Consumer Protection

CONSUMER PROTECTION: THE ROLE OF THE COURTS, THE LAW, AND THE INSURANCE COMMISSIONER We have now examined two of the three sides of the insurance market, the sellers and buyers. The third side is regulation. Regulation can come from one of three sources: the courts, state insurance law (and, to limited extent, federal laws), and state insurance commissioners. Transactions in the insurance market cannot be understood without appreciating the role of regulation. This site provides an overview of regulation that is just sufficient to see the interface between regulation, buyers, and sellers. We present the specific details of insurance regulation, its history, and current policy in the next chapter.

THE COURTS If insured’s believe that they have not received what their contract promised, they have the opportunity to bring the case to court. If the court is convinced the consumer has not been dealt with fairly, it can force the insurance company to correct the situation. The usual reason for litigation is the insurer's denial of the insured's claim for payment. That is, after a claim is denied, the insured sues the insurer for breach of contract. An insurer may deny claims for many legitimate reasons including the following:

The insured may have attempted to defraud the insurer. The contract might not be in force because premiums were not paid. The coverage may have been suspended because an insured violated a contract condition. The loss may have been caused by an excluded peril.

Most of these grounds for claims denial raise questions of fact. Were the premiums paid promptly? When was the notice of cancellation mailed? What, in fact, was the proximate peril causing the loss? A jury in court often must resolve questions such as these. It is the function of the court to protect the legitimate rights of both insured and insurer. On the one hand. if an insurer were to pay claims that should be denied, it would hurt the interest of all members of the insurance pool by increasing costs. On the other hand, the denial of valid claims is intolerable and courts can prevent such an injustice. Thus, the role of the court is to protect the legitimate rights of both parties to an insurance contract.

Stare decisis

The doctrine of stare decisis gives court decisions in a particular case added weight if the decision is considered precedent setting. The literal translation of the term means "to stand by decisions." In practice, the doctrine means current court decisions will be consistent with previous decisions involving the same, or essentially similar, facts. For example, if a state court sets a precedent and decides the term "animal" includes birds and fish, the next time the issue arises in litigation the precedent will be followed in that state. If a court in another state (jurisdiction) decides a contract meaning to exclude bird damage must specify birds and animals, that decision will be precedent setting in that state. Stare decisis adds certainty to the outcome of litigation. It also greatly enhances the role and power of the court in the area of consumer protection.

THE LAW

The insurance law (code) of the various states provides consumers with essential protection. It establishes rules of conduct. requiring some behaviors and forbidding others. For instance, Article 24 of New York State's revised insurance code (http://assembly. state. ny. us/leg/) is titled "Unfair Methods of Competition and Unfair and Deceptive Acts and Practices." One part of this article states "No person shall engage in this state in any trade practice which is defined ... to be an unfair or deceptive act or practice." The article goes on to define several prohibited unfair or deceptive acts or practices. The list includes (1) issuing or circulating false literature, (2) making false statements or rumors about insurance institutions, and (3) making incomplete comparisons between insurance contracts.

New York's Article 24 is an example of a law prohibiting direct abuse of consumers. In some broad sense, all insurance law is designed to protect the consumer's interest. Rules and regulations governing company solvency, licensing of agents, approval of policy forms, licensing of insurance companies, and rate regulation all promote and protect consumer rights. The law, however, is fairly rigid. It can deal only with issues in general. It can mark out boundaries between acceptable and unacceptable behavior. For dealing with particular problems on a daily basis, however, a more flexible institution is needed. The state insurance commissioner is this flexible institution. The combination of state insurance law and the actions of the state's insurance commissioner provide a state with insurance regulation.

THE INSURANCE COMMISSIONER Every state has an administrator in charge of insurance regulation. This person's responsibilities include interpreting and enforcing the state's insurance code. In most states the governor appoints an insurance commissioner; in a few states the commissioner is elected.

Two selections from New York's insurance law read as follows:

The superintendent shall possess the rights, powers, and duties, in connection with the business of insurance in this state, expressed or reasonably implied by this chapter or any other applicable law of this state. The superintendent and the department have broad authority under this chapter to investigate activities which may be fraudulent and to develop evidence thereon. This article is intended to permit the full utilization of the expertise of the superintendent and the department so that they may more effectively investigate and discover insurance frauds, halt fraudulent activities and assist and receive assistance from federal and state law enforcement agencies in the prosecution of persons who are parties to insurance frauds.

Two important differences exist between the role of the courts and the role of the insurance commissioner. First, unlike courts, the commissioner can initiate action even before a complaint is brought by an insured. Second, a court will decide if the Very Mean Insurance Company has been unfair in denying the claim of John Consumer. If the insurance commissioner becomes convinced the Very Mean Insurance Company is unfairly denying many insured’s' claims, however, it is the commissioner's duty to correct this situation or withdraw this company's license to conduct business. The courts protect individual consumers from injustice. The commissioner protects all the state's insured’s from injustice.