Some of us made careers out of advising insurance and related companies despite the fact that our parents wanted us to be doctors or engineers or, in the worst-case scenario, at least lawyers with good cocktail-party stories. Aside from the deep sadness in their eyes at Thanksgiving dinners, we are plagued by perennial client requests to advise them on regulatory compliance across more than fifty United States jurisdictions on the insurance issue of the day. Recently, a client asked me what would appear to be the most basic question: “Can we do [fill in the blank] to promote our insurance product?” This is a variation on a very common theme. For example, can we pick up the tab for lunch when we talk to a customer about buying an insurance policy? Can we gift them a nice pen with our logo on it? Can we give them some free educational materials? Can we throw their name in a raffle, make a small donation to a charity on their behalf, or even put their policy in a nice notebook? For most industries, these simple questions would merely require the review of a single set of rules. However, for insurance regulatory issues, we know that the response is always the following: maybe in some states, maybe not in others; we will have to review more than fifty sets of local laws that govern the issue, and the answer that we give you will likely be contradictory and convoluted. [And, hence begins yet another moment of letting down someone we want to please, our clients.] First, we must review each state’s statute [Fine]. Then, we must review the administrative regulations. [Fine, again. And I have a research associate for that.] Then, we must review the various (sometimes voluminous) bulletins issued by the local regulators opining on how the statutes and regulatory codes should be interpreted on various topics. [Now, I’m going to owe the research associate lunch.] Then, we will review case law to see if courts have overruled any of these decisions. [I do not think the associate is going to keep returning my calls.] And then, we will need to check the overlay of federal rules that might apply. [Maybe I’ll try another associate for that research.] That will be dozens (maybe hundreds) of hours of work to figure out if an insurance producer’s agents can pick up the tab for a coffee at local diner when they meet with a client. [Not only is that a lot of legal fees, but I’ve now burned up two associates with one simple question.] By the way, the answer is that it might be illegal in some states, but not others, depending on the price of the coffee, whether you discussed an insurance policy, whether you bound the insurance during the discussion, or even if the coffee was purchased at a nonprofit fundraiser! [Bravo! Yet another frustrated client!]
Alas, that is the reality of insurance law. In particular, it is the reality of inducement rules in insurance law. While one might be tempted to think that this conundrum is created by a recent upheaval in the law or perhaps unique innovations that simply have not had time to settle into established rules, this view unfortunately would massively miss the mark. The truth is that inducement rules in insurance have been around for well over 150 years. [In retrospect, it would have been wise to check the historical entanglements of the practice area before I ventured into this specialty. Is there still time to switch my practice area?] States and state regulators have had a model law available to them for seventy years issued by their own coordinating body, the National Association of Insurance Commissioners (NAIC). Yet, we remain in a quagmire of Brobdingnagian proportions: over fifty jurisdictions, each with different rules, all resisting attempts for coordination and uniformity, and most that overlap in some ways and contradict each other in other ways. Despite a valiant attempt by a NAIC working group in 2020 to promulgate an updated model law, and even achieving endorsement by the broader NAIC governing body itself, no states have adopted the revised model law, leaving the entire state of the law a tangled mess. While one might be able to reasonably debate the different possible approaches to the various applications of this rule, one would still be left wondering why states cannot manage to align on one approach. [One has to wonder if this variety may be a strategy by states to torture insurance lawyers.] This issue is emblematic of the idea that differences in states’ treatment of identical regulatory issues resulting from regulations—all of which have their own “special” approach—results in a destructive regulatory predicament. Industry participants would likely say that this fractalized regulatory framework impedes innovation, reduces the adoption of insurance generally, and impedes good-faith compliance. It is difficult to conjure an argument to support the fractalized state-by-state system when states have resisted adoption of the model law recommended by their own coordinating body. [But, I digress.]
The so-called “undue influence” rule has been adopted in most every state and, essentially, dictates the following: an insurance producer may not provide an inducement to an insured or prospective insured for the purpose of enticing them to purchase an insurance policy unless the offered service or good is specifically contained in the insurance policy. Each of these items has a myriad of tentacles developed by courts, legislators, and regulators over the last 150 years. To understand the rule and its various tentacles, it is helpful to understand its rationale.
