The Essential Insurance Act
The Essential Insurance Act is chapter 21 of the Insurance Code, MCL 500.2101 to 500.2131, added by 1979 PA 145. It governs private passenger automobile insurance and home insurance. An insurer can’t refuse an “eligible person” except under written rules the Act allows, and it can’t price anyone using factors the Act forbids.
What the Act Covers
Automobile insurance under the Act means insurance for private passenger nonfleet automobiles that provides no-fault security, higher amounts of the no-fault coverages, comprehensive and collision, or other coverage the Director adds by rule (MCL 500.2102(2)). Home insurance means fire insurance on an eligible dwelling, other nonbusiness coverage included in or endorsed to that fire policy, and other residence coverage added by rule. It doesn’t include insurance on commercial, industrial, professional or business property or liabilities (MCL 500.2103(3)).
A policy of either kind “must not be offered, bound, made, issued, delivered or renewed” in Michigan unless it conforms to chapter 21 (MCL 500.2105(1)). If another part of the Insurance Code is inconsistent with chapter 21, chapter 21 governs for these two products (MCL 500.2106(4)).
Much of the chapter still says “commissioner.” The Director of the Department of Insurance and Financial Services (DIFS) holds that authority now.
A true group plan is exempt if its members share a common enterprise or affinity, the group wasn’t created to obtain insurance, membership isn’t conditioned on buying insurance, members can be identified, and any criteria set by rule are met (MCL 500.2105(3)). Even so, an exempt group can’t use an auto rating factor that section 2111 disallows, and group membership can’t be based on home ownership or postal zone (MCL 500.2105(4)).
Eligible Persons
An insurer may insure people who aren’t eligible (MCL 500.2119(6)), but only an eligible person has the Act’s protection against refusal.
Automobile Insurance
An eligible person for automobile insurance is an owner or registrant of an automobile registered or to be registered in Michigan, or a person holding a valid Michigan driver’s license (MCL 500.2103(1)). The definition then removes these people:
| Not eligible | Look-back |
|---|---|
| A person not required to maintain no-fault security, unless the person states in writing an intent to reside in Michigan 30 days or more | None |
| A person whose license is suspended or revoked | None |
| A person convicted of fraud involving an insurance claim or application, or denied an auto claim over $1,000 with evidence of fraud | 5 years |
| A person convicted, or subject to a family court disposition, for operating while intoxicated or another Vehicle Code section 625 violation, a moving violation causing death or serious impairment, a felony resulting from driving, reckless driving, or failing to stop and meet a driver’s duties after an accident | 3 years |
| A person whose vehicle fails Vehicle Code safety requirements | None |
| A person whose auto policy was canceled for nonpayment, unless the premium is paid in full before issuance or renewal | 2 years |
| A person who doesn’t keep a membership the insurer uniformly requires | None |
| A person with more than 6 insurance eligibility points | 3 years |
Insurance Eligibility Points
Points are calculated under MCL 500.2103(4). A ticket alone earns none: the schedule runs on convictions, determinations of responsibility for civil infractions and findings of responsibility in probate court, and an accident counts on a determination that the person was substantially at-fault:
| Event | Points |
|---|---|
| Speeding more than 15 mph over, or careless driving | 4 |
| Speeding 11 to 15 mph over | 3 |
| Speeding 6 to 10 mph over | 2 |
| Speeding 6 to 15 mph over on a road posted at 70 mph or more as of January 1, 1974 | 2 |
| Speeding less than 6 mph over | 1 |
| Any other moving violation | 2 |
| First substantially at-fault accident | 3 |
| Second and each later substantially at-fault accident | 4 |
“Substantially at-fault” means the person’s action or inaction was more than 50% of the cause of the accident (MCL 500.2104(4)). When one occurrence involves several violations, or violations plus an at-fault accident, only the highest value counts (MCL 500.2119a).
Suppose Marisol was determined substantially at-fault for one accident two years ago, for 3 points, and was found responsible for driving 12 mph over last year, for 3 more. Her total of 6 keeps her eligible, because the line is more than 6. If she had also been found responsible for careless driving in that accident, the single occurrence would count as 4 points, not 7, but her total would then be 7, over the line.
