What Are Unfair Claims Settlement Practices?
Insurance Regulators Oversee Insurers' Claims Practices
Many states have enacted laws called Unfair Claims Settlement Practices Acts (UCSPAs). As their name suggests, these laws are designed to protect policyholders from unjust behavior by insurers when settling claims.
Unfair Claims Practices Acts
Most state UCSPAs are based on a model law drafted by the National Association of Insurance Commissioners (NAIC) in 1990. The model UCSPA sets standards for the investigation and settlement of claims under all insurance policies except workers compensation, boiler and machinery (equipment breakdown), fidelity, and surety. While a majority of states have adopted the model law, each has incorporated its own modifications. Thus, UCSPAs vary from state to state. The laws are enforced by individual state insurance departments.
Insurance is governed by the states so laws can vary widely from state to state. By developing model laws, the NAIC helps promote uniformity and consistency in state laws.
What Constitutes Unfair Claims Practices?
An important element of a UCSPA is the meaning of unfair claims practices. The definition of this term determines the types of acts that are prohibited. While the laws differ somewhat from one jurisdiction to another, they generally exclude the types of acts described below.
Misrepresentation or Alteration
- Misrepresenting relevant facts or policy provisions. For instance, your commercial property policy states that Building Ordinance coverage is included, but your insurer insists the coverage is excluded.
- Making a significant alteration in an application without your consent and then settling a claim based on the alteration. For instance, you requested a $50,000 limit for Utility Interruption when you applied to property coverage but your insurer reduced the limit to $10,000 without telling you. The insurer now refuses to pay more than $10,000 for a loss you've sustained.
- Settling claims for less than what you would reasonably expect based on a written advertisement you received when applying for coverage. For instance, an ad indicates your policy includes a $50,000 limit for extra expense coverage. Your insurer now refuses to pay an extra expense claim, arguing that you didn't pay the additional premium (which wasn't mentioned in the ad).
- Failing to respond promptly to your communications regarding claims you've filed. For instance, you've phoned your insurer repeatedly for an update on a claim you filed six months ago but your insurer has not responded
- Failing to confirm or deny coverage within a reasonable time period after the insurer has finished its claim investigation.
- Failing to provide a prompt explanation after denying coverage or offering a compromise settlement
- Failing to provide claim forms within a specified period of time (such as 15 days) of your request
- Offering small settlement amounts, forcing you to sue the insurer to recover the amount you are owed
- Demanding written verification of a loss after you have submitted a completed proof of loss form, delaying the claim investigation or payment process
- Refusing to pay claims without conducting a reasonable investigation. For example, your insurer denies your claim for fire damage to your building. The insurer claims that no fire occurred but has not dispatched an adjuster to inspect your property.
- Failing to make a prompt, fair settlement even though you've submitted a valid claim and the insurer's liability is clear.
Filing a Complaint
Suppose that you are a small business owner. You own a warehouse that is insured under a commercial property policy. A windstorm blew through town eight months ago, causing $50,000 in damage to your warehouse. You are unable to repair the damage because your insurer is using delay tactics to avoid paying your claim.
First, the claims representative kept "forgetting" to send you the claim forms. Now the adjuster says he needs another (third!) proof of loss. You are angry and frustrated. What should you do?
The first step is to speak with your state insurance department. A representative of the department can tell you how the law applies in your state and how to file a formal complaint. You can also check the insurance department's website for information about your state's UCSPA. Many states provide online forms consumers can use to file complaints about insurers' unfair claims settlement practices.
Some states permit policyholders to file a tort claim against their insurer on the basis that the insurer's unfair claim handling constitutes bad faith. To determine whether your state permits this type of suit, consult an attorney.
Once a policyholder has filed a complaint under a state's UCSPA, the regulator must determine if the insurer's behavior violates the law. If the answer is yes, the regulator may do one or more of the following:
- Issue a cease and desist order
- Impose a monetary penalty
- Suspend or revoke the insurer's license