Regulation of Policy Forms – New Appleman on Insurance Law Library Edition, Chapter 10

   By Carrie Cope

This chapter begins with a discussion of the history and purpose of policy form regulation and notes that dramatic differences among the states in size, geography, industry, politics and financial resources have impacted their reasons for regulation as well as their philosophies in applying and enforcing particular laws and regulations. The states have broad power to regulate insurance policies. That authority includes the power to prescribe policy provisions, require insurers to submit policy forms intended for use in their states to the insurance commissioner for review, and prohibit the use of forms that do not comply with applicable law, as well as punish insurers for violating their mandates.
Historically, a state’s approval of an insurance policy meant that the form, and its content, was in the public interest and complied with the state’s regulatory requirements. However, over the years, the movement for deregulation of insurance has impacted the review of policy forms in many states. While insurers have always had the ultimate obligation of ensuring that their policy forms comply with the law, they could rely on the state approval of a policy form as constituting the result of an in depth review by the state in light of its applicable statutory and regulatory requirements. However, in an effort to address contentions that the form review process is too time-consuming and has not kept pace with the needs of the insurance industry and financial marketplace, many states have considerably modified their review processes so that many type of policy forms receive less evaluation and, in some cases, little or no evaluation prior to their permitted use by the states. In many states, insurers filing forms must certify, at the time of the filing, that the forms comply with all applicable statutory and regulatory requirements and bear the consequences, if the forms are subsequently found to be in violation of such requirements.
The states regulate policy forms through a mixture of statutes, regulations, rules, bulletins and advisory opinions as well as other materials, such as department checklists. Most states have broadly drafted statutes that give regulators the power prevent the use of forms that are “unfair, misleading or discriminatory.” While many states have statutes that set forth policy content requirements and provide detailed requirements for particular lines of insurance, most states do not have such specific requirements for all lines of insurance. Consequently, a rule or regulation may specifically enumerate policy content, or other form requirements, pursuant to a statute that gives the insurance commissioner broad power to regulate policy forms, but does not otherwise address the particular policy provision or requirement that the regulation is interpreting. Rules and regulations have a pivotal role in enumerating, interpreting and clarifying the intent of state statutes in this way. Policy form requirements are also addressed in, and interpreted by, bulletins issued by the insurance departments and advisory opinions issued by the states’ attorneys general. While bulletins and advisory opinions do not have the force of law, some courts give them a great deal of weight when interpreting the meaning of a statute in a dispute. The regulators also assert regulatory requirements as a matter of “department position”, some of which are based on the interpretation of a statute or regulation, or some other basis, such as a matter of public policy. To assist insurers in evaluating whether their policy forms comply with applicable law and regulations, many insurance departments also issue checklists that identify the requirements for specified lines of insurance.
The National Association of Insurance Commissioners has played an important role in shaping the states’ regulatory requirements by developing model laws addressing a wide variety of insurance issues. In addition to supporting and improving the state regulation of insurance, the NAIC’s stated goals include protecting the public interest, promoting competitive markets, facilitating the fair and equitable treatment of consumers and promoting the reliability, solvency and financial solidity of insurance institutions. While the NAIC has taken many steps to modernize the state system of insurance regulation in the last several years, critics of state regulation contend that the changes made by the states not been fast enough or significant enough to truly address the concerns of insurers, the business community or the public.
Section 10.04 of this chapter describes in detail the nature and types of form filing requirements mandated by the states. Although the movement toward deregulation has impacted such requirements, some states still expressly require insurers to file their policy forms and obtain state approval prior to using them. Other states have “file and use” laws that permit an insurer to file a policy form and use it after a specified number of days if the insurance commissioner has not objected to the form. A few states have “use and file” laws under which an insurer may use an insurance policy in a particular state but must file it with the state within a specified period after using it. Although most states have a great deal of control over the timing of the review and approval of forms, many states have deemer provisions that operate to limit the time the insurance department has to approve or disapprove the filing. The laws typically provide that the forms are “deemed” approved if the state does not issue a determination within a specified period of time. However, the statutes often give the commissioner the right to extend the review period upon written notice to the insurer and some states may request that the insurer “waive” the deemer provision so they may have an extended period in which to review the filing. Notwithstanding that a policy may have been “deemed” approved, it must still comply with the applicable state’s regulatory requirements and the state typically has the power to subsequently review the policy and request that it be amended or even disapprove it at a later date.
Section 10.05 discusses examples of provisions generally regulated by the states. Of all of the provisions found in insurance policies, those provisions addressing the cancellation and nonrenewal of insurance policies issued on an admitted basis are among the most widely regulated provisions. An insurer’s termination of coverage, whether due to cancellation or nonrenewal, is viewed by regulators as a critical action given that it involves a loss of coverage. Prior to the late 1960s, the insurance statutes of most states did not require an insurance company to have a valid reason for canceling an insurance policy or to warn a policyholder that a lapsing policy would be nonrenewed. However, over time, virtually all states instituted some form of law or regulation addressing the cancellation and nonrenewal of insurance policies and there is a great deal of case law interpreting such requirements. Section 10.05 goes on to discuss other types of policy provisions regulated by the states and provides examples of some types of standard provisions required for particular lines in some states. Section 10.05 also discusses the impact of an insurer’s non-compliance with the states’ regulatory requirements. Insurers face a variety of penalties and sanctions for violating insurance laws and may even lose the ability to issue insurance policies in some instances.
Section 10.06 discusses in detail exceptions to form filing requirements. There are a variety of exceptions to form filing requirements and an insurer’s ability to use them may depend on the nature and size of the risk being insured and the applicable jurisdiction. Some states have laws that explicitly exempt certain risks from form filing requirements based on the size of the policyholder. Such laws are often referred to as “industrial insured” exemptions or apply to “large commercial risks.” It is important to recognize that not all such exemptions are equivalent. In addition, insurers may be excepted from form filing requirements, in limited circumstances, based on the nature of the risk being written (unique risks) or the number of times a policy is issued in a state (manuscript forms). Section 10.06 also provides examples of filing exemptions designed to apply to certain classes of risks that meet specific criteria. One example is New York’s Free Trade Zone.
Section 10.07 provides examples of federal insurance programs and discusses the relationship of state regulation with those programs. Section 10.08 discusses the movement to modernize the current regulatory system and notes that dramatic advances in technology and communications, and the globalization of financial markets, call into question the best approach for regulating insurance products in a rapidly changing world. Section 10.08 also discusses the arguments advanced by each side in the debate of whether the industry should simply keep trying to improve the state system of regulation or consider some type of federal regulation such as an optional federal charter. Finally, this chapter considers whether, in light of the movement to deregulate the form review process, market conduct examinations may provide a feasible option for regulation.
Carrie E. Cope is a partner in the Chicago office of Tressler, Soderstrom, Maloney & Priess, LLP. She specializes in insurance law and manages two synchronized practice areas of insurance regulation and specialty lines claim handling. She also has extensive experience in product development and policy and endorsement drafting for a wide variety of commercial and personal lines insurance policies. She writes and speaks frequently on insurance issues.