When an insurer discovers that insureds are being treated differently in any scenario, it is important to consider very seriously whether such differential treatment could be contrary to unfair trade practices laws. Specifically, an insurer may wonder: “Is it permissible to treat insureds in different product lines differently,” or “How can we ensure that insureds being treated differently within the same line or ‘block’ of business are still being treated fairly.” This Article addresses those questions. Of course, this Article does not contain an exhaustive list of such considerations, and insurers should consult with regulatory counsel on the specific circumstances related to these issues.
1. Unfair Trade Practices Defined
Under Section 4(G) of the Model Unfair Trade Practices Act (the “Act”) the following are prohibited:
- “(1) Making or permitting any unfair discrimination between individuals of the same class and equal expectation of life in the rates charged for any life insurance policy or annuity or in the dividends or other benefits payable thereon, or in any other of the terms and conditions of such policy.”
- “(2) Making or permitting any unfair discrimination between individuals of the same class and of essentially the same hazard in the amount of premium, policy fees or rates charged for any accident or health insurance policy or in the benefits payable thereunder, or in any of the terms or conditions of such policy, or in any other manner.”
- “(3) Making or permitting any unfair discrimination between individuals or risks of the same class and of essentially the same hazard by refusing to insure, refusing to renew, canceling or limiting the amount of insurance coverage on a property or casualty risk solely because of the geographic location of the risk, unless such action is the result of the application of sound underwriting and actuarial principles related to actual or reasonably anticipated loss experience.”
2. The Scope of the Term “Policy”
Key to the definitional provisions excerpted above are the phrases:
(1) “any life insurance policy or annuity” and “any other of the terms and conditions of such policy”;
(2) “any accident or health insurance policy” and “any of the terms or conditions of such policy”; and
(3) “a property or casualty risk.”
The phrasing in (3) (“a property or casualty risk”) is relatively straightforward, identifying the focal point of the analysis as the “risk” (i.e., the property, person, or business exposure that is the subject or object of coverage). However, the phrasing in (1) and (2) is more difficult to interpret, because it is not clear under the Act what the intended scope of the term “policy” is (as that term is used within sub-items (1) and (2) of Section 4(G)). For example, one might ask: “Is the term ‘policy’ intended to mean a specific coverage form, a block of similar coverage forms, or something more?”
Under the Act, “Policy” is defined as “a contract of insurance, indemnity, medical, health or hospital service, suretyship, or annuity issued, proposed for issuance, or intended for issuance by any insurer.” One could argue that the phrase “any [life insurance] [accident or health insurance] policy,” as used in (1) and (2), is scoped to a particular product or block of business. Therefore, differential treatment between different blocks would arguably not be in violation of the Act. Conversely, the phrase “any [life insurance][accident or health insurance] policy” could also be interpreted broadly to incorporate similarly situated insureds across different products or blocks, especially where there is a perception that similarly situated insureds are being treated differently based on an arguably “unfair” motivation.
3. What Is “Unfair”?
Determining what constitutes an “unfair” motivation or effect is a complicated and circumstance-specific analysis, and must be undertaken in consultation with regulatory counsel, but, for the purposes of this Article, a good general definition arises out of the phrasing used in Section 4(G)(3) of the Act. That Section creates a safe harbor carveout for certain actions that are “the result of the application of sound underwriting and actuarial principles related to actual or reasonably anticipated loss experience.”
For the purposes of this Article, we can consider negative differential treatment between one “policy” and another that is not the result of the application of sound underwriting and actuarial principles related to actual or reasonably anticipated loss experience as “unfair.” Of course, insurers should consult with their actuarial personnel and advisors on the actuarial bases for such considerations.
4. A Framework for Analysis
Therefore, in creating and maintaining frameworks that avoid unfair differential treatment, comply with the Act, and that situate insureds under one “policy” fairly in relation to each other, insurers should consider the following key questions in relation to the definition of “policy”:
- Could it be argued that insureds under a single “policy” are being treated differently? Specifically:
- Are insureds in the same line or ‘block’ of business being treated differently?
- Are insureds insured under the same coverage form being treated differently?
- If so, is the differential treatment arguably “unfair”? Specifically, is the differential treatment not the result of:
- The application of sound underwriting and actuarial principles, which principles are
- Related to actual or reasonably anticipated loss experience.
Of course, circumstances may dictate additional points of analysis, and insurers should consult with their regulatory counsel on these points, but the above provides an abbreviated map to the conceptual “base camp” for these issues.