1.4 Unfair Trade Practices & Claims Settlement Regulations

Unfair Trade Practices & Claims Settlement Regulations

Quick Answer: The insurance industry operates under strict ethical guidelines enforced by law. Regulators fiercely penalize deceptive sales tactics (Unfair Trade Practices) and bad faith claims handling (Unfair Claims Settlement Practices).

Because the insurance industry is built on a promise of future performance, consumer trust is paramount. State legislatures have enacted comprehensive laws to ensure that insurance is sold honestly and that claims are settled fairly. Violations of these statutes can result in license revocation, massive fines, and severe civil lawsuits for "bad faith."

Unfair Trade Practices

Unfair Trade Practices generally deal with the marketing, underwriting, and sales side of the insurance business. Regulators strictly prohibit tactics that deceive or unfairly pressure consumers.

Misrepresentation and False Advertising

It is illegal to issue, publish, or circulate any illustration or sales material that is false, misleading, or deceptive as to policy benefits or terms. This includes guaranteeing future dividends (which are never guaranteed) or misrepresenting the financial health of an insurer.

Defamation

Defamation occurs when an agent or company makes malicious, critical, or derogatory statements about the financial condition of another insurance company with the intent to injure that company's reputation.

Rebating

Rebating is offering an applicant any financial inducement or reward that is not specified in the insurance contract to convince them to buy a policy. Examples include offering to split your commission with the buyer, giving them expensive gifts, or offering to pay their first month's premium. Rebating is illegal in almost all states.

Twisting and Churning

• Twisting: Using misrepresentations or incomplete comparisons to induce a policyholder to lapse, forfeit, or surrender their current policy in order to buy a new policy from a different company.
• Churning: Similar to twisting, but the agent replaces a policy within the same company, solely to generate a new commission for themselves, to the detriment of the insured.

Boycott, Coercion, and Intimidation

It is illegal to use force, threats, or monopolistic practices to restrict fair trade or force consumers into purchasing insurance. For example, a bank cannot legally require a consumer to buy homeowners insurance from the bank's own insurance agency as a condition of securing a mortgage loan.

Unfair Claims Settlement Practices

While Unfair Trade Practices affect agents, Unfair Claims Settlement Practices directly govern your behavior as an adjuster. The National Association of Insurance Commissioners (NAIC) drafted a model act outlining specific behaviors that constitute unfair claims handling. Almost all states have adopted variations of this act.

As an adjuster, you must avoid all of the following practices. Engaging in them, particularly as a general business practice, is illegal:

1. Misrepresenting pertinent facts or policy provisions relating to the coverage at issue.
2. Failing to acknowledge and act reasonably promptly upon communications with respect to claims. (Many states mandate that you must acknowledge a claim within 15 days of receipt).
3. Failing to adopt and implement reasonable standards for the prompt investigation of claims.
4. Refusing to pay claims without conducting a reasonable investigation based upon all available information.
5. Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed.
6. Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.
7. Compelling insureds to institute litigation to recover amounts due by offering substantially less than the amounts ultimately recovered in actions brought by such insureds (low-balling).
8. Attempting to settle a claim for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material.
9. Making claims payments to insureds not accompanied by a statement setting forth the coverage under which the payments are being made.
10. Delaying the investigation or payment of claims by requiring an insured to submit a preliminary claim report and then requiring subsequent submission of formal proof of loss forms, both of which contain substantially the same information.

The Duty of Timeliness

Notice how many of the unfair practices focus on time: "promptly," "reasonable time," "delaying." Time is of the essence in claims handling. States enforce strict statutory timelines that adjusters must meet.

While specific days vary by state, a typical timeline requires the adjuster to:

• Acknowledge the claim within 15 days.
• Begin the investigation within 15 days.
• Request all necessary items (like a Proof of Loss form) from the insured during the initial contact.
• Accept or deny the claim within 15 business days of receiving all requested documentation.
• Pay the claim within 5 business days of agreeing to pay it.

Missing these deadlines is a primary trigger for regulatory audits and bad faith lawsuits against the insurer.

The Fiduciary Duty of an Adjuster

When you receive your adjuster's license and begin working claims, you operate in a fiduciary capacity. A fiduciary is a person who holds a position of special trust and confidence, particularly regarding financial matters.

As an adjuster (whether Staff or Independent), your principal is the insurance company. You have a fiduciary duty to handle the company's money with absolute integrity. You are authorized to issue checks on the company's behalf and make decisions that financially bind the insurer.

Fiduciary responsibilities include:

• Disclosing all conflicts of interest.
• Never commingling personal funds with company funds.
• Investigating claims thoroughly to protect the company from paying fraudulent claims.
• Paying valid claims promptly to protect the company from bad faith litigation.

By understanding and strictly adhering to Unfair Claims Settlement laws, you protect the public, shield your employer from lawsuits, and safeguard your own adjusting license.