Legislation and the Insurance Industry
also Insurance Consultant
A consultant's license is not required for the following individuals who provide insurance recommendations or general financial advice in the normal course of their employment: ⦁ attorneys ⦁ trust officers of a bank ⦁ certified public accountants
Domestic, Foreign, and Alien Insurers Insurance companies are classified according to where they were incorporated or organized.
A domestic insurer is formed under the laws of New Jersey. A foreign insurer is formed under the laws of a jurisdiction of the United States other than New Jersey. An alien insurer is incorporated and organized in any country other than the United States.
Insurance Agents
An insurance agent is a person who has been authorized by an insurance company to act as its agent to solicit, negotiate, or sell insurance contracts on its behalf or to collect insurance premiums. Agents also may be authorized to countersign insurance policies for an insurer.
Insurance Broker
An insurance broker is a person who, for a commission or fee, negotiates, solicits, or sells insurance to insureds. A broker also places insurance with insurers that he or she does not represent as an agent. In an insurance transaction, a broker represents the insured, not the insurer.
Insurance Consultant
An insurance consultant provides advice and recommendations about the terms, benefits, and coverage of insurance policies.
Certificate of Authority
An insurer may not transact insurance in New Jersey unless it has a certificate of authority. The Commissioner issues certificates of authority, which specify the kinds of insurance that the insurer is authorized to transact, to qualified insurers.
the McCarran-Ferguson Act in 1945
Congress enacted the McCarran-Ferguson Act in 1945, which recognized that state regulation of insurance was in the public's best interest and exempted the insurance industry from federal regulation.
Court decisions may modify
Court decisions may modify insurance rules and regulations promulgated by legislatures or insurance departments by making ambiguous rulings explicit.
Anyone who violates a cease and desist order after it has become final must pay a fine of up to $5,000 per violation.
During a hearing, the Commissioner can ⦁ examine witnesses under oath; ⦁ issue subpoenas; and ⦁ compel the production of books, records, and documents.
U.S. v. South-Eastern Underwriters Association
During the period following Paul v. Virginia, the individual states regulated the insurance industry. However, in 1944 the Supreme Court reversed the Paul v. Virginia decision in Southeastern v. Underwriters Association. In Southeastern, the Court ruled that insurance is a form of interstate commerce and consequently should be regulated by the federal government. While this case did not affect the power of states to regulate insurance, it did nullify state laws that conflicted with federal legislation. The Southeastern case therefore created a shift in the balance of regulatory control to the federal government.
Effect of Court Action on Insurance Interpretations of Case Law
If questions arise regarding the interpretation or enforcement of state insurance laws, a state's commissioner may bring an action in court to resolve these issues. Similarly, policyowners may file lawsuits when disputes arise under insurance contracts.
In Paul v. Virginia
In Paul v. Virginia, the Supreme Court held that the sale and issuance of insurance is not considered interstate commerce, thereby upholding the right of states to regulate insurance.
Regulation of Producers Capacity of Producers
Insurance producers are required to be licensed under New Jersey law to sell, solicit, or negotiate insurance.
State Insurance Regulation
Many life and health insurance products and procedures are somewhat common to all states. Many legal requirements are also similar from one state to another, either because
Reinsurance; Retrocession
Reinsurance refers to a transaction in which an insurance company transfers part of a risk it has assumed to another insurer. Generally, reinsurance is used to limit the loss an insurer would face should a large claim become payable.
also Definition of Sell, Solicit, and Negotiate
Selling insurance involves exchanging an insurance policy for money on behalf of an insurer. Soliciting insurance involves attempting to sell insurance or urging a person to apply for a specific type of insurance from a particular insurer.
Insurance Commissioner's Duties and Powers
The Commissioner may also conduct examinations, administer oaths, question licensees, and issue subpoenas in connection with investigations and hearings under the insurance code.
