Insurance is one of the most important features of daily life in the U.S., but it is also one of the least understood. For many people, an insurance policy is all that stands between them and financial ruin in the event of an accident, illness, or other unexpected catastrophe. Consumers must therefore be on guard against deceptive and fraudulent practices by insurers, and consumer protection laws are often there to help them. The federal government generally takes a hands-off approach to insurance regulation, leaving it up to the states.
Insurance, Defined as Succinctly as Possible
We can trace the history of modern insurance back to the ancient world, when merchants and sailors decide to share the risk of loss. The earliest insurance plan might have been a group of people who each contributed to a pool of money, to be used in the event that any of them met with a specific type of calamity. Each individual contributes a smaller amount of money, with the knowledge that he or she will not be solely responsible for the cost of a loss. They might have appointed one person to manage the fund, and that person became the first ancestor of modern insurance companies.
A modern insurance policy is, essentially, a contract between a consumer and an insurance provider, by which the consumer pays premiums in exchange for a promise to pay for certain expenses, damages, or losses. The policy will typically identify the types of losses that are covered, and it may limit coverage to “definite” losses, meaning ones that have a distinct time, place, and cause. Policies usually set a limit on the amount the insurer must pay for a single claim or a single incident. For example, a basic automobile insurance policy might limit coverage to $20,000 per individual injury claim and $40,000 for a single incident with multiple claims.
Types of Insurance
While insurance is available for a vast array of claims, the following are the most common for individual consumers:
- Automobile Insurance: Covers the risk of financial loss and legal liability for personal injury and property damage in the event of an automobile accident. Most U.S. states require licensed drivers to carry a minimum amount of automobile insurance, and they may impose minor criminal penalties for failure to do so.
- Health Insurance: Covers medical and certain other healthcare-related expenses. While most forms of insurance are primarily used to cover the risk of accidental injury or loss, health insurance in the U.S. has become one of the primary means of financing regular health care.
- Property Insurance: Covers the risk of damage or loss to a person’s real property, such as his or her residence, as well as its contents. This type of coverage is one of the major features of a homeowner’s or tenant’s insurance policy. Additional policies may cover property against specific risks, such as flooding, fire, or earthquakes.
- Life Insurance: Provides for payment of a defined sum of money to a beneficiary, as designated by the insured, on the event of the insured’s death. The purpose of a life insurance policy is typically to cover the sudden loss of support, financial or otherwise.
The federal government leaves most insurance questions to the states. The U.S. Supreme Court held that the Commerce Clause of the Constitution does not extend to insurance. Paul v. Virginia, 75 U.S. 168 (1869). Congress passed the McCarran-Ferguson Act in 1945, which further declared that state-level regulation of insurance served the public interest. States have therefore enacted a wide range of laws regarding insurance, such as the Texas Insurance Code.
The term “insurance fraud” is most commonly associated with fraudulent claims targeting insurance companies. State insurance laws prohibit these types of acts, but consumer protection laws also protect consumers from false or deceptive practices by people or businesses selling insurance coverage. This includes anything from false claims about a policy’s features or coverage to schemes to collect premiums from consumers with no intention of paying claims.
Insurance Bad Faith
Most U.S. states allow a tort claim against insurers known as “insurance bad faith,” which refers to a refusal by an insurer to pay a claim that it is contractually obligated to pay. In some states, a consumer may recover damages from his or her insurer only when the insurer knew, or had reason to know, that it had no good-faith basis for denying a claim. Other states have expanded insurance bad faith to include failure to adequately investigate or evaluate a claim.
When an insured is involved in litigation as a defendant, most states have held that the insurer has a duty to negotiate with a claimant in good faith. Rejection of a reasonable settlement demand could result in significant liability for the insurer. In Texas, for example, the Stowers Doctrine holds that if a defendant’s insurer rejects a reasonable settlement demand within the policy limits, takes the case to trial, and loses, the insurer could be liable for the entire judgment amount, even if it exceeds the policy limits. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544 (Tex. Comm’n App. 1929).