Ethical Regulations That Govern the Insurance Industry
The effectiveness of the insurance industry depends on the integrity of insurers and their agents.
Like all businesses involving contracts for services, the insurance industry has ethical responsibilities to its customers, both in marketing its products fairly and in faithfully living up to its contractual responsibilities through the processing of claims.
Because the industry operates through agencies, the burden of ethical responsibility is shared equally by insurers and producers.
Regulating this industry is a series of federal and state laws and regulations. While states carry the major burden of regulating insurance affairs, including ethical conduct of producers licensed to conduct business within their borders, the difference in regulations varies little from state to state. All adhere to a common set of ethical guidelines that have been instituted into law.
Their importance is emphasized by the number of questions on the subject of marketing ethics that are included in the various states’ certification examinations.
Unfair Marketing Practices
The Unfair Trade Practices Act is divided into two parts: unfair marketing practices and unfair claims practices. In each state, statutes define and prohibit certain trade and claims practices that are unfair, misleading, and deceptive. Violations of these laws are taken seriously and can result in loss of license.
Misrepresentation
Any written or oral statement that does not accurately describe a policy’s benefits, conditions, or coverage is considered a misrepresentation. A misrepresentation is simply a lie.
Any statement representing a health discount plan (HMO) as a form of insurance is a misrepresentation.
Relating only the benefits and not including a description of conditions or limitations is misrepresenting the policy.
Suggesting a policy is better suited for a prospective applicant than the facts would indicate to a reasonable person is misrepresentation.
Statements are deemed to be misrepresentations if, when taken in the context of the whole presentation, they may tend to mislead or deceive a person.
It is illegal to make any misleading representations or comparisons of companies or policies to insured persons to induce them to forfeit, change or surrender their present insurance.
Defamation
Defamation is any false, maliciously critical, or derogatory communication – written or oral – that injures another’s reputation, fame, or character. Both individuals and companies can be defamed. Unethical producers practice defamation by spreading rumors or falsehoods about the character of competing producers or about the financial condition of another company.
Most state insurance regulations state that no person or company may make, publish, or circulate an oral or written statement or circulate literature that is false, maliciously critical, or derogatory to the financial condition of any insurer or that is calculated to injure anyone engaged in the insurance business.
Rebating
Rebating occurs if a buyer of an insurance policy is given anything of significant value as an inducement to purchase or renew a policy. Any inducement in the sale of insurance that is not specified in the insurance contract itself is a rebate. For instance, splitting a commission with a prospect is not a part of the insurance contract and, therefore, constitutes a rebate. Rebates include not only cash, but also personal services or items of value. The free use of a vacation condominium, seats at ballgames, tickets to special events, or anything else not specifically named as part of the contract may be rebates.
Twisting
Twisting is the unethical act of persuading a policyowner to drop a policy solely for the purpose of selling another policy without regard to possible disadvantages to the policyowner. By definition, twisting involves some kind of misrepresentation – or “twisting” of truth –by the producer to convince the policyowner to switch insurance companies. Often, it involves encouraging an insured to lapse on his current policy and to take out another.
Churning
Churning is the practice of using misrepresentation to induce a policyholder to replace a policy issued by the insurer the producer represents, rather than the policy of a competitor. The objective of churning is to allow the producer to collect a large first-year commission on a new policy. Whereas twisting involves the policies and revenues of another insurer, churning occurs within the same company. Churning is the result of a producer putting his own interests above those of the client and the company for whom he is an agent.
False Financial Statements
It is a violation of unfair marketing practices of any person to deliberately make a false financial statement regarding the solvency of an insurer with the intent to deceive others.
Unfair Discrimination
Discrimination is a necessary part of the insurance business. Underwriters must make distinctions in rates and available policies based on applicants’ ages, predicted expectation of life, health hazards, and similar principles. In other words, they must consider the nature of the risk, the expense of conducting business, the propriety of the plan of insurance, and similar principles. So long as these principles are applied equally to each and every applicant or policyholder, discrimination is fair. When these principles are applied only to certain individuals within a group, the discrimination is unfair.
