3.1 NC Unfair Trade & Claims Settlement Practices

3.1 NC Unfair Trade & Claims Settlement Practices

Insurance contracts are contracts of utmost good faith (uberrimae fidei). Because policyholders rely on insurers for financial protection during times of acute distress, the State of North Carolina strictly regulates market conduct through statutory mandates. The North Carolina General Statutes (NCGS) Chapter 58, Article 63—known as the Unfair Trade Practices Act—defines and prohibits unfair methods of competition and unfair or deceptive acts or practices across the insurance industry. For claims adjusters, mastering the prohibited trade practices and the specific Unfair Claims Settlement Practices under NCGS § 58-63-15(11) is essential both for state licensing and for daily claims administration.

1. Statutory Purpose and Regulatory Authority

The fundamental purpose of NCGS Chapter 58, Article 63 is to regulate trade practices in the business of insurance by defining, or providing for the determination of, all such practices in North Carolina that constitute unfair methods of competition or deceptive acts, and by prohibiting them.

Under NCGS § 58-2-50 and § 58-63-20, the Commissioner of Insurance has broad authority to:

• Investigate the affairs of any person engaged in the business of insurance in North Carolina.
• Issue statements of charges, conduct formal administrative hearings, and subpoena witnesses and documents.
• Issue Cease and Desist Orders against insurers, adjusters, or producers.
• Impose monetary penalties under NCGS § 58-2-70 (ranging up to $1,000 to $5,000 per violation depending on willful intent) or order license suspension or revocation.

2. Prohibited Unfair Trade Practices (NCGS § 58-63-15)

Article 63 defines broad categories of prohibited marketing, underwriting, and competitive behaviors that undermine market integrity.

3. Unfair Claims Settlement Practices (NCGS § 58-63-15(11))

The heart of North Carolina claims regulation is NCGS § 58-63-15(11). This statute lists specific acts that constitute unfair claims settlement practices when committed knowingly or with such frequency as to indicate a general business practice.

The Statutory Prohibitions

Under NCGS § 58-63-15(11), the following acts are unlawful:

1. Misrepresentation of Coverage (§ 58-63-15(11)(a)): Misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue.
2. Failure to Acknowledge Communications (§ 58-63-15(11)(b)): Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies.
3. Failure to Adopt Investigation Standards (§ 58-63-15(11)(c)): Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies.
4. Refusal to Pay Without Investigation (§ 58-63-15(11)(d)): Refusing to pay claims without conducting a reasonable investigation based upon all available information.
5. Failure to Affirm or Deny Promptly (§ 58-63-15(11)(e)): Failing to affirm or deny coverage of claims within a reasonable time after proof-of-loss statements have been completed.
6. Failure to Settle Where Liability Is Clear (§ 58-63-15(11)(f)): Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.
7. Compelling Litigation Through Lowball Offers (§ 58-63-15(11)(g)): Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds.
8. Settling on Advertising Material (§ 58-63-15(11)(h)): 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 accompanying or made part of an application.
9. Altered Applications (§ 58-63-15(11)(i)): Attempting to settle claims on the basis of an application that was altered without notice to, or knowledge or consent of, the insured.
10. Payments Without Explanation of Coverage (§ 58-63-15(11)(j)): Making claims payments to insureds or beneficiaries not accompanied by a statement setting forth the coverage under which the payments are being made.
11. Threatening Appeals to Force Compromises (§ 58-63-15(11)(k)): Making known to insureds or claimants a policy of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration.
12. Duplicative Proof-of-Loss Requirements (§ 58-63-15(11)(l)): Delaying the investigation or payment of claims by requiring an insured, claimant, or physician of either 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.
13. Leveraging Unrelated Coverages (§ 58-63-15(11)(m)): Failing to promptly settle claims, where liability has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage.
14. Failure to Provide Written Explanation of Denial (§ 58-63-15(11)(n)): Failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement.

4. Statutory Claims Deadlines & Operational Timelines

To comply with North Carolina statutory and administrative standards, adjusters must adhere to strict temporal benchmarks:

• Furnishing Claim Forms (NCGS § 58-3-40): When an insurer receives written notice of loss from an insured or claimant, the insurer must furnish claim forms / proof-of-loss forms to the claimant within 15 calendar days. If the insurer fails to deliver the forms within 15 days, the claimant is deemed to have satisfied the proof-of-loss requirement by submitting written proof covering the occurrence, character, and extent of loss.
• Communication Acknowledgment: Insurers must acknowledge receipt of notices of claims and substantive inquiries within 15 days.
• Coverage Determination: The carrier must affirm or deny coverage, or state why additional time is needed, within 30 days of receiving a properly executed proof of loss.
• Claim Payment: Once an agreement on the settlement figure is reached, payment must be issued promptly (typically within 30 days).

5. Bad Faith, Extracontractual Damages, and NCGS Chapter 75

In North Carolina, claims handling failures subject insurers not only to administrative penalties from the NCDOI, but also to severe civil liability under both common law and statutory frameworks.

First-Party vs. Third-Party Bad Faith

1. First-Party Bad Faith (Dailey v. Integon General Ins. Corp. / Lovell v. Nationwide):

   • Arises between the insurer and its own named insured.
   • To recover punitive or extracontractual damages for breach of the covenant of good faith and fair dealing, the insured must establish three distinct elements:
     1. A refusal by the insurer to pay the valid claim after recognition of liability;
     2. Bad faith—meaning intentional wrongdoing, dishonest purpose, or conscious disregard of duty; and
     3. Aggravating conduct—such as fraud, malice, oppression, gross negligence, or reckless disregard of the insured's rights.

2. Third-Party Duty to Settle (State Auto Ins. Co. v. McClamrock):

   • Arises when a third party sues the insured for damages exceeding policy limits.
   • The insurer has a fiduciary duty to investigate thoroughly and negotiate in good faith. If the insurer unreasonably refuses a policy-limits settlement offer when liability is clear and damages plainly exceed limits, exposing the insured to a massive personal excess judgment, the insurer may be held liable for the entire excess judgment regardless of policy limits.

The Power of NCGS § 75-1.1 and Treble Damages

Under North Carolina law, a critical statutory bridge exists between the insurance code and general commercial law:

• NCGS § 75-1.1 prohibits unfair and deceptive trade practices in commerce.
• The North Carolina Supreme Court established in landmark decisions (Gray v. North Carolina Ins. Underwriting Ass'n and Murray v. Nationwide Mutual Ins. Co.) that a violation of NCGS § 58-63-15(11) constitutes a per se violation of NCGS § 75-1.1 as a matter of law.
• Mandatory Treble Damages (NCGS § 75-16): If a plaintiff proves actual damages resulting from an unfair claims practice under § 75-1.1, the trial court must automatically treble (triple) the actual damages award.
• Attorney Fees (NCGS § 75-16.1): The court may also award reasonable attorney fees to the prevailing plaintiff if the insurer's refusal to settle was willful and unwarranted.