Massachusetts Insurer Regulation, Unfair Practices and Fraud
This chapter covers how Massachusetts regulates insurance companies (solvency, rates and claim payment), the unfair or deceptive practices defined in chapter 176D, insurance fraud, and the types of insurers. The chapter on Massachusetts State Regulations covers the Commissioner’s duties, the certificate of authority, capital impairment, policy form filing, examinations, unfair discrimination and rebating.
Company regulation
Solvency (Mass. Gen. Laws ch. 175, §§ 180A–180L; ch. 175J)
Administrative supervision. The Commissioner may place an insurer under administrative supervision, without a prior hearing, if its condition makes continuing its business hazardous to policyholders or the public, if it consents, or if its business is being conducted fraudulently (Mass. Gen. Laws ch. 175J, § 3(A)). Chapter 175J applies to all domestic insurers, and to another insurer doing business in Massachusetts if its home state asks in writing (ch. 175J, § 2).
Rehabilitation and liquidation. The Commissioner may ask the Supreme Judicial Court for appointment as receiver to rehabilitate a domestic company and conserve its assets (Mass. Gen. Laws ch. 175, § 180B). If the Commissioner considers the company insolvent and that it should be liquidated, the Commissioner applies to the court, which after notice and a full hearing may order liquidation and appoint the Commissioner permanent receiver (Mass. Gen. Laws ch. 175, § 180C). The receiver then asks the court to approve paying the company’s marshalled assets to the Massachusetts Insurers Insolvency Fund, the Massachusetts Life and Health Insurance Guaranty Association and similar organizations in other states (§ 180C).
Risk-based capital standards, which measure an insurer’s capital against its risks, are covered in the base course.
Rates (Mass. Gen. Laws ch. 175, § 113B; chs. 175A, 175E; ch. 176A, § 6; ch. 176H, § 6; ch. 176J, § 3)
Massachusetts has separate rating laws by line. Most share the standard that rates must not be excessive, inadequate or unfairly discriminatory.
| Law | Covers | Key rule |
|---|---|---|
| Ch. 175A | The kinds of insurance listed in § 4, such as liability, surety and fidelity, and auto physical damage | The standard applies (§ 5(a)). Each manual, rating plan and change is filed at least 15 days before its proposed effective date; the Commissioner may delay it up to 30 additional days (§ 6(a)) |
| Ch. 175E | Motor vehicle liability policies and bonds (§ 2) | The same standard; private passenger auto rates may not be based on credit information; risks may not be grouped by sex or marital status; a driver 65 or older who otherwise qualifies for the lowest rate pays 25 percent less (§ 4) |
| Ch. 175, § 113B | Motor vehicle rates the Commissioner fixes | Includes a safe driver insurance plan that adjusts premiums to reflect driving records |
| Ch. 176A, § 6 | Nongroup contracts of nonprofit hospital service corporations, other than Medicare supplement | Not approved if benefits are unreasonable in relation to the rate, or if rates are excessive, inadequate or unfairly discriminatory; “excessive” includes affordability for consumers |
| Ch. 176H, § 6 | Insured legal services plans | Rates are filed and determined under chapter 175A |
| Ch. 176J, § 3 | Individual and small group health plans | One group base premium rate for a merged individual and small group risk pool (grandfathered plans excluded), adjusted only by the factors the statute lists; the standard age factors for adults over 20 may vary no more than 2 to 1 |
Two further rules:
- Under chapter 175A, a rate higher than the filed rate may be used on a specific risk if the insured applies in writing, giving reasons, and the Commissioner approves (ch. 175A, § 6(d)).
- Under chapter 175E, if the Commissioner finds after a hearing that competition is insufficient to keep rates from being excessive, or is destructive of competition or harmful to insurer solvency, the Commissioner fixes and establishes the rates under ch. 175, § 113B, for no more than one year at a time (ch. 175E, § 5).
