Federal Laws and Regulations for Insurance

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The Unfair Insurance Trade Practices Act

The purpose of this Act is to regulate Trade Practices in the business of insurance in accordance with the intent of Congress as expressed in the Act of Congress of March 9, 1945 (Public Law 15, 79th Congress) and the Gramm-Leach-Bliley Act (GLBA) (Public Law 106-102, 106th Congress), by defining, or providing for the determination of, all such practices in this state that constitute unfair methods of competition or unfair or deceptive acts or practices and by prohibiting the trade practices so defined or determined. Nothing herein shall be construed to create or imply a private cause of action for a violation of this Act.

Understanding The Unfair Insurance Trade Practices Act

The National Association of Insurance Commissioners (NAIC) has created legislation that states that claims be handled fairly and that there is clear communication between the insurer and the insured. Because of this legislation, many states have implemented unfair claims practice laws.

The NAIC defines unfair trade practices as:

• Misrepresents the benefits, advantages, conditions or terms of any policy; or
• Misrepresents the dividends or share of the surplus to be received on any policy; or
• Makes a false or misleading statement as to the dividends or share of surplus previously paid on any policy; or
• Is misleading or is a misrepresentation as to the financial condition of any insurer, or as to the legal reserve system upon which any life insurer operates; or
• Uses any name or title of any policy or class of policies misrepresenting the true nature thereof; or
• Is a misrepresentation, including any intentional misquote of premium rate, for the purpose of inducing or tending to induce the purchase, lapse, forfeiture, exchange, conversion or surrender of any policy; or
• Is a misrepresentation for the purpose of effecting a pledge or assignment of or effecting a loan against any policy; or
• Misrepresents any policy as being shares of stock

The NAIC considers an unfair trade practice any of the above acts coupled with the conditions below:

• It is committed flagrantly and in conscious disregard of the act or of any rules promulgated hereunder; or
• It has been committed with such frequency to indicate a general business practice to engage in that type of conduct.
• Unfair Methods of Competition and Unfair or Deceptive Acts
• Settling a claim based upon an altered application, either as a binder or as part of the policy
• Material representation made to the insured or anyone else having an interest in the policy proceeds
• Failing to affirm or deny full or partial coverage without a written statement within 30 days after proof of loss is presented
• Failing to advise insured of additional information necessary to finalize a claim
• Failing to advise insured of the reason additional information is necessary
• Fair Credit Reporting Act (15 USC 1681-1681d)
• The Fair Credit Reporting Act protects consumer privacy while ensuring data collected is confidential, accurate, relevant and used for a proper and specific purpose. It also protects the public from overly intrusive information collection practices.

When an application is taken, it must inform the applicant a credit report (from consumer reporting agency) will be obtained. The purpose of this is to determine the financial and moral status of an applicant (for a variety of purposes such as employment screening, insurance underwriting or loan approvals).

Financial Anti-Terrorism Act (The USA Patriot Act)
The Financial Anti-Terrorism Act imposes record keeping and government reporting requirements on banks, financial institutions and non-financial businesses for specific financial transactions and customer financial records (a part of the Bank Secrecy Act).

A fraudulent act involves a misstatement of material fact by a person who knows or believes that statement to be false. The statement is made to another person who relies on its accuracy to make a decision or to act and is subsequently harmed by relying on the deliberately false statement. State fraudulent insurance acts do not modify the privacy of any individual; they protect producers, brokers, and insurers in the event fraudulent information is provided by consumers.

Insurance applications and claim forms must contain a disclosure about how false statements and fraud will be treated by the insurer. A sample warning is, “Any person who knowingly presents false or fraudulent information on an insurance application or claims for the payment of a loss is guilty of a crime and may be subject to fines and confinement in state prison.”

If a person engaged in the business of insurance whose activities affect interstate commerce willfully embezzles, misappropriates funds/property, knowingly and with the intent to deceive makes a false material statement or purposely overstates the security of an insurer, the following penalties apply:

Merchant Marine Act of 1920 (the Jones Act)
Because workers’ compensation laws do not apply to seamen, the Jones Act allows insured seamen to make claims for injuries suffered during the course of employment. It also regulates maritime commerce in U.S. waters, transportation of cargo, and the rights of seamen.

Motor Carrier Regulatory and Modernization Act (the Motor Carrier Act of 1980)
Deregulated the trucking industry by prohibiting any entity from interfering with a motor carrier’s right to set its own rates. Motor carriers and private motor carriers that transport property is required to establish evidence of financial responsibility in the form of insurance, a bond, a guarantee, or qualification as a self-insurer.

