2011.
SB 2046 revises provisions governing licensure of employee-leasing companies to remove certain restrictions on change of ownership. Prior approval for the acquisition of a company is no longer required if a controlling person of the company being acquired also is a controlling person of the acquiring company. Existing stockholders or partners no longer need board approval to acquire control from other stockholders or partners, and the Department of Business and Professional Regulation is no longer authorized to conduct an investigation prior to the acquisition of control. SB 2046 also changes the sanctions for failure to pay late fees for license renewals. The failure to pay the late fee will now be grounds for disciplinary action, rather than automatically voiding the license.
SB 2046 was signed by the governor on May 27, 2010 and took effect July 1, 2010.
HB 159 revises various provisions relating to the Florida Insurance Guaranty Association (FIGA), the Florida Life & Health Insurance Guaranty Association (FLAHIGA), and the Florida Workers' Compensation Insurance Guaranty Association (FWCIGA). Several provisions of the bill are intended to make Florida's guaranty fund laws more closely conform to NAIC model laws.
The bill revises the process by which insurers may pass their FIGA assessment costs through to their policyholders. Current law prevents insurers from recouping FIGA assessments until their FIGA costs are included in an approved rate filing. Under HB 159, an insurer may apply a recoupment factor to its premium invoices after providing an informational notice to the regulator. The bill also streamlines FIGA by consolidating two auto insurance accounts into a single account.
HB 159 increases several FLAHIGA coverage limits for deferred annuities while in the accumulation phase to $250,000, removes a prohibition that prevents agents and insurers from mentioning FLAHIGA protections to prospective policyholders, provides circumstances under which FLAHIGA may protect persons who are not Florida residents, and excludes Medicare Advantage policies and several forms of indexed products from FLAHIGA coverage.
The bill also excludes coverage under employer's liability policies from FIGA and covers those claims under FWCIGA, up to the lesser of $300,000 or policy limits.
HB 159 was approved by the governor on May 11, 2010 and took effect July 1, 2010.
House Joint Resolution 37 proposes an amendment to the Florida Constitution that would add a section on health care services to the Declaration of Rights if approved by 60 percent of the voters in the 2010 general election.
The constitutional amendment provides that a law or rule may not directly or indirectly compel any person, employer, or health care provider to participate in any health care system. It also provides that a person has the right to pay directly for health care services and that a health care provider has the right to accept direct payment for health care services. It further provides that, subject to “reasonable and necessary rules that do not substantially limit a person's options,” the purchase or sale of private health insurance may not be prohibited. These provisions may be superseded by a law passed by two-thirds of the membership of each house of the Legislature.
If approved by the voters, the amendment will take effect January 4, 2011.
SB 2176 includes provisions allowing Medicare-supplement insurers to use inpatient facility networks. Under the bill, a Medicare-supplement insurer may grant a premium credit to insureds who use an inpatient facility within the insurer's network. The bill also authorizes insurers to enter into network agreements with facilities that agree to waive the Medicare Part A deductible. Both the premium credit and the deductible waiver must be factored into the insurer's loss-ratio calculation and policy premium.
These provisions will take effect January 1, 2011.
HB 885 amends several life insurance provisions. The bill exempts certain transactions from the requirement that the current insurer be notified of the replacement of a policy. The notice requirement will not apply in transactions involving an application to the current insurer when a contractual change or conversion privilege is being exercised, when a current contract is being replaced by the same insurer with regulatory approval, or when a term-conversion privilege is being exercised among corporate affiliates.
The bill also allows coverage of spouses and dependent children under a group life insurance policy up to the full amount for which the employee is insured, prohibits creation of a class of employees for purposes of a group life policy that consists solely of employees covered under the employer's group health plan, and prohibits the sale or transfer to third parties of annuities that were obtained as part of a settlement to satisfy Medicare secondary payer requirements.
HB 885 was approved by the governor on May 11, 2010 and took effect on that date.
