P&C Insurance Regulation and Ethics 2 — Questions and Answers
Question 1: Which federal law requires insurers to notify consumers about their privacy practices and limits sharing of nonpublic personal information?
- The Sherman Antitrust Act
- The Gramm-Leach-Bliley Act (GLB Act) (Correct answer)
- The McCarran-Ferguson Act
- The Fair Credit Reporting Act
Correct answer: The Gramm-Leach-Bliley Act (GLB Act)
The Gramm-Leach-Bliley Act (GLBA) requires financial institutions, including insurers, to provide privacy notices to customers and restrict the sharing of nonpublic personal information with third parties.
The Gramm-Leach-Bliley Act mandates that insurance companies provide an initial privacy notice when a customer relationship begins and annual notices thereafter, explaining what information is collected, how it is used, and the customer's right to opt out of certain sharing. Most insurers are also subject to state privacy regulations, which may be stricter than the federal baseline. Violating GLB can result in civil and criminal penalties.
Question 2: Insurance is primarily regulated at the state level because of:
- The Sherman Antitrust Act
- The McCarran-Ferguson Act of 1945 (Correct answer)
- The Employee Retirement Income Security Act
- Federal Executive Order 12612
Correct answer: The McCarran-Ferguson Act of 1945
The McCarran-Ferguson Act of 1945 confirmed that states have the primary authority to regulate insurance, providing a limited antitrust exemption for the business of insurance as long as states actively regulate it.
Prior to 1944, insurance was considered purely a state matter. After the Supreme Court ruled in U.S. v. South-Eastern Underwriters Association that interstate insurance is subject to federal commerce law, Congress passed McCarran-Ferguson to restore state primacy. The Act grants a limited antitrust exemption for insurance activities (such as rate-sharing bureaus) regulated by state law, which is why every state has an insurance department with broad regulatory authority.
Question 3: An insurance producer who places a client in a policy primarily to earn a higher commission rather than to meet the client's needs is engaging in:
- Twisting
- Churning (Correct answer)
- Rebating
- Churning or twisting, depending on whether an existing policy is replaced
Correct answer: Churning
Churning (also called internal replacement) involves inducing a policyholder to replace an existing policy unnecessarily, primarily to generate new commissions, to the detriment of the insured.
Churning typically involves persuading an insured to replace an in-force policy from the same company or producer with a new one that offers no material benefit, simply to generate additional commissions. Twisting refers to using misrepresentation to induce a replacement from one company to another. Both practices are unethical and illegal in most states. Rebating involves sharing commissions or providing other inducements not specified in the policy.
Question 4: The concept of 'fiduciary duty' requires a producer to:
- Share client information with competing producers
- Act in the best interest of the client when handling premium funds and placing coverage (Correct answer)
- Maximize the insurer's premium revenue above all else
- Disclose all commission rates to the public
Correct answer: Act in the best interest of the client when handling premium funds and placing coverage
A producer has a fiduciary duty to act in the client's best interest when collecting premiums, placing coverage, and handling funds — the client's trust must not be exploited for the producer's personal gain.
In many states, producers who collect premiums are considered to be holding those funds in a fiduciary capacity, meaning the premiums belong to the insurer (or the insured if unearned) and must be kept separate from the producer's own funds. A fiduciary duty also requires honest advice when recommending coverage and avoiding conflicts of interest. Misappropriating premium funds is a criminal offense.
Question 5: Which of the following acts is an example of 'unfair claims settlement practices'?
- Acknowledging a claim within 10 business days
- Denying a claim with a written explanation citing the relevant policy provision
- Failing to promptly investigate or pay undisputed claims (Correct answer)
- Requesting a sworn proof of loss from the insured
Correct answer: Failing to promptly investigate or pay undisputed claims
Failing to promptly investigate and pay clearly undisputed portions of a claim is an unfair claims settlement practice prohibited under the NAIC Model Unfair Claims Settlement Practices Act.
Most states have adopted unfair claims settlement practices laws based on the NAIC model. Prohibited practices include misrepresenting policy provisions, failing to acknowledge communications promptly, not attempting to settle claims in good faith, compelling insureds to litigate to get fair settlements, and not providing reasonable explanations for claim denials. Violations can result in fines, license suspension, and market conduct examinations.
Question 6: A producer who accepts a check from a client, endorses it to themselves, and uses the money for personal expenses is committing:
- Rebating
- Defamation
- Misappropriation of funds (conversion) (Correct answer)
- Twisting
Correct answer: Misappropriation of funds (conversion)
Misappropriation (conversion) of premium funds is a serious ethical violation and criminal act — premium money collected from a client belongs to the insurer or the insured and may not be used for the producer's personal benefit.
Insurance premium funds collected by a producer are held in a fiduciary capacity and must be remitted to the insurer or returned to the client as appropriate. Using those funds personally — even temporarily, with the intent to repay — constitutes misappropriation. It is grounds for immediate license revocation, civil liability, and criminal prosecution. Most states require producers to maintain separate premium trust accounts to prevent commingling.
P&C Insurance Regulation and Ethics 2
Which federal law requires insurers to notify consumers about their privacy practices and limits sharing of nonpublic personal information?