Before we talk about the rationale for the rule itself, one needs to understand the fundamental nature of insurance as a product and a socioeconomic mechanism. The United States Supreme Court has explained that insurance is a “contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on a specified subject by specified perils.” Further, the Supreme Court found that the “primary elements of an insurance contract are the spreading and underwriting of a policyholder’s risk. . . . It is characteristic of insurance that a number of risks are accepted, some of which involved losses, and that such losses are spread over all the risks so as to enable the insurer to accept each risk at a slight fraction of the possible liability upon it. . . . Insurance is an arrangement for transferring and distributing risk.” Central to this idea is that insurance must transfer risk from insureds to an insurer for the purpose of redistributing (spreading) those risks among the pooled group of insureds, and to do so requires the insurer to be able to actuarially predict the exposure being received from one insured such that the insurer can properly assess and reallocate those risks among the other insureds by translating them into a component of each insured’s premium. The Supreme Court carefully distinguished these risks (the insureds’ exposures) from the insurance company’s own exposures, the latter of which are not the “business of insurance” but rather just the business activities of an insurance company. In one case, the Supreme Court agreed with an amicus advocate who noted, “[T]here is an important distinction between risk underwriting and risk reduction. By reducing the amount it must pay to policyholders, an insurer reduces its liability and therefore its risk. But unless there is some element of spreading risk more widely, there is no underwriting of risk.” In other words, insurance is not merely about risk reduction but about risk spreading.
Ratemaking is one of the core mechanisms of insurance as an industry and, in particular, of insurance regulation because it is the mechanism by which risk spreading is accomplished. An insurance commissioner is tasked with ensuring that insurance rates are not excessive, inadequate, or unfairly discriminatory. As noted by one state supreme court, “By design, insurance rate setting involves the prospective use of proposed rates which are calculated based on cost projections derived from past experience combined with a reasonable expectation of future losses and expenses.” The Supreme Court went on to note that “each company’s base rates are tied to its actual historic loss portfolio. . . . If an insurer’s rates do not adequately account for potential future losses corresponding to its risk pool, the insurer risks going out of business.” Thus, essentially, regulators are tasked with ensuring that the amount of insurance premium charged to insureds (in aggregate) covers the projected losses anticipated on the risks assumed (i.e., the risks assumed and spread to other insureds (plus the costs of operating the insurance business)). Thus, it is sacrosanct that rates charged to an insured equate to the risks assumed.
This risk spreading via rate making explains why the anti-rebate laws have stood the test of time, despite a myriad of challenges. In one recent challenge, Katt v. Insurance Bureau, the challenger’s contention was that unlawful inducement laws violated due process, but the court found this argument groundless because unlawful inducement laws support accurate ratemaking, and, as a result, there is a clear rational basis for them. The Katt court pointed out the rationale for the unlawful inducement laws is based on the prohibition against unfair discrimination in the process of risk spreading and rate calculation, balancing insurer solvency against rate inadequacy. It is worth noting that, while “discrimination” based on characteristics traditionally thought of as discriminatory (race, religion, gender, etc.) is certainly prohibited under other laws that apply generally to insurance as much as any other industry, the type of unfair “discrimination” the court (and the concept of unlawful inducement) is referring to relates to treating similarly situated risks differently from a pricing standpoint. In other words, two people with the same risk ought to pay the same premium. In Katt, the court pointed out that unlawful inducement provisions exist to prevent unfair discrimination in rate making because rebating “could permit an agent or company to discriminate amongst applicants by offering varying rebates to different applicants or subgroups of applicants within a similarly situated class of risk, which means the premiums no longer match the risks accepted.” As a result, unfair discrimination between similarly situated individuals exhibiting the same risk profile is prohibited as an unfair method of competition and a deceptive trade practice. As the court noted, “Antirebate provisions effectively achieve a proper legislative objective for eliminating price discrimination based on considerations other than risk and expenses.”
In addition to unfair discrimination, the Katt court went on to point out two other rationales that underpin the unlawful inducement laws. First is the promotion of insurer solvency because, for example, antirebate provisions prevent insureds from annually cancelling life insurance policies to receive rebates of the insurance agents’ first year commissions. If insureds cancel policies to obtain rebates of agents’ commissions, the insurance companies may not realize a profit on those policies. Profit is necessary to fund adequate reserves to cover the assumed risks and satisfy claims. As a result, the solvency of insurance companies could be compromised over time by the rebating of commissions.” Second, unlawful inducement laws ensure that insureds are able to compare prices based on stated premium amounts. The court noted, “Antirebate provisions also promote public convenience in the comparison of insurance costs.” One court described this concept as the requirement that the premium noted for the policy should actually equal the total amount paid, and that rebates render that stated amount false.