SB 2176 also included a series of life insurance provisions known as the Safeguard Our Seniors Act. The bill revises disclosure requirements for the sale of fixed or variable annuities and provides a 21-day “free look” period for buyers who are 65 years of age or older, instead of the 14-day period applicable to other buyers. It also prohibits surrender or deferred sales charges in excess of 10 percent for annuity contracts sold to senior consumers, subject to some exceptions, and allows the Department of Financial Services to order an insurance agent to pay restitution to a senior consumer who is the victim of misappropriation by the agent. In a provision not limited to senior consumers, the bill increases the penalties for willful violations of the prohibitions against “twisting” and “churning” to $75,000 and removes the requirement that criminal penalties may be imposed only if the conduct was fraudulent.
These provisions will take effect January 1, 2011.
Ninth Circuit Denies Petition for Writ of Mandamus; Lower Court’s Ruling That Sharing Documents With Reinsurer Waives Privilege and Work Product Protection Stands
By Edward W. Diffin, III
In 2007, Regence Group filed suit in the U.S. District Court for the District of Oregon against TIG Specialty Insurance Group (TIG) alleging breach of contract, bad faith, and fraud in connection with TIG’s refusal to provide coverage to Regence for certain RICO claims. In 2008, Regence served subpoenas on two of TIG’s reinsurers and counsel for one of those reinsurers, seeking a variety of documents, including documents that TIG had been ordered to produce to its reinsurers in arbitrations involving, among other things, the reinsurers’ obligations to indemnify TIG for the Regence loss. Those documents included privileged communications between TIG and its coverage counsel regarding TIG’s potential liability to Regence and work product generated by or on behalf of that counsel. In support of its subpoena, Regence maintained that by sharing these documents with third parties, TIG had breached confidentiality, which is one of the defining characteristics of a privileged document, and as a result had waived the privilege.
Not surprisingly, TIG, its reinsurers, and the subpoenaed law firm objected to the scope of Regence’s subpoenas. The movants argued that sharing work product or privileged documents with TIG’s reinsurers did not compromise the protected nature of those documents since TIG and the reinsurers had a “common interest” in the outcome of the underlying dispute. The movants argued further that despite their dispute with one another regarding the availability and scope of reinsurance coverage for the underlying claims, the parties continued to have a “common interest” in the underlying action. Alternatively, the movants argued that TIG had provided the reinsurers with at least some of the disputed documents prior to the commencement of any arbitration and as such, there should be no question as to the protected status of those documents. With regard to the documents produced in the arbitrations, the movants argued that TIG had only produced those documents after it had been ordered to do so by the arbitrators, and as such this could not have constituted a waiver. Finally, the movants stressed that the production of the documents in the arbitrations (and, indeed, the arbitration proceedings themselves) had been subject to strict confidentiality provisions and that in one of the arbitrations, the arbitrators had even issued a statement “declaring” that the production of documents in that arbitration did not waive any otherwise applicable privilege attaching to those documents.
On May 1, 2009, the district court overruled the movants’ objections to the requested discovery, ruling that where a cedent shares work product and/or privileged documents with a reinsurer in circumstances in which the interests of the cedent and its reinsurer are not aligned, work product protection and/or privilege is waived. Noting that TIG had engaged in contested arbitrations with its reinsurers, the court held that TIG’s interests were, per se, not aligned with the interests of its reinsurers and because of this the common interest exception doctrine did not apply. The court ruled that TIG had waived its right to assert work product or privilege over the documents and ordered the requested documents to be produced.
TIG immediately filed a motion for clarification and for reconsideration or in the alternative, asked the court to authorize a discretionary appeal on the privilege and work product issue. The court responded by “clarifying” that it had approved Regence’s requests for discovery in their entirety. The court then denied TIG’s alternative motions for reconsideration and certification of the question for interlocutory appeal.
On February 19, 2010, TIG filed a petition for a writ of mandamus with the Ninth Circuit, asking the Ninth Circuit to direct the district court to vacate its orders compelling the production of work product and privileged documents. TIG noted that this was an issue of first impression in the Ninth Circuit, but cited, as support for its motion, cases from a number of other jurisdictions upholding the common interest exception to waiver in similar circumstances.