Related Federal Laws and Court Cases Paul v. Virginia
The history of insurance regulation in the United States demonstrates the tug-of-war between the authority of the states and the federal government. In 1868, the U.S. Supreme Court decided the case of Paul v. Virginia, in which one state attempted to regulate an insurance company domiciled in another state. The Supreme Court ruled against the insurance company, holding that the sale and issuance of insurance is not considered interstate commerce, thereby upholding the right of states to regulate insurance.
also Reinsurance; Retrocession
The insurer seeking to transfer some of its risk is known as the ceding company, while the insurer accepting some of the risk being transferred is known as the reinsurance company or the assuming insurer. The ceding company pays a premium to the reinsurer for its coverage.
The Commissioner is responsible for
enforcing and administering all laws pertaining to insurance in the state of New Jersey and can make rules and regulations to help administer the insurance code.
A person charged with violating the insurance laws is
entitled to a hearing and at least ten days' notice in advance of the hearing.
A stock insurer is an
incorporated insurer owned by stockholders.
In an insurance transaction, a broker represents the
insured, not the insurer.
The insurer seeking to transfer some of its risk is the ceding company, while the
insurer accepting some of the risk being transferred is known as the reinsurance company or the assuming insurer.
An alien insurer is formed
under the laws of a country other than the United States.
In addition to suspending, denying, or revoking a producer's license, the Commissioner may impose:
⦁ a fine of up to $5,000 for a first offense ⦁ a fine of up to $10,000 for each subsequent offense
Although insurance laws vary from state to state, most states' insurance codes regulate:
⦁ insurers' investment activities ⦁ insurers' solvency ⦁ the types of insurance policies that may be sold ⦁ marketing practices and unfair methods of competition ⦁ the licensing of producers and insurers ⦁ prelicensing and continuing education requirements
Regulation of Insurers Insurance-Related Conduct Insurance-related conduct includes
⦁ selling, soliciting, negotiating, or binding insurance policies; ⦁ communicating with insureds about a policy's terms or conditions; ⦁ engaging in office management policies affecting insureds; ⦁ processing claims; and ⦁ transmitting funds between insureds, producers, premium finance companies, and insurance companies.
⦁ they are federal laws that apply nationwide, such as ERISA (the pension law that explicitly pre-empts state law) or the securities laws that apply to variable insurance products that are enforced by the Financial Industry Regulatory Authority (FINRA); or
⦁ they are based on NAIC model laws that have been adopted by most state legislatures.
In which of the following cases did the Supreme Court uphold the right of states to regulate insurance by ruling that the sale of insurance is not considered interstate commerce?
Paul v. Virginia In 1868, the U.S. Supreme Court decided the case of Paul v. Virginia, in which it held that the sale and issuance of insurance is not considered interstate commerce, thereby upholding the right of states to regulate insurance.
Penalties
The Commissioner may place on probation, suspend, revoke, or refuse to issue or renew a producer's license or may impose a civil penalty for the following reasons:
The Commissioner
The Commissioner may seek a court order to compel a person to obey a subpoena or produce evidence. A person who does not obey a court order may be punished by the court for contempt.
An insurance agent is a person who has been authorized to
act as an insurer's agent to solicit, negotiate, or sell insurance contracts on its behalf or to collect insurance premiums.
An insurance broker is a person who,
for a commission or fee, negotiates, solicits, or sells insurance to insureds.
The Commissioner is the
head of the state's Department of Banking and Insurance.
The Commissioner issues certificates of authority to
qualified insurers, which permits them to transact insurance business in New Jersey.
Reinsurance refers to a
transaction in which an insurance company transfers part of a risk it has assumed to another insurer.
If the Commissioner finds that the producer has committed the alleged acts or practice, the Commissioner can order that the producer
⦁ cease and desist from committing the act or engaging in the practice; ⦁ be fined up to $1,000; ⦁ be fined up to $5,00 if the person knew or should have known he or she was violating the law; or ⦁ be subject to a combination of these disciplinary measures.
