Unfair and Deceptive Insurance Practices; Rebating

In the insurance business, rebating is a practice whereby something of value is given to sell the policy that is not provided for in the policy itself. An example of rebating is when the prospective insurance buyer receives a refund of all or part of the commission for the insurance sale. Rebates can be made in the form of cash, gifts, services, payment of premiums, employment, or almost any other thing of value.

The National Association of Insurance Commissioners promulgated the model "Act Relating to Unfair Methods of Competition and Unfair and Deceptive Acts and Practices in the Business of Insurance" (Model Act). Under the Model Act, the rebating practice of splitting insurance commissions with the consumer to induce a sale is classified as both an unfair method of competition and an unfair or deceptive act or practice in the business of insurance. The Model Act is directed at companies, agents, and brokers. Some states extend the prohibition against rebates to the consumer or prospective insurance purchaser.

All states responded by adopting the Model Act in whole or in part. Some states adhered to the Model Act's policy view that rebating is a form of price discrimination inasmuch as all policyholders in the same actuarial pool may not receive the extra-contractual incentives. However, the policy concern underlying the enactment of anti-rebating laws in many states was and continues to be that rebating encourages insurer insolvency by effectively discounting insurance premiums.

The definition of what constitutes rebating varies from state to state. However, the rebating practice of returning part of an agent's commission to a prospective insured is prohibited in all states with the exception of Florida and California. The Florida Supreme Court struck down the state's anti-rebate statutes as an unreasonable restriction of competitive pricing. While acknowledging the "Legislature's interest in protecting title insurers and agents against insolvency," the court found that legitimate interest was "not furthered by the anti-rebating statutes." The Florida Supreme Court reaffirmed the validity of agent premium rebating in a 2000 decision. In practice, rebating is not a common practice because an agent must offer the same rebate to all prospective purchases. Although a lower California court upheld the validity of anti-rebating statutes, the decision was rendered moot with the passage of Proposition 103 in 1988. The California Supreme Court ultimately upheld the validity of rebates.

While the Model Act applies only to life, health, and accident insurance, a large number of states extend anti-rebating provisions to other lines of insurance. A few states prohibit an insured from taking a rebate from an agent or broker. Some states have passed a provision of the Producer Licensing Model Act. This model act permits a person (an individual or a business entity) that is not licensed in the state to take an override commission as long as the person does not sell, solicit, or negotiate insurance in the state and the payment does not violate the state rebating laws.

Most states give the chief insurance regulator the authority to investigate and penalize insurance companies that allow agents or brokers to give rebates to consumers. Various civil sanctions including license revocation, nonrenewal, and cease and desist orders are standard remedies. Criminal penalties are also available for unlawful rebating in some states.

The statutes prohibited insurance agents from negotiating the amount of their commissions with clients and from offering to rebate a portion of their commissions to clients.

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