The Law of Unintended Consequences and Insurance

Simplified Wording Causes Ambiguity

Insurance contracts can be simple or exceedingly complex, depending on the risks taken on by the insurer. Regardless, insurance is neither more nor less than a contract whose terms are agreed to by the parties to the contract.

Over the last few centuries, almost every word and phrase used in insurance contracts have been interpreted and applied by one court or another. Ambiguity in contract language became certain. However, the average person saw the insurance contract as incomprehensible and impossible to understand.

Courts, struggling to understand policies of insurance added to the concern of Legislators and, as said in Insurance Company of North America v. Electronic Purification Company, 67 Cal. 2d 679, 689, 63 Cal. Rptr. 382, 433 (1967):

the insurance company gave the insured coverage in relatively simple language easily understood by the common man in the marketplace, but attempted to take away a portion of this same coverage in paragraphs and language which even a lawyer, be he from Philadelphia or Bungy, would find difficult to comprehend. [Hays v. Pacific Indemnity Group,8 Cal. App. 3d. 158, 80 Cal. Rptr. 815 (1970).]

Ostensibly to protect the public, to salve the concerns of jurists like the one quoted above, insurance regulators and Legislatures decided to require that insurers write their policies in “easy to read” language. Because they were required to do so by law, the insurers changed the words in their contracts into language that people with a fourth-grade education could understand. Precise language interpreted by hundreds of years of court decisions was disposed of and replaced with imprecise, easy to read language. [For examples of the “easy to read” or “plain English statutes” go to Appendix 1.]

The “easy to read statutes” made with the intent to help the public understand insurance policies and avoid litigation, became a victim of law of unintended consequences. Instead of protecting the consumer, the imprecise language resulted in thousands of lawsuits determined to impose penalties on insurers for attempting to enforce ambiguous “easy to read” language.

The lawsuits cost insurers and their insureds millions of dollars to get court opinions that interpret the language and reword their “easy to read” policies to comply with the court decisions. For more than 50 years, the unintended consequence of a law designed to avoid litigation has done exactly the opposite.

The attempts by regulators and courts to control insurers and protect consumers were made with the best of intentions. The judges and regulators found it necessary to protect the innocent against what they perceived to be the rich and powerful insurer. Unfortunately, the plain English statutes had the opposite effect.

Of course, the fact that easy to read policies cause more problems than they cure, had no effect on regulators and legislators, the laws and regulations have not been changed.

Bad Faith Causes Bad Behavior

In the 1950s, the California Supreme Court created a tort new to U.S. jurisprudence: the tort of bad faith.

A tort is a civil wrong from which one person can receive damages from another for multiple injuries. The tort of bad faith was created because an insurer failed to treat an insured fairly, and the court felt that the traditional contract damages were insufficient to properly compensate the insured. The court allowed the insured to receive, in addition to the contract damages that the insured was entitled to receive under the contract had the insurer treated the insured fairly, damages for emotional distress and punitive damages to punish the insurer for its wrongful acts.

Insureds, lawyers for insureds, regulators, and courts across the United States cheered the action of the California Supreme Court, for providing a fair remedy to abused insureds. Most of the states adopted the tort created by the California Supreme Court. Some enacted statutes allowing for litigation of the tort of bad faith. Many did so, like California, by judicial fiat.

After the creation of the tort of bad faith, if an insurer and insured disagreed on the application of the policy to the factual situation, damages were no longer limited to contract damages as in other commercial relationships. If the court found that the insurer was wrong, it could be required to pay the contract amount and damages for emotional distress, pain, suffering, punishment damages, attorney fees, and any other damages the insured and the court could conceive in order to deter other insurers from treating their insureds badly.

The courts and legislators adopting the tort of bad faith hoped that the tort of bad faith would have a salutary effect on the insurance industry and force insurers to treat their insureds fairly. However, even after claims for $40 wrongfully denied resulted in $5 million verdicts, the intended purpose of the bad faith cases and statutes were skewed. Juries, unaware of the reason for and operation of insurance, decided that insurers that did not pay claims were evil and that they wrote contracts so they never had to pay claims. The jurors were convinced it was appropriate to punish insurers severely even when the insurer’s conduct was correct and proper under the terms of its contract since no insurance policy can cover every possible eventuality.

The massive judgments were publicized, and many insurers decided fighting their insureds in court was too expensive regardless of how correct their position was on the contract. They found it less expensive to pay than to fight just as shop owners threatened by the Mafia decided it was better to pay protection to the Mob rather than fight.

Most of the massive verdicts were reversed or reduced on appeal. The bad actors raised their premiums and lost little business. Other insurers, faced with the massive verdicts, allowed fear to control reason, and paid claims that were improper or fraudulent.

The extra cost was passed on to all insurance consumers. The insurers who acted improperly were punished less than then honest insurers who were threatened with punitive damages. The insurers who treated their insureds badly, in fact, profited since they continued their wrongful acts and only were required to pay the few insureds that sued. Those insureds that did not sue added to the wrongdoers’ profit margins.

Honest insurers, fearful of being painted with the bad faith brush, paid frauds and claims they did not owe. As a result the insurers that paid claims they did not owe found they needed to raise premium charges to cover the extra expense. The increased premium paid by insureds to cover the extra expense was a clear example of the effect of the law of unintended consequences. The insurers and their insureds who paid rather than fight for fear of assessments of punitive damages, lost business and profits because they could not actuarially predict the cost of paying tribute to insureds and lawyers claiming the tort of bad faith.