Home Insurance
An eligible person for home insurance is the owner-occupant or tenant of a house, condominium unit, cooperative unit, room or apartment, or the owner-occupant of a multiple unit dwelling of not more than 4 residential units (MCL 500.2103(2)). This person isn’t eligible if any of these applies:
- Convicted of arson, conspiracy to commit arson or another listed crime within 5 years
- Denied a home claim within 5 years, based on evidence of arson or fraud by or for the person
- The dwelling is used for an illegal or demonstrably hazardous purpose
- Refuses to buy at least 80% of replacement cost on a replacement cost policy, 100% of market value on a repair cost policy, or 100% of actual cash value on a tenant’s policy
- A home policy was canceled for nonpayment within 2 years, unless the premium is paid in full before issuance or renewal
- The insured value is below the Act’s minimum for that type of policy
- Physical conditions clearly present an extreme likelihood of a significant loss
- Real property taxes have been delinquent for 2 or more years
- Doesn’t keep a membership the insurer uniformly requires
Underwriting Rules
Underwriting rules are an insurer’s written standards for issuing, renewing and limiting coverage (MCL 500.2104(6)). The insurer must apply them “uniformly and without exception” (MCL 500.2119(2)). Rules are filed with the Director before use and are open to public inspection (MCL 500.2119(5)).
Automobile
An insurer’s auto rules may rest only on the bases the Act lists (MCL 500.2118(2)). The main ones are:
- The eligibility standards themselves
- Excess points of a household member who usually accounts for 10% or more of a vehicle’s use
- Substantial modifications that increase a vehicle’s speed or acceleration
- Failure to certify that required security was kept on an owned vehicle driven during the 6 months before application
- Vehicle type, without regard to age: limited production, custom manufacture, or extraordinary repair expense
- Use for hire, rental or commercial purposes, but not volunteer or charitable use
- Comprehensive claim experience, to require a deductible of not more than $150
- A threat, harassment or physical assault against an insurer employee, agent or agent’s employee, if reported to law enforcement
A lapse can’t be held against an eligible person who certifies it occurred because of active military duty of at least 30 consecutive days and that the vehicle wasn’t driven or moved (MCL 500.2116a).
Affiliated insurers, or one insurer with separate rating plans, may sort eligible persons among them, but only if every eligible person can get coverage from one of them (MCL 500.2120(1), (2)).
Home
Home rules may rest only on the bases in MCL 500.2117(2), including:
- The eligibility standards themselves.
- Physical condition, if the rule is objective, directly related to the perils insured and, without regard to the age of the structure, based on a specific housing or safety code, manufacturer’s specification or similarly specific standard. A government certificate of compliance or habitation creates a rebuttable presumption that the home meets these rules.
- Claim history at renewal, for the prior 3 years, if based on the insured’s negligence or a failure to correct a condition after written notice.
- Nonrenewal for paid claims, excluding liability claims: three paid claims in 3 years whose total reaches a dollar amount adjusted every sixth year, with separate amounts that exclude and include weather claims (MCL 500.2117(2)(e), (5)).
- Vacancy, if the home has been unoccupied more than 60 days and there is evidence of intent to keep it vacant.
- An adjacent physical hazard posing a significant risk of insured loss, though residential property and traffic patterns don’t count. A nonrenewal needs a change in the hazard since issuance.
- The same kind of threat or assault that applies to auto.
An insurer may underwrite on the gap between a home’s market value and its replacement cost, but only if it offers a repair cost policy. That policy is based substantially on market value and must be substantially equivalent to the insurer’s replacement cost policy (MCL 500.2104(2), 500.2117(2)(d), (3)). Its premium can’t exceed 105% of the premium for insurance equal to 80% of replacement cost (MCL 500.2117(4)).
If an insurer inspects homes to determine eligibility, it can’t select them based on race, color, creed, marital status, sex, national origin, residence, age, disability or lawful occupation (MCL 500.2121(1)).