Various amici, including the Complex Insurance Claims Litigation Association, the Reinsurance Association of America, the Property Casualty Insurance Association of America, Great American Insurance Companies, and the Federation of Defense and Corporate Counsel, filed briefs in support of TIG’s petition, arguing that the issue was of paramount importance to the reinsurance industry. Specifically, the amici argued that the decision could have a negative impact on the free flow of information between cedents and reinsurers and on the ability of cedents and reinsurers to arbitrate their disputes privately — as they have done for hundreds of years.
On May 21, 2010, the Ninth Circuit denied TIG’s petition (and those of the various amici), holding that “Petitioner has not demonstrated that this case warrants the intervention of this court by means of the extraordinary remedy of mandamus.” On June 4, 2010, TIG filed a motion asking, at a minimum, for full briefing and oral argument or in the alternative asking for reconsideration by the panel and/or that the motion and underlying petition be circulated for rehearing en banc. On July 2, 2010, the Ninth Circuit denied TIG’s motion in its entirety.
TIG has now filed a motion with the district court stating that it plans to petition the U.S. Supreme Court for a writ of certiorari. The motion asks the district court to stay production of the work product and privileged documents pending the disposition of that petition. The district court has yet to rule on TIG’s motion.
The extent to which the Regence decision will have an impact in other cases and jurisdictions is not clear. While there is a chance that the U.S. Supreme Court will grant TIG’s petition for a Writ of Certiorari, the chances that it will do so are not terribly good. The more likely scenario (barring settlement) is that the case will proceed to judgment in the district court. If TIG wins, it will have no reason to pursue an appeal of the district court’s ruling on the issue. If TIG loses, however, the issue will likely be appealed, at which point the Ninth Circuit will review the issue. Because issues of privilege are mixed questions of law and fact, they are reviewed de novo. Thus, on appeal, the Ninth Circuit would not give deference to the district court’s findings on this issue. In the interim, the district court’s issue does not constitute binding precedent for any court or arbitration panel.
That said, this decision could have at least some of the impacts highlighted in the amici briefs supporting TIG’s mandamus petition. While Regence is not the first case in which a court has found the exchange of information between a cedent and a reinsurer to constitute a waiver of privilege, the Regence decision goes further than other cases by rejecting the applicability of the common interest exception to wavier in circumstances where at least some documents were produced prior to the relationship between the cedent and reinsurer becoming openly adverse and in circumstances where a number of the documents had been compelled by the validly issued order of an arbitration panel.
As a consequence, cedents may seek to use the Regence decision as grounds for withholding alleged work product and privileged documents from their reinsurers regardless of the existence of any overt hostility between the parties. Additionally, arbitration panels may soon see cedents and reinsurers using the Regence decision as a basis for arguing for restraint in fashioning discovery orders. Although the Regence decision is out of step with numerous decisions from other jurisdictions holding that the production of documents pursuant to a validly issued discovery order does not waive privilege or work product protection, parties seeking to limit the scope of discovery might seek to distinguish Regence on the basis that the Regence decision involved an order issued by an arbitration panel as opposed to a court. Although this fact does not appear to have been a factor in the Regence court’s decision to break with the majority position on this issue, it is a distinguishing fact and one that a party arguing for restraint might seize upon.
Finally, it is worth noting that the parties did not address the fact that in finding “waiver,” the district court failed to draw the appropriate legal distinction between the requirements for waiver of attorney-client privilege on the one hand and the very different requirements for establishing waiver of the protections covering work product. With a few exceptions, common interest being one, voluntarily sharing attorney-client communications with a third party waives the privilege protecting these communications from discovery. Work product, on the other hand, can only be waived by disclosures that are inconsistent with the adversary system (i.e., disclosures likely to result in the protected information being given to one’s opponent.) If this issue is addressed in a subsequent appeal, it is possible that TIG could prevail in obtaining protection over its coverage attorney’s work product independent of the outcome regarding the privileged documents.
How Will Recent Changes in Patent Eligibility Influence the Insurance Industry?
