FEDERAL REGULATIONS Flashcards
Fraud always involves a false statement and deceit; it can be either a criminal or civil crime. Federal laws prohibit the commission of fraud. In 2001, the NAIC adopted model legislation for the prevention and enforcement of insurance fraud. Subsequently, each of the states enacted its own Fraudulent Insurance Act.
A fraudulent act involves a misstatement of material fact by a person who knows or believes that statement to be false. The statement is made to another person who relies on its accuracy to make a decision or to act and is subsequently harmed by relying on the deliberately false statement. State fraudulent insurance acts do not modify the privacy of any individual; they protect producers, brokers, and insurers in the event fraudulent information is provided by consumers.
Insurance applications and claim forms must contain a disclosure about how false statements and fraud will be treated by the insurer. A sample warning is, “Any person who knowingly presents false or fraudulent information on an insurance application or claim for the payment of a loss is guilty of a crime and may be subject to fines and confinement in state prison.”
If a person engaged in the business of insurance whose activities affect interstate commerce willfully embezzles, misappropriates funds/property, knowingly and with the intent to deceive makes a false material statement or purposely overstates the security of an insurer, the following penalties apply:
A fine of no more than $50,000, imprisonment for up to 10 years, or both
If the violation jeopardized the safety and soundness of an insurer and was a significant cause of the insurer being placed in conservation, rehabilitation, or liquidation by an appropriate court, imprisonment can be for up to 15 years
If the amount embezzled or misappropriated does not exceed $5,000, violators will be fined up to $50,000 or imprisoned for up to 1 year, or both
Merchant Marine Act of 1920 (the Jones Act)
Because workers’ compensation laws do not apply to seamen, the Jones Act allows insured seamen to make claims for injuries suffered during the course of employment. It also regulates maritime commerce in U.S. waters, transportation of cargo, and the rights of seamen.
Motor Carrier Regulatory and Modernization Act (the Motor Carrier Act of 1980)
Deregulated the trucking industry by prohibiting any entity from interfering with a motor carrier’s right to set its own rates. Motor carriers and private motor carriers that transport property are required to establish evidence of financial responsibility in the form of insurance, a bond, a guarantee, or qualification as a self-insurer.
Gramm-Leach-Bliley Act (GLBA, a.k.a. the Financial Services Modernization Act of 1999)
This act repealed parts of the Glass-Steagall Act of 1933 to allow the merger of banks, securities companies, and insurance companies. It also established the Financial Privacy Rule and Safeguards Rule for the protection of consumers’ privacy. The Financial Privacy rule requires “financial institutions,” which include insurers, to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter. The privacy notice must explain:
The information collected about the consumer
Where that information is shared
How that information is used
How that information is protected
The notice must also identify the consumer’s right to opt out of the information being shared with unaffiliated parties pursuant to the provisions of the Fair Credit Reporting Act. Should the financial institutions privacy policy change at any point in time, the consumer must be notified again for acceptance.
Each time the privacy notice is re-established, the consumer has the right to opt out again.
notes
terrorism Risk Insurance Act
The Terrorism Risk Insurance Act of 2002 (TRIA) was enacted in direct response to the terrorist attacks on New York City and Washington, D.C. on September 11, 2001. Congress provided temporary financial compensation to insured parties during its crisis of recovery from the terrorist attacks. TRIA was intended to respond to the chaos the 9/11 terrorist attacks caused in the insurance industry as well as to assure that commercial property and liability insurance would continue to be able to provide coverage for the peril of terrorism. It was initially a temporary program that allowed the federal government to share in terrorism losses with private insurers in the event a certified act of terrorism took place.
TRIA programs have been extended several times over the years. Most recently, the Terrorism Risk Insurance Program Reauthorization Act of 2019 extended TRIA for seven years through December 31, 2027. It protects consumers by addressing market disruptions and ensuring the continued widespread availability and affordability of property and casualty insurance for terrorism risk.
The Act provides for a Terrorism Insurance Program established in the Department of the Treasury. The Secretary of the Treasury administers the Program and an “Act of Terrorism” is defined as any act certified by the Secretary of Treasury, in cooperation with the Secretary of Homeland Security and Attorney General. Only commercial property and casualty insurance is covered by the Program; personal lines insurance and life and health insurance are not covered. TRIA requires insurers to make terrorism coverage available to commercial policyholders, but does not require insureds to purchase it.
No payment may be made by the Secretary under the Program with respect to an insured loss that is covered by an insurer, unless:
The person that suffers the insured loss, or a person acting on behalf of that person, files a claim with the insurer.
The insurer provides clear and conspicuous disclosure to the policyholder of the premium charged for insured losses covered by the Program and the Federal share of compensation for insured losses under the Program.
The insurer processes the claim for the insured loss in accordance with appropriate business practices, and any reasonable procedures that the Secretary may prescribe.
The insurer submits to the Secretary, in accordance with such reasonable procedures as the Secretary may establish.
An insurer must make coverage for insured losses that do not differ materially from the terms, amounts, and other coverage limitations applicable to losses arising from events other than acts of terrorism. Under the current program, a terrorist act must cause at least $5 million in insured losses to be certified for TRIA coverage. The aggregate insured losses from certified acts of terrorism must be at least $200 million (for the calendar year) and an individual insurer must meet a deductible of 20% of its annual premiums for government coverage to begin.
Once all thresholds are met, the government covers 80% of insured losses due to terrorism.
iolent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)
The largest crime bill in U.S. history expands funding to federal agencies such as the FBI, DEA, and INS and includes provisions that address (among other topics) domestic abuse and firearms, gang crimes, immigration, registration of sexually violent offenders, victims of crime, and fraud.
The Act made it a felony for a person to engage in the business of insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust. Violations include willfully embezzling money, knowingly making false entries in any book, report or statement of the business, threatening or impeding proper administration of the law in any proceeding involving the business of insurance.
Dishonesty – Deceit, misrepresentation, untruthfulness, falsification
Breach of Trust – Based on fiduciary relationship of parties and the wrongful acts violating the relationship
Penalties include fines and possible prison time.
Insurance license applicants and producers:
Applicants who have been convicted of a felony must apply for Consent to Work in the business of insurance—prior to applying for an insurance license
Producers must apply for consent in their resident state
Officers and employees must apply for consent in the state where their home office is located
Prohibited persons (convicted felons) must apply for consent in order to discover if they are permitted or prohibited from the insurance business
Reciprocity – If consent is granted by any state, other states must allow the applicant to work in their states as well
Consent Withdrawal – If conditions of consent are not continually met, the consent may be withdrawn
Risk Management
Risk – A condition where the chance, likelihood, probability or potential for a loss exists; Uncertainty concerning a loss.
Management – The determination of what types of protection are required to meet an insured’s needs using:
A survey of the insured’s operations, health, assets and exposures that could give rise to losses
Assessment of potential loss frequency and severity
Physical inspections, applications or medical exams used for underwriting help manage a risk
Types of Risk
Speculative Risk – Situations where there is a chance or possibility for loss, no loss or gain (i.e., gambling)
Pure Risk – Situations where there is no chance for gain, only loss. Only pure risks can be insured (For instance, the possibility of damage to property caused by a fire or other natural disaster; or the possibility of financial loss as a result of premature death).
Loss – Reduction, decrease, or disappearance of value. The basis of a claim for damages under the terms of an insurance policy.
Peril – The cause of a loss.
Hazard – A specific condition that increases the probability, likelihood, or severity of a loss from a peril.
