All states nationwide have enacted laws and/or promulgated regulations, in substantial part based upon NAIC models (especially the Unfair Trade Practices Act), which proscribe unfair discrimination in a wide variety of insurance contexts. Rules and regulations against unfair discrimination typically are based upon the Model Act’s authority granted to the commissioner to further define unfair trade practices and/or promulgate regulations.

The law prevents unfair discrimination, not simply discrimination. Some discrimination among policyholders is deemed appropriate since not all policyholders present the same degree of risk. If classification groups consist of persons possessing widely diverse risk potentials and if all members of the group pay the same premium, the less risky persons in the group subsidize the more risky persons; that is, the less risky pay more than their fair share. Charging more premium or providing less benefits for the same premium for higher risks has long been accepted as appropriate. This is fair discrimination. In contrast, unfair discrimination refers to the same treatment for persons posing different risks or to the inequality of treatment among policyholders which is not justified by underwriting considerations or sound business practices. Among the specific prohibitions contained in the Model Act are making or permitting any unfair discrimination between individuals of the same class and equal expectation of life in the rates charged for life insurance or annuities, in the dividends paid, in other benefits paid, or in the terms and conditions of such contract.

Some insurers rejected applicants who had been previously rejected by other insurers as a simple and efficient means of underwriting. However, the Model Act was amended in 1991 to define as illegal discrimination the refusal to insure solely because another insurer has rejected granting a new policy or canceled or failed to renew an existing policy. This seeks to compel insurers to base their decisions upon sound underwriting rather than upon the action of another insurer.

The legal protection of civil rights cuts across various areas of this nation’s laws including insurance laws. Whether founded upon constitutional or statutory provisions (federal and/or state), discrimination in a variety of contexts has been banned as a matter of social policy. In these situations, discrimination itself is prohibited whether one deems it fair or unfair. For example, throughout insurance law, there is a fundamental tension between the rights of persons to be free from discrimination based upon the characteristics of race, sex, age and other unalterable traits and the need of the insurance business to distinguish fairly among insureds based on risk and sound actuarial principles.

Following the Civil War, two leading writers of industrial life insurance wrote significant amounts of insurance on the lives of black people. However, the benefits payable were only two-thirds of the amounts payable to white insureds. This was based upon the mortality experience of blacks being significantly shorter than that of whites. As a matter of social policy, several states enacted legislation prohibiting charging different rates based upon race. As a consequence, a substantial segment of the life insurance industry refused to sell to blacks at all and another substantial segment avoided soliciting business from blacks. By 1940, nearly two-thirds of legal reserve life insurers either did not accept or did not solicit business from black people. Most of the remaining companies, while providing coverage, did so on a basis different from what was done for whites.

Following World War II, at least three factors led to the virtual elimination of race discrimination in the writing of life insurance. First, the gap between the life expectancy between whites and blacks has been dramatically reduced. Insurance industry classifications are no longer based upon mortality by racial group.

Second, the removal of discriminatory rate setting and life insurance policy provisions has been, in part, due to the life insurance industry’s recognition of the social unacceptability of classifications based upon race. For the most part, racially discriminating rate-setting and life insurance policy provisions have been removed by the life insurance industry voluntarily rather than having to be coerced by government to do so.

Third, Sec. 4G(5) of the NAIC Unfair Trade Practices Act defines as an unfair trade practice refusing to insure, refusing to continue to insure or limiting the amount of coverage available to an individual because of sex, marital status, race, religion or national origin. Here, no reference is made to unfair discrimination. Whether or not there are valid underwriting or actuarial reasons, these types of discrimination are banned as a matter of fundamental social policy. Various states, in addition to this bar in their unfair trade practices acts, may also have other applicable statutory and/or regulatory provisions barring discrimination based upon race in the context of the marketing practices of insurance companies. However, some of these are primarily directed at "redlining" in the property insurance field.

The issue of the use of gender-based classifications for insurance premiums has perhaps been the most controversial and often debated of all civil rights insurance issues. In recent years, the issue has been raised in several forums.

Activity at the Federal Level. Two United States Supreme Court decisions, while not directly related to insurance, have substantially impacted the debate as to the treatment of gender discrimination in insurance. In both Los Angeles Department of Water & Power v. Manhart and Arizona Governing Committee v. Norris, the concepts that an insurance institution is inherently risk-discriminatory in that all insureds do not offer the same risk characteristics and that insurance is a risk taking business in which risk is quantified for premium purposes according to actuarial methods clashed with the concept of an individual’s civil right not to be treated differently due to gender.