The law of unintended consequences struck the insurance industry and the insurance buying public. Rather than deter wrongful actions the law of unintended consequences resulted in punishing the honest and correct insurers, honoring the insurers who acted in bad faith with profit, and allowed many frauds to succeed.


 According to the CDC, between 2000 and 2017, the number of opioid overdose deaths in the United States more than 700,000 people have died from a drug overdose.  On average, 130 Americans die every day from an opioid overdose.

From 1999-2017, almost 400,000 people died from an overdose involving any opioid, including prescription and illicit opioids.

This rise in opioid overdose deaths can be outlined in three distinct waves.

  1. The first wave began with increased prescribing of opioids in the 1990s , with overdose deaths involving prescription opioids (natural and semi-synthetic opioids and methadone) increasing since at least 1999.
  2. The second wave began in 2010, with rapid increases in overdose deaths involving heroin.
  3. The third wave began in 2013, with significant increases in overdose deaths involving synthetic opioids – particularly those involving illicitly-manufactured fentanyl (IMF). The IMF market continues to change, and IMF can be found in combination with heroin, counterfeit pills, and cocaine.

The road to the current epidemic began to be paved with good intentions in the late 1990s when, soon after the FDA approved the controlled-release form of oxycodone (Oxycontin), the American Pain Society introduced the phrase “pain as the fifth vital sign.”

In 1999, the Department of Veterans Affairs embraced the statement, as did other organizations. The Joint Commission standards for pain management in 2001 stated “pain is assessed in all patients” (all was dropped in 2009) and contained a passing reference to pain as the fifth vital sign.

In 2012, CMS added to its ED performance core measures timely pain treatment for long bone fractures, emphasizing parenteral medications. The government was, to save people from pain, requiring the prescription of opiods that resulted in multiple addictions.

By 2010, the problems created by emphasizing effective pain management had become evident, and measures began to be introduced to restrict the prescribing and availability of pharmaceutical opioids. The restrictions sent many patients to EDs seeking pain medications. Others sought substitutes on the street and ultimately ended up in EDs as overdoses from very potent synthetics. Many EPs began to limit opioid prescriptions to 3 days for acute painful conditions, though not all patients were able to obtain follow-up appointments with PCPs within that time period.

In April 2016, the Joint Commission issued a statement claiming it was not responsible for “pain as the fifth vital sign” or for suggesting that pain be treated with opioids.

In June 2016, the AMA urged dropping “pain-as-the-fifth-vital-sign” policies, and in 2014, CMS modified its core measure emphasis on parenteral medication in the timely treatment of long bone fractures. But the damage has been done, leaving many people requiring help managing their pain and others suffering the consequences of opioid dependence.

As a result, the government health programs began paying for opiods without any real controls or limitations on the doctors prescribing them and patients becoming dependent on them.

In the hope of reducing opioid use, abuse, and overdoses, policymakers have focused on developing and promoting tamper-resistant or abuse-deterrent formulations (ADFs) that render diverted opioids unusable if individuals attempt to use them for nonmedical (i.e., recreational) purposes.

Although the benefits of ADFs seem to be nonexistent, these formulations have led to real harms. ADFs have encouraged users to switch to more dangerous opioids, including illegal heroin. In at least one instance, the reformulation of a prescription opioid led to a human immunodeficiency virus (HIV) outbreak.

Along the way, ADFs unnecessarily increase drug prices, imposing unnecessary costs on health insurance purchasers, taxpayers, and particularly patients suffering from chronic pain. Like the federal government’s promotion of abuse-deterrent alcohol a century ago, these efforts are producing unintended consequences, such as making legal pain relief unaffordable for many patients and possibly increasing morbidity and mortality.

In the 1990s, for example, some states required consumers to purchase coverage for an experimental, expensive, and highly toxic breast-cancer treatment called high-dose chemotherapy with autologous bone marrow transplant. The treatment involves harvesting the patient’s bone marrow, administering essentially lethal doses of chemotherapy, and then reinfusing the patient’s bone marrow to restart her immune system. The treatment proved no more effective than standard chemotherapy, meaning it subjected breast-cancer patients to greater suffering for no clinical benefit. Under pressure from patient advocacy groups, states—including Massachusetts and Minnesota—nevertheless required insurers to cover the procedure.

The evidence shows that ADF opioids are an ineffective and harmful approach to reducing opioid overdoses. Government at all levels should stop promoting them. Congress should end or limit the ability of pharmaceutical manufacturers to impose higher costs on pain patients by using ADFs to evergreen their opioid patients. The FDA should end its policy of encouraging ADF opioids, particularly its goal of eliminating non-ADF opioids. Ideally, the agency should adopt a position of skepticism.

At the least, it should be neutral on the issue. Lawmakers should abandon efforts to require consumers to purchase coverage for costlier ADF opioids and should instead allow insurers to steer medical users of these products toward cheaper, non-ADF, generic formulations.

The prescription of opiods has become a temptation for physicians who feel they are underpaid to become rich providing medically unnecessary opiods.

This post was adapted from my newest book, The Law of Unintended Consequences and the Tort of Bad Faith.

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.

Most often, however, the law of unintended consequences illuminates the perverse unanticipated effects of legislation and regulation. 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. 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.

The business of insurance is, unfortunately, subject to the law of unintended consequences as if it were on steroids.

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© 2019 – Barry Zalma

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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