Rates
Filing
Home rates may be used as soon as filed (MCL 500.2106(3)). An auto manual or plan must remain on file for a 90-day waiting period before it takes effect, though the Director may approve earlier use on written application (MCL 500.2108(6)). Filings are public except for trade secrets (MCL 500.2108(5)), and an insurer can’t issue or renew a policy except under filings in effect (MCL 500.2108(7)).
Refusing to insure, continue to insure or limit coverage because of the risk’s location is redlining, and it is prohibited (MCL 500.2108(8)).
Standards
Rates must not be excessive, inadequate or unfairly discriminatory (MCL 500.2109(1)(a)). A rate is excessive only if it is unreasonably high and a reasonable degree of competition doesn’t exist. A rate is unfairly discriminatory if a difference between rates isn’t reasonably justified by differences in losses, expenses or uncertainty of loss (MCL 500.2109(1)(c)).
Rating Factors
Auto classifications may be based only on listed factors, applied uniformly statewide (MCL 500.2111(2)):
| Coverage | Permitted factors |
|---|---|
| All coverages | Driver age, experience or years licensed; driver primacy; miles driven; type of use; vehicle characteristics; commuting mileage; number of cars or licensed operators; amount of insurance |
| Personal protection | Also earned income, dependents of income earners, coordination of benefits, safety belt use |
| Collision and comprehensive | Also repair or replacement cost, make and model, damageability, theft prevention devices |
| All but comprehensive | Also completion of an accident prevention course of at least 8 hours |
Seven factors are prohibited for auto: sex, marital status, home ownership, educational level, occupation, the insured’s postal zone, and credit score (MCL 500.2111(4), 500.2162). Auto risks may be grouped by territory (MCL 500.2111(5)). Each insurer must have a merit rating plan that surcharges for substantially at-fault accidents and Vehicle Code violations on all coverages except comprehensive (MCL 500.2111(3)).
Home classifications, other than for inland marine floaters or endorsements, may be based only on amount and type of coverage, security and safety devices, repairable structural defects, fire protection class, construction, the insured’s controllable loss experience, smoking within the structure, distance from a hydrant, and availability of police or crime prevention services (MCL 500.2111(7)).
MCL 500.2111(9) says an insurer “may use factors in addition to those permitted by this section for insurance if the plan is consistent with the purposes of this act and reflects reasonably anticipated reductions or increases in losses or expenses,” and MCL 500.2110a allows the same “[i]f uniformly applied to all its insureds.” MCL 500.2111(4) says an insurer “shall not establish or maintain rates or rating classifications for automobile insurance based on” the seven factors above, and MCL 500.2105(4) bars auto rates “based on a factor that is not allowed, or that is prohibited, under section 2111.” Neither subsection (9) nor subsection (4) refers to the other.
An auto insurer may offer a discount plan to seniors 65 or older, and without one must offer reduced rates to those seniors who drive less than 3,000 miles a year (MCL 500.2111(6)). A home insurer may offer a discount plan for seniors at least 55 (MCL 500.2111d).
Personal Protection Premium Reductions
For policies effective before July 2, 2028, an insurer’s filed personal protection rates must produce, as nearly as practicable, an average reduction per vehicle from its May 1, 2019 rates, unless the Director approves a lower reduction or an exemption (MCL 500.2111f(2), (7)). The required average depends on the medical limit selected: at least 45% for the $50,000 limit, 35% for $250,000, 20% for $500,000 and 10% for no limit. These are averages, so one client’s premium can still rise through approved rating factors (MCL 500.2111f(9)).
Your Duties as an Agent
MCL 500.2116(1) sets these duties “as a condition of licensure.” With each eligible person seeking auto or home insurance, you must:
- Give a premium quotation for the coverages sought that your insurers offer
- State the number of insurers you represent
- Not channel the person away from an insurer or coverage to avoid your duty to submit an application or an insurer’s duty to accept
- On request, submit the application to the insurer the person selects
- For auto, supply at least annually with renewal, unless the insurer provides it, an explanation of the point system, a statement that an eligible person may qualify with more than one insurer and possibly at a lower rate, and a statement that you will furnish quotations on request
An insurer can’t pay you less than normal compensation because of your business’s loss experience or geographic location (MCL 500.2116(2)).
