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The law on unintended consequences and insurance

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The law on unintended consequences is not statutory. No state or federal government has enacted it into law. No boss has signed the law. It is rather a law of nature for humans. It is a saying or idiomatic warning that an intervention in a complex system always creates unexpected and often undesirable results.

General observation requires the hypothesis that human actions, especially governments, will always have effects that are unexpected or unintentional, have been proven. Economists and other social scientists have respected its power for centuries. Regardless, for just as long, politicians, insurance companies and public opinion have largely ignored the law of unintended consequences to their detriment.

There is no customary obligation for a court, especially in a tightly regulated sector of the economy as insurance to create new rules. Every court should be reluctant to invent duties that are not rooted in existing precedents. The law on unintended consequences advises against it.

A good illustration of the law of unintended consequences can be

To find a good illustration of the law on unintended consequences, one need look no further than the Supreme Court’s ruling in Williamson County Regional Planning Comm’n v. Hamilton Bank of Johnson City, 473 US 172, 105 S.Ct. 3108, 87 L.Ed.2d 126 (1985). The Court’s actual holding was pedestrian: that Hamilton Bank’s claim was immature because the bank had not exhausted its administrative remedies, in particular its right to ask the county for a deviation to develop the property in the manner proposed. In dictum, men – dictum in the sense that the court’s statement at the time was unnecessary for its decision – the court went on to say that the bank’s claim was not yet mature for a “second reason”. This reason was also stated in terms of exhaustion: that according to state law “a property owner can institute a reverse condemnation measure to obtain fair compensation for an alleged takeover of property”; and that, until the bank “has used that procedure, its payment claim is premature.” The court’s implicit assurance was, of course, that once a plaintiff has checked these boxes, it can return its payment claims to the federal court.

That assurance proved to be illusory. Judgments of state courts are things that the federal courts owe in full faith and credit. That obligation means that claims that have been tried in a state court cannot be tried again in federal. So – by all accounts unintentional – Williamson County all but guarantees that the plaintiff will not be able to use the federal courts to enforce the Fifth Amendment’s guarantee of fair compensation against state and local authorities. [Lumbard v. City of Ann Arbor, 913 F.3d 585 (6th Cir. 2019)]

The law on unintended consequences applies just as much in case law as elsewhere; Bending a rule to satisfy a plaintiff does not always provide better justice – sometimes it only creates confusion for anyone trying to find out what a court can do in other cases in the future. A prudent court will take the lesson of handing over the regulation to legislators and administrators, even when the outcome seems unfair. The orderly development of the law is not without its hard spots, but it is better than living under the law of unintended consequences. [United States ex rel. Prather v. Brookdale Senior Living Cmtys., Inc., 892 F.3d 822 (6th Cir. 2018)]

Moreover, as one dissident said, the majority’s desire to remedy all wrongs by eroding the doctrine of state immunity, even if well-meaning, is filled by the law of unintended consequences. Depriving government officials of state immunity when making political decisions, when making sentencing decisions, and when leading the government would surely make most of us reconsider the traditional notion of public service. [Doe v. Dep’t of Corr., 323 Mich.App. 479, 917 N.W.2d 730 (Mich. App. 2018)]

Philosophers, economists and politicians

The concept of unintended consequences is one of the building blocks of the economy. Adam Smith’s “invisible hand”, the most famous metaphor in the social sciences, is an example of a positive unintended consequence. Smith argued that each individual, seeking only his own gain, is “led by an invisible hand to advance a goal that was not part of his intention,” which is the public interest. “It is not out of the goodwill of the butcher or baker that we expect our dinner,” Smith wrote, “but out of their own self-interest.”

Most often, however, the law on unintended consequences highlights the perverse unexpected effects of legislation, regulation and decisions of the courts of appeal. In 1692, the English philosopher John Locke, a forerunner of modern economists, called for a parliamentary bill to disappear from 6 percent to 4 percent.

The law on unintended consequences forms the basis for many critics of government programs. Unintended consequences can increase the cost of certain programs so much that they make the programs unwise even if they achieve their set goals. For example, the US government introduced quotas on steel imports to protect steel companies and steel workers from competition at lower prices. The quotas help steel companies. But they also make less of the cheap steel available to American automakers. As a result, automakers have to pay more for steel than their foreign competitors do. So a policy that protects one industry from foreign competition makes it more difficult for another industry to compete with imports.

In the same way, social insurance has helped alleviate poverty among pensioners and the disabled. Many economists, however, claim that this has entailed a cost that goes beyond the payroll taxes levied on workers and employers. Martin Feldstein and others claim that today’s workers save less until old age because they know they will receive social security checks when they retire. If Feldstein and the others are right, it means that less savings are available, less investment is being made and that the economy and wages are growing more slowly than they would without social security.

The law of unintended consequences is always and everywhere. People who are outraged by the high prices of plywood in areas that have been devastated by hurricanes, for example, may advocate price controls to keep prices closer to normal levels. An unintended consequence is that suppliers of plywood outside the region, who would have been willing to supply plywood quickly at the higher market price, are less willing to do so at the state-controlled price. This created a shortage of goods where they were needed.

Insurance is controlled by the courts, by appeals decisions and by government agencies, by laws and regulations. Complying with the appeals decisions, statutes and regulations – different in the various states – is extremely difficult and expensive.

In the United States alone, insurance companies pay more than $ 1.2 trillion in premiums, and insurance companies pay in damages and expenses as much or more than they collect. The profit margins are small because the competition is fierce and a year’s profit can be lost. a single firestorm, hurricane or flood.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his internship to the position of insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as a lawyer for insurance coverage and claims management and more than 54 years in the insurance industry. He is available at http://www.zalma.com and zalma@zalma.com.

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