Last December, the National Association of Insurance Commissioners (NAIC) adopted amendments to the Model Act. If enacted by individual states, these amendments will result in significant changes to anti-rebating laws that were first established in 1887. Here’s what brokers and insurers need to know moving forward.
What has changed
According to the National Association of Professional Insurance Agents, the NAIC unanimously approved amendments to Section 4(H) (“Rebating”) of the NAIC Unfair Trade Practices Act (Model #880). The revised language allows insurers and producers to offer value-added products and services to customers and prospects at no cost or a discount, provided that the products or services are related to the coverage and satisfy one or more specified conditions relating to mitigating loss, reducing claim costs, enhancing health or assisting the administration of employee benefits.
The amendments also allow insurers and producers to offer noncash gifts, items and services in connection with the marketing of insurance, provided the customer is not required to purchase insurance in return, among other requirements. These provisions go beyond certain exceptions in many state anti-rebating laws. Currently, the revisions leave open the possibility of state insurance commissioners placing limits on certain gift amounts.
California Department of Insurance reacts to amendment
Despite the fact that rebating is largely allowed under California’s insurance laws, recent NAIC enforcement of the amendments has the California Department of Insurance pushing back in an effort to limit the practice to the fullest extent permitted by law. In 1988, when Proposition 103 was passed, California repealed existing laws that prohibited rebates. Since that time, only a handful of insurance statutes remain that specifically address the issue of rebates.
California’s anti-rebating insurance codes 750, 12760 and 12404
According to the Insurance Coverage Law Center, Section 750 applies to any person or entity that handles insurance claims, and bans them from offering or receiving any “rebate, refund, commission or other consideration” to or from a person for the referral or procurement of clients, cases, patients or customers. However, because the statute only prohibits insurers from paying someone to refer them clients or procure clients for them, California courts will allow an insurer to pay rebates directly to an insured or insurance applicant.
Another California anti-rebating code is 12760, which prohibits the payment of a commission to any person as an inducement or compensation for the insurance, purchase or acquisition of a home protection contract. However, the code does permit commission payments and marketing fees to be paid to employees and commission-based sales agents of home protection companies.
Lastly, insurance code 12404 deems it unlawful for any title insurers, underwritten title company or controlled escrow agent to pay any commission, companion or other consideration to any person as an inducement to the placement or referral of title business.
During the time when the NAIC was revising the Model Act on rebating, in January 2020, Section 12404 named an underwritten title company and its employee in a lawsuit based on an employee who was providing housing report data as leads for realtors. The department contended that the title insurer had ethical guidelines that required its employees to comply with state anti-inducement laws, and that the employee had violated the law. Ultimately, the claims for both respondents were settled, with the employee surrendering any rights to a certificate of registration and the insurer paying a $25,000 fine and another $25,000 in costs.
The Insurance Coverage Law Center notes that the initiation of the lawsuit during the time when the NAIC was actively working on a loosening of rebate rules and settlement orders that allowed additional rebates, is notable. Moving forward, it warns that in California, as well as for the industry as a whole, it would be wise to ensure that any rebating activities that may occur are well outside the prohibitions of the remaining anti-rebating statutes.
Kristi W. Dean, Managing Partner
Stone Dean LLP
Kristi is an experienced litigator and transaction attorney who represents clients in business transactions and litigation disputes. Her litigation practice focuses on trade secrets, unfair business competition, insurance law and complex business disputes, with a focus on insurance-related issues.