While many companies think of themselves first and foremost as insurance consumers—that is, negotiating and purchasing insurance products to protect their business and the individuals that run it from liability—there are many other roles that companies can take on that cause them to be operating directly or indirectly within the insurance industry. Retailers may offer insurance products to customers, businesses may sell or advertise health insurance or other plans to employees, or vendors may provide back-office or other services to insurers, just to name a few.
Given the critical role that insurance plays, companies may find themselves subject to regulatory or other restrictions related to the solicitation, negotiation, or execution of insurance contracts. Those that run afoul of insurance regulations may find themselves in the crosshairs for engaging in the unauthorized business of insurance. Recently, for example, the Washington State insurance commissioner fined Airbnb for its Host Damage Protection program, which advertised $1 million in coverage for damages caused by a guest. There, Washington insurance regulators found that by offering this program, Airbnb engaged in the unauthorized practice of insurance. Similarly, the New York Department of Financial Services (DFS) levied fines against the National Rifle Association (NRA) and its administrator for its involvement in providing a “Carry Guard” program, which the DFS found insured illegal conduct. Both the NRA and its administrator faced fines in the millions of dollars.
Further, businesses that are purportedly engaged in the unauthorized business of insurance can also face liability by private actors. One Florida statute permits a private cause of action if a person is damaged by an unauthorized insurer. Just last year, Avis Budget Rental Car agreed to settle a class action lawsuit for nearly $34 million based on allegations that Avis Budget, among other things, violated Florida’s statute regarding the unauthorized business of insurance.
Businesses that work in the insurance industry or even in insurance-adjacent fields should be aware of the numerous laws and regulations governing the unauthorized business of insurance. A proactive approach, including retaining competent counsel, can help navigate myriad regulations, assess whether providing a service or product may run counter to those regulations, and, if needed, defend against investigations and lawsuits arising from any alleged unauthorized business of insurance (or, conversely, pursue legal action for persons or businesses damaged by unauthorized insurance transactions).
What is the unauthorized transaction of insurance? Insurance is generally a matter of state law. As a result, each state has its own regulations that address the unauthorized transaction of insurance. Generally speaking, these regulations prohibit a person or entity from transacting insurance in a state unless previously authorized by the insurance regulator of that state. A violation can result in a hefty civil fine, large lawsuits, and even criminal sanctions.
Nevada Revised Statute section 685B.030(2), for example, states that “[i]t is unlawful for any insurer to transact an insurance business in this State . . . without a certificate of authority from the Commissioner.” This same statute defines the transaction of insurance to include (a) the making of or proposing to make, as an insurer, an insurance contract; (b) the taking or receiving of any application for insurance; (c) receiving or collecting a premium, commission, or other dues for any insurance; (d) issuing or delivering a contract of insurance to a Nevada resident; (e) and directly or indirectly representing an insurer in the solicitation, negotiation, procurement, or effectuation of insurance or renewals.
Likewise, the Revised Code of Washington section 48.05.030 states that “[n]o person shall act as an insurer and no insurer shall transact insurance in this state other than as authorized by a certificate of authority issued to it by the Commissioner and then in force. . . .” The Washington Revenue Code defines “insurance transaction” as solicitation, negotiations preliminary to execution, execution of an insurance contract, transaction of matters subsequent to the execution of the contract and arising out of it, and insuring. Further, the Revised Code of Washington section 48.15.020 prohibits an unauthorized insurer from soliciting insurance business or transacting insurance business in Washington. If the insurance commissioner has cause to believe there has been a violation of section 48.15.020, the commissioner may assess a civil penalty of up to $25,000 for each violation. In addition, a knowing violation of Washington’s regulation is a felony, and any criminal penalty imposed is in addition to, and not in lieu of, any other civil or administrative penalty or sanction authorized under state law.
Similarly, New York Insurance Law section 1102 states that “[n]o person, firm, association, corporation or joint-stock company shall do an insurance business in this state unless authorized by a license. . . .” New York law defines “insurance business” broadly to include “making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association, or corporation authorized to do business herein, or solicitation of applications for any such policies or contracts.” Insurance business also means “doing any kind of business . . . specifically recognized as constituting the doing of an insurance business within the meaning of this chapter; . . . or doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this chapter.”
Florida’s regulations are much the same. Section 624.401 states in part that “[n]o person shall act as an insurer, and no insurer or its agents, attorneys, subscribers, or representatives shall directly or indirectly transact insurance, in this state except as authorized by a subsisting certificate of authority issued to the insurer by the office.” The statute specifies that “[a]ny person who acts as an insurer, transacts insurance, or otherwise engages in insurance activities in this state without a certificate of authority in violation of this section commits a felony of the third degree.” Further, Florida Statute section 624.155 provides a private right of action for a “party damaged by a violation of s. 624.401 by the unauthorized insurer.”
