Insurer Extracontractual Liability for Biased Algorithms and AI in Underwriting and Claims Handling

Description

Increasingly, insurance companies are turning to third-party vendors and software for underwriting, premium calculation, claims adjustment, and other functions previously done in-house. Some of this "insurtech" is software as a service (SaaS), while other companies sell artificial intelligence (AI)-based predictive analytics (algorithms). Insurtech is marketed to and designed to benefit the insurance company, its shareholders, venture capital, and other investors. Insurtech solutions promise cost efficiencies and new revenue streams, and predictions are that insurtech will shift the traditional insurance business model from loss compensation to loss prediction and prevention.

On the other hand, the U.S. Supreme Court has stated that insurance contracts are different from ordinary commercial transactions and are of the greatest public concern. All parties to an insurance contract (insurer, broker, policyholder) must perform their duties with the highest degree of good faith. For the insurance company, this duty demands that the insurance company not elevate its own self-interest above the policyholder's interests and must treat the policyholder fairly and honestly, and must treat the insurance company’s financial interest no greater than the policyholder’s financial interest.

From coast to coast, policyholders assert that using software expressly designed to favor the insurance company is irreconcilable with the duty of utmost good faith. They assert that insurtech fails to fairly and honestly investigate claims, uses formulas that artificially and unfairly lower settlement amounts, and is based on historically biased and inaccurate claims payment data incorporating decades of stereotypes and artificially suppressed values. Insurance companies and brokers are facing lawsuits for breach of contract, bad faith, RICO, conspiracy, negligence, professional malpractice, and in some states, violation of consumer protection laws.

Listen as this experienced panel discusses liability arising from the use of insurance technology and software.