Unfair Discrimination, Rebating and Inducements

Insurance depends on two kinds of fairness. People who present the same risk should be treated alike, and the deal a client gets should be the deal written in the contract. This lesson covers chapter 20’s rules on unfair discrimination, rebating and other inducements, credit transactions, and several narrower prohibitions a producer should recognize.

Unfair Discrimination

Same class, same hazard

Insurers classify risks, and classifying is not unlawful. A 30-year-old and a 70-year-old do not share an expectation of life, so they do not pay the same life insurance rate. The law asks a narrower question: among people in the same class, presenting the same risk, is anyone treated differently without reason?

• Life insurance and life annuities. It is unfair to make or permit unfair discrimination between individuals “of the same class and equal expectation of life” in rates, dividends, other benefits, or other terms and conditions (MCL 500.2019).
• Accident and health insurance. It is unfair to make or permit unfair discrimination between individuals “of the same class and of essentially the same hazard” in premiums, membership or policy fees, rates, benefits, or terms and conditions for individual or family expense coverage (MCL 500.2020).

Refusing or limiting coverage

MCL 500.2027 applies to every line. It covers refusing to insure, refusing to continue to insure, and limiting the amount of coverage available.

Reasons that are off limits. Coverage may not be refused or limited because of race, color, creed, marital status, sex, national origin, gender, gender identity or expression, or sexual orientation. The one exception is that marital status may be used to classify individuals or risks for the purpose of insuring family units (MCL 500.2027(a)(i)).

Reasons that need a connection to the risk. Residence, age, disability, lawful occupation and location of the risk are permitted reasons only with “a reasonable relationship” to the extent of the risk or the coverage (MCL 500.2027(a)(ii)). Occupation plainly bears on a disability income risk. An insurer may also specialize in certain occupational groups, types or risks as approved by the Director.

Location in property insurance. Location is a permitted reason only with “a statistically significant relationship” between the location and a risk of loss due to fire within the area where the property sits, and “area” means a single zip code (MCL 500.2027(a)(iii)). Automobile and home insurers are held to more: a Chapter 21 filing must specify that the insurer will not refuse to insure, refuse to continue to insure or limit coverage “because of the location of the risk”, which is redlining (MCL 500.2108(8)).

Prior denial. Coverage may not be refused or discontinued solely because an insurer previously denied it (MCL 500.2027(b)).

These are usually underwriting decisions, but MCL 500.2003(1) binds every person, so a producer who turns an applicant away on one of these grounds is within the rule too.

Charging different rates

It is unfair to charge a different rate for the same coverage based on race, color, creed, marital status, sex, national origin, gender, gender identity or expression, sexual orientation, age, residence, location of risk, disability or lawful occupation, unless the difference is based on sound actuarial principles and a reasonable classification system, and is related to actual and credible loss statistics or, for new coverages, reasonably anticipated experience. The subdivision does not apply if the Director has previously approved the rate (MCL 500.2027(c)).

Race and life insurance

A life insurer may not make any distinction or discrimination based on race or color in premiums or rates “or in any other manner,” and a policy condition that binds the insured or heirs to accept less than full value on that basis is void (MCL 500.2082(1)). An insurer is subject to a civil fine of $1,000 for each violation. An officer or agent commits a misdemeanor punishable by county jail of not more than 1 year, a fine of not less than $500 and not more than $1,000, or both (MCL 500.2082(2)).

Price optimization

A property and casualty insurer may not use price optimization in ratemaking (MCL 500.2027a(1)). That means charging based on an insured’s price tolerance, in a way that results in adjustments that are not actuarially justified and rest on factors unrelated to risk of loss or expense. In plain terms, a premium may not rise because a model predicts this customer will not bother to leave. The section’s examples include considering how likely an insured is to shop with other insurers, cancel, fail to renew or complain to the insurer or its agent (MCL 500.2027a(2)).

What is not discrimination or a rebate

MCL 500.2025 lists three practices outside sections 2017 through 2024:

• In life insurance and life annuities, paying bonuses or abating premiums out of surplus from non-participating insurance, if fair and equitable to policyholders and in the best interest of the company and its policyholders.
• In industrial debit life policies, an allowance to policyholders who have continuously paid directly to an insurer’s office for a specified period, fairly representing the saving in collection expense.
• Readjusting a group policy’s premium rate based on its loss or expense experience, retroactive only for that policy year.

