Insurance has a long history, which stretches back to the 3rd millennium BC. In its early history, insurance was nothing other than rudimentary risk spreading mechanisms employed by Chinese traders. They distributed their wares into many vessels so that if one or a few vessels capsized, the loss was evenly distributed among several traders. Over the years, insurance has evolved to become the well organized industry that exists today.
However, contrary to the notion that such a refinement would eliminate malpractices from this industry, the case has been different. Insurance malpractices are estimated to cost over $40 billion globally (“Insurers Say Fraud on the Rise” par. 10). To make matters worse, despite there being regulations to control the industry, there are no signs of a reduction in the prevalence of this behavior.
The U.S. is one of the countries in which the prevalence of this problem is at its highest level (Goel 241). Consequently, this report examines the disciplinary measures that have been employed by the insurance regulator in the State of New York in a bid to determine what constitutes a good insurance company.
The New York State Department of Financial Services deals with a myriad of malpractice cases in the insurance industry. The cases involve insurance companies, insurance agents and agencies as well as insurance brokers. The severity of a disciplinary action taken by this government agency against any player in the industry is dependent on the nature of the malpractice committed. Some cases can be fined up to millions of dollars while others only cost the culprits a few thousand dollars.
In the recent past, the most serious case handled by the New York State Department of Financial Services involved Aetna Life Insurance Company (New York State Department of Financial Services (a) par. 1). It had used noncompliant policy forms to issue life insurance for six different groups. The certificates issued thereof omitted some critical information on the statutory provisions that the insured people had a right to know.
In essence, the insurance company withheld information about rights and benefits, which the insured individuals were entitled to. The Department of Financial Services requested Aetna Life Insurance Company on several occasions to change the faulty forms and use the right ones, but the company refused to comply.
In the end, the company was charged for this malpractice and fined $500,000. This case is among the most serious cases handled by the Department in the recent past. In all the cases that were handled by the Department in 2014 and those that were handled in 2013, this case attracted the second highest fine. However, it is not isolated because there were numerous other cases that the Department dealt with in the same period.
The other cases handled by the Department of Financial Services include the Permanent General Assurance Corporation case in which the insurance company had to part with a fine of $75,000 after it was found culpable for reporting incorrect cancellation dates for numerous automobile insurance policies to the New York State Department of Motor Vehicles. The company also issued numerous cancellation notices for automobile insurance policies in violation of Section 313 of the New York Vehicle and Traffic Law.
A point worth noting in this case is that the incorrect cancellation dates were reported via electronic transmission. This point is important because a careful look at the cases that the Department of Financial Services dealt with in 2014 and 2013 shows that other insurance companies also reported false cancellation dates and interestingly, they also did so via electronic transmission. A good example involves Encompass Indemnity Company and its affiliates, which were fined $40,100 for reporting incorrect cancellation dates via the electronic platform.
In a case that sounds bizarre, the Department fined Liberty Mutual Fire Insurance Company $46,800 due to its failure to inform a large number of its clients about the cancellation of their personal policies. The law requires insurance companies to notify a client whenever a policy is cancelled, but this company consciously failed to do so.
The implication of this behavior is that if any of the insured individuals had encountered a problem that required this company to come to their aid, they would have been shocked because according to the company, they were no longer in the list of clients. In other words, there would be no compensation for them. This case demonstrates how reckless and unethical insurance companies and their agents can become in their quest to rake in profits.
They constantly violate established laws and regulations and hope to get away with their crimes. However, they tend to be careful enough not to violate laws that can lead to the revocation of their licenses. The highest fine charged by the Department in 2014 was $525,000 (New York State Department of Financial Services (b) par. 13). It is a hefty fine, but it is far much less severe in comparison to license revocation. Insurance agents and brokers were, however, not as lucky.
In most of the cases that involved insurance agents and brokers, the penalty involved license revocation. It is not clear whether they were more reckless than the companies they worked with, but a good number of them were barred from operating. It is thus plausible to deduce that it is easier to deal with agents and brokers more strictly because the collateral damage the results from the revocation of their licenses is easily manageable.
On the other hand, the most prevalent malpractice among insurance companies involved the violation of assorted sections of insurance law and the Department of Financial Services’ regulations and the use of noncompliant forms in issuing insurance policies. Specifically, the violation of subdivisions of Department Regulations 64 & 68 (11 NYCRR 65 & 216), Regulation 95 (11 NYCRR 86) and Section 3425 of the Insurance Law were the most common malpractices.
The violations attracted varying amounts of fines for different companies, but it is almost certain that the companies that were involved will still violate either the same regulations or others since trends indicate that insurance malpractices are far from showing any signs of abatement (“Insurers Say Fraud on the Rise” par. 10).
This state of affairs leads to an important conclusion. The reputation of an insurance company or agent is critical when seeking an insurance policy. The leading insurance companies did not feature on the Department of Financial Services’ list of victims except the Hartford Group of Companies whose several affiliates were culpable for several assorted violations.
Since this is an isolated case, it is safe to argue that the company only featured in the list due to lack of diligence among its individual employees. Therefore, the reputation of an insurance company or an agent can serve as the ultimate yardstick for determining the best company to deal with. Established insurance companies and agents strive to maintain a good reputation because their ability to attract new clients is pegged on their reputation. As such, they are unlikely to consciously engage in insurance malpractices, making them the best.
Goel, Rajeev K. “Insurance fraud and corruption in the United States.” Applied Financial Economics 24.4 (2014): 241-246. “Insurers Say Fraud on the Rise.” American Agent & Broker 1. Insurance Journal.
New York State Department of Financial Services (a). New York State Department of Financial Services takes disciplinary actions against companies, agents, brokers & adjusters. NYSDFS, New York, 2014.
New York State Department of Financial Services (b). New York State Department of Financial Services takes disciplinary actions against companies, agents, brokers & adjusters. NYSDFS, New York, 2014.