S.B. 877 (“Insurance Department Act”) and S.B. 878 (“Insurance Company Act”) amend The Insurance Department Act of 1921 and The Insurance Company Law of 1921, respectively, to authorize producers and companies to give to insureds or prospective insureds rebates or other things of value not exceeding $100 in the aggregate annually that are not specified in the insurance contract. In neither event may the purchase of insurance be the condition to receipt of the rebate or thing of value. These are exceptions to what had been absolute prohibitions on rebates and inducements. The purpose of the prohibition is to prevent discrimination in the provision of insurance and to create a level playing field among large and small insurers. The Insurance Company Act and the Insurance Department Act (“New Legislation”) are important because they modernize rules that, if strictly construed, would have resulted in criminal convictions for low value items of good will or providing loss control services regarding the risks covered under the related insurance policy, neither of which fulfills the policy reasons for the prohibition.
The Insurance Company Act of 1921, the Insurance Department Act of 1921 and the Unfair Trade Practices Act contain prohibitions against insurance companies and producers offering in Pennsylvania rebates and inducements to policy purchasers. These consumer protection provisions are similar to those in other states. The National Association of Insurance Commissioners (“NAIC”) has promulgated models laws regarding insurance regulation. . One such model law of the NAIC is Model 880 – Unfair Trade Practices Act (“Model 880”) whose purpose is to regulate trade practices in the insurance industry following federal legislation. Section 4(H)(1) of Model 880 enumerates unfair trade practices to include “rebates” that are practiced repeatedly or in conscious disregard of Model 880.
Rebates are defined in Model 880 as follows: “Except as otherwise expressly provided by law, knowingly permitting or offering to make or making any contract of life insurance, life annuity or accident and health insurance, or agreement as to such contract other than as plainly expressed in the insurance contract issued thereon, or paying or allowing, or giving or offering to pay, allow or give, directly or indirectly, as inducement to such insurance or annuity, any rebate of premiums payable on the contract, or any special favor or advantage in the dividends or other benefits thereon, or any valuable consideration or inducement whatever not specified in the contract; or giving, or selling, or purchasing or offering to give, sell, or purchase as inducement to such insurance contract or annuity or in connection therewith, any stocks, bonds, or other securities of any insurance company or other corporation, association, or partnership, or any dividends or profits accrued thereon, or anything of value whatsoever not specified in the contract.” (emphasis added).
Section 1 of the Insurance Department Act amends sections 645-A and 646-A of the Insurance Department Act of 1921, 40 P.S. §310.45 regarding rebates and 40 P.S. §310.46 regarding inducements. As to rebates and inducements, producers may now offer or give to an insured or a prospective insured things of value other than money with a redeemable value not exceeding $100 (“Value”). The thing of value is referred to as “any favor, advantage, object, valuable consideration or anything other than money that has a cost or redeemable value less than or equal to one hundred dollars ($100)” (“Thing of Value”). The Thing of Value may be given only if its receipt is not contingent on the purchase of insurance where the Thing of Value is not specified in the insurance policy. In each case, the producer may not make receipt of the Thing of Value contingent on purchase of insurance.
Similarly, Section 1 of the Insurance Company Act amends section 346 of the Insurance Company Law of 1921, 40 P.S.§471, so that “an insurance company, association or exchange, by itself or by its officers or members, attorney-in-fact or by any other party” (“Company Party”) may offer or give to an insured or prospective insured Things of Value provided receipt is not contingent on the purchase of insurance where the Thing of Value is not specified in the insurance policy. The Company Party may not make receipt of the Thing of Value contingent on purchase of insurance.
In each statute of the New Legislation, the General Assembly included provisions governing insurance industry practices that will evolve without further legislative amendment. The Insurance Commissioner may increase the Value on publication of notice in “The Pennsylvania Bulletin.” Accordingly, the Commissioner may increase the amount of the Value without further action by the General Assembly. Further, nothing in the New Legislation “shall be construed as permitting any unfair method of competition or an unfair or deceptive act or practice….under the ‘Unfair Insurance Practices Act.’” That Unfair Practice Act is Pennsylvania’s equivalent of Model 880 of the NAIC and serves to limit practices under the New Legislation that would involve discrimination in the provision of insurance or creation of disparities among large and small insurers.
One term of the New Legislation could provide an advantage to larger insurance companies. The New Legislation provides that nothing in it prevents producers or Company Parties “from offering or giving to an insured or a prospective insured, for free or at a discounted price, services that relate to loss control of the risks covered under the policy.” Such services might include: site-specific hazards analysis, valuation of building replacement, business planning, prevention of hazards giving rise to third party liability, prevention of work-related injuries and maintenance a safe workplace. These services benefit the insured and the insurer because they mitigate risks covered by policies of insurance. Larger companies would benefit to the extent they have larger risk mitigation staffs able to do work for the insured. It is a common practice to provide risk analysis of the insured and this provision authorizes an industry standard.
The New Legislation was approved by Governor Wolf on May 4, 2018, to be effective 60 days thereafter.
© 2018 Robert J. Hobaugh, Jr.