In Norris, under a state employee deferred compensation plan, employees possessed the option to have their accounts invested in a fixed annuity contract of a private insurer. Men received larger monthly annuity benefits for their contributions than did women since the mortality table used by the insurer reflected that women lived longer than men. Thus, while a man’s monthly payment was larger, women on average received a greater number of payments. The Supreme Court noted that the sole factor of classification was gender. In Manhart, women participating in a municipal employee retirement plan made higher monthly contributions than men in order to receive equivalent monthly pension payments, again on the basis that women live longer than men. In both cases, the Court struck down the insurance practices on the basis that such discriminated against women. The Court directed equal benefits for equal payments regardless of gender, actuarial tables notwithstanding. The Court stated that "Congress has decided that classifications based on sex, like those based on national origin or race, are unlawful."

Importantly, however, these cases were decided under Title VII of the Civil Rights Act of 1964 which deals with gender discrimination in employment. Consequently, they are not directly applicable in the insurance context outside the embrace of Title VII. Nevertheless, these decisions have contributed to energizing the controversy over gender discrimination in insurance rates which became part of the political agenda in the 1980s.

Women’s groups and others maintain that social policy and civil rights demands that women be charged the same rates and receive insurance benefits equal to those accorded to men. They argue that the characteristic of gender is an immutable characteristic, as is the case with respect to race, and that other factors (such as the person’s health and habits) should be determinative rather than a stereotyped gender-based classification. These critics note that insurers have abandoned classifications based upon race. The same should be done with respect to gender.

In contrast, the life insurance industry has maintained that fairness and actual economic costs dictate gender-based classifications in the establishment of rates. Such classifications are based upon objective actuarial experience. The life expectancy of women is greater than that for men, generally resulting in lower life insurance premiums and higher annuity rates for women. Traditionally, such rate discrimination has been deemed equitable and appropriate rather than unfair since the rates reflect actual cost experience. The business of insurance is built on the ability of the insurer to evaluate risk and assign a price to that risk. Although unisex rates are now found in employment benefit plan situations, life insurance companies have not conceded that they are barred from classifying risks according to the insured’s expected mortality in other situations.

To bridge the gap between coverage provided pursuant to employee benefit plans, which cannot discriminate on the basis of gender under Title VII and the Manhart and Norris decisions thereunder, and insurance obtained by individuals whose rates can differ based upon gender, several efforts have been made at the federal level to bar gender-based discrimination in insurance even though deemed fair under traditional insurance concepts. To date these have been unsuccessful. Corresponding demands arose for nondiscriminatory unisex rates in insurance at the state level.

Activity at the State Level. In the past, some insurers were found to have applied restrictions to the availability of coverages for females which were not applied to males. However, more recently few dispute the notion that women should have equal access to insurance. In accordance with this view, in 1975, the NAIC adopted the Model Regulation to Eliminate Unfair Sex Discrimination to prohibit denying benefits or availability of coverage on the basis of sex or marital status. The amount of benefits payable, the terms or conditions of the contract and the types of coverage shall not be restricted or excluded on the basis of gender or marital status except to the extent they vary as a result of permitted rate differentials. However, with respect to insurance rates (as distinct from availability of coverage), the NAIC accepted the traditional view, when its Model Regulation steered clear of tampering with the pricing mechanism. As of 1994, approximately 20 states had adopted the Model Regulation or something similar thereto and another eight states had effectuated related legislation or regulations.

Individual states have varied in their responses to the issue of gender based rates. Most have followed the traditional and NAIC view. But not all.

In 1983, Montana enacted legislation preventing an insurer from differentiating among premium rates on the basis of gender or marital status with respect to any kind of insurance. In contrast, a California statute mandated rate differentials based upon gender for life insurance and individual annuities when such are substantially supported by valid pertinent data segregated by gender. (However, employee benefit plans are exempted to bring California law into conformity with the Norris decision.) Subsequently, the Attorney General of California ruled that the mandated gender-based distinction violated the equal protection clauses of both the United States and the California Constitutions. And a lower California court enjoined the insurance commissioner from enforcing the mandated differential decision. (A few states, by statute, regulation or attorney general opinion, prohibit gender-based discrimination in rates for automobile insurance.) A few state regulators have attempted, without the aid of specific statutes, to compel insurers to use unisex life insurance rates. To date, such efforts generally have been successfully resisted.