By David G. Luettgen and Kathryn M. Trkla
Two important recent events are likely to influence the patenting of inventions related to the insurance industry. First, on June 28, 2010, the U.S. Supreme Court issued its long-awaited opinion in Bilski v. Kappos (http://www.supremecourt.gov/opinions/09pdf/08-964.pdf). The Bilski decision is the Supreme Court’s most recent statement on what types of inventions are eligible to receive patents. For a detailed discussion of the Bilski opinion, please see our Legal News Alert at http://www.foley.com/publications/pub_detail.aspx?pubid=7243. Second, on July 27, in response to the Bilski decision, the U.S. Patent and Trademark Office (USPTO) updated its guidelines for evaluating patent applications on subject matter eligibility. The guidelines, which provide concrete insight on how the USPTO will treat specific types of patent applications, are available online at http://www.uspto.gov/patents/law/exam/bilski_guidance_27jul2010.pdf.
The insurance industry, of course, is no stranger to business method patents. Insurance companies have sought to patent all manner of business methods and related innovations, including underwriting systems, insurance and retirement planning products, modeling techniques, customer and B-2-B Web site features, and so forth. A number of high profile patent lawsuits also have been filed involving insurance companies. While some of the patent lawsuits have been filed by non-practicing entities, a number of patent lawsuits pit large insurance companies against each other.
Many speculated that the Bilski decision would categorically abolish business method patents. That did not happen. While the Supreme Court ruled that the invention at issue was not patentable, it refused to adopt a broad exclusion against business method patents. In Bilski, the invention related to a process for hedging risk. The Supreme Court indicated that this fact alone did not preclude the invention from being eligible for a patent. Rather, the problem was that the invention was defined too abstractly. According to the Court, “Claims 1 and 4 in petitioners’ application explain the basic concept of hedging, or protecting against risk: ‘Hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class.’” Slip op. at 15. The Court’s reasoning suggests that if Mr. Bilski had defined his invention in more practical terms and less abstractly, it may have been eligible for a patent.
The USPTO guidelines shed further light on how the USPTO will treat specific types of patent applications. As instructed by the Supreme Court decision in Bilski, the USPTO will evaluate patent claims “as a whole” to determine patent eligibility. Thus, it would be improper for a patent examiner to dissect the invention into old and new elements and then ignore the old elements in assessing whether the invention is too abstract to be patent-eligible. Hence, patent applicants would be well advised to consider including a computerized implementation of their invention in their patent application. Even though the computer hardware (without the inventive software) may be old, the patent examiner may not ignore the presence of the computer hardware in conducting the patent-eligibility analysis. Of course, to receive patent protection, the invention also must meet the separate requirements that it represents a new and non-obvious advance over what is already known. However, the inventive software elements can be used to meet those tests, even though the otherwise old elements relating to the computer hardware are relied upon to qualify as patent-eligible.
The guidelines also include provisions that are pertinent to insurance-related inventions. Specifically, they discuss the patent eligibility of “general concepts” such as economic practices or theories (e.g., hedging, insurance, financial transactions, marketing); legal theories (e.g., contracts, dispute resolution, rules of law); concepts relating to “how business should be conducted,” and so forth. In evaluating such inventions, the guidelines instruct patent examiners to weigh various factors to assess whether the patent applicant is seeking a patent on merely the general concept in the abstract or on a particular practical application of the concept. One factor weighing against patent eligibility is if the invention is defined so abstractly that granting the patent would effectively grant a monopoly over the general concept. Another factor weighing against patent eligibility is if performance of the invention is subjective and imperceptible rather than observable and verifiable. A factor that weighs in favor of patent eligibility is if the invention is described as being implemented in some tangible way. This suggests the advisability of including a computerized implementation of the invention in the claims of the patent application. For example, an insurance product described purely in terms of a legal contract may be too imperceptible and intangible to be patent-eligible. The insurance product may stand a better chance of being patent-eligible if it is instead described in terms of the computer system that performs the processing necessary to support the insurance product, particularly if further steps are added (e.g., a step of communicating electronic signals to other computer systems to perform other tasks, such as receiving information about an insurance claim or triggering a payment to a policy owner).
State Street Bank
Although State Street Bank ultimately came to stand for the broad patent eligibility of business methods based on the “useful, tangible, concrete result” test enunciated in that case, that test was much broader than it needed to be to find the State Street Bank invention to be patent-eligible. Unlike the invention in Bilski, the State Street Bank invention was defined in terms of a computer system.
