Business Insurance and Legislation
In most states, legislation requires rating manuals and rating plans that must be filed for approval by the regulatory authority before they are put into application. Insurers are permitted to cooperate in the gathering and sharing of data for rating purposes in the preparation of these manuals and plans. These rating organizations are licensed and supervised by the individual states.
Until modern insurance legislation, the common law of caveat emptor, or “let the buyer beware” prevailed. This law has governed business and consumer transactions in England and the United States for centuries. Under the common law of caveat emptor, an unprincipled insurance company or the negligent agent or broker could conceal themselves from the consequences of their actions. Now, however, the term caveat vendor, literally meaning “let the seller beware” and commonly interpreted to mean “let the seller fully and accurately disclose,” prevails under the various legislative measures taken to protect insurance consumers.
Modern legislation has brought us the Unfair Trade Practices Act and the Unfair Claim Settlement Practices Act. Under these legislative acts, insurance consumers are protected from unfair or deceptive practices or acts. The objective of this consumer protection legislation is to provide private causes of action in cases of unfair or deceptive insurance practices. All states have statutes that protect insurance consumers from these practices. Most of these were enacted in the 1970s when consumer activism was at its peak. In 1905, Congress began a complete investigation into the entire life insurance industry. When the investigation, known as The Armstrong Report, was completed, few were surprised that it described widespread abuses.
During this time, there were many in favor of handing over the power of regulating the insurance industry to the federal government. Even in light of the poor reviews of the industry, however, the prevailing opinion was that the states, rather than the federal government, should continue to be responsible for the affairs of the insurance consumer. These included fair competition, fair insurance practices, and the public protection of insurance consumers in general. It was at this time that the individual states began establishing their own licensing programs.
Soon the financial conditions and the reputations of the insurance companies improved. However, during the Great Depression, insurance companies once again began to fail. They fell at unrivaled rates. In 1932, the National Convention of Insurance Commissioners recommended that insurance companies set up voluntary contingency reserves. Although the failures continued for a short time, they eventually leveled off.
Until 1944, the United States Supreme Court held that insurance was not commerce. Therefore, the Court repeatedly held that the regulation of insurance was not within the power of the federal government. This changed, however, in the case of United States v. South-Eastern Underwriters Association. The Court decided that insurance was in fact commerce and, therefore, subject to federal regulation.