Article

State-by-State Hurdles: Understanding U.S. Insurance Jurisdictions and the Unique Risks of New York’s Action Over Exposure

The United States insurance market is uniquely complex due to its structure of state-based regulation. Each of the 50 states, along with several territories, acts as a separate insurance jurisdiction with its own regulatory framework, laws, and market conditions. This decentralized system creates a diverse landscape of challenges for insurance carriers operating across the country. This article explores the different insurance jurisdictions throughout the United States and the specific challenges insurance carriers face in each.

Overview of U.S. Insurance Jurisdictions

Insurance regulation in the U.S. is governed primarily at the state level, a system established by the McCarran-Ferguson Act of 1945. This act affirms that states have the authority to regulate and tax the insurance industry as being in the public interest, superseding federal law in this domain. Each state has its own insurance department or commission responsible for overseeing insurer solvency, market conduct, rate approvals, and consumer protections. The National Association of Insurance Commissioners (NAIC) provides coordination and standard-setting but does not supersede state authority.

There are 56 recognized insurance jurisdictions in the U.S., including states and territories, each with varying degrees of regulatory stringency and market dynamics.

Key Challenges for Insurance Carriers by Jurisdiction

Regulatory Complexity and Compliance

State-by-State Licensing and Compliance: Insurance carriers must obtain licenses in each state where they operate, complying with diverse and sometimes conflicting regulatory requirements. This includes different rules on policy forms, rates, claims handling, and reporting. Failure to comply can result in penalties, license suspension, or revocation.

Rate and Form Approval: Many states require prior approval of insurance rates and policy forms, which can delay product launches and limit pricing flexibility. States vary widely in their approach, with some being more market-friendly and others more protective of consumers.

Market Stability and Solvency Oversight

States monitor insurer solvency to protect policyholders and maintain market stability. Insolvencies are rare but can have significant impacts. States have guaranty funds to protect consumers in case of insurer failure.

Some states focus more on policyholder protection, while others emphasize insurer solvency, creating a balancing act for regulators and carriers.

Natural Disaster Exposure and Catastrophe Risk

Certain states face acute challenges due to their exposure to natural disasters, which significantly impact insurance carriers:

California: Wildfires have caused massive losses, leading many insurers to restrict or cease writing new policies. The state's Proposition 103 imposes regulatory requirements on rate-setting that carriers find restrictive amid rising wildfire risks. The market is characterized by high premiums, limited availability, and regulatory efforts to stabilize coverage through programs like the FAIR Plan.

Florida: Hurricanes and flooding have led to a crisis in the homeowner insurance market. Insurers have exited the market or limited coverage due to high claims costs. Florida has implemented depopulation policies to move policyholders from the state insurer of last resort back to private carriers, but the market remains volatile with many smaller, less stable insurers entering and exiting.

Louisiana: Faces challenges with hurricane exposure and has recently passed legislation to address insurer solvency and claims disputes. The state has one of the worst insurance regulatory environments, complicating carrier operations.

Competitive and Regulatory Environment Variability

States differ in how competitive and free their insurance markets are. For example, Vermont consistently ranks as having the best insurance regulatory environment, promoting competition and solvency, while Louisiana and New York rank among the worst.

Some states have regulatory policies that discourage capital formation or stifle competition, impacting carriers' ability to operate profitably.

Emerging Regulatory Trends and Increased Activity

Regulatory activity has increased nationwide, with many states issuing new regulations, bulletins, and omnibus bills that complicate compliance for carriers. This trend is partly a response to the COVID-19 pandemic's aftermath and evolving market conditions.

States are also focusing on consumer protections related to claims handling, cancellations, and premium rate increases, requiring carriers to maintain robust compliance and market conduct programs.

Jurisdictional Disputes and Legal Challenges

Courts in different states sometimes disagree on issues such as personal jurisdiction over insurers, especially those issuing policies with nationwide or global coverage. This legal uncertainty adds complexity for carriers operating across multiple states.

Action Over Exposure in New York

What Is Action Over Exposure?

