What Is Unfair Claims Practice?

What Is Unfair Claims Practice?

Let me explain what unfair claims practice really means. It's when an insurer improperly avoids paying a claim or tries to shrink the amount they're supposed to pay out. By doing this, the insurer is basically cutting their own costs, but you should know this is illegal in many places.

Key Takeaways

Here's what you need to grasp: Unfair claims practice happens when an insurer delays, avoids, or cuts down a claim that's rightfully due to you as the insured. Insurers pull these moves to save money or push back payments, and they're often breaking the law. Many states have their own laws to shield you from this kind of bad behavior during claims settlement. These Unfair Claims Settlement Practices Acts, or UCSPA, get enforced by states, not the feds, and they differ depending on where you are.

Understanding Unfair Claims Practice

You should understand that the National Association of Insurance Commissioners, or NAIC, put together a model law for unfair claims practices. It requires claims to be handled fairly with clear communication between you and your insurer. Since insurance is regulated by states, not the federal government, many areas have adopted laws based on this model.

Most states have their version of this, called the Unfair Claims Settlement Practices Act. It guards you against unfair actions by insurers when settling claims. The details can vary by state, and it's the state insurance departments that enforce them, not any federal body.

Example of Unfair Claims Practice

Picture this scenario to see it in action: You're a small business owner with a commercial property policy covering your building and equipment. A fire hits, causing $100,000 in damage. Your insurer drags their feet on paying, leaving you unable to fix anything. They keep using delays, like the claims rep 'forgetting' to send forms or demanding more proof of loss even after you've submitted it twice. This is exactly the kind of thing unfair claims practice laws aim to stop.

Other Examples of Unfair Claims Practice

There are more ways this plays out. For instance, an insurer might misrepresent key facts or policy details—like telling you Building Ordinance coverage is excluded when your policy clearly includes it.

Another tactic is changing your application without your okay and then basing the claim settlement on that change. Say you asked for $50,000 in Utility Interruption coverage, but they drop it to $10,000 secretly and refuse to pay more than that when a loss happens.

Or they might settle for less than what you'd expect from a written ad you saw. An ad promises $50,000 for flood damage, but it skips mentioning you need to pay extra premium for it, and they stick to the lower amount.