What Is Unfair Claims Practice?
Unfair claims practice is theimproper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims practices, an insurer tries to reduce its costs. However, this is illegal in many jurisdictions.
Key Takeaways
- An unfair claims practice is what happens when an insurer tries to delay, avoid, or reduce the size of a claim that is due to be paid out to an insured party.
- Insurers that do this are trying to reduce costs or delay payments to insured parties, and are often engaging in practices that are illegal.
- Many states have passed unfair claims practices laws to protect insured parties from bad behavior on the part of insurers in the claims settlement process.
- Unfair Claims Settlement Practices Acts (UCSPA) are enforced by individual states, rather than the federal government, and vary state-by-state.
Understanding Unfair Claims Practice
The National Association of Insurance Commissioners (NAIC) has created a model of unfair claims practicelegislation that mandatesclaims be handled fairly and that there beclear communication between the insurer and the insured. States, not the federal government, regulate insurance; many jurisdictions have implemented unfair claims practices laws modeled after the NAIC's model act.
Also, most states have enacted a version of thismodel law. Called the Unfair Claims Settlement Practices Act, it protects insurance buyers from unjust behavior by insurers in the claims settlement process. Specifics of thelaw vary from state to state. Unfair Claims Settlement Practices Acts (UCSPA) are not federal law; instead, theyare enforced by individual state insurance departments.
Example of Unfair Claims Practice
Consider a small business owner that insures hiscompany's building and business personal property under acommercial property policy. Unfortunately, a fire broke out in thebuilding, causing $100,000 in property damage. The insurance company delays payment, rendering the business ownerunable to repair any of the damage.The insurance company continuesusing delay tactics to avoid making a payment. For example, theclaims representative keeps"forgetting" to send the claim forms. Also,the adjustersays he needs another proof of loss, but the small business owner has alreadysubmittedproof of loss twice. These are the types of situations that unfair claims practice laws are designed to prevent.
Other Examples ofUnfair Claims Practice
- Misrepresenting relevant facts or policy provisions. For instance, your commercial property policy states thatBuilding Ordinancecoverage is included, but yourinsurerinsists 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 forUtility Interruptioncoverage, 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 advertisem*nt you received. For instance, an ad announcesa $50,000 limit for damage caused by flooding. However, the ad doesn't mention anywhere that this coverage is provided only if the insuredpays an additional premium beyond the premium stated in the ad.
FAQs
Other Examples of Unfair Claims Practice
What is an example of an unfair claim practice? ›
Some instances of unfair claims settlement practice may involve issues with timeliness on the part of insurers. Examples of specific timeliness issues could involve: Failure to provide a timely explanation for the denial of coverage or a low settlement offer.
What is an example of an unfair claims practice in Quizlet? ›
An example of an unfair claim settlement practice would include: Trying to discourage a claimant from arbitrating a claim by implying that arbitration might result in an award lower than the amount offered is an unfair claim settlement practice.
What might be considered evidence of an unfair claims settlement practice? ›
Under the Insurance Code, these unfair acts or practices include misrepresenting what medications or treatments an insurance policy covers, failing to promptly pay claims where liability is reasonably clear, and forcing claimants to file lawsuits to get full payment, and other acts.
Which of these actions is considered to be an unfair claim settlement practice? ›
Unfair claims settlement practices include denying a claim without a reasonable investigation, refusing to explain a claim refusal, not acting promptly on claim-related communications, and offering a less than reasonable settlement amount.
What are the examples of fair or unfair practice? ›
Unfair practices refer to any actions or decisions taken by an organization that are unethical, discriminatory, or illegal. These practices can take many forms, such as workplace discrimination, unethical business practices, conflict of interest, abuse of power, harassment, retaliation, and more.
What does the Unfair Claims Practice Act not cover? ›
The purpose of this Act is to set forth standards for the investigation and disposition of claims arising under policies or certificates of insurance issued to residents of [insert state]. It is not intended to cover claims involving workers' compensation, fidelity, suretyship or boiler and machinery insurance.
Which of the following is an example of an unfair trade practice? ›
Some examples of unfair trade methods are: the false representation of a good or service; false free gift or prize offers; non-compliance with manufacturing standards; false advertising; or deceptive pricing.
What is unfair practice? ›
Unfair business practices include misrepresentation, false advertising or representation of a good or service, tied selling, false free prize or gift offers, deceptive pricing, and noncompliance with manufacturing standards.
Which of the following would not be considered an improper claims practice? ›
Denying a claim after proof of loss statements are completed and submitted by insureds would NOT be considered an improper claims practice, provided that the denial is justifiable and is based on a valid and explained reason.
Delaying payment unreasonably. Denying a policyholder's claim despite overwhelming evidence to support it. Making a partial payment and seeking a settlement for the remainder. Not investigating a claim or, in some cases, denying the claim without providing any reason.
What is an example of rebating? ›
In most cases, states consider a cash return of the agent's commission an example of rebating. Some also include gifts or services in exchange for the purchase of an insurance policy, a type of rebating, while other states do not.
Which of the following is not an unfair claims settlement practice if committed by an insurance company in Florida? ›
Final answer: Option 4 (Offering a fair settlement to a claimant) is NOT considered an unfair claims settlement practice in Florida. The rest of the options provided describe actions that would be unfair and inappropriate in the settlement of insurance claims in the state.
What is an example of an unfair claims practice? ›
Example of Unfair Claims Practice
The insurance company delays payment, rendering the business owner unable to repair any of the damage. The insurance company continues using delay tactics to avoid making a payment.
What does unfair practices include? ›
Acts or practices that have the potential to be deceptive include: making misleading cost or price claims; using bait-and-switch techniques; offering to provide a product or service that is not in fact available; omitting material limitations or conditions from an offer; selling a product unfit for the purposes for ...
What is twisting in insurance? ›
Twisting describes the act of inducing or attempting to induce a policy owner to drop an existing life insurance policy and to take another policy that is substantially the same kind by using misrepresentations or incomplete comparisons of the advantages and disadvantages of the two policies.
Which of the following would not be considered an improper claim practice? ›
Denying a claim after proof of loss statements are completed and submitted by insureds would NOT be considered an improper claims practice, provided that the denial is justifiable and is based on a valid and explained reason.
