The Law of Unintended Consequences & Insurance
The Business Of Insurance Is Subject To The Law Of Unintended Consequences As If It Were On Steroids
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The law of unintended consequences is not statutory. No state or federal government has enacted it into law. No executive has signed the law. It is, rather, a law of the nature of people. It is an adage or idiomatic warning that an intervention in a complex system always creates unanticipated and often undesirable outcomes.
General observation requires the hypothesis that actions of people, especially of governments, will always have effects that are unanticipated or unintended, has been proved. Economists and other social scientists have heeded its power for centuries. Regardless, for just as long, politicians, insurers and popular opinion have largely ignored the law of unintended consequences to their detriment.
There is no common-law duty for a court, especially in a heavily regulated sector of the economy like insurance to create new rules. Every court should be loathe to invent duties unmoored to any existing precedent. The law of unintended consequences counsels against it.
To find a good illustration of the law of unintended consequences, one need look no further than the Supreme Court’s decision in Williamson County Regional Planning Comm’n v. Hamilton Bank of Johnson City, 473 U.S. 172, 105 S.Ct. 3108, 87 L.Ed.2d 126 (1985). The Court’s actual holding was pedestrian: that Hamilton Bank’s takings claim was unripe because the bank had not exhausted its administrative remedies, specifically its right to ask the County for a variance to develop the property in the manner proposed. In dictum, however—dictum in the sense that the Court’s pronouncement was at that point unnecessary to its decision—the Court went on to say that the bank’s claim was “not yet ripe” for a “second reason. That reason too was couched in terms of exhaustion: that under state law “a property owner may bring an inverse condemnation action to obtain just compensation for an alleged taking of property”; and that, until the bank “has utilized that procedure, its takings claim is premature.” The Court’s implicit assurance, of course, was that once a plaintiff checks these boxes, it can bring its takings claim back to federal court.
That assurance proved illusory. State-court judgments are things to which the federal courts owe full faith and credit. That obligation means that takings claims litigated in state court cannot be relitigated in federal. Thus—by all appearances inadvertently— Williamson County all but guarantees that claimants will be unable to utilize the federal courts to enforce the Fifth Amendment’s just compensation guarantee against state and local governments. [Lumbard v. City of Ann Arbor, 913 F.3d 585 (6th Cir. 2019)]
The law of unintended consequences applies as much in jurisprudence as anywhere else; bending a rule to accommodate one litigant doesn’t always achieve better justice — sometimes it just sows confusion in anyone trying to figure out what a court might do in other cases in the future. A prudent court will take the lesson to leave rulemaking to the legislators and administrators, even when the outcome appears unjust. The orderly development of the law is not without rough patches, 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)]
In addition, as one dissenter said that the majority’s desire to cure all wrongs by eviscerating the doctrine of governmental immunity, while well-intentioned, is fraught with the law of unintended consequences. Depriving governmental officials of governmental immunity when making policy decisions, when making sentencing decisions, and when running the government would certainly cause most of us to rethink 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 economics. Adam Smith’s “invisible hand,” the most famous metaphor in social science, is an example of a positive unintended consequence. Smith maintained that each individual, seeking only his own gain, “is led by an invisible hand to promote an end which was no part of his intention,” that end being the public interest. “It is not from the benevolence of the butcher, or the baker, that we expect our dinner,” Smith wrote, “but from regard to their own self-interest.”
Most often, however, the law of unintended consequences illuminates the perverse unanticipated effects of legislation, regulation and the decisions of appellate courts. In 1692 the English philosopher John Locke, a forerunner of modern economists, urged the defeat of a parliamentary bill designed to cut the maximum permissible rate of interest from 6 percent to 4 percent.
The law of unintended consequences provides the basis for many criticisms of government programs. Unintended consequences can add so much to the costs of some programs that they make the programs unwise even if they achieve their stated goals. For instance, the U.S. government-imposed quotas on imports of steel in order to protect steel companies and steelworkers from lower-priced competition. The quotas do help steel companies. But they also make less of the cheap steel available to U.S. automakers. As a result, the automakers have to pay more for steel than their foreign competitors do. So, a policy that protects one industry from foreign competition makes it harder for another industry to compete with imports.
Similarly, Social Security has helped alleviate poverty among senior citizens and the disabled. Many economists argue, however, that it has carried a cost that goes beyond the payroll taxes levied on workers and employers. Martin Feldstein, and others, maintain that today’s workers save less for their old age because they know they will receive Social Security checks when they retire. If Feldstein and the others are correct, it means that less savings are available, less investment takes place, and the economy and wages grow more slowly than they would without Social Security.
The law of unintended consequences is at work always and everywhere. People outraged about high prices of plywood in areas devastated by hurricanes, for example, may advocate price controls to keep the prices closer to usual levels. An unintended consequence is that suppliers of plywood from 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 government-controlled price. Thus, a shortage of a good resulted where it was badly needed.
Insurance is controlled by the courts, through appellate decisions, and by governmental agencies, through statute and regulation. Compliance with the appellate decisions, statutes, and regulations—different in the various states—is exceedingly difficult and expensive.
In the United States alone, people pay insurers more than $1.2 trillion in premiums, and insurers pay out in claims and expenses as much or more than they take in. Profit margins are small because competition is fierce, and a year’s profits can be lost to a single firestorm, hurricane, or flood.
(c) 2022 Barry Zalma & ClaimSchool, Inc.