Payment of claims (Mass. Gen. Laws ch. 176D, § 3(9))
Massachusetts sets no single deadline for settling every claim: the Division of Insurance tells policyholders that insurers legally have to pay all claims in a prompt and reasonable amount of time (Massachusetts Division of Insurance). Some claims have statutory deadlines of their own, such as accident and health medical expense claims (Mass. Gen. Laws ch. 175, § 108). Chapter 176D lists the unfair claim settlement practices, below.
Unfair or deceptive practices (Mass. Gen. Laws ch. 176D, § 3)
Chapter 176D is Massachusetts law, not only a model act. It forbids any person to engage in an unfair trade practice in the business of insurance, and “person” expressly includes agents, brokers and adjusters (Mass. Gen. Laws ch. 176D, §§ 1, 2). The chapter on Massachusetts State Regulations covers its hearing, cease and desist and appeal procedure.
Misrepresentation (Mass. Gen. Laws ch. 175, §§ 181, 186; ch. 176D, § 3(1), (11))
- In sales material. Misrepresentation includes any estimate, illustration, circular or statement that misrepresents a policy’s benefits, advantages, conditions or terms; misrepresents dividends; misleads about any person’s financial condition; misnames a policy; misrepresents to induce a lapse, forfeiture, exchange, conversion or surrender; or represents a policy as shares of stock (Mass. Gen. Laws ch. 176D, § 3(1)).
- As a crime. No insurer, officer, agent, broker or insurance adviser may misrepresent a policy’s terms or benefits, or make a misleading or incomplete comparison to induce an insured to lapse, forfeit, surrender, convert or exchange a policy (twisting). The penalty is a fine of up to $1,000 or up to six months in prison (Mass. Gen. Laws ch. 175, § 181). A life insured or annuity holder induced to buy by a company officer’s or agent’s violation may recover from the company the premiums paid, less policy debt and payments made, by suing within two years after the date of issue (§ 181).
- On applications. Making false or fraudulent statements on or about an insurance application to obtain a fee, commission, money or other benefit is an unfair practice (ch. 176D, § 3(11)).
Misstatements by the applicant. A misrepresentation or warranty made by or for the insured in negotiating a policy does not void it unless it was made with actual intent to deceive, or the matter misrepresented increased the risk of loss (Mass. Gen. Laws ch. 175, § 186(a)). For a statement about physical condition or health in a life policy or annuity, the misrepresentation must also be material, meaning knowing the truth would have influenced whether the insurer issued the contract, how it judged the risk, or the premium (§ 186(b)).
For example, a homeowners applicant who innocently understates the roof’s age has not voided the policy unless the older roof increased the risk of loss.
False advertising (Mass. Gen. Laws ch. 176D, § 3(1), (2))
False advertising is making, publishing, circulating or placing before the public, in any medium, an advertisement, announcement or statement about the business of insurance, or about any person in the conduct of an insurance business, that is untrue, deceptive or misleading (ch. 176D, § 3(2)).
Defamation of insurer (Mass. Gen. Laws ch. 176D, § 3(3))
Defamation is making or circulating, or aiding or encouraging, a statement that is false, or maliciously critical of or derogatory to the financial condition of any person, and calculated to injure that person (ch. 176D, § 3(3)). The Massachusetts rule protects any person, not only insurers.
Boycott, coercion, intimidation (Mass. Gen. Laws ch. 176D, §§ 3(4), 3A)
Beyond the general rule in the chapter on Massachusetts State Regulations, Massachusetts adds health care contracting practices. It is unfair for a nonprofit hospital service corporation, medical service corporation, insurer or HMO to refuse to contract with a provider because of its contracts, licensure or affiliations with a competitor, or to set a provider’s price by reference to what a competitor pays (ch. 176D, § 3(4)). For insurers licensed under chapter 175 and health plans, it is also unfair to refuse to contract with a health care facility because of its religious or governmental affiliation, or to arrange for an employee to apply for individual health coverage in order to move that employee off the employer’s group plan to cut the employer’s costs (§ 3A).
