In his book Couch on Insurance, author George J. Couch defines insurance as a contract by which one party, for a consideration, which is usually paid in money either in one sum or at different times during the continuance of the risk, promises to make a certain payment of money upon the destruction or injury of something in which the other party has an interest. In fire insurance and in marine insurance the thing insured is property; in life or accident insurance it is the life or health of the person (Russ and Segalla 2002, 1, 6).
As a going concern, insurance has been defined by Kulp and Hall as “a formal social device for the substitution of certainty for uncertainty through the pooling of risks” (1968). In this vein, insurance may be conducted as either a public or private venture. Risk may be pooled, spread, and ultimately borne, either through full transference or through various kinds of cooperative ventures by which it may be shared among the risk parties themselves.
Insurance is of special note in discussions of federalism by virtue of the unique regulatory regime under which it is conducted in the United States. The regulation of most aspects of the insurance business as an aspect of commerce is carried on by the states under a very general “reverse preemption” against federal jurisdiction that is provided in the McCarran-Ferguson Act (P.L. 15, U.S.C., 1945). Essentially this means, in contrast to the normal pattern, that when federal and state laws conflict in the realm of insurance regulation, the state statutes prevail. Jurisdictional and operational definitions of insurance therefore bear directly upon the scope and exercise of state regulatory authority.
At the level of state regulation, and therefore also in the context of establishing the scope and applicability of the reverse preemption under the McCarran-Ferguson Act, discussions of what constitutes insurance—and in a transactional sense, what constitutes the “conduct” or business of insurance—are given weight and meaning. Do, for example, the sales of auto club memberships or extended product or service warranties constitute the business of insurance? What about the terms of collision damage waivers in auto rental agreements? Regulators and state and federal courts have held variously on these and other peripheral issues over the years.
Of a less peripheral nature is the matter of regulating health insurance and managed care. Many believe that state regulation of health insurance leads to higher premiums. Consumers must buy policies in a state where they either live or work, restricting their ability to “shop around” for lower prices. Some Republican alternatives to the Affordable Care Act have therefore included proposals allowing the purchase of health insurance across state lines. While such legislation has failed in Congress to date, its passage would presumably lead states to compete to offer a more flexible regulatory environment, resulting in lower premiums. On the other hand, this potential deregulation could also lead states to reduce considerably consumer protections or coverage requirements. Similar concerns attach to related legislative initiatives to enhance state flexibility over health care spending through block granting health insurance programs such as Medicaid. For example, the American Health Care Act that passed the House of Representatives in 2017 contained such a provision. Had it been enacted into law, it could have encouraged states to reduce current levels of coverage under the Affordable Care Act, in response to expected cuts in total federal funding. In addition, there remains much continued conflict and uncertainty over the scope and meaning of the preemption clause under the federal Employee Retirement Income Security Act of 1974 (ERISA). The preemption clause is vague, and this holds major implications for state health and insurance policy makers. ERISA’s preemption clause has been interpreted by courts in a piecemeal fashion and on a case-by-case basis with much inconsistency regarding the authority of the states to regulate health insurance plans.
Outside the realm of health care, the tradition of state regulation of insurance faces other challenges. State insurance regulators proved unable to deal with systemic risks associated with the 2008 financial crisis, leading to some calls for federal preemption. International trade agreements, such as the General Agreement on Trade in Services also limit states’ regulatory scope by prohibiting restrictions that harm foreign companies. Ongoing negotiations may further hamper the ability of states to regulate insurance.
A. Kulp and John W. Hall, Casualty Insurance, 4th ed. (New York: Ronald Press Company, 1968); Lee R. Russ and Thomas F. Segalla, eds. Couch on Insurance, 3rd ed. (St. Paul, MN: Thomson/West, 2002); Stephanie Kanwit, “The Purchase of Insurance Across State Lines in the Individual Market,” Journal of Law, Medicine, and Ethics 37 (2009):152-164; and Ethan Marks, “Federalism in an Era of International Free Trade: The General Agreement on Trade in Services and the Regulation of Insurance in the United States,” Tort Trial and Insurance Practice Law Journal 50 (2014): 129-153.