Opponents of the unlawful inducement rule argue that the current laws are outdated, thereby leaving little room for innovation in marketing and sales and, because of those limitations, they infringe upon a business’s ability to compete. Essentially, the difference between the positions in this debate boils down to the age-old tension in insurance between the strict fundamentals of insurance (proper rate making, solvency, etc.) versus the industry’s desire to innovate and conduct sales in a way that most other industries do on an even playing field.
This debate regarding the “undue influence” rule over the last century is interwoven with another debate relevant to the concept of the rule: the question of whether states should regulate the business of insurance or whether it should be regulated federally. This is because many (perhaps most) insurance companies have national (or at least multistate) footprints, which intensifies the industry’s innovation and market-competition concerns.
When looking backward in history at the business of insurance, it is hard to resist the urge to note that, in the midst of all the novel and new industries that exist, one of the fun (and challenging) issues with insurance is that it has been around for a minute (or closer to 2,000,000,000 minutes). Apparently, insurance has been around since the Hammurabi Code circa 1750 B.C. [Despite insinuations by my children to the contrary, I had no hand in the drafting of that particular code.] Even modernists would argue that the “modern” insurance era began in Britain in the 1700s, with the United States being the youngster to arrive on the scene in the mid-1800s. While this all might seem somewhat pedantic, the point is that insurance is one of those “old” industries with a lot of history. So, when we start talking about the unlawful inducement rule in the United States, we are not talking about a few decades of history; we are talking about a rule that was first enacted by Massachusetts in 1887. That history was impacted heavily by the development of state-based regulation.
For context, in 1869, just before the 1887 Massachusetts undue-influence statute was enacted, the United States Supreme Court first declared in Paul v. Virginia that state insurance regulation did not violate the commerce clause of the United States Constitution. This ruling began a tradition of support from the Supreme Court for the concept of regulation on a state level. Not coincidentally, just two years later, in 1871, the state insurance regulators of all the states, the District of Columbia, and the five U.S. territories piled on to the momentum created by the Supreme Court in Paul v. Virginia and formed the NAIC. The NAIC’s goal was, among other things, to coordinate state-based regulation of multistate insurers.
Not long thereafter, the first undue influence statute was enacted in Massachusetts in 1887. Within a short time, a majority of states had enacted similar laws. These early laws were enacted in response to life insurance practices in which agents paid rebates to induce purchases of insurance. Agents, in turn, demanded higher commissions from the insurer, which resulted in an increased solvency risk to the insurer. As a result of these practices, insurance companies began forming pacts to terminate agents who engaged in rebating. [That is a pretty gangster move for an industry that is generally risk adverse.] For roughly sixty years, the states marched along with no model law from the NAIC, instead enacting their own versions of the rule, or the industry simply taking matters into its own hands.
In United States v. South-Eastern Underwriters Ass’n, the United States Supreme Court took a hard left turn in 1944 when it analyzed the issue of state regulation and how it interacted with federal laws as it considered whether a federal law (specifically, the Sherman Act) applied to insurance companies that had up until then been solely regulated by the states. The Supreme Court called into question the appropriateness of state regulation under the rubric of supporting the federal government’s power to regulate interstate commerce under the United States Constitution’s Commerce Clause. In fact, the Supreme Court ruled that insurance was subject to the Sherman Act because insurance crosses state lines. This meant that the idea of state regulation was called into question because, if one federal law applied due to the interstate nature of the industry, then, arguably, states may have no (or limited) authority to regulate the industry. While less than a definitive answer, it was a seismic shift in the analysis that led to the possibility of full federal preemption and, thus, the unwinding of all the state regulations, which, of course, called into question the validity of the various state “undue influence” laws. Specifically, the Supreme Court held that a) insurance is multistate and thus within the concept of the commerce clause; b) the federal government could regulate the industry if the federal government opted to occupy the field; and c) because the federal government had declared, at least with regard to the Sherman Act, that it was illegal to coordinate in various ways in the market, insurance coordination was now illegal. In other words, the NAIC, whose express role included coordination of insurance, was now theoretically in conflict with declared federal law, as was most of the states’ insurance regulatory processes, which often apply rate-making and other principles between competitors. With ratemaking in question, state unlawful inducement laws were also in doubt.