Gramm-Leach-Bliley Act (GLBA, a.k.a. the Financial Services Modernization Act of 1999)
This act repealed parts of the Glass-Steagall Act of 1933 to allow the merger of banks, securities companies, and insurance companies. It also established the Financial Privacy Rule and Safeguards Rule for the protection of consumers’ privacy. The Financial Privacy Rule requires “financial institutions,” which include insurers, to provide each consumer with a privacy notice at the time the consumer relationship is established and annually after that. The privacy notice must explain:

• The information collected about the consumer
• Where that information is shared
• How that information is used
• How that information is protected
• The notice must also identify the consumer’s right to opt out of the information being shared with unaffiliated parties pursuant to the provisions of the Fair Credit Reporting Act. Should the financial institution’s privacy policy change at any point in time, the consumer must be notified again for acceptance.
• Each time the privacy notice is re-established, the consumer has the right to opt out again.

Terrorism Risk Insurance Act and Its Extensions of 2005 and 2007
The Terrorism Risk Insurance Act of 2002 (TRIA)
This act was enacted in direct response to the terrorist attacks New York City and Washington, D.C. on September 11, 2001. Congress provided temporary financial compensation to insured parties during its crisis of recovery from the terrorist attacks.TRIA was intended to respond to the chaos the 9/11 terrorist attacks caused in the insurance industry as well as to assure that commercial property and liability insurance would continue to be able to provide coverage for the peril of terrorism. It also was a temporary program that allowed the federal government to share in terrorism losses with private insurers in the event a certified act of terrorism took place.

TRIA expired on December 31, 2005, and was extended for two years, with changes, under the Terrorism Risk Insurance Extension Act of 2005 (TRIEA). It was extended with changes a second time, in 2007, under the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) and is scheduled to expire on December 31, 2020. It protects consumers by addressing market disruptions and ensuring the continued widespread availability and affordability of property and casualty insurance for terrorism risk.

The Act provides for a Terrorism Insurance Program established in the Department of the Treasury. The Secretary of the Treasury administers the Program and an “Act of Terrorism” is defined as any act certified by the Secretary of Treasury, in cooperation with the Secretary of State and Attorney General. The Program covers only commercial property and casualty insurance; personal lines insurance and life and health insurance are not covered.
No payment may be made by the Secretary under the Program with respect to an insured loss that is covered by an insurer, unless:

• The person that suffers the insured loss, or a person acting on behalf of that person, can file a claim with the insurer.
• The insurer provides clear and conspicuous disclosure to the policyholder of the premium charged for insured losses covered by the Program and the Federal share of compensation for insured losses under the Program.
• The insurer processes the claim for the insured loss in accordance with appropriate business practices, and any reasonable procedures that the Secretary may prescribe.
• The insurer submits to the Secretary, in accordance with such reasonable procedures as the Secretary may establish.

An insurer must make coverage for insured losses that do not differ materially from the terms, amounts, and other coverage limitations applicable to losses arising from events other than acts of terrorism. However, the Secretary shall not make any payment for any portion of the amount of such losses that exceed $100 billion (cap on annual liability) and no insurer that has met its insurer deductible shall be liable for the payment of any portion of that amount that exceeds $100 billion.

The insurer deductible is 20% of all covered losses and the insurance marketplace aggregate retention amount (the maximum losses the insurance industry must sustain before federal co-payments are available) is the lesser of $27.5 billion and the aggregate amount, for all insurers, of insured losses during such period. The insurance companies share of losses in excess of the deductible (amounts paid or losses exceeding insurer’s deductible) is 15%, while the federal government is responsible for 85%.

Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)
The largest crime bill in U.S. history expands funding to federal agencies such as the FBI, DEA, and INS and includes provisions that address (among other topics) domestic abuse and firearms, gang crimes, immigration, registration of sexually violent offenders, victims of crime, and fraud.

The Act made it a felony for a person to engage in the business of insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust. Violations include willfully embezzling money, knowingly making false entries in any book, report or statement of the business, threatening or impeding proper administration of the law in any proceeding involving the business of insurance.

• Dishonesty – Deceit, misrepresentation, untruthfulness, falsification
• Breach of Trust – Based on the fiduciary relationship of parties and the wrongful acts violating the relationship

Penalties include fines and possible prison time.

Insurance license applicants and producers:

• Applicants who have been convicted of a felony must apply for Consent to Work in the business of insurance— before applying for an insurance license
• Producers must apply for consent in their resident state
• Officers and employees must apply for consent in the state where their home office is located
• Prohibited persons (convicted felons) must apply for consent to discover if they are permitted or banned from the insurance business
• Reciprocity – If consent is granted by any state, other states must allow the applicant to work in their states as well
• Consent Withdrawal – If conditions of consent are not continually met, the consent may be withdrawn