March 26, 2007
Sealing Shut Insurer Misconduct?
Posted by Seth Chandler

Today's New York Times had an interesting article discussing extremely nasty claims settlement practices by long term care insurers. The article discusses, for example, the curious variation in consumer complaint ratios, against the major players in this field. Conseco got one complaint per 383 policy holders. Genworth Financial received 1 complaint per 12,434 policy holders. Some of the allegations are pretty darned scary, the sort of misconduct I thought John Grisham had only fantasized about in his book The Rainmaker. It's hard to know how to assess the allegations, however, since the Times report finds few instances in which judges or jurors passed on the entire case. Instead, it appears that most of these matters, like an awful lot of civil litigation today, were resolved by confidential settlements in which records of the proceedings were sealed.

I think it's time we think longer and harder about the propriety of using public resources to fund litigation and then denying the public the results of that subsidized dispute resolution mechanism. There's an excellent and sophisticated article up on on SSRN about this subject by Professor Scott Moss from Marquette. If I might be permitted some speculation, it seems that basically what we've done is to create the equivalent of intellectual property rights in information about alleged wrongdoing. The parties generate information from use of the discovery process and generate further information by arriving on a settlement amount. While the parties pay much of the cost of this endeavor, taxpayers rather than litigants are amortizing the fixed costs of the civil justice apparatus or some of the marginal costs of dedicating the court system to their particular dispute. If the parties are able to bargain over the privacy of this information, they can extract from each other -- usually the plaintiff extracting from the defendant -- some portion of any expected increase in liability in other lawsuits that would result from publication of the information. Although perhaps this ability to bargain doesn't greatly alter the total amount paid by the defendant for the wrongdoing, at a minimum it would seem to reallocate compensation among plaintiffs in a way that may have little to do with the merits of the claims.

Anyway, I'd hate for this structural issue about modern litigation or my back-of-the-envelope musings on the subject to drown out what appears to be a compelling argument for nourishing that duty of good faith and fair dealing. But there that structural issue was, lurking not too far in the background in this and much other litigation about alleged corporate wrongdoing. So, I brought it up.

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