Unfair trade practices II: unfair discrimination, claims practices, fraud, and controlled business

Four more unfair practices

Florida's Unfair Insurance Trade Practices Act exists to define and prohibit unfair methods of competition and unfair or deceptive acts in the business of insurance. This lesson covers four areas the exam groups together: unfair discrimination, unfair claims practices, insurance fraud, and controlled business.

Unfair discrimination

Insurance sorts people into classes by risk, and that is legitimate. What is unfair is treating people of the same class and essentially the same hazard differently, for example charging one of them a different rate, offering different benefits or terms, or refusing coverage, for a reason that has nothing to do with the risk. The test is simple: same risk, same treatment. A difference must be justified by a real difference in expected loss.

Unfair claims practices

The claim is where the promise in the policy is kept or broken. Standard examples of unfair claim settlement practices include:

• misrepresenting pertinent facts or policy provisions to a claimant;
• failing to acknowledge and act promptly on claim communications;
• failing to adopt reasonable standards for prompt investigation;
• denying a claim without a reasonable investigation;
• not attempting in good faith to settle promptly and fairly once liability is reasonably clear;
• forcing claimants to sue to recover amounts due by offering substantially less than they are owed.

Insurance fraud and the anti-fraud unit

Florida puts a duty on insurers themselves. Every insurer admitted to do business in the state must either establish a designated anti-fraud unit or contract with others to investigate and report possible fraudulent insurance acts by insureds or claimants. The insurer must also adopt an anti-fraud plan, designate at least one employee responsible for these requirements, and file a description of the unit (or the contract), the plan, and that employee's name with the Division of Criminal Investigations of the Department.

Anti-fraud staff get at least 2 hours of initial training, then a 1-hour course every year. Each insurer reports fraud data for the prior year by March 1. An insurer that fails to comply faces an administrative fine of up to $2,000 per day until it complies.

Controlled business

Controlled business is insurance written on the producer's own life, property, or interests, or on those of family, an employer, or a business the producer controls. A license exists to serve the public, so a producer is not supposed to hold a license mainly to write controlled business.

Florida also regulates a related arrangement: a controlling producer placing business with a controlled property and casualty insurer. Those rules kick in when the controlling producer's gross written premiums with that insurer in a calendar year reach 5 percent of the insurer's admitted assets. Then there must be a written contract approved by the insurer's board of directors. Among its terms:

• the producer remits funds at least monthly, and premiums no later than 90 days after a policy's effective date;
• collected funds are held in a fiduciary capacity in identified bank accounts;
• commissions are no greater than those paid on comparable business from other producers;
• profit-based commissions wait at least 5 years after liability premiums are earned and 1 year for other lines;
• the producer may negotiate but generally may not bind reinsurance for the insurer.

The controlled insurer must also keep an audit committee of independent directors to review its loss reserves.

Same risk, same price; pay fair claims fast; fight fraud; do not let control replace competition.