Neither an auto insurer nor its agents may unreasonably restrict an insured’s choice of repair or glass shop (MCL 500.2110b(1)).
Declinations
A declination includes an agent’s refusal to submit an application to any insurer the agent represents, an insurer’s refusal to issue, offering higher rates with a different insurer than the one requested, and offering less favorable terms than those requested (MCL 500.2102(4)). Refusing to provide an application form is also a declination (MCL 500.2122(2)).
Whoever declines, insurer or agent, must give each specific reason. A written application gets a written explanation. An oral one may get an oral explanation, with an offer of a written one if requested within 90 days (MCL 500.2122(1)).
Ending Coverage
A termination is a refusal to continue to insure for any reason other than nonpayment. It also includes a transfer to an affiliate at higher rates or less coverage, and an offer of less favorable terms, unless the insured asked for the change or, for terms, they are no longer available from the insurer anywhere in Michigan (MCL 500.2104(5)). Both midterm cancellation and nonrenewal fall within it.
| Situation | Notice rule |
|---|---|
| Termination, generally | Written notice at least 30 days before the date, stating the date and each specific reason (MCL 500.2123(1)) |
| Notice given within the first 55 days after initial issuance | May take effect not less than 20 days after mailing or delivery (MCL 500.2123(2)) |
| Nonpayment of premium | Effective as the policy provides (MCL 500.2123(3)); a motor vehicle policy must provide at least 10 days’ written notice (MCL 500.3020(1)(b)) |
The reason must also conform to the insurer’s underwriting rules (MCL 500.2123(4)).
For auto, chapter 32 applies as well (MCL 500.2123(5)). Once a policy has been in effect 55 days, or at once on a renewal, an insurer can’t cancel it midterm except when the named insured, or a household or customary operator, has had a license suspended or revoked and that action is final (MCL 500.3220). Nonpayment is outside this limit (MCL 500.3212). A chapter 32 notice goes by certified mail and must state the right to appeal to DIFS within 7 days of mailing (MCL 500.3224(2), (3)).
When a Client Disputes a Decision
At least annually, the insurer must tell each policyholder what information is available on request, including rating classifications and appeal rights, and suggest asking the agent about an affiliate or another rating plan (MCL 500.2112(1)).
A person who has reason to believe an insurer improperly denied them automobile or home insurance, or charged an incorrect premium for it, is entitled to a private informal managerial-level conference with the insurer (MCL 500.2113(1)). If the insurer doesn’t provide a conference and proposed resolution within 30 days after a request, or the person disagrees with the result, the person may have the Director decide, and either side may then ask for a contested case hearing (MCL 500.2113(3), (5)).
When the Voluntary Market Says No
Every authorized auto insurer participates in the Michigan automobile insurance placement facility, which exists to guarantee coverage to anyone unable to get it through ordinary methods (MCL 500.3301(1)). An agent for a participating insurer must offer to place a qualified applicant through the facility when asked (MCL 500.3355(1)(a)).
Lesson summary
- Chapter 21 covers private passenger auto and home insurance, and any inconsistent part of the code yields to it for those products.
- An eligible person can be refused only under written rules based on the Act’s listed grounds, applied uniformly.
- More than 6 insurance eligibility points in 3 years removes a person from auto eligibility, and one occurrence counts only at its highest value.
- Home rates can be used on filing, while auto filings wait 90 days.
- Auto rates can’t be based on sex, marital status, home ownership, educational level, occupation, postal zone or credit score.
- As a condition of licensure, you must quote, disclose how many insurers you represent, avoid channeling and submit an application on request.
- A declination requires each specific reason, and an agent can make one.
- Termination takes 30 days’ written notice with specific reasons, or 20 days within the first 55 days, and nonpayment follows the policy.