What are some of the differences between the insurance industry in Australia and the United States? Insurance broker Joe Hershewe (pictured above) says key differences include each country’s regulatory structures but also complexities unique to the US, like “insurance bad faith”.
“I think one of the biggest differences is that with the US and its 50 different states, you may get idiosyncrasies in those state laws which you obviously have to be quite well equipped to know,” said Hershewe.
Before moving to Australia in 2013, the American tax and insurance attorney turned Aussie insurance broker was advising insurance firms in Missouri and Kansas. For both legal and insurance contracts, he said, “you end up becoming quite entrenched in the various state law precedents in each of those states.”
This was the regulatory backdrop to his US career. Today, as head of claims for Bellrock in Sydney, he said he’s “entrenched” in a different “overarching umbrella”: Australia’s Insurance Contracts Act 1984 (ICA).
“In the US there isn't something like Australia’s Insurance Contracts Act which pre-empts the space in a way, regardless of what Australian state you're in,” said Hershewe.
Unlike in the state focused industry of the US, he said the ICA is “principally what governs an insurance contract in Australia.”
The result, he suggested, is that insurance contracts in the US can be very different from state to state. In Australia, insurance contracts tend to be quite uniform.
“That's one of the biggest differences for me, particularly from a claims side,” said Hershewe. “I think from a broker's perspective that probably makes it challenging when you have a customer who has business in all 50 states and you're managing their operations in different jurisdictions and when it crosses state lines.”
He suggested that this could be one reason why big US insurers and brokerages tend to have significant regionally based operations.
“Because they know there are so many idiosyncrasies between what you need in Missouri versus what you might need in California,” said Hershewe.
Typically, he said, each US state has an insurance commissioner responsible for regulating insurance.
However, the US industry does have its national bodies and laws.
“Then there’s the National Association of Insurance Commissioners (NAIC),” he said. “So they link together when issues touch upon each of the different states.”
Some US states, he said, have adopted important uniform legislation in whole or in part, like the Unfair Claims Settlement Practices Act.
“This really governs what you're held to as far as expectations for how your claims handling should be done, so including turnaround times,” said Hershewe.
He said some of this uniform state legislation can look a little like Australia’s General Insurance Code of Practice. However, he said compared to the US regulatory system, Australia’s ICA is “more of a unified, guiding light.”
However, he said state laws Down Under do still play a role in the industry.
“I think the main differences you get in state laws here might be on legal liability theories and various types of cognitive actions and how the different states’ courts have interpreted them,” said Hershewe. “In the US the insurance contracts themselves can be very different between the states.”
Insurance Business asked just how different they can be.
“If you look at California versus other jurisdictions, this state is probably the one that always sticks out as generally having a very consumer-orientated framework,” he said.
“I think the other difference is that when I was in the US giving advice to insurers, there is this concept of bad faith that's unique to the US,” said Hershewe.
Insurance bad faith, according to online sources, describes a claim that a policyholder may file against an insurance company for alleged acts of bad faith.
“Within most jurisdictions in the US, insurance companies owe a duty of good faith and fair dealings to their policyholders,” says Legal Dictionary. “If an insurance company violates this duty, however, it has committed insurance bad faith.”
“It typically goes to whether or not they had a reasonable and good-faith basis for declining cover to a customer,” said Hershewe.
According to Legal Dictionary, the term is “exclusive to the United States.”
Investopedia defines bad faith insurance as “an insurer’s attempt to renege on its obligations to its clients,” including refusing to pay a legitimate claim.
“Claims handling in the US can be quite damaging both to a firm’s reputation and also financially,” said Hershewe. “If an insurer is found to have handled a claim in bad faith it can actually result in what's called an extra-contractual exposure to the insurer with damages above the policy limits in certain instances.”
Hershewe said that Australia’s Insurance Contracts Act does have a positive impact on how the industry operates.
“I will say that when I first came into contact with the Insurance Contracts Act I was somewhat taken aback but very interested,” he said. “Then the more I’ve worked with it, the more I think it does help.”
He said it can cut down on contested contract terms and provisions “because there's so much case law around it.”
This means, he said, that the act – rather than individual insurance contracts – tends to drive how certain provisions are interpreted which, he suggested, gives more clarity to decisions and outcomes.
Have you worked in both the American and Australian insurance industries? What similarities or differences did you notice? Please tell us below