Rebating and Inducements

Two statutes, one idea

Except as the law expressly provides, a benefit offered to induce insurance must be specified in the contract. Michigan states the rule twice, and the sections differ in reach.

	MCL 500.2024	MCL 500.2066(1)
Location	Inside the uniform trade practices act	Outside the act, with its own penalties
Lines	Life, life annuity, accident and health	“Any kind of insurance business”
Who	Any person	An insurer, agent or solicitor, personally or by any other party
Reaches	Knowingly making a contract or agreement other than as plainly expressed in the policy; a rebate, special favor or advantage; securities; anything of value not specified	A rebate of premium or commission; dividends or other benefits; valuable consideration; stocks, bonds or securities; any thing of value not specified

Section 2066 covers offering and promising as well as paying, “directly or indirectly.” An offer the client declines is still an offer. Paying through a relative is still paying.

• Tomasz tells a new auto client, “I’ll give you back half my first-year commission.” That is a rebate of the agent’s commission, even if no money changes hands.
• A life producer offers to pay a client’s first premium. That is a consideration not specified in the contract.
• A producer says a policy comes with shares in a company the producer owns. Both sections bar offering securities as an inducement, and MCL 500.2017 separately bars issuing or delivering stock or securities that way.

Sharing commission has a related limit. An insurer or producer “may pay or assign commissions, service fees, or other valuable consideration to an insurance agency or to persons who do not sell, solicit, or negotiate insurance in this state, unless the payment would violate section 2024” (MCL 500.1240(4)). Separately, “an agent shall not reward or remunerate any person for procuring or inducing business in this state, furnishing leads or prospects, or acting in any other manner as an agent,” except as sections 1211 and 1212 and subsection (12) provide (MCL 500.1207(11)). Neither says which controls, so check with DIFS before paying for a lead.

Gift limits by line

Michigan allows small gifts only where a statute says so. Each exception also reaches section 2070, so the client may accept the item.

Line	What is allowed	Limit	Citation
Life	An article of merchandise to each applicant for a life policy, from a life insurer or agent	Invoice value of $5 or less	MCL 500.2024a
Property-casualty	An article of merchandise to an applicant or insured, from a property-casualty insurer or producer	Cost to the insurer of $50 or less per calendar year	MCL 500.2024b
Accident and health; annuities	No merchandise exception in chapter 20	No allowance at any value	Sections 2024a and 2024b do not name them

Health insurance has a separate premium exception, for wellness rather than gifts. An insurer may give a rebate or premium reduction for taking part in a health behavior wellness program. The rebate may not exceed 50% of paid premiums for tobacco cessation or 30% for other programs in group coverage, and 50% in individual and family coverage, unless the Director approves otherwise (MCL 500.3426(1), (2)).

The buyer is covered too

No insured person or party may receive or accept, directly or indirectly, a rebate or other consideration not specified in the policy contract (MCL 500.2070(1)). If the insured knowingly accepts one, the amount of insurance is reduced in the proportion the rebate bears to the total premium, and the insured commits a misdemeanor with a fine of not more than $100 (MCL 500.2070(2)). If Elena knowingly accepts a $100 rebate on a $1,000 premium for a $100,000 policy, the rebate is one-tenth of the premium, so her insurance drops to $90,000.

Penalties for the giver

On satisfactory evidence of a section 2066 violation, the Director shall revoke the license or certificate of authority after the procedure in section 2068, and none may be issued within 1 year from the date of revocation (MCL 500.2066(2)). A violation is also a misdemeanor, with a fine of not more than $100 for each violation or, in the court’s discretion, county jail (MCL 500.2066(3); MCL 500.2069).

Credit Transactions

An insurer may not automatically write insurance on a debtor on the principle that it applies unless the debtor specifically rejects it. The exceptions are insurance required by law or statutory administrative rule, insurance provided for by contract, and insurance whose premium or charge the creditor pays in full (MCL 500.2023).

No person may require, as a condition of lending money, extending credit or renewing either, that the borrower buy insurance through a particular agent or with a particular insurer. A person who finances property other than motor vehicles, lends money or extends credit also may not require a payment for substituting one insurer’s policy for another’s (MCL 500.2077(1)). The rest of the section sets the boundaries:

• A vendor or creditor keeps a reasonable right to approve or disapprove the insurance selected, but may not disapprove a policy containing more than the basic coverage required (MCL 500.2077(3)).
• A vendor, mortgagee or lender may not use or disclose information about required insurance on real property to its own advantage, or to the detriment of the borrower, insurer or agency (MCL 500.2077(2)).
• An insurer lending its own funds may require the debtor to insure his or her own life with it for a reasonable amount (MCL 500.2077(4)).

