The idea behind insurance is pretty simple. In exchange for paying premiums, an insurance customer is granted protection from certain risks by an insurance provider.
However, an insurance provider exists first and foremost to earn a profit and stay in business. While there is certainly nothing wrong with this mindset, some unscrupulous insurers go too far in their quest to earn money by outright denying or making it unreasonably difficult for their customers when they are affected by perils.
Typically, when an insured is hit with a peril (hail damage to a roof, an unexpected illness, etc.), he submits a claim to his insurer. The insurer examines the claim to make sure it is legitimate; if it is, the claim is approved and the insurers provides monetary benefits to the insured in order to pay for the relevant damage. However, the aforementioned unscrupulous insurers can sometimes interrupt this process by making claim submission unreasonably difficult.
While every state has its own specific list of what constitutes unfair claims practices, the following claims-related actions are generally prohibited everywhere:
Misrepresenting coverage terms – for example, a producer telling a customer that her health insurance policy covers a particular illness, when it in fact does not. Altering an application for insurance to make it appear that a particular claim is not covered by the policy is also considered a misrepresentation of coverage terms, and is also illegal.
Failing to take prompt action after a claim is filed – this pertains to recording, investigating, or settling the claim. For example, an insurer who takes an unreasonably long time to investigate a claim, in hopes that the insured will give up on the process, is acting unethically. Requiring an insured to fill out unnecessary paperwork or perform other excessive requirements is also considered an unfair delay in the claims process.
Refusing to pay a claim without taking all reasonable measures to investigate the relevant
circumstances – for example, an insurer who denies an auto insurance claim following an accident without reviewing police reports or witness statements has committed an unfair claims practice.
Intentionally offering a low settlement amount – some insurers offer artificially low claim settlements in hopes that the insured will not notice, or will take it over pursuing costly and time-consuming litigation. This too is unethical.
Paying a claim without informing the insured which coverage applies – insurance policies often carry certain benefit limits for the various coverages they provide; for example, an auto insurance policy usually offers separate coverages and limits for property damage and bodily injuries caused during an accident. An insured has the right to know which coverage applies to a specific claim so he can remain aware of the relevant policy limits.
Discouraging an insured from appealing an arbitration ruling – when a claim dispute arises between an insurer and insured, an insurance policy provides for an arbitration process to determine a final judgment regarding a claim. Insurers who discourage customers from appealing an arbitration ruling are acting unethically, as an insured has every right to do so.
Failing to settle simultaneous claims promptly – some insurers attempt to influence the settlement of one claim by withholding another. For example, an insurer cannot withhold policy benefits for a collision claim under an auto policy in order to bully a policyholder into accepting a lower settlement for a claim which applies to a separate coverage, such as bodily injuries.
Failing to provide a clear and reasonable explanation for a claim denial – if an insurer elects not to pay a claim, it must provide a detailed reasoning for the claim denial. Simply denying a claim and offering no explanation is considered an unfair claims practice.
Each state determines its own penalties for insurers who commit these unfair claims practices. To find out more about how these situations are handled in a particular state, contact your local insurance department.
About The Author: Nathan Rothwell serves as the lead instructor and subject matter for Insurance License Express, a division of Express Schools, LLC. Since 1996, Express Schools has offered online insurance licensing courses and online real estate courses, as well as online real estate exam prep and insurance license exam prep.