Wisconsin Rate Standards, Prohibited Classifications and Oral Contracts
Every property and casualty premium your client pays comes from a rate the insurer built and filed with the Commissioner of Insurance (OCI). Wisconsin law sets the standards those rates must meet, limits the facts an insurer may use to sort people into rating classes, and lets a producer commit an insurer to coverage before any paperwork exists.
How Wisconsin regulates rates (ch. 625, Wis. Stat.)
What the rate law covers
Chapter 625, Wis. Stat., governs rates for direct insurance written on Wisconsin risks by authorized insurers: homeowners, dwelling, commercial property, auto, liability and most other property and casualty lines (s. 625.03). Ocean marine is excluded, and workers’ compensation rates are regulated under their own chapter, ch. 626.
The law’s stated purposes are to protect the public against “excessive, inadequate or unfairly discriminatory rates” and to rely first on “reasonable price competition among insurers,” keeping formal controls for when competition fails (s. 625.01 (2)).
The three rate standards (s. 625.11)
Rates may not be excessive, inadequate or unfairly discriminatory, and no insurer may charge a rate that tends to destroy competition or create a monopoly.
- Excessive. Where a class of business has real price competition, its rates are presumed not excessive. Where it does not, a rate is excessive if it is likely to yield a long-run profit unreasonably high for the riskiness of the class, or if expenses are unreasonably high for the services provided.
- Inadequate. A rate is inadequate if, together with the investment income it earns, it is clearly too low to pay projected losses and expenses. Inadequate rates threaten an insurer’s ability to pay claims.
- Unfairly discriminatory. A rate is unfairly discriminatory if it clearly fails to reflect fairly the differences in expected losses and expenses within its class. Different premiums for different loss exposures or expenses are fair when the difference is reasonably accurate.
In building rates, insurers weigh past and expected loss and expense experience, catastrophe hazards, trends and the judgment of their technical staff, and may include a profit reasonable for the riskiness of the class (s. 625.12).
Use and file (s. 625.13)
Wisconsin is a use and file state. An insurer may begin using a new or changed rate, then must file it with OCI “within 30 days after they become effective” (s. 625.13 (1)). The filing includes the “supplementary rate information”: manuals, classifications, rating schedules, minimum premiums, policy fees and rate-related underwriting rules (s. 625.02 (3)). Filings are open to public inspection (s. 625.14). An insurer may build its own rates or use those of a rate service organization licensed by OCI (ss. 625.15, 625.31). Inland marine rates are exempt from filing (s. Ins 4.08, Wis. Adm. Code).
OCI can require filing before use:
- Where competition is not effectively regulating rates in a line, class or territory, OCI may adopt a rule requiring rate changes to be filed at least 15 days before they take effect (s. 625.21).
- OCI may order an individual insurer whose finances or rating practices need closer supervision to file its rates 15 days before use (s. 625.23).
- If OCI finds after a hearing that a rate violates the standards, it orders the rate discontinued. For one year afterward, a replacement rate may not be used until it has been filed and not disapproved within 30 days (s. 625.22).
Consent to rate (s. 625.13 (2))
When a risk is too unusual for the filed rate, an insurer may charge more for that specific risk if the insured applies in writing, stating the reasons, and OCI does not disapprove within 10 days of filing. If OCI disapproves, the filed rate applies from the start; the insurer may cancel proportionally on 10 days’ notice or refund the excess premium. The signed request must state the client’s real reasons. It is the client’s application, not a form to sign blind.
Prohibited classifications
Classes never permitted (s. 625.12 (2))
Insurers may classify risks “in any reasonable way,” except that no classification may be based on race, color, creed or national origin, and no auto classification may be based on physical condition or developmental disability.
Suspect factors for auto and homes (s. Ins 6.54)
For auto coverage and for residential property of not more than four living units (and its contents), s. Ins 6.54 names seven factors: past criminal record; physical condition or developmental disability; past mental disability; age; marital status; sexual preference; and “moral” character.
An insurer may not refuse, cancel or deny coverage to a class of risks solely on these factors. It may use one in a rating class only with credible information showing the class fairly reflects differences in losses and expenses, filed with OCI. In auto, physical condition and developmental disability stay barred outright by s. 625.12 (2). Still permitted: declining someone convicted of an offense directly related to the risk, rating an auto on the records of all its drivers, and rating on household size. An insurer that requires a physical examination must pay for it.
Auto: the flat bar of s. 632.35
No insurer may cancel, refuse to issue or refuse to renew an automobile policy, wholly or partly, because of any person’s age, sex, residence, race, color, creed, religion, national origin, ancestry, marital status or occupation (s. 632.35).
Two smaller auto rules: an accident while driving for work may affect the rate or renewal only if the policy covers business use (s. 632.36), and odometer readings from emissions inspections may not be used to set auto liability rates (s. 632.365).
Location, age of home and past declinations (s. Ins 6.68)
In property and casualty insurance, refusing, canceling, nonrenewing or limiting coverage because of a risk’s geographic location is unfair discrimination unless it serves a genuine business purpose that is not a pretext, or the law requires it. The rule’s examples are catastrophe-prone areas and an insurer already heavily concentrated in one area, and the insurer must prove the exception. The same test applies to the age of a home of four units or fewer. And no insurer may refuse a risk solely because the applicant was declined or canceled elsewhere or had coverage in a residual market such as the Wisconsin Insurance Plan.
Oral contracts and binders (s. 631.05)
Wisconsin law does not forbid an oral contract of insurance or a written binder, and the insurer must issue a policy “as soon as reasonably possible” afterward (s. 631.05). Because an insurer is bound by its agent’s acts within the agent’s apparent authority (s. 628.40), a producer with binding authority who tells a client “you’re covered” has committed the insurer.
- Bind only within your authority, and confirm in writing the date, time, coverages, limits and property or vehicles bound.
- Get the signed application. A client’s statement affects the insurer’s obligations only if it appears in the policy, a signed application made part of it, or a written communication from the insurer (s. 631.11 (1) (a)). Phone answers alone do not.
- A binder cannot be withdrawn on the spot. The Wisconsin Supreme Court has held that the new-policy cancellation rule of s. 631.36 (2) (c) applies to binders (Terry v. Mongin Insurance Agency, 1982), so an insurer that wants to cancel one must give at least 10 days’ written notice.
Lesson summary
- Chapter 625 regulates property and casualty rates; ocean marine and workers’ compensation fall outside it.
- Rates may not be excessive, inadequate or unfairly discriminatory, or tend to create a monopoly.
- Wisconsin is use and file: rates are filed within 30 days after taking effect, but OCI can require filing 15 days before use where competition fails or an insurer needs supervision.
- A higher rate on one risk needs the insured’s written, reasoned consent, not disapproved by OCI within 10 days.
- No class may rest on race, color, creed or national origin; in auto, not on physical condition or developmental disability.
- The seven factors of s. Ins 6.54 may enter a rate only with credible, filed support, and never alone justify refusing a class.
- An auto policy may never be refused, canceled or nonrenewed for age, sex, residence, race, color, creed, religion, national origin, ancestry, marital status or occupation.
- Oral contracts and binders are valid; the policy must follow promptly, and the insurer can cancel a binder only on 10 days’ written notice.