While uniformly critical of the very broad useful, tangible, concrete result test of State Street Bank, the USPTO, Federal Circuit, and Supreme Court do not appear to have been critical of the specific holding that the computer-implemented invention in State Street Bank was eligible for a patent. The fact that State Street Bank was not overruled suggests that the use of a claim format similar to that in State Street Bank, which defined the invention in terms of its computerized implementation, may be sufficient to render the invention patent-eligible. Whether an invention is defined in terms of a computer and software (as in State Street Bank) or purely in terms of a business process (as in Bilski) is often determined as much or more by how the patent is drafted than by the nature of the underlying innovation.
Looking to the Future
Companies should expect to continue to see patents issuing that relate to the insurance industry. Prior to the decision in Bilski, the USPTO provided guidelines to patent examiners for evaluating patent eligibility issues that were based on the machine-or-transformation test. While the Supreme Court rejected the machine-or-transformation test as the sole test for patent eligibility, all nine Justices appear to agree that it is a useful tool for evaluating patent eligibility. Hence, companies should not expect to see a dramatic shift in the types of patents being granted by the USPTO. Companies in the insurance industry also face threats in connection with patents from other industries. Various companies have been sued on patents that the patent owners assert cover technologies used by the companies in their everyday business operations, such as in their marketing operations, in their implementations of their Web sites, and so forth.
The Value of IP Programs
With that in mind, companies should consider developing and maintaining IP programs that parallel the IP programs of companies in other industries more traditionally impacted by patents. First, companies should pursue patents on important innovations, particularly where those innovations are outward-facing, capable of being reverse engineered, or otherwise not readily susceptible to trade secret protection.
There are many reasons companies seek patents. For example, patents can help a company carve out a niche in the marketplace. There are obvious competitive advantages to offering a product or service that no other company is able to offer. Additionally, patents can serve a defensive purpose, in that owning patents may reduce the risk of being sued for patent infringement by other companies and thus may help to maintain a company’s freedom to operate. If your company is sued by another company on a patent matter, but holds a patent that is being infringed by the other company, the risk of cross-claims can lead to settlement of the litigation at a fraction of what it would have cost to settle without the patent. Indeed, if a company owns a substantial portfolio of patents relative to its competitors, that alone can serve as an effective deterrent when one of its competitors is considering suing the company on a patent issue. When both companies have roughly equal-sized patent portfolios, that can create an environment in which neither company is likely to sue the other because to do so would result in mutually assured destruction. If one company has a clearly superior patent position, that can often provide significant leverage against its competitors.
Second, companies also should consider performing patent searches before introducing new products and services in the marketplace. Performing a patent search before investing in new product development is analogous to performing research before investing in a company. A patent search helps ensure that the return on investment for the new product development will meet expectations. If a new product is being developed in an area that is already heavily patented by others, the costs to gain access to the necessary patent rights may create an ongoing drain to the profitability of the product that is being introduced.
Third, companies should stay abreast of the patent positions of their competitors. If a competitor does not patent any of its innovations, then there is no risk of being accused of patent infringement by that competitor when copying that competitor’s innovations. Care may need to be taken to avoid other types of intellectual property infringement, e.g., trade secret, when copying; however, those risks are typically much more easily managed than patent infringement risks. Conversely, if a competitor aggressively seeks to patent all of its innovations, then the cost of resolving potential infringement claims needs to be taken into account when predicting the return on investment of any new product development that may infringe that company’s patent rights.
Finally, while patents provide the strongest form of protection for many innovations, it is important to use patents as part of an orchestrated intellectual property strategy that also effectively employs other types of intellectual property protection. Trade secret protection, for example, may be more suitable in some circumstances to protect “under the hood” underwriting algorithms that would be difficult for an outsider to reverse engineer. A critical consideration in the context of trade secret law is to ensure that your company is taking sufficiently “reasonable efforts” to maintain the secrecy of the trade secret. It is important to ensure that your company is exercising the appropriate care with regard to its trade secrets in order to permit your company to successfully claim its trade secret status later on during litigation.