False financial statements (Mass. Gen. Laws ch. 176D, § 3(5))
False statements and entries means knowingly filing with a public official, or circulating, a false material statement of fact about a person’s financial condition, or knowingly making a false entry, or omitting a true entry, of a material fact in a book, report or statement (ch. 176D, § 3(5)).
Failure to maintain a complaint record (Mass. Gen. Laws ch. 176D, § 3(10))
Every person in the business of insurance keeps a complete record of all complaints received since its last examination, showing the total number, their classification by line of insurance, and the nature, disposition and processing time of each. A complaint is any written communication primarily expressing a grievance (ch. 176D, § 3(10)). Agents, brokers and adjusters keep those written grievances for two years (§ 3(10)).
Unfair claims settlement practices (Mass. Gen. Laws ch. 176D, § 3(9))
Massachusetts defines each of these acts or omissions as an unfair claim settlement practice (ch. 176D, § 3(9)):
- Misrepresenting pertinent facts or policy provisions relating to the coverage at issue
- Failing to acknowledge and act reasonably promptly on claim communications
- Failing to adopt and implement reasonable standards for prompt investigation
- Refusing to pay claims without a reasonable investigation based on all available information
- Failing to affirm or deny coverage within a reasonable time after proof of loss is completed
- Failing to effectuate prompt, fair and equitable settlements once liability has become reasonably clear
- Compelling insureds to sue by offering substantially less than they later recover
- Attempting to settle for less than a reasonable person would expect from the advertising that came with the application
- Attempting to settle on an application altered without the insured’s notice, knowledge or consent
- Paying a claim without a statement of the coverage it is paid under
- Making known a policy of appealing arbitration awards won by insureds or claimants, to make them accept less than the award
- Delaying claims by demanding a preliminary claim report and then formal proof of loss containing substantially the same information
- Withholding a clear payment under one coverage to influence settlement under another
- Failing to explain promptly and reasonably the basis, in the policy, facts or law, for denying a claim or offering a compromise
Insurance fraud regulation (Mass. Gen. Laws ch. 175, §§ 170, 181; ch. 176D, § 3; ch. 266, §§ 111A, 111B)
Massachusetts law punishes insurance fraud by producers, applicants and claimants:
| Who and what | Penalty |
|---|---|
| An agent or broker who knowingly obtains a premium by fraudulent representations | $100 to $1,000 or up to one year in prison (ch. 175, § 170) |
| Misrepresenting a policy, or twisting | Up to $1,000 or up to six months (ch. 175, § 181) |
| False statements on an application to obtain a fee, commission or other benefit | An unfair practice under ch. 176D, § 3(11), with the ch. 176D penalties |
| Knowingly presenting, or helping prepare, a false written claim document with intent to defraud | Up to five years in state prison, six months to 2½ years in jail, or a fine of $500 to $10,000, or the fine and jail together (ch. 266, § 111A) |
| A knowingly false application or claim on a motor vehicle, theft or comprehensive policy | Up to five years in state prison, 6 months to 2½ years in a house of correction, or a fine of $1,000 to $10,000, or the fine and imprisonment together, plus required restitution to the insurer (ch. 266, § 111B) |
A Commissioner who believes chapter 175 has been violated reports the facts to the Attorney General or the district attorney, who prosecutes (Mass. Gen. Laws ch. 175, § 3A). The Insurance Fraud Bureau (IFB) of Massachusetts is the state’s special fraud bureau; it undertakes cases for investigation and preparation for criminal prosecution. A person aware of insurance fraud can also file a complaint with the Division of Insurance’s Consumer Services Unit (Massachusetts Division of Insurance).
Types of insurers
Foreign, alien, domestic (Mass. Gen. Laws ch. 175, §§ 1, 151, 155)
A domestic company is one incorporated or formed in Massachusetts. A foreign company is one formed by authority of any state or government other than Massachusetts (Mass. Gen. Laws ch. 175, § 1). So in Massachusetts law, an insurer formed in another country (the base course’s “alien” insurer) is a foreign company, with extra conditions, among them: it must deposit in trust for its U.S. policyholders and creditors at least the capital required of a domestic stock company, and appoint an approved resident manager in the United States (§ 155). A foreign company’s Massachusetts license expires on June 30 each year unless revoked or suspended sooner, and may be renewed on written application (§ 151).