Each violation is a misdemeanor with a fine of not more than $100 (MCL 500.2077(5)). Except as section 2077(4) allows, no person may induce a purchase through a particular agent or insurer by promising, or threatening to refuse, to sell goods, lend money or provide services (MCL 500.1207(13)).

For fire and inland marine insurance subject to chapter 26, a contract with an insured that the insurance will be placed by a particular person or written by a particular insurer or agent is null and void, apart from the policy and the usual other insurance agreement (MCL 500.2078).

Other Chapter 20 Prohibitions

Medicare-eligible clients

For a disability policy or rider issued to an individual eligible for Medicare, an insurer may not pay a first-year commission greater than what the agent receives in each of the 2 following annual renewal periods (MCL 500.2011(1)). If coverage is converted to or replaced by similar coverage with the same insurer or an affiliate, the policy may not start a new preexisting condition waiting period, though it may carry over what remains of the old one. That limit does not reach an increase in benefits the individual voluntarily selects (MCL 500.2011(2)).

Workers’ compensation

Unless the insured was guilty of misrepresentation, fraud or other bad faith, these practices are unfair (MCL 500.2016(1), (2)):

• Requiring renewal, or continued group participation, as a condition of receiving a dividend.
• Requiring a premium deposit greater than 25% of total projected annual premium or $2,500, whichever is greater.
• Requiring the purchase of another form of insurance from the same insurer.
• Requiring payment of an increased premium from a payroll audit within 30 days of written notification.

Payroll audits have their own timeline. An insured with reason to believe payroll changed by not less than 20% may request an audit in writing, and it must be completed within 120 days of the receipt of the written request if all required information has been made available (MCL 500.2008(1)). An amount the insurer owes its insured from an audit must be paid within 60 days after completion, and a late amount bears simple interest at 12% per year (MCL 500.2008(3), (4)).

Other named practices

Citation	Rule
MCL 500.2021	A rating organization, or an insurer making its own rates, must give an affected insured all pertinent rate information within a reasonable time after a written request and a reasonable charge. Trade secrets are excluded.
MCL 500.2010	A malpractice insurer may not refuse to offer insurance because a health care provider or hospital uses valid written arbitration agreements with patients.
MCL 500.2013	Violating chapter 5, on nonpublic personal financial information (MCL 500.501(1)), or a rule under it, is an unfair practice.
MCL 500.2013a	An insurer’s failure to materially comply with MCL 500.3107e, on delivering and completing certain auto coverage selection forms, is an unfair practice.

Lesson summary

• Life insurance discrimination is measured among individuals of the same class and equal expectation of life, and accident and health among those of the same class and essentially the same hazard (MCL 500.2019; MCL 500.2020).
• MCL 500.2027 bars refusing or limiting coverage for listed personal characteristics, and allows residence, age, disability, lawful occupation or location only with a reasonable relationship to the risk. Property insurance location needs a statistically significant link to fire loss within a single zip code. Automobile and home insurers may not redline at all (MCL 500.2108(8)).
• Coverage may not be refused solely because an insurer previously denied it, and a rate difference on a listed factor must rest on sound actuarial principles and credible loss statistics unless the Director approved the rate.
• A property and casualty insurer may not use price optimization in ratemaking.
• A rebate is anything of value not specified in the contract. Section 2024 covers life, annuity and accident and health, and section 2066 covers any kind of insurance. An offer is enough.
• Gift limits differ by line: $5 invoice value per life applicant, $50 cost to the insurer per calendar year for property-casualty applicants and insureds, and no chapter 20 exception for accident and health. Health insurance has the separate wellness rebate in MCL 500.3426.
• A section 2066 violation means mandatory revocation after an opportunity for a hearing, a 1-year bar and a misdemeanor. An insured who knowingly accepts a rebate loses coverage in proportion and commits a misdemeanor.
• A lender may not require a particular agent or insurer as a condition of credit, and an insurer may not write insurance automatically on a debtor unless an exception in MCL 500.2023 applies.