The Commissioner may place on probation, suspend, revoke, or refuse to issue
⦁ fraudulent, coercive, or dishonest practices in conducting insurance; ⦁ demonstrating financial irresponsibility or lack of competence or trustworthiness to transact insurance; ⦁ having a producer license suspended in another state, province, district, or territory;
The Commissioner may place on probation, suspend, revoke, or refuse to issue or renew a producer's license or may impose a civil penalty for the following reasons:
⦁ making a materially untrue, incorrect, or misleading statement in the license application; ⦁ violating New Jersey's insurance laws or a rule, subpoena, or order of the Commissioner or another state's commissioner; ⦁ misrepresentation or fraud in obtaining the license;
McCarran-Ferguson Act (Public Law 15)
Because the Supreme Court's decision in Southeastern threatened to disrupt the regulation of the insurance industry, Congress enacted the McCarran-Ferguson Act in 1945. This law recognized that state regulation of insurance was in the public's best interest and exempted the insurance industry from federal regulation. However, it did give the federal government the right to apply antitrust laws to the extent that insurance business is not regulated by the state. To avoid federal intervention, each state has revised its insurance laws to conform to these requirements.
also Certificate of Authority
Each insurer must maintain a principal office from which it conducts or manages its general affairs. Canadian insurers maintain their principal offices in Canada, while alien insurers that are authorized to transact insurance in the United States must maintain a principal office in the U.S.
nonrenew or deny an application
If the Commissioner decides to nonrenew or deny an application for a license, he or she must give the person written notice stating the reason for the decision. The applicant or licensee may then request a hearing on the matter.
Definition of Sell, Solicit, and Negotiate
Producers must be licensed to sell, solicit, and negotiate insurance in New Jersey. Negotiating insurance involves discussing or offering advice to prospective purchasers regarding the benefits, terms, or conditions of an insurance policy by a person who sells insurance.
State legislatures
State legislatures are responsible for establishing and overseeing state insurance departments and regularly review and revise state insurance laws.
New Jersey Department of Banking and Insurance Insurance Commissioner's Duties and Powers
The Commissioner is the administrator and chief executive officer of the Department of Banking and Insurance in New Jersey. The Commissioner is responsible for enforcing and administering all laws pertaining to insurance in the state and can make rules and regulations to help administer the insurance code.
Which of the following activities is typically not regulated by state insurance departments?
insurer hiring practices State insurance departments regulate the licensing of producers and insurers along with insurers' marketing practices and solvency requirements. They do not regulate the hiring practices of insurers.
After a hearing, the Commissioner can
issue a cease and desist order, impose a fine, or take any combination of these measures.
A mutual insurer is owned by
its policyholders, who hold policies as their evidence of ownership.
A domestic insurer is formed under the
laws of New Jersey, while a foreign insurer is formed under the laws of any state or government other than New Jersey.
An insurance consultant provides advice and recommendations about
the terms, benefits, and coverage of insurance policies.
The Commissioner may place on probation, suspend, revoke, or refuse to issue or renew a producer's license
⦁ misappropriation, conversion, or unlawful withholding of money belonging to insurers or others; ⦁ intentionally misrepresenting the terms of an insurance contract, policy, or application; ⦁ being convicted of a felony or crime of the fourth degree or higher; ⦁ being found guilty of an unfair trade practice or fraud;
In carrying out his or her duties, the Commissioner is responsible for
⦁ overseeing and administering the Department's work; ⦁ appointing and removing officers and employees of the Department; ⦁ establishing divisions within the Department; ⦁ regulating insurance companies, licensees, agencies, boards, and commissions within the Department's jurisdiction; ⦁ bringing legal proceedings to enforce the Commissioner's powers and duties; ⦁ filing an annual report with the governor and state legislature concerning the Department's operations during the prior year; ⦁ appointing advisory committees to help the Department carry out its duties; ⦁ maintaining headquarters for the Department; and ⦁ performing other functions as required by law.
