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Ethics and Laws (Chapter 15)

Terms in this set (126)

The Insurance Code does not always define how the laws are enforced. The Commissioner enforces the Code by writing and adopting Regulations that specify the manner of enforcement or provide details that are not explicitly cited in the Code. The various Regulations enacted by the Commissioner are found in the California Code of Regulations (CCRs).

The Commissioner's regulations are first proposed and published in draft form, then undergo a series of public hearings, and following final adoption, are reviewed by the Office of Administrative Law (OAL). After passing review by the OAL, the regulations are passed on to the Secretary of State, who is responsible for maintaining the CCRs.

In order to protect the public from imminent harm or unfair acts or practices, or to expedite claims processes, the Commissioner has authority to enact Emergency Regulations without having to follow the normal public hearing process, subject to OAL review and judicial appeal by any person directly impacted by such emergency regulations after they have become effective.

The Commissioner's regulations cover all aspects of the business of insurance. Among others, the Regulations include topics such as:
1. Criteria the Commissioner may use to deny an application for an insurance license
2. Fictitious business name approval for insurance producers
3. Bail transactions
4. Insurance for motor vehicles as required by the Vehicle Code
5. Surplus lines of insurance
6. The sale of insurance products in connection with loans or the sale of real or personal property
7. Premium financing and the compensation a person may derive from it
8. Recordkeeping by Agents, Agencies, and Insurers
An admitted insurer is one that has complied with the laws of this state to become authorized to transact insurance. An admitted insurer has been issued a Certificate of Authority from the State of California. Admitted insurers are also known as "standard" insurers because they sell policies for the standard market, which covers average or better than average risks. When risks are too high for the standard market, they must be covered by other types of policies, such as surplus lines or assigned risk.

A non-admitted insurer is not authorized to transact insurance in this state and has not been issued a Certificate of Authority. Excess and Surplus lines insurance for risks that are too high for the standard market is placed through a non-admitted insurer. An Excess and Surplus lines insurer writes standard coverage in a state where the insurer is unlicensed.

Some risks can be placed only with non-admitted insurers. Such risks include:
1. Shipowner interest, international maritime transportation
2. Marine builder's risks, drydocks
3. Aircraft or spacecraft insurance
4. Property or operations of railroads engaged in interstate commerce

These risks may only be placed by a special lines surplus lines broker. A special lines surplus lines broker is subject to the same fees and requirements. If a person is licensed as both an insurance broker and special lines surplus broker, only one fee can be collected.

Except when performed by a surplus line broker, the following acts are misdemeanors in California:
1. Acting as agent for a non-admitted insurer in the transaction of insurance business
2. In any manner advertising a non-admitted insurer
3. In any other manner aiding a non-admitted insurer to transact insurance business in this state

In addition to any penalty assessed for the commission of misdemeanors, a person violating these provisions may be fined $500, together with $100 for each month the violation is continued.

A licensed surplus line broker may accept business from any other originating licensee duly licensed for the type(s) of insurance involved, and may compensate those licensees.

A surplus lines broker may not:
1. Issue a binder or any other evidence of coverage without the prior written approval of the insurer
2. Place auto insurance with a non-admitted insurer unless the applicant has first been rejected by the standard market and the California Automobile Assigned Risk Plan (CAARP)

Each surplus lines broker must ensure that a diligent search is made among admitted insurers actually writing the particular type of insurance in this state before procuring the coverage from a non-admitted insurer. Within 60 days of placing the coverage with a non-admitted insurer, the broker must file a report with the Commissioner detailing the efforts made in trying to place the coverage with an admitted insurer.
Knowingly committing any of the following acts is a violation of the Unfair Claim Settlement Practices:
1. Misrepresenting to claimants pertinent facts or provisions in the insurance policy
2. Failing to acknowledge and act promptly on claims
3. Failing to use reasonable standards for the prompt investigation of claims
4. Failing to acknowledge claim coverage within a reasonable period of time after proof of loss requirements have been met by the insured
5. Failing to attempt to promptly and fairly settle claims in which liability is clear
6. Offering an insured substantially less than what a lawsuit would award, therefore forcing the insured to sue
7. Attempting to settle a claim for less than the amount to which the claimant believed he/she was entitled by reference to written or printed advertising material
8. Attempting to settle claims based on an application that was altered by the agent
9. Failing to inform the insured or beneficiary, upon request, of the coverage under which payment has been made
10. Failing to settle claims promptly under one portion of the policy in order to influence settlements under other portions of the policy
11. Failing to provide a reasonable explanation for the denial of a claim
12. Failing to settle claims promptly, where liability has become apparent, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy
13. Failing to provide a reasonable explanation for the denial of a claim
14. Directly advising a claimant not to obtain the services of an attorney
15. Misleading a claimant as to the applicable statute of limitations
16. Canceling or refusing to renew a policy based on religious affiliation
The Fraudulent Claims section of the Code enables the Commissioner and Department of Insurance to more effectively investigate and discover insurance fraud and to halt fraudulent activities. Insurance fraud is particularly problematic in automobile, Workers' Compensation and health insurance.

While investigating suspected fraud claims, insurers and agents will have access to all relevant public records required to be open for inspection.