The constitutions of approximately one-third of the states include Equal Rights Amendments (ERA). For example, the Maryland Constitution very briefly states that "[e]quality of rights under the law shall not be abridged or denied because of sex." The application of the ERA amendments to insurance related issues has varied from state to state. For example, whereas the Montana ERA applies to both public and private action, the more common approach is illustrated by Illinois which prohibits gender discrimination only by state or local government units.

Furthermore, different states apply different standards in determining whether a particular piece of legislation violates the ERA constitutional provision. The rational basis test simply requires that any classification be a rational one which furthers an important governmental interest. Under this articulation of the constitutional test, a statute will not violate the ERA so long as there is a rational relationship between the statute and the legislative goal. States applying this standard merely require that the gender-based classifications not be arbitrary or capricious in order to permit the discrimination. A couple of states apply a more intermediate test requiring that gender-based classifications be reasonable and not arbitrary and that the distinctions bear a fair and substantial relationship to the legislative objective sought. Other states apply a standard of strict scrutiny under which the ERA affords a stronger proscription against gender-based classifications. The strict scrutiny test demands a determination as to whether the gender-based classification is premised upon a compelling state interest. In these states, gender-based distinctions are placed in a "suspect" category. Courts in other ERA states have not yet articulated a standard either because of the lack of opportunity or the deciding of cases on other grounds. In short, the application of state equal rights amendments to insurance rates, especially life insurance rates, has been limited, with efforts to bar gender-based distinctions being both successful and unsuccessful.

The tension between the objective of defining risk classifications according to actuarial principles and anticipated economic consequences, on the one hand, and the civil rights objective of eliminating individual and group distinctions to treat all persons equally, on the other hand, is keenly felt when handicapped persons are involved. Insurers have tended to refuse to insure or have tended to set prohibitively high premium rates for handicapped individuals who are anticipated, according to the insurers’ actuarial tables and experience, to die prematurely or be susceptible to total disability. These perceived more expensive risks, when included in classifications with others, cause the premium costs to rise for these other members of the pool. On the other hand, social policy advocates seek equitable coverage for these individuals, arguing that statistically handicapped individuals are not as bad risks as insurers assert and that insurer bias governs the underwriting process. In attempting to resolve the tension between these objectives, the thrust of remedial legislation has been to restrict risk discrimination against handicapped to demonstrable actuarial principles and reasonably anticipated experience.

A number of states have enacted legislation based upon the NAIC model regulations pertaining to unfair discrimination in life and health insurance on the basis of physical or mental impairment and upon the basis of blindness or partial blindness. The NAIC model regulations were adopted under the Unfair Trade Practices Act authority to further define what constitutes an unfair trade practice. In 1979, the NAIC adopted a model regulation defining as unfair discrimination life insurer refusal to insure, refusal to continue to insure or charging a different rate for the same coverage solely due to physical or mental impairment unless the rate differential is based on sound actuarial principles or is related to actual or reasonably anticipated experience. A 1978 model regulation (as amended in 1984) does the same with respect to blindness except that there is no exception for actuarial experience. Nearly half of the states have adopted legislation or regulation pertaining to mental and physical impairments (10 of which are based upon the NAIC model) and most states have done so with respect to blindness (approximately 35 of which are based upon the NAIC model).

In addition to or in lieu of the NAIC type regulation, most states have adopted general nondiscriminatory legislation applicable to persons suffering from physical or mental disabilities which might be applicable to the insurance situation.

Prohibitions against age discrimination do not appear in NAIC model regulations in the context of life insurance. However, several states prohibit discrimination on the basis of sexual preference or orientation in insurance coverage.

Both the NAIC and the several states have addressed and continue to address insurer unfairly discriminatory conduct. The statutory framework not only is quite extensive in coping with past and current problems, but it is also quite flexible to be able to deal with new concerns as they evolve. The commissioners possesses substantial authority and enforcement powers in their efforts to achieve the regulatory objective of equity, that is, equal treatment of policyholders within the same class and avoidance of separating persons out of a class based upon invalid or unacceptable distinctions.