Authorized and unauthorized insurers (Mass. Gen. Laws ch. 175, §§ 3, 45, 160, 160A)
- No company may make an insurance or annuity contract on property, interests or lives in Massachusetts, or with a resident, and no person may negotiate, solicit, sell or aid in one, except as the insurance laws authorize (Mass. Gen. Laws ch. 175, § 3).
- Acting or aiding, for someone else, in a policy with a foreign company not lawfully admitted in Massachusetts is punishable by a fine of $100 to $500. A licensed special insurance broker acting under § 168 is excepted, as are some marine and transportation placements by licensed brokers (ch. 175, § 160).
- Publishing in a Massachusetts periodical, or broadcasting from a Massachusetts radio station, an advertisement soliciting residents for an unlicensed foreign company or fraternal benefit society is punishable by a fine of $50 to $500 (ch. 175, § 160A).
- A domestic company may not appoint agents to solicit business in another state where it is not authorized to do business; the fine is not less than $300 (ch. 175, § 45).
Stock and mutual insurers (Mass. Gen. Laws ch. 175, §§ 1, 19T, 48, 48A)
| Stock company | Mutual company | |
|---|---|---|
| Formed by | Ten or more Massachusetts residents (§ 48) | Ten or more Massachusetts residents (§ 48A) |
| Financial requirement | Paid-up capital and surplus, paid in cash within 12 months after the charter date; no policies issued until paid in (§ 48). A single-line company needs combined capital and surplus of at least $1,200,000 (§ 48) | Subject to the combined capital and surplus provisions of § 48; its minimum surplus equals the combined capital and surplus required of a stock company (§§ 48, 48A) |
The “profits” of a mutual company are the part of its cash funds not needed for losses and expenses or set apart for a purpose the law allows (Mass. Gen. Laws ch. 175, § 1). A domestic mutual insurer may reorganize with a mutual holding company: it becomes a domestic stock insurer, its members become members of the holding company, and the holding company must own at least 51 percent of the reorganized insurer’s voting stock (§ 19T(a)).
Lesson summary
- The Commissioner may place an insurer under administrative supervision without a prior hearing; rehabilitation and liquidation go through the Supreme Judicial Court (ch. 175J, § 3; ch. 175, §§ 180B, 180C).
- Rates must not be excessive, inadequate or unfairly discriminatory. Chapter 175A rates (such as liability, surety and auto physical damage) are filed at least 15 days before use (ch. 175A, § 6). Auto rates may not use credit information or sex or marital status, and drivers 65 or older get 25 percent off (ch. 175E, § 4). Small group and individual health plans share one merged rate pool (ch. 176J, § 3).
- Chapter 176D applies to agents, brokers and adjusters. Its unfair claim settlement practices are listed in § 3(9), and every insurance business keeps a complaint record (§ 3(10)).
- A misstatement by an applicant voids a policy only with intent to deceive or if it increased the risk of loss (ch. 175, § 186).
- Misrepresentation and twisting can bring up to $1,000 or six months (ch. 175, § 181); a false claim can bring up to five years in state prison, or a fine of up to $10,000 (ch. 266, § 111A). The Insurance Fraud Bureau investigates fraud for prosecution.
- A domestic company is formed in Massachusetts; a foreign company anywhere else, including another country, which must also make a U.S. trust deposit and appoint a U.S. manager (ch. 175, §§ 1, 155).
- Aiding an unadmitted foreign company can bring a fine of $100 to $500 (ch. 175, § 160).
- Stock and mutual companies are each formed by ten or more Massachusetts residents; a single-line stock company needs at least $1,200,000 in capital and surplus (ch. 175, §§ 48, 48A).