Any insurer who provides a form to file a claim against it must include the following statement on the form: "For your protection, California law requires the following to appear on this form: Any person who knowingly presents a false or fraudulent claim for the payment of a loss is guilty of a crime and may be subject to fines and confinement in state prison."

In the case of a claim arising from the theft of an insured vehicle, the insurer must secure all of the following from the insured prior to the settlement of the claim:
1. A warning that false representations made on a signed claim form by the insured subject the insured to a penalty of perjury
2. A detailed description of the vehicle including any interior, exterior and special equipment
3. The name of the seller and purchase date and location of the insured vehicle
4. A detailed statement of the circumstances surrounding the theft
5. The insured's current driver's license number

The insured must sign the claim form under penalty of perjury in the presence of the agent, broker, adjuster or claims representative who will verify the driver's license number. The signature must be notarized. The insurer must retain copies of all auto theft settlement checks, the original claim form, and a legible copy of the police report for 3 years.
The Code identifies a variety of reasons for which a license application will be denied following a hearing into the allegations of the Commissioner. These same reasons may be used as the basis for suspending or revoking an agent's license after it has been issued, or if the applicant:
1. Is not properly qualified to perform the duties of a person holding the license applied for
2. Does not intend actively and in good faith to carry on as a business with the general public the transactions which would be permitted by the issuance of the license applied for
3. Is not of good business reputation
4. Is lacking in integrity
5. Has been refused a professional, occupational or vocational license or had such a license suspended or revoked by any licensing authority for reasons that should preclude the granting of the license applied for
6. Seeks the license for the purpose of avoiding or preventing the operation or enforcement of the insurance laws of this state
7. Has knowingly or willfully made a misstatement in an application to the Commissioner for a license, or in a document filed in support of such an application, or has made a false statement in testimony given under oath before the Commissioner or any other person acting in his stead
8. Has previously engaged in a fraudulent practice or act or has conducted any business in a dishonest manner
9. Has shown incompetency or untrustworthiness in the conduct of any business, or has by commission of a wrongful act or practice in the course of any business exposed the public or those dealing with him to the danger of loss
10. Has knowingly misrepresented the terms or effect of an insurance policy or contract
11. Has failed to perform a duty expressly enjoined upon him by a provision of this Code or has committed an act expressly forbidden by such a provision
12. Has been convicted of a:
1. Felony
2. Misdemeanor denounced by this Code or other laws
regulating insurance
3. Public offense having as one of its necessary elements a fraudulent act or an act of dishonesty in acceptance, custody or payment of money or property
13. Has aided or abetted any person in an act or omission which would constitute grounds for the suspension, revocation or refusal of a license or certificate issued under this Code to the person aided or abetted
14. Has permitted any person in his employ to violate any provision of this Code
15. Has violated any provision of law relating to conduct of business which could lawfully be done only under authority conferred by such license
16. Has submitted to the Commissioner a false or fraudulent certificate of prelicensing or continuing education

The Commissioner also could deny a license application if the granting of the license would be against public interest.
The Commissioner will specify the manner and type of records to be maintained by those licensees acting as insurance agents and brokers and the location where the records must be kept. Those records must be open to inspection or examination by the Commissioner at all times, and the Commissioner may require the licensee to furnish any information maintained or required to be maintained in those records.

The following records must be kept by agents, brokers, surplus lines and special line surplus lines broker for every insurance transaction for at least 5 years after expiration or cancellation date. All records are to be maintained at the principal office in California of the resident agent or broker:
1. Name of insured
2. Name of insurer
3. Policy number
4. Effective date, termination date, and mid-term cancellation date of coverage
5. Amount of gross premium
6. Amount of net premium
7. Amount of commission and basis on which computed

In the case of business transacted on a direct billing basis (where the insurer directly bills and receives premium from the insured), the agent or broker transacting the insurance must maintain for 5 years, the following records:
1. A policy record card or sheet, or declarations page
2. Copies of premium payment receipts or premiums when collected by the agent or broker
3. Records of premium payments if made by the agent or broker
4. Monthly or other periodic statements from the insurer showing premium receipts on the agent's or broker's business
5. Copy of any cancellation notice

The following records are to be maintained by every agent or broker at the office servicing the insured in a file pertaining to a particular insured for a period of 18 months after the transaction described by such records:
1. Identity of each person who transacted the insurance, renewals, and any change in coverage
2. Records of all binders, whether oral or written, showing the names of insured and insurer, nature of coverage, effective and termination dates, and premium for the binder or policy to be issued
3. Copy of the application or memorandum of request for insurance
4. Correspondence received, copies of correspondence sent, memoranda, notes of conversation, or another record necessary to describe the transaction

The following requirements also apply:
1. Bank records, including: periodic statements of account supplied by the bank, records of all deposits, cancelled checks, and records of withdrawal shall be maintained at all times.
2. If an insurer has authorized an agent or broker to maintain funds received in a fiduciary capacity in an interest bearing account, and to retain interest earned, the authorization must be in writing and must be maintained for as long as fiduciary funds are maintained for an insurer
3. One year after cancellation or expiration of a policy, pertinent records may be stored off premises so long as they are retrievable within 2 business days.