In response to South-Eastern Underwriters, the United States Congress swiftly enacted the McCarran-Ferguson Act in 1945. A number of U.S. Supreme Court cases over the course of the years addressed the impact of the McCarran-Ferguson Act on the issue of federal versus state authority to govern the insurance industry. For example, in FTC v. National Casualty Co., the Supreme Court noted that the McCarran-Ferguson Act declares that states shall regulate the business of insurance and, in particular, stated that the Federal Trade Commission Act is applicable to insurance companies only to the extent that such business was not regulated by state law, effectively withdrawing from the Federal Trade Commission the authority to regulate the advertising practices of insurance companies in those states that regulated those practices under their own laws. Further, in National Casualty Co., the United States Supreme Court reviewed an order by the Federal Trade Commission mandating that insurance companies cease certain advertising practices in violation of the Federal Trade Commission Act. The appellate court had set aside the Commission’s order on the ground that the McCarran-Ferguson Act had removed the authority of the Federal Trade Commission to regulate the insurance companies. The Supreme Court affirmed this holding, and, therefore, the Federal Trade Commission was prohibited from federally regulating such activity. The Supreme Court followed up in FTC v. Travelers Health Ass’n, by explicitly pointing out that the McCarran-Ferguson Act’s purpose was to confirm the power of the states to regulate insurance activities broadly. This line of cases presumably revalidated all state-based unlawful inducement laws.
However, a later case, Group Life & Health Ins. Co. v. Royal Drug Co., pointed out an important distinction between the “business of insurance” and the “insurer’s business,” which plays into the analysis of whether to apply state or federal law with regard to an insurance company. In Royal Drug, Blue Shield of Texas (Blue Shield) made arrangements with pharmacies to fix the retail prices of drugs and pharmaceuticals. It enabled insureds to receive the same drugs at a cheaper price by creating a participating set of pharmacies, and, if the insured obtained the medicine from the participating pharmacy, the price of the drug was lower than if the insured obtained the medication from a nonparticipating pharmacy. The question became whether the activity proposed by Blue Shield was prohibited under the Sherman Act or whether it was permitted because state laws permitted such actions and overrode the Sherman Act. The Supreme Court interpreted the McCarran-Ferguson Act as applying only to the “business of insurance,” not the “business of insurers.” According to the Supreme Court, insurance companies were only exempt from federal regulations to the extent that the activity related to the provision of insurance to insureds but not as to an insurer’s general activities. Recall that insurance requires risk spreading, not merely risk reduction. Ultimately, the Supreme Court determined that the pharmacy agreement was not the “business of insurance” because it was not risk spreading and, thus, the Sherman Act did apply and preempted the McCarran-Ferguson Act.
Spoiler alert: it is settled law today—to the extent an insurance company is engaged in the “business of insurance” (i.e., risk spreading)—then state regulations prevail over the federal law. Whereas, if the insurer is engaged in merely reducing its own risk, federal laws prevails. This reasoning becomes important when considering whether unlawful inducement law remains a valid state-regulated activity; because the rationale is based on the need to properly rate policies (i.e., spread risks correctly), then presumably state regulations should continue to apply.
The conflict between state and federal regulatory approaches and the tension between the “business of insurance” and the “insurer’s business” leads to following practical conundrum: if there will not be one regulator, should there not be at least a unified rule? Where was the NAIC and the unlawful inducement rule during this epic state versus federal debate? Recall that the NAIC had been around since 1871 with the express task of being “the U.S. standard-setting organization . . . [and] governed by the chief insurance regulators from the 50 states, the District of Columbia, and five U.S. territories to coordinate regulation of multistate insurers.” In 1945, with states having been handed the power to regulate insurance, and unlawful inducement laws presumably falling within the “business of insurance” and thus governed by state law, and in the absence of any apparent attempt by federal regulators to preempt the unlawful inducement space, what was left was a hodgepodge of state unlawful inducement laws. What this meant practically is that the law was a quilt of confusing and sometimes contradicting insurance codes, implementing regulations, and advisory bulletins issued by local regulators. This fractalized state-based system included the unlawful-inducement laws.
In 1944, when South-Eastern Underwriters was decided, the NAIC must have been watching with bated breath wondering if and how the NAIC would survive in a future in which federal preemption decimated state-based regulation of insurance. Then, with the McCarran-Ferguson Act arriving to its rescue in 1945 (and the ensuing U.S. Supreme Court cases), the NAIC clearly received a second wind, as only two years later, the NAIC promulgated the first model law to address unlawful inducement, known as Model Law 880 (the 1947 version).
