Unfair Claims Practice

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Unfair Claims Practice

What it is

An unfair claims practice occurs when an insurer improperly delays, avoids, or reduces payment on a valid claim. These actions are typically intended to lower the insurer’s costs but are illegal in many jurisdictions.

How it works

Insurers may use tactics such as prolonged delays, repeated requests for documents already provided, misrepresenting policy terms, or altering applications to justify paying less or denying a claim. The National Association of Insurance Commissioners (NAIC) has developed a model Unfair Claims Settlement Practices Act (UCSPA) that requires claims be handled fairly and communicated clearly. Insurance regulation is state-based, and many states have adopted versions of this model law; enforcement is handled by individual state insurance departments.

Examples

  • A small business suffers $100,000 in fire damage. The insurer repeatedly delays payment—claim forms “forgotten” or an adjuster repeatedly requests proof of loss already submitted—preventing repairs and business recovery.
  • Misrepresenting policy terms (e.g., claiming Building Ordinance coverage is excluded when the policy includes it).
  • Altering an application without consent (e.g., reducing a requested $50,000 coverage limit to $10,000 and then refusing to pay more).
  • Advertising a coverage limit (e.g., $50,000 for flood damage) without disclosing that additional premiums or conditions apply, then paying less than advertised.

Legal protections

  • Many states have enacted unfair claims practices laws modeled on the NAIC framework to protect insured parties.
  • These laws and enforcement mechanisms vary by state; they are not federal statutes.
  • State insurance departments oversee enforcement and handling of complaints.

Key takeaways

  • Unfair claims practices are actions by insurers that improperly delay, deny, or reduce claims.
  • Such practices are intended to lower insurer costs but are illegal under many state laws.
  • Protections and enforcement are administered at the state level, often using versions of the NAIC’s model act.