What are Unfair Claims Settlement Practices?

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Many states have enacted laws called Unfair Claims Settlement Practices Acts. The following example demonstrates why such laws are needed.

Example

Suppose that you are a small business owner. You have insured your company's building and business personal property under a commercial property policy. Unfortunately, a fire broke out in your building eight months ago, causing $100,000 in property damage.

You have been unable to repair any of the damage because you have not received payment from your insurer.

The company has been using delay tactics to avoiding making a payment. First, the claims representative kept "forgetting" to send you the claim forms. Now the adjuster says he needs another proof of loss. You have submitted a proof of loss twice already! You are angry and frustrated with your insurer. Isn't there a law that prevents insurers from acting this way? The answer is likely yes.

Most states have enacted a version of a model law drafted by the National Association of Insurance Commissioners (NAIC). This law is called the Unfair Claims Settlement Practices Act. It protects insurance buyers from unjust behavior by insurers in the claim settlement process. The specifics of the law vary from state to state. Unfair Claims Settlement Practices Acts (UCSPA) are enforced by individual state insurance departments.

Purpose of Law

An UCSPA establishes standards for the investigation and settlement of claims that arise under insurance policies or certificates of insurance. The law typically applies to all policies except for those that afford workers compensation, boiler and machinery (equipment breakdown), surety bonds or fidelity coverage.

Policyholders who believe their insurer has violated their state's UCSPA may file a complaint with the state insurance department. Insurance regulators investigate complaints and determine whether the insurer has committed a violation. Insurers who violate the law may be subject to a fine or other penalty. An insurer that has committed multiple unfair acts may be subject to multiple penalties.

What Constitutes Unfair Claims Practices?

Here are some types of acts that are prohibited by a typical UCSPA. Remember that the specific provisions of the law vary from one state to another.

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, in your application you requested a $50,000 limit for Utility Interruption coverage but your insurer reduced the limit to $10,000 without telling you. The insurer then refuses to pay more than $10,000 for a loss.
  • Settling claims for less than what you would reasonably expect based on a written advertisement you received when you were given the application. For instance, an ad indicates that your policy includes a $50,000 limit for damage caused by mold. The ad doesn't mention that this coverage is provided only if you pay an additional premium.

    Timeliness

    • Failing to respond promptly to your communications regarding claims filed under your policy. For instance, you filed a claim six months ago but have not received a response from the insurer.
    • 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

    Unfair Requirements

    • Offering small settlement amounts, forcing you to sue the insurer to recover the amount you are owed
    • Requiring you to provide both a proof of loss form and a loss verification, thereby delaying the claim investigation or payment process

    Unfair Acts

    • 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 a fire never occurred but no adjuster has visited your property.
    • Failing to make a prompt, fair settlement even though you've submitted a valid claim and the insurer's liability is clear.

    What Should You Do?

    Suppose you think your insurer has violated your state's UCSPA. 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. Some states permit policyholders to cite unfair claim handling as a basis for filing a bad faith suit against the insurer. Thus, you may also want to consult an attorney.