Evolving Obama Administration Health Care Reform Regulations Will Affect the Health Insurance Industry
By Thomas R. Hrdlick, Kevin G. Fitzgerald, Michelle A. Leeds, Maria Gonzalez Knavel, and Diane Ung
The Obama administration has begun the arduous task of implementing the recently passed Patient Protection and Affordable Care Act (PPACA), starting with reforms for the health insurance industry. The Departments of Health and Human Services, Treasury, and Labor (collectively, Departments) jointly issued a request for comments in the April 14, 2010 Federal Register on the definitions and standards to be used in implementing the medical loss ratio (MLR) provisions of the PPACA. The Department of Health and Human Services (HHS) also separately issued a similar request for comments regarding the premium rate review provisions of the PPACA.
In addition to the request for comments, HHS Secretary Kathleen Sebelius issued a separate letter to the NAIC seeking information that the PPACA directs the NAIC to provide. In particular, the PPACA directs the NAIC to establish uniform definitions and standardized methodologies for determining and calculating the services that will constitute clinical services, quality improvement, and/or other non-claims costs for purposes of enforcing the MLR provisions of the PPACA. While the PPACA allows the NAIC until December 31, 2010 to establish these definitions and methodologies, Secretary Sebelius states in her letter that she hopes to publish regulations as soon as possible to allow sufficient time for health insurers to incorporate the resulting changes, given that the MLR provisions are effective for plan years beginning six months after enactment of the PPACA. Therefore, the secretary’s letter asks the NAIC to provide the information at issue by June 1, 2010.
Medical Loss Ratio
Under the PPACA, for plan years beginning on or after September 23, 2010 (six months after passage of the PPACA) health insurers must begin submitting a report to HHS for each plan year detailing the MLR for that plan. The MLR is essentially the percentage of revenue from a plan’s premiums that is spent on reimbursement for clinical services or other activities that improve the quality of health care. Beginning no later than January 1, 2011, a health insurer offering group or individual coverage must provide an annual pro rata rebate to each enrollee if its MLR is less than 85 percent for plans in the large group market or less than 80 percent for plans in the small group or individual markets.
Through the comment process, the Departments are seeking information on a variety of issues, including:
Comments also are requested for data submission and public reporting such as how states currently require submission of statistics, timing of submission, and any industry standards relating to communication of MLR statistics. The Departments would like comments from all interested parties, but are especially interested in responses from health insurers and states. All comments received will be made public.
Premium Rate Review
Beginning with the 2010 plan year, the PPACA requires the HHS secretary to work with states to establish a process for the annual review and monitoring of “unreasonable” rate increases and to award some $250 million of grant money to states to carry out their review responsibilities in this regard. The process shall include requirements for health insurers to submit to the secretary and the relevant state(s) a justification for any “unreasonable” premium increases prior to the implementation of any such increases and to prominently post such justifications on their Internet sites. The PPACA also requires states, as a condition of receiving any grants from HHS for carrying out their review responsibilities, to make recommendations about whether particular health insurers should be excluded from participation in the insurance exchange(s) created under the PPACA based on a pattern or practice of excessive or unjustified premium increases. HHS seeks feedback regarding issues such as defining an unreasonable rate increase, current state processes for reviewing and approving premium rates and increases, health insurers’ justifications for rate increases, and public disclosure issues such as the current availability of information to the public. The comments also ask what kinds of factors should be considered when allocating the $250 million in grant money to states.
All comments received will be made public and were due May 14, 2010.
For your convenience, we have provided links to the applicable Federal Register and to Secretary Sebelius’ letter to the NAIC below.
Federal Register Proposed Rules, "Medical Loss Ratios; Request for Comments Regarding Section 2718 of the Public Health Service Act" at http://edocket.access.gpo.gov/2010/pdf/2010-8599.pdf.
Federal Register Proposed Rules, "Premium Review Process; Request for Comments Regarding Section 2794 of the Public Health Service Act" at http://edocket.access.gpo.gov/2010/pdf/2010-8600.pdf
For More Information on Health Care Reform
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On September 23, 2010, Peter McLaughlin will participate on a panel titled, “Are Privacy and Data Protection Still Issues?” as part of the HB Litigation Conference, “OFAC and Regulation in International Business — Important Considerations for Insurance and Reinsurance.”