Research Handbook on the Economics of Insurance Law

Research Handbook on the Economics of Insurance Law

Research Handbooks in Law and Economics series

Edited by Daniel Schwarcz and Peter Siegelman

Insurance law and insurance economics each have long and distinguished scholarly histories, but participants in the two disciplines have not always communicated well across academic silos. The Handbook encourages more policy-relevant insurance economics scholarship and more economically sophisticated legal scholarship by bringing together original contributions from leading scholars in insurance law and insurance economics on a range of issues involving insurance law and regulation.

Chapter 9: Classification risk and its regulation

Kenneth S. Abraham and Pierre-André Chiappori

Subjects: law - academic, commercial law, insurance law, law and economics


In McGann v. H & H Music Company (McGann), a man with group health insurance provided through his employer contracted AIDS. At the expiration of the policy period, his employer changed the terms of coverage, which previously had provided lifetime coverage of $1 million, by limiting lifetime coverage of AIDS-related claims to a maximum of $5,000. McGann sued for ‘discrimination’ under the Employment Retirement Income Security Act of 1974 (ERISA, § 510). The court held that there had been no discrimination in the sense prohibited under ERISA, because the new lifetime maximum applied to all employees, not just to McGann himself. ERISA, said the court, does not regulate the actual terms of employee benefits, only the manner in which those terms are administered and applied. It seems likely that, whatever personal attitudes the employer had toward AIDS, it had understandable economic reasons for making the change. The employer probably was providing health insurance to a comparatively small group of employees. After one of them incurred the need for expensive treatment, the employer’s premiums would likely have increased steeply when the policy period (and therefore the insurance contract) expired, if the employer continued to provide the same coverage. So new, more limited coverage was negotiated in order to keep overall premiums manageable.

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