The primary regulatory mechanisms for overseeing the activities of insurance institutions are at the State level. State regulation has developed around two basic aims: (1) maintaining the solvency of individual insurance companies; and, (2) assuring fair business practices and pricing. Although interest in the record-keeping practices of insurance institutions has increased in the last few years, few States have focused significant attention on the privacy protection problems the Commission has identified. No State, to the Commission's knowledge, has enacted privacy protection legislation which would affect insurance record-keeping practices. More-over, regulation of insurance record-keeping practices at the State level is limited because State Insurance Departments do not have regulatory authority over most insurance-support organizations.
There are, however, existing regulatory mechanisms at the State level which could be used to implement some of the Commission's insurance recommendations. These include the unfair trade practices provisions of State insurance laws, and the authority State Insurance Commissioners have been given over the contents of those application forms which are considered part of the policy.
Most States have passed a version of the Model Unfair Trade Practices Act.87 These laws are applicable to all types of insurance and are designed to protect the insurance consumer by prohibiting insurance institutions from engaging in a wide range of practices specifically defined by the Act to be unfair. The Act includes prohibitions against false advertising, defamation of competitors, boycotts, fraudulent financial statements, rebates, and unfair discrimination. Many States have added to this statute an Unfair Claims Practices Act which protects claimants by forbidding unreasonable claim settlement practices, including misrepresentation, delays in claim payments, and claim settlement offers which are so low as to compel claimants to institute litigation to collect their claims.
The Model Act provides the State Insurance Commissioner with several mechanisms to enforce the prohibition against defined unfair trade practices. The Commissioner has the authority to promulgate regulations identifying the methods of competition or practices which come under the specific prohibitions enumerated in the Act. In addition, the Commissioner may hold a hearing and issue a cease and desist order whenever he believes an insurer is engaging in one of the unfair practices. Monetary penalties or suspension or revocation of a company's license may also be imposed for a violation of the defined unfair trade practices where the insurer knew or should have known that it was in violation of the Act.
In addition to the Commissioner's powers to enforce defined unfair trade practices, the Model Act also provides that he may hold hearings on any act or practice which he believes is unfair, even though the practice is not specifically defined in the Act. If, after a hearing, an undefined act or practice is found to be unfair, the Commissioner may issue a cease and desist order. The Model Act, however, does not empower the Commissioner to add by regulation new acts to the defined unfair trade practices, or to impose monetary penalties for engaging in undefined unfair trade practices.
Some States already make use of the Unfair Trade Practices Act prohibition against unfair discrimination to regulate record-keeping practices. The regulations, however, are limited in scope and, in almost all instances, are concerned with the use of infor mation in the underwriting process rather than its actual collection. For instance, the Privacy Commission heard testimony on the regulation of the relevance of information used in the underwriting process from a representative of the California Insurance Department. California has used its regulatory authority under its unfair trade practices laws to prohibit unfairly discriminatory practices on account of sex, marital status, unconventional life-styles, and sexual orientations differing from the norm. The California Department normally does not attempt to prohibit collection; rather, it acts on an ad hoc basis to prohibit the use of certain criteria in underwriting decisions upon the receipt of complaints from insurance consumers.88
Because the Model Unfair Trade Practices Act is applicable to all lines of insurance and contains strong enforcement provisions, it can serve as an appropriate regulatory mechanism for several of the Commission's recommendations. It will, however, be necessary to amend the Act to define certain unfair record-keeping practices as unfair trade practices. These unfair practices would then be subject to the full range of regulatory and enforcement authority granted Insurance Commissioners under the Model Act, including the power to hold hearings and issue cease and desist orders, and to impose monetary penalties.
Many State Insurance Commissioners have an additional power which could assist in the implementation of certain of the Commission's recommendations. In many States, Commissioners have the authority to approve policy forms. In the case of life and health policies, application forms are considered a part of the policy, so they would be subject to the Commissioner's approval. Thus, Insurance Commissioners in a number of States would be in a position to monitor and enforce the Commission's notification, authorization, and previous adverse decision recommendations insofar as life and health insurance are concerned.