CreditSlips

Prompted by several comments to one of my earlier posts, I've been thinking about situations where a homeowner files an insurance claim for property damage to her home while she is in default on her mortgage.  The general practice, as I understand it, is for insurers to write claim settlement checks out to the mortgagee, rather than the policyholder, in such situations.

I’ve argued in my posts so far that transparency in property/casualty insurance markets is woefully inadequate.  Transparency, however, is not always a particularly good solution to a regulatory problem. The most visible controversy in the property/casualty insurance industry in the last decade illustrates this point nicely.  

Eric Rasmusen of Indiana University and I were having a back channel communication on the U.S. Supreme Court's holding Stern v. Marshall (see here for a summary).

Insurance nerds like to point out that insurance coverage is a pre-requisite to a wide range of activities, from starting a business to practicing medicine to driving a car.  In this sense, insurers often serve as gatekeepers to fundamental social privileges.  Nowhere is this more starkly illustrated than in the residential real estate context.  As one court succinctly put it: “No insurance, no loan; no loan, no house; lack of insurance thus makes housing unavailable.”  

Not surprisingly, one of the core consumer protection issues in insurance is ensuring that carriers pay claims fairly and expeditiously.  Unlike many contracts, insurance policies are sequential and contingent: whereas the policyholder performs routinely by paying premiums, the insurer performs by paying a claim if, and only if, a loss occurs.  This dynamic creates special risks of unfair business practices.  These risks are enhanced by the fact that many insurance policies (outside of the life insurance context) necessarily rely on abstract languag