Unfair discrimination is the unequal application of the principles used to approve, rate, set premiums, and issue insurance policies.
Every state has laws prohibiting unfair discrimination in insurance. In general, they state that no insurance producer may unfairly discriminate between individuals of the same class and equal expectation of life in the rates charged for the policy or between individuals of the same class and of the same hazard in the amount of premium rates, in any manner whatsoever.
It is illegal to do any of the following:
Refuse to insure or to limit the amount of coverage offered to an individual solely because of the individual’s sex, marital status, race, religion, or national origin;
Refuse to insure solely because another insurer has refused to write a policy or has cancelled an existing policy on that person; or
Terminate or modify coverage or refuse to renew coverage solely because the applicant or insured is mentally or physically impaired.
Boycott, coercion, and intimidation
What these have in common is bullying: they use power unethically and unprofessionally to attempt to force a company or individual to behave in a certain way.
The difference is the means used to get the desired result.
Coercion and intimidation are more general and may employ a variety of means. Coercion generally manipulates through the prospect of something desirable. An agent’s subtly suggested offer to recommend the prospective client for membership in a selective club if the person purchases a particular policy is coercive, for instance. Intimidation manipulates through the threat of a negative result – the loss of business or the denial of coverage, for instance. A boycott is a form of intimidation in which an individual or group refuses to do business with a company or individual, either to drive them out of business or to force them to act in certain way.
All states have laws forbidding these practices. For instance, some states specify that no person may require, as a condition to a loan or credit extension, that the obligee purchase an insurance policy through any particular agency or insurer. Others specify that no person may require, as a condition to a loan or credit extension, that the obligee purchase an insurance policy through any particular person. All have laws stating simply that it is illegal to commit or agree to commit any act of boycott, coercion, or intimidation that results in a monopoly in the insurance business.
Penalties
Following an investigation and a hearing, if the Department of Insurance finds that any person or insurer is engaged in any unfair marketing or unfair claims practice, the Commissioner may issue a cease and desist order prohibiting the individual or company from continuing the practice.
Failure to comply with the cease and desist order can result in a substantial fine. In addition, fines and loss of license may also be imposed for a company or person guilty of violating the Unfair Trade Practices Act.
Unfair Claims Settlement Practices
Claims settlement practices are regulated in the public interest.
Insurance companies have collected and held policyholders’ money for the purpose of settling claims. And when insureds are denied claims or claim payments are delayed unreasonably or altered, the consequences go beyond the policy benefits and can drastically affect other areas of the insured’s financial situation.
The unfair claims practices provisions are designed to protect insureds and claimants from any claims settlement practices that are unfair, deceptive, or misleading.
Any of the following acts, if committed without just cause and performed frequently, constitute improper and unfair claim practices:
Knowingly misrepresenting to claimants pertinent facts relating to coverages;
Failing to acknowledge with reasonable promptness communications regarding claims;
Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed and filed;
Failing to adopt reasonable standards for prompt investigation and settlement of claims;
Not attempting in good faith to effect prompt, fair, and equitable settlement of claims;
Offering to settle claims for an amount less than the amount otherwise reasonably due or payable;
Delaying the investigation or payment of a claim by requiring an insured, claimant, or the physician of either to submit a preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information;
Threatening a client in order to discourage his effort to recover a loss or reduce the claim by, for instance, mentioning a policy of appealing arbitration awards that are in favor of insureds;
Any other practice which constitutes an unreasonable delay in paying or an unreasonable failure to pay or settle in full claims.
Penalties
Following an investigation and a hearing, if the Department of Insurance finds that any person or insurer is engaged in any unfair marketing or unfair claims practice, the Commissioner may issue a cease and desist order prohibiting the individual or company from continuing the practice.
Failure to comply with the cease and desist order can result in a substantial fine. In addition, fines and loss of license may also be imposed for a company or person guilty of violating the Unfair Trade Practices Act.
