Possession of the power to license as the foundation of regulatory control is not without its problems. Insurers which only advertise in a state, do a mail order business therein or, at most, only conduct sporadic activities in a state have maintained that they are not legally "doing business" in the state, hence they are beyond the scope of that state’s control. By refusing to apply for a license, an unauthorized (unlicensed) insurer seeks to avoid regulation in states other than its state of domicile.

Unauthorized Insurers Process Act. In 1948 the NAIC approved and all states subsequently adopted in some form the Unauthorized Insurers Process Act in which the legislature deems that insurer performance of a specific act (such as issuing or delivering an insurance policy to a state resident or corporation licensed to do business in the state, soliciting applications, and/or collecting premium for such insurance) constitutes an appointment of the insurance commissioner as the insurer’s attorney for service of process purposes. This authorizes the insured (or beneficiary) to bring a legal action involving a claim against an unauthorized out-of-state insurer by serving legal process on the insurance commissioner of the insured’s home state.

Unauthorized Insurers False Advertising Act. In 1961 the NAIC adopted and 17 states subsequently enacted the Unauthorized Insurers False Advertising Act or something similar thereto as a means to regulate unauthorized mail order insurers. In addition seven other states either previously or subsequently adopted related legislation or regulations. The Act seeks to subject such insurers to the jurisdiction of both that state’s courts and the insurance commissioner. The focus is on advertising misrepresenting the insurer’s financial condition, contract terms, benefits provided or dividends paid. The Act provides for substituted service of process akin to that in the Unauthorized Insurers Process Act. Furthermore, the Act extends its embrace to persons soliciting, issuing, delivering or collecting premium for unauthorized insurers.

Unauthorized Insurers Model Statute. In 1968 the NAIC adopted the Unauthorized Insurers Model Statute to subject unauthorized insurers to the jurisdiction of the insurance commissioner and the courts of the enacting state. Subsequently, 27 states enacted the Model Statute or something similar thereto and 10 other states adopted related legislation or regulation. The Model Statute states that it is illegal for any insurer (other than specified exceptions such as certain group life and health insurance, surplus lines insurance and reinsurance) to transact insurance business in the state without a license. Any specified act effected by mail or otherwise by or on behalf of an unauthorized insurer is deemed to constitute such transaction. These acts include, proposing to make an insurance contract, taking an application for insurance, receiving or collecting premium, issuing or delivering contracts of insurance to residents of the state or to persons authorized to do business in the state, soliciting insurance, adjusting claims, etc. The insurance commissioner may seek through the courts to enjoin such illegal activity. Any of the specified acts by the insurer is deemed to appoint the insurance commissioner as attorney of the insurer for service of process.

To overcome the constitutional problems of enforcing the injunctions issued by the courts of one state against an insurer in another state, the Model Statute contains a reciprocal enforcement provision. The courts of each state enacting this provision will enforce such judicial determinations of the courts of the other reciprocal states having a similar provision, as if it were a judicial decree of the enacting state.

The purposes of Unauthorized Insurers Model Statute include: (1) affording those in the state the benefits of the protection provided by regulatory safeguards, (2) preventing unfair competitive advantage between unauthorized and authorized insurers, the latter being subject to regulatory constraints and mandates, (3) protecting the state’s regulatory interest by preventing avoidance of state law and (4) preserving premium tax revenue.

Nonadmitted Insurance Model Act. In 1994, prompted by the perceived need to implement stricter financial requirements for alien insurers operating in the United States, the NAIC adopted the new Nonadmitted Insurance Model Act. In the process, it incorporated and replaced the earlier Unauthorized Insurers Process Act, the Unauthorized Insurers Act, and the Model Surplus Lines Law. The major area changed was the regulation of non-admitted non-United States surplus lines insurers doing business in this country, with particular emphasis on requirements to compel the maintenance of minimum-size trust accounts available for the payment of claims.

Two basic constitutional considerations arise when a state seeks to exert its regulatory authority over unauthorized out-of-state insurers doing business within the state.

First, does a state exceed the federal constitutional bounds of due process when it attempts to assert jurisdiction over such insurers? Although the answer to this question is fact driven by the circumstances of each situation, when the United States Supreme Court let a Wisconsin Supreme Court decision stand which upheld the authority of the insurance commissioner to apply that state’s unauthorized insurers law against mail-order insurers, it appears that, as a general proposition, due process does not preclude the exercise of state regulatory against unauthorized insurers.

Second, can a state effectively enforce its decisions against out-of-state insurers? While not perfect, the reciprocal enforcement provisions under the Model Statute afford a means to do so.

An alternative or supplementary approach to a state attempting to exercise its regulatory control over unauthorized out-of-state insurers is for the insurance commissioner to regulate its domestic insurers with respect to their activities in other states. However, a state insurance department’s primary obligation is to enforce its laws to protect the citizens of its state. Few if any departments have the incentives, the resources, the local expertise and/or the time to regulate on behalf of other states.

A different approach, long available but not widely adopted, has been a compulsory licensing law. As early as 1895 through at least the early 1940s, the NAIC has raised the concept of each state enacting a law prohibiting its domestic insurers from engaging in business in another state without complying with the laws of that state provided that those states in which such business is done have a comparable law. Some states have enacted such a compulsory licensing law without a reciprocal provision.

In short, unfettered activity by unauthorized insurers can seriously undermine a state’s ability to regulate the insurance business. The NAIC and individual states have addressed this problem in a variety of ways. Although state regulatory response has not been fully effective, techniques have been developed and implemented on a sufficiently adequate and widespread basis to provide acceptable control at least to date.