Insurance law deals with the rules and regulations governing the insurance industry. It also relates to legal issues that arise from disputes between insurers and policyholders.
In addition, most states have solvency laws and guaranty funds to help failing insurers. The majority of regulation occurs at the state level, and it covers everything from capitalization and reserves to rates and various back office processes.
State regulation of insurance companies
State regulation of insurance companies is a common way to protect consumers and maintain fair prices. It can take many forms, from examining a company’s sales practices to ensuring that its financial health is sound. State insurance departments also have consumer services that provide assistance with questions and complaints. They may recommend operational improvements or impose penalties, such as license suspension or revocation, for violations.
Insurance regulation is a complicated issue. The GAO found that state regulations can have a significant impact on the availability of insurance, for example by preventing alleged redlining (denial of coverage to people in certain neighborhoods). It is important to ensure that these rules are effective and are administered fairly.
Several court rulings have influenced state insurance regulation. One of the most notable is the Paul v. Virginia ruling, which states that policy contracts are commercial and therefore can be regulated. The McCarran-Ferguson Act of 1945 gives states the authority to regulate the business of insurance. However, federal laws that are not specifically about insurance are excluded from the act’s scope.
Most states regulate the rates that insurers charge by requiring them to submit their rates to regulators for approval before they can be used. A number of states have switched to “file and use” systems, but most still require a review of each rate before it can be implemented. In addition, the National Association of Insurance Commissioners develops model legislation and standards for the insurance industry.
State regulation of agents and brokers
In the United States, most insurance regulation takes place at the state level. Most states have a department of insurance that creates administrative regulations to govern the industry. The department’s head official is often called the insurance commissioner, or a similar title. The federal government regulates some public insurance programs, but the vast majority of insurance is private and regulated by state law. Most state laws regulating insurance companies are passed in response to the McCarran-Ferguson Act, which gives states control over the insurance industry. State insurance laws override federal statutes that do not specifically relate to the business of insurance, including labor, tax and securities laws.
State laws and regulations determine the rights and responsibilities of insurers and insured parties, the terms and conditions of insurance policies, and the management of legal disputes between insurers and policyholders. A significant part of insurance law is the creation and enforcement of state regulations to prevent bad faith actions on the parts of insurers, such as denying claims or refusing to pay for an unreasonable amount of time.
In addition, state insurance law establishes licensing requirements for insurance producers (agents and brokers), title insurance agents, insurance consultants, life settlement brokers and others. State regulators also manage consumer disputes and other complaints against the insurance industry. The National Association of Insurance Commissioners helps achieve some uniformity through its development of model laws and other initiatives.
State regulation of insurance policies
Since 1945, the federal government has delegated its regulatory authority over the business of insurance to the states. State-based regulation is primarily achieved through the development and adoption of model laws, regulations and guidelines by the National Association of Insurance Commissioners (NAIC). In addition to these models, insurance industry groups such as the American Institute of CPCU set moral and professional standards in the industry through their own membership programs and seminars.
A primary focus of state-based regulation is the solvency of insurance companies. Regulators monitor the financial health of insurance companies through detailed annual financial statements and periodic onsite examinations. If a company appears to be in trouble, regulators can take action to protect consumers from the loss of their insurance policies.
Moreover, state laws require insurance companies and agents to abide by state contract laws. Failure to comply with these laws can result in a breach of contract or bad faith lawsuits from policyholders. Additionally, state-based regulation also requires that insurers investigate and defend claims based on the terms of the policy, pay legitimate insurance claims and remit any profits to the policyholder. These rules are enforced through a combination of civil penalties and criminal prosecutions.
State regulation of insurance rates
The vast majority of insurance regulation in the United States takes place at the state level. While the U.S. government runs a few public insurance programs, such as Social Security and Medicare, most insurance is privately purchased. Therefore, insurance law primarily concerns private insurers and their policies.
The main function of insurance regulators is to ensure that rates are adequate enough to cover the cost of claims, but not excessive so that companies earn exorbitant profits. Additionally, rates must be fair and nondiscriminatory. Different state insurance departments use different methods to regulate rates, but they all have a common goal: to maintain insurer solvency.
Insurance regulations are a complex area of law, and state laws have precedence over federal laws. However, federal laws that touch upon peripheral aspects of the industry (such as labor or tax laws) still govern.
Regulatory frameworks vary by state, but most states have some form of prior approval or “use and file” rating laws. Prior approval laws require insurers to seek preapproval for a rate change, and they may have to provide justifications for the changes. Other states have flex-rating laws, which allow insurers to adjust rates based on market forces, but only up to a specified limit. Finally, open competition laws let insurers change rates at their discretion, but any increase above a certain threshold must be reviewed by regulators.