An insurance company’s basic function is to pay justified claims. Failure to administer the claims function in an appropriate manner to assure prompt and full payment of claims fundamentally contravenes the basic regulatory objective of fair treatment of the insurance consuming public. As a consequence, state regulators are vitally concerned over the manner in which insurers handle their claim settlements.

This concern was originally reflected by the inclusion in the Unfair Trade Practices Act of a full section defining certain patterns of conduct as unfair trade practices subject to the full investigative and enforcement powers of the commissioner. However, in 1990, the NAIC opted to establish a freestanding act separate from the Unfair Trade Practices Act. However, states were left with the option of retaining these provisions in the Unfair Trade Practices Act.

The Model Unfair Claims Settlement Procedures Act sets forth standards for the investigation and disposition of claims arising under insurance policies. To supplement the Act and further elaborate on insurer and agent obligations, the NAIC adopted the Unfair Claims Settlement Practices Model Regulation.

Certain defined acts committed in a flagrant manner and/or in conscious disregard of the Act and rules promulgated thereunder and defined acts committed with such frequency to indicate a general business practice are illegal unfair claims settlement practices. The minimum standards relate to specific forms of misrepresentation, failure to acknowledge communications, failure to promptly investigate claims, and failure to effectuate prompt, fair and equitable settlements. In addition, an insurer is required to maintain complete claim files which are subject to examination by the commissioner. Several states have adopted the model regulation and several others have similar or modified versions. As a general proposition, accident and health and property and liability insurance give rise to more claim settlement problems than does life insurance. Whether a particular life claim should be paid and in what amount usually is reasonably clear-cut. Nevertheless, problems have occurred in the life area, whether due to honest disputes or somewhat questionable insurer or agent practices. In any event, insurers and agents must be aware of their obligations under the Act and whatever regulation applies in the state in which they do business.

Furthermore, life insurance policies provide for the payment of death proceeds upon receipt by the insurer of proof of death of the insured. Occasionally, payments of proceeds are delayed due to the failure of the beneficiary to promptly or correctly present his or her claim due to a dispute as to the validity of the claim or who is entitled to the benefits or due to some fault of the insurer. Typically, when there has been considerable delay, especially when at least some of the fault rests with the insurer, insurers have paid interest on the proceeds that they held. More recently, perhaps a dozen states have enacted laws requiring the payment of interest on policy proceeds where there has been a delay in payment, regardless of fault.