These are just some examples. And while there are many similarities across different states’ regulations, the nature of disparate state law on insurance leads to different wording and enforcement that can materially differ depending on applicable state law.
What fines, penalties, or other consequences may result from unauthorized insurance transactions? Just as the statutes and regulations regarding the unauthorized business of insurance vary from state to state, the way these statutes are violated and the outcome of violations also vary. Traditional examples include businesses in the crosshairs for having violated a state’s unauthorized insurer statute by selling insurance products without a license. In 2022, for example, a Texas company selling health insurance to over 2,000 Michigan residents without proper licensure was found to have violated Michigan’s unlicensed insurer statute. The Michigan Department of Insurance issued a cease-and-desist order to this “health insurer” and provided it 30 days to contest the order by requesting a hearing on the allegations. In 2021, the Texas Department of Insurance also ordered this same company to stop selling unauthorized health insurance and to begin an orderly shutdown. Thus, as expected, selling insurance without the proper licensure can result in harsh penalties in various states.
Penalties extend to activities beyond unauthorized insurance sales to things like advertising or solicitation of insurance products. Most recently, the Washington insurance commissioner, through a consent order, fined Airbnb $20,000 for acting as an unauthorized insurer. Airbnb faced this fine after being investigated in connection with its Host Damage Protection program, which was advertised as $1 million in coverage for damages caused by a guest. According to the commissioner’s office, this program “was included with each booking as part of the company’s AirCover program, provided under a general liability policy with hosts covered as insureds.”
In addition, Washington regulators required that Airbnb review all claims since January 1, 2021, that were previously denied under the Host Damage Protection program and pay out any covered costs that were improperly denied. “Going forward, all claim coverage and amounts paid out to Airbnb hosts will be determined by an insurance adjuster licensed in Washington state.” To continue offering its Host Damage Protection program, Airbnb will have to obtain a surplus lines insurance policy.
New York’s Department of Financial Services has also imposed large fines on organizations that have advertised insurance without a license. In 2020, the NRA agreed to a civil fine of $2.5 million and a five-year suspension of its insurance business in New York. The New York DFS found that from 2000 to 2018, the NRA, in conjunction with its insurance administrator, violated New York insurance law by operating as an unlicensed insurance producer, soliciting insurance products, and receiving compensation. In the consent order, the DFS found that the NRA program offered coverage that violated New York law because it insured intentional acts. The Carry Guard program provided coverage “for losses and costs associated with the aftermath of the purposeful use of the firearm, including defense costs in a criminal prosecution.” The NRA solicited customers for its Carry Guard program through various channels such as on its website and in emails and direct mail.
Companies that offer warranties are also facing fines by insurance regulators. For example, the Washington Insurance Commission imposed a $20,000 fine on an equipment repair and servicing company providing an “all-inclusive warranty” for certain electronics such as televisions. Because the warranties constituted regulated insurance products and the company was not authorized to transact insurance in Washington, the commissioner found that the company had violated Washington Revised Code sections 48.05.020 and 48.05.030 and imposed a $20,000 fine.
Similarly, in 2020, the California Department of Insurance issued a cease-and-desist order against an unlicensed company that unlawfully sold extended warranties for automobiles. The company allegedly transacted insurance without a license, collected premiums, and failed to place insurance coverage for its customers, resulting in more than $100,000 in uncovered losses to customers. In California, the penalty for offering or selling insurance without a valid license is punishable by a fine not to exceed $50,000.
In addition to potential regulatory fines and penalties, companies engaging in the unauthorized business of insurance can also face lawsuits by private actors. Last year, for example, Avis Budget Car Rental, LLC, agreed to pay—and the District Court for the Middle District of Florida approved—a $33,956,613.00 class action settlement after a putative class action plaintiff alleged that, among other claims, Avis Budget violated Florida Statute section 624.401 when it engaged in the business practice of selling supplemental liability insurance or additional liability insurance to international customers, even though it lacked the authority and allegedly left the renters without legally valid insurance coverage. In addition to the nearly $34 million settlement, the district court also approved an award of $8,925,000 in attorney fees and costs against Avis Budget.
Thus, companies soliciting or offering either traditional or untraditional types of insurance may face liability from insurance regulators and private actors if found to violate laws and regulations across the country prohibiting the unlicensed business of insurance.
To avoid fines and other penalties, businesses that work in the insurance industry and in insurance-adjacent fields should be knowledgeable of the laws and regulations governing the unauthorized business of insurance from state to state. A proactive approach, including retaining competent counsel, can help a business traverse differing statutes and regulations regarding the unauthorized business of insurance. Counsel can likewise assess whether providing a service or product may run counter to these regulations or statutes and, if needed, defend against investigations and lawsuits arising from any alleged unauthorized business of insurance. Likewise, if a person or business believes it has been damaged by the unauthorized business of insurance, counsel can assist in assessing or even pursing a legal claim for damages.
