Insurance Law
What is Insurance?
Insurance is a contract between two parties. The insured party pays a premium for a policy from the other party, the insurer. In the contract, the insurer agrees to pay the insured the costs of specific types of losses.[1]
For instance, if you have a home insurance policy, you pay a certain amount of money for it, the premium. If a storm damages your home and you need to replace the roof, the insurer pays the cost.
What a policy covers depends on the contract you agreed to with the insurer. Insurance comes in many different forms. A policy may cover your home, a vehicle, or medical costs. It may pay out when someone dies or if you become disabled on the job.
Insurance can be through a private company. Home, life, auto, and business insurance are generally private. It can also be government-run. This includes Social Security disability and unemployment insurance. Health insurance is often private, but government programs include Medicare and Medicaid.
What is Insurance Law?
Insurance law encompasses all laws that regulate the insurance industry, which is mostly at the state level. The laws and regulations are in place to protect consumers. They include laws for company and producer licensing, product regulation, market conduct, financial regulation, and consumer services.
Federal Insurance Law
The federal government has little influence on the insurance industry. It was not even considered subject to regulation for many years as it was not considered commerce. In 1944, a Supreme Court decision determined that insurance could be regulated. The subsequent federal McCarran-Ferguson Act gave the power to regulate insurance to the states.
The federal Dodd-Frank Act of 2010 put a lot of regulations on financial institutions. It also created the Federal Insurance Office. This agency is supposed to monitor and stabilize the insurance agency, but it has no regulatory power.
How Do States Regulate Insurance?
States regulate the industry through an administrative agency or office, which goes by different names depending on the state. State laws regulate insurance in several ways to protect consumers’ interests:[2]
Market Regulation
Regulation of prices for policies keeps the cost of insurance within a certain range. Prices are not too high to be unfair to consumers and not so low that insurers lack the funds to pay claims.
Price regulation also helps prevent unlawful discrimination. An insurance company can charge different rates based on risk, for instance, giving someone a higher auto insurance policy because they have been in a lot of accidents. They cannot discriminate based on unrelated or protected factors, such as race or religion.
Company and Producer Licensing
Every state requires that insurance companies and producers be licensed. A producer is an insurance agent or broker. Both must meet professional standards that vary by state. This helps maintain fair and good practices. Producers must keep up to date with continuing education programs.
Financial Regulation
States regulate the finances of insurance companies, keeping databases of 15 years of quarterly and annual filings. Companies must also submit to periodic reviews of their finances. If a company is found to be in poor financial standing, the state may take over operations. The state keeps a fund to reimburse consumers when an insurance company fails.
Consumer Services
Each state also protects consumers by providing them with service units to handle complaints and questions. State insurance departments handle thousands of complaints and are able to resolve many disputes with insurance companies.
Consumer services units in many states offer hotlines and websites consumers can use as well as a search tool for researching an insurance company before buying a policy and educational opportunities for consumers to learn more about insurance and to get comparison guides.
Anti-Discrimination Insurance Laws
Federal laws prohibit discrimination by certain factors—such as race and gender—in many settings. They do not include insurance because regulation of the industry is largely left up to states. Most states have some degree of protection against discrimination in insurance.
Insurance companies may discriminate based on certain factors that are not protected or that are relevant to risk. For instance, a younger driver with less experience can be charged more for auto insurance than an older driver. This is not considered unfair discrimination.
Anti-discrimination varies by state. All states have robust policies against discrimination by race, religion, and national origin. Other factors, including gender, sexual orientation, credit score, age, zip code, and genetics, are handled differently. Some states offer some protections, and those vary by insurance type.[3]
What is Good Faith and Bad Faith in Insurance?
There is some overlap in insurance with contract law. An insurance policy is a contract held to a high standard. The insurance company and the policy holder are expected to act in good faith, each holding up their end of the contract.
An insurance company acts in bad faith when it refuses to pay a claim for something covered in the policy. A policy holder acts in bad faith when they lie on the insurance application to get a lower rate. Repercussions for the policy holder include not getting payouts and for insurance companies fines and even lawsuits.
Insurance laws are largely state-based, which means they vary depending on where you are. If you have concerns about a policy or claim or need help making decisions about purchasing insurance, an insurance lawyer in your state can help.