While eventually a 2020 version of unlawful inducement portion of Model Law 880 would be adopted by the NAIC (as will be discussed below), to understand the 2020 version requires first a solid understanding of the law as it existed before 2020. The original 1947 version essentially espoused the simple principle set out at the begining of this article: inducements outside the policy are prohibited. Despite some minor tweaks over the decades, the anti-rebate portion of Model Law 880 was substantively unchanged from its first 1947 version through its 2001 version (which is the last version prior to the current 2020 version). The wording of the pre-2020 version (using the 2001 version’s wording for illustration, which is italicized below) states as follows:
H. Rebates.
(1) Except as otherwise expressly provided by law, knowingly permitting or offering to make or making any life insurance policy or annuity, or accident and health insurance or other insurance, or agreement as to such contract other than as plainly expressed in the policy issued thereon, or paying or allowing, or giving or offering to pay, allow, or give, directly or indirectly, as inducement to such policy, any rebate of premiums payable on the policy, or any special favor or advantage in the dividends or other benefits thereon, or any valuable consideration or inducement whatever not specified in the policy; or giving, or selling, or purchasing or offering to give, sell, or purchase as inducement to such policy or annuity or in connection therewith, any stocks, bonds or other securities of any insurance company or other corporation, association or partnership, or any dividends or profits accrued thereon, or anything of value whatsoever not specified in the policy.
(2) Nothing in Subsection G, or Paragraph (1) of Subsection H shall be construed as including within the definition of discrimination or rebates any of the following practices:
(a) In the case of life insurance policies or annuities, paying bonuses to policyholders or otherwise abating their premiums in whole or in part out of surplus accumulated from nonparticipating insurance, provided that any such bonuses or abatement of premiums shall be fair and equitable to policyholders and for the best interests of the company and its policyholders;
(b) In the case of life insurance policies issued on the industrial debit plan, making allowance to policyholders who have continuously for a specified period made premium payments directly to an office of the insurer in an amount that fairly represents the saving in collection expenses;
(c) Readjusting the rate of premium for a group insurance policy based on the loss or expense thereunder, at the end of the first or any subsequent policy year of insurance thereunder, which may be made retroactive only for such policy year.
Prior to 2020, nearly every state had implemented the pre-2020 version of the anti-rebate provisions of Model Law 880. Opponents have certainly challenged the undue influence rule over the years, but, as of the 2020 version, the pre-2020 version remained largely implemented throughout the country. There were (and still are) two major exceptions. First, in California, the state court of appeal reviewed whether unlawful inducement laws were violations of equal protection and determined that they were not. In response, California voters stepped in and repealed a significant majority of the anti-rebating law in 1988 under Proposition 103 in 1988. Notably, however, Proposition 103 left alone several unlawful inducement rules found outside of the repealed portions of the code, which continue to prohibit rebating in some instances. Section 7 of Proposition 103 repealed section 750–766, 1642, and 1850–1850.3 of the Code. The California Supreme Court has analyzed certain prohibitions against unlawful inducement in the context of state antitrust laws, the California Unfair Competition Act, and the Unfair Insurance Practices Act, and held that three narrow prohibitions continue to apply to insurers. Aside from those prohibitions, however, it appears that rebates remain permissible in many forms. Interestingly, in response, some insurance companies simply refused to work with brokers who discounted their insurance commissions, a behavior that was upheld by the California Insurance Commissioner.
Second, in Dade County Consumer Advocate’s Office v. Department of Insurance, Florida’s First District Court of Appeal struck down Florida’s unlawful inducement law finding that it violated the Florida Constitution as an unjustified police power. In response, in 1990, Florida modified the law but with broader exceptions designed to avoid the issues raised in Dade County. In 2000, opponents took another swipe at the concept when they successfully argued that the unlawful-inducement statute violated due process, as it prohibited title insurance agents from rebating to clients a portion of premium for title insurance. The end result is that, in Florida, while not as severely eviscerated as it is in California, the rule is circumscribed from the Model Law 880 approach.