"Action over" exposure refers to a unique legal and insurance risk, particularly prevalent in New York, where an injured employee—after collecting workers’ compensation benefits—sues a third party (such as a property owner or general contractor) for additional damages. The third party, in turn, may seek indemnification from the employer, often through contractual agreements. This creates a scenario where the employer faces liability beyond workers’ compensation, despite statutory protections in most other states.

Why Is It a Major Issue in New York?

New York Labor Laws (Sections 200, 240, and 241): Commonly known as the "Scaffold Law," these statutes impose absolute liability on property owners and general contractors for elevation-related injuries, regardless of fault. This means that even if a worker’s own negligence contributed to the accident, the owner or general contractor can still be held fully liable.

High Frequency and Severity of Claims: Action over claims in New York often result in large settlements or judgments, sometimes reaching tens of millions of dollars, especially in construction-related cases involving falls or gravity-related injuries.

Insurance Market Impact: Many insurers either exclude action over coverage, restrict it, or charge significantly higher premiums for policies that include it. Some carriers have exited the New York market altogether due to poor loss experience and the unpredictability of these claims.

Contractual Risk Transfer: Hold-harmless and indemnity agreements in construction contracts can shift liability back to the employer, even after workers’ compensation has been paid. This contractual risk transfer is a key driver of action over exposure.

Challenges for Insurance Carriers

Coverage Exclusions and Gaps: Many general liability policies contain action over exclusions, leaving contractors and employers exposed to significant uninsured losses.

Underwriting Hesitancy: Insurers are often reluctant to offer action over coverage to new contractors or those without a proven safety record, further limiting market access and increasing costs for insureds.

Regulatory and Legal Uncertainty: The interplay between New York’s labor laws, contractual indemnity, and insurance policy language creates a highly complex and litigious environment for carriers and insureds alike.

Risk Management Strategies

Careful Policy Review: Contractors and employers must ensure their insurance policies do not contain action over exclusions and that coverage limits are adequate for the potential severity of claims.

Contract Negotiation: Limiting indemnity obligations and ensuring all parties on a project carry appropriate insurance can help mitigate exposure.

Alternative Risk Transfer: Some sophisticated insureds, including those using captive insurance solutions, may explore alternative structures to manage or finance this unique risk.

State	Key Challenges	Regulatory Environment Notes
California	Wildfire risk, high claims, restrictive rate-setting laws, insurer market exits	Proposition 103 impacts rate flexibility; FAIR Plan
Florida	Hurricane exposure, insurer market exits, high premiums, depopulation policies	Active efforts to transition policyholders to private market
Louisiana	Hurricane risk, legislative changes on claims and solvency, poor regulatory environment	Recent laws to improve insurer stability
Vermont	Favorable regulatory environment, promotes competition and solvency	Consistently top-ranked state for insurance regulation
New York	Action over exposure, strict labor laws, high liability for contractors and property owners	Scaffold Law imposes absolute liability; high insurance costs
Texas	Highly regulated workers' compensation market, diverse regulatory requirements	Unique in mandating workers' comp insurance
Georgia	Emerging market restrictions, premium caps, insurer limitations	Increasing carrier restrictions noted

The U.S. insurance market's state-based regulatory system creates a patchwork of jurisdictions, each with unique challenges for insurance carriers. These challenges range from regulatory compliance and market conduct oversight to managing catastrophe risks and navigating competitive environments. In New York, action over exposure stands out as a particularly acute risk, driven by unique labor laws and legal doctrines that can result in substantial liability for contractors, property owners, and their insurers. Carriers must adapt to diverse legal frameworks, regulatory expectations, and market conditions to operate successfully nationwide. Understanding the nuances of each jurisdiction is critical for insurers to manage risk, maintain solvency, and serve policyholders effectively. The evolving regulatory landscape and increasing natural disaster risks underscore the need for carriers to remain agile and compliant across all states.With these challenges come opportunity. As carriers may have limited appetite in challenging jurisdictions, sophisticated insureds will look to retain their own risk to insure their operations. This will allow them to take control of their insurance program and retain underwriting profit that before was absorbed by the insurance carrier in the commercial market. Captives Insure has the ability to provide AM Best Rated solutions in these jurisdictions that will satisfy any contractual requirements your business may have and allow you to take control of your insurance program and retain underwriting profit, giving your business a significant competitive advantage.