Barry Zalma, Esq., CFE, now limits his practice to service as an 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 an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected].
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Jury’s Findings Interpreting Insurance Contract Affirmed
Post 5105
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Madelaine Chocolate Novelties, Inc. (“Madelaine Chocolate”) appealed the district court’s judgment following a jury verdict in favor of Great Northern Insurance Company (“Great Northern”) concerning storm-surge damage caused by “Superstorm Sandy” to Madelaine Chocolate’s production facilities.
In Madelaine Chocolate Novelties, Inc., d.b.a. The Madelaine Chocolate Company v. Great Northern Insurance Company, No. 23-212, United States Court of Appeals, Second Circuit (June 20, 2025) affirmed the trial court ruling in favor of the insurer.
BACKGROUND
Great Northern refused to pay the full claim amount and paid Madelaine Chocolate only about $4 million. In disclaiming coverage, Great Northern invoked the Policy’s flood-exclusion provision, which excludes, in relevant part, “loss or damage caused by ....
Failure to Name a Party as an Additional Insured Defeats Claim
Post 5104
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Contract Interpretation is Based on the Clear and Unambiguous Language of the Policy
In Associated Industries Insurance Company, Inc. v. Sentinel Insurance Company, Ltd., No. 23-CV-10400 (MMG), United States District Court, S.D. New York (June 16, 2025) an insurance coverage dispute arising from a personal injury action in New York State Supreme Court.
The underlying action, Eduardo Molina v. Venchi 2, LLC, et al., concerned injuries allegedly resulting from a construction accident at premises owned by Central Area Equities Associates LLC (CAEA) and leased by Venchi 2 LLC with the USDC required to determine who was entitled to a defense from which insurer.
KEY POINTS
Parties Involved:
CAEA is insured by Associated Industries Insurance Company, Inc. ...
Exclusion Establishes that There is No Duty to Defend Off Site Injuries
Post 5103
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Attack by Vicious Dog Excluded
In Foremost Insurance Company, Grand Rapids, Michigan v. Michael B. Steele and Sarah Brown and Kevin Lee Price, Civil Action No. 3:24-CV-00684, United States District Court, M.D. Pennsylvania (June 16, 2025)
Foremost Insurance Company (“Foremost”) sued Michael B. Steele (“Steele”), Sarah Brown (“Brown”), and Kevin Lee Price (“Price”) (collectively, “Defendants”). Foremost sought declaratory relief in the form of a declaration that
1. it owes no insurance coverage to Steele and has no duty to defend or indemnify Steele in an underlying tort action and
2. defense counsel that Foremost has assigned to Steele in the underlying action may withdraw his appearance.
Presently before the Court are two ...
ZIFL Volume 29, Issue 10
The Source for the Insurance Fraud Professional
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Zalma’s Insurance Fraud Letter (ZIFL) continues its 29th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year by ClaimSchool and is written by Barry Zalma. It is provided FREE to anyone who visits the site at http://zalma.com/zalmas-insurance-fraud-letter-2/ You can read the full issue of the May 15, 2025 issue at http://zalma.com/blog/wp-content/uploads/2025/05/ZIFL-05-15-2025.pdf
This issue contains the following articles about insurance fraud:
Health Care Fraud Trial Results in Murder for Hire of Witness
To Avoid Conviction for Insurance Fraud Defendants Murder Witness
In United States of America v. Louis Age, Jr.; Stanton Guillory; Louis Age, III; Ronald Wilson, Jr., No. 22-30656, United States Court of Appeals, Fifth Circuit (April 25, 2025) the Fifth Circuit dealt with the ...
Professional Health Care Services Exclusion Effective
Post 5073
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This opinion is the recommendation of a Magistrate Judge to the District Court Judge and involves Travelers Casualty Insurance Company and its duty to defend the New Mexico Bone and Joint Institute (NMBJI) and its physicians in a medical negligence lawsuit brought by Tervon Dorsey.
In Travelers Casualty Insurance Company Of America v. New Mexico Bone And Joint Institute, P.C.; American Foundation Of Lower Extremity Surgery And Research, Inc., a New Mexico Corporation; Riley Rampton, DPM; Loren K. Spencer, DPM; Tervon Dorsey, individually; Kimberly Dorsey, individually; and Kate Ferlic as Guardian Ad Litem for K.D. and J.D., minors, No. 2:24-cv-0027 MV/DLM, United States District Court, D. New Mexico (May 8, 2025) the Magistrate Judge Recommended:
Insurance Coverage Dispute:
Travelers issued a Commercial General Liability ...
A Heads I Win, Tails You Lose Story
Post 5062
Posted on April 30, 2025 by Barry Zalma
"This is a Fictionalized True Crime Story of Insurance Fraud that explains why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers. The story is designed to help everyone to Understand How Insurance Fraud in America is Costing Everyone who Buys Insurance Thousands of Dollars Every year and Why Insurance Fraud is Safer and More Profitable for the Perpetrators than any Other Crime."
Immigrant Criminals Attempt to Profit From Insurance Fraud
People who commit insurance fraud as a profession do so because it is easy. It requires no capital investment. The risk is low and the profits are high. The ease with which large amounts of money can be made from insurance fraud removes whatever moral hesitation might stop the perpetrator from committing the crime.
The temptation to do everything outside the law was the downfall of the brothers Karamazov. The brothers had escaped prison in the old Soviet Union by immigrating to the United...