Producers must be licensed to
sell, solicit, and negotiate insurance.
The Commissioner may also
suspend or revoke the license of anyone engaged in an unfair method of competition.
A business entity's license may also be suspended if the Commissioner finds
A business entity's license may also be suspended if the Commissioner finds that the partners, officers, or managers knew about an individual licensee's violation and did not report the violation to the Commissioner or take corrective action.
also Stock and Mutual Insurers
A domestic mutual insurer has also been incorporated in New Jersey but is owned by its policyholders, who hold policies as their evidence of ownership. A mutual company does not have permanent capital stock and has a governing body elected by its policyholders.
Hearings; Notice of Hearings
A person who is charged with engaging in an unfair method of competition or committing an unfair or deceptive act or practice is entitled to a hearing before the Commissioner. The person must be notified of the time and place of the hearing at least ten days in advance. The notice will also specify the offenses and violations with which the person is charged.
Effect on Law and Policy Forms
Court decisions may modify insurance rules and regulations promulgated by legislatures or insurance departments by making ambiguous rulings explicit. Courts may also add clarity to the law by filling in voids or explaining the meaning of policy terms. Sometimes a court may declare an insurance law or rule unconstitutional and, thus, void.
Effect of State Laws on Insurance
Each state has its own insurance department that is headed by a commissioner, director, or superintendent of insurance. State insurance departments are responsible for promoting the public welfare and interests of consumers by regulating the licensing and activities of insurers, producers, and others who transact insurance. They also help ensure that premiums are reasonable and that policy forms comply with state law.
Tom is an insurance broker and just sold a life insurance policy issued by ABC Insurers to his client Ella. Which party does Tom represent in the transaction?
Ella A broker places insurance with insurers that he or she does not represent as an agent. In an insurance transaction, a broker represents the insured, not the insurer.
The Commissioner
The Commissioner may also issue an order before a hearing is completed, if immediate action is required. A preliminary hearing on the order must then be held within 20 days.
The Commissioner may also order
The Commissioner may also order a person to make restitution to injured parties and to reimburse the Department for the costs of investigating and prosecuting unlawful acts and practices.
regulated primarily at the state level
The insurance industry has been regulated primarily at the state level rather than by the federal government.
The Commissioner may conduct
examinations, administer oaths, question licensees, and issue subpoenas in connection with investigations and hearings under the insurance code.
Insurance-related conduct includes selling and
negotiating insurance policies, communicating with insureds about policies, processing claims, and transmitting funds in connection with insurance transactions.
The Commissioner may place on probation, suspend, revoke,
⦁ forging another's name on an insurance application; ⦁ cheating on the licensing examination; ⦁ knowingly accepting insurance business from an unlicensed producer; ⦁ failing to comply with an administrative or court order imposing a child support obligation;
Stock and Mutual Insurers
A domestic stock insurer is formed under the laws of New Jersey and is owned by its stockholders. Ownership is evidenced by shares of stock, and profits are distributed as stock dividends.
The Commissioner determined that Agent Smith has unlawfully engaged in rebating in order to boost his sales. The Commissioner can impose all of the following penalties EXCEPT: up to six months' imprisonment
If the Commissioner finds that a producer has committed an unfair trade practice, he or she can order that the producer cease and desist from committing the act or engaging in the practice. The Commissioner can also impose a fine of up to $1,000 ($5,000 if the person knew he or she was violating the law) or impose both a fine and a cease and desist order.
In Southeastern v. Underwriters Association
In Southeastern v. Underwriters Association, the Supreme Court overruled Paul v. Virginia and held that insurance is a form of interstate commerce and consequently should be regulated by the federal government.
Which party does a broker represent in an insurance transaction?
In an insurance transaction, a broker represents the insured, not the insurer.