The remaining forty-nine jurisdictions, however, have either expressly approved or not challenged their versions of the rebate laws based on the pre-2020 version. For example, as noted, in 2001, the court in Katt v. Commissioner of Insurance upheld the constitutionality of the Michigan unlawful-inducement law. Yet, despite the widespread adoption of the general rule across the states, a number of cases remain on the books that have resulted in state-specific nuances developed as to the application of anti-influence rules. While some rulings came before the adoption by states of the 1947 version of Model Law 880, the rationales for the cases are likely still applicable in most instances, resulting in court interpretations of the application of the undue influence rule (either ruling types of agreements or situations as within scope of the rule or outside its purview) and include the following:
In addition to court rulings circumscribing the rule, the NAIC pointed out in its review of Model Law 880 in 2019 that many state regulators (either based on local statutes or through regulatory fiat) now provide a myriad of exceptions. For example:
As a result of the fractured state of the law that grew for over seventy years, the NAIC attempted to come to the rescue in their role as state regulation coordinator and adopted a revised Model Law 880 on December 9, 2020, to synthesize the most important themes developed in the law. The original Model Law 880 concept included the general prohibitions against inducements with just three exceptions: 1) premium abatements for life insurance out of surplus from nonparticipating insurance; 2) allowances for saved expenses on life insurance policies issued on the industrial debt plan; and 3) adjustment of premium for a group insurance policy based on the previous year’s loss experience. A number of sections were added to the 2020 version to synthesize additional carveouts. The bold type in the text below reflects the newly added wording:
H. Rebates.
(1) Except as otherwise expressly provided by law, knowingly permitting or offering to make or making any life insurance policy or annuity, or accident and health insurance or other insurance, or agreement as to such contract other than as plainly expressed in the policy issued thereon, or paying or allowing, or giving or offering to pay, allow, or give, directly or indirectly, as inducement to such policy, any rebate of premiums payable on the policy, or any special favor or advantage in the dividends or other benefits thereon, or any valuable consideration or inducement whatever not specified in the policy; or giving, or selling, or purchasing or offering to give, sell, or purchase as inducement to such policy or annuity or in connection therewith, any stocks, bonds or other securities of any company or other corporation, association or partnership, or any dividends or profits accrued thereon, or anything of value whatsoever not specified in the policy.
(2) Nothing in Subsection G, or Paragraph (1) of Subsection H shall be construed as including within the definition of discrimination or rebates any of the following practices:
(a) In the case of life insurance policies or annuities, paying bonuses to policyholders or otherwise abating their premiums in whole or in part out of surplus accumulated from nonparticipating insurance, provided that any such bonuses or abatement of premiums shall be fair and equitable to policyholders and for the best interests of the company and its policyholders;
(b) In the case of life insurance policies issued on the industrial debit plan, making allowance to policyholders who have continuously for a specified period made premium payments directly to an office of the insurer in an amount that fairly represents the saving in collection expenses;
(c) Readjusting the rate of premium for a group insurance policy based on the loss or expense thereunder, at the end of the first or any subsequent policy year of insurance thereunder, which may be made retroactive only for such policy year; or
(d) Engaging in an arrangement that would not violate Section 106 of the Bank Holding Company Act Amendments of 1972 (12 U.S.C. § 1972), as interpreted by the Board of Governors of the Federal Reserve System, or Section 5(q) of the Home Owners’ Loan Act, 12 U.S.C. § 1464(q).
(e) The offer or provision by insurers or producers, by or through employees, affiliates, or third-party representatives, of value-added products or services at no or reduced cost when such products or services are not specified in the policy of insurance if the product or service:
(i) Relates to the insurance coverage; and
(ii) Is primarily designed to satisfy one or more of the following:
A) Provide loss mitigation or loss control;
B) Reduce claim costs or claim settlement costs;
C) Provide education about liability risks or risk of loss to persons or property;
D) Monitor or assess risk, identify sources of risk, or develop strategies for eliminating or reducing risk;
E) Enhance health;
F) Enhance financial wellness through items such as education or financial planning services;
G) Provide post-loss services;
H) Incent behavioral changes to improve the health or reduce the risk of death or disability of a customer (defined for purposes of this subsection as policyholder, potential policyholder, certificate holder, potential certificate holder, insured, potential insured or applicant); or
I) Assist in the administration of the employee or retiree benefit insurance coverage.
(iii) The cost to the insurer or producer offering the product or service to any given customer must be reasonable in comparison to that customer’s premiums or insurance coverage for the policy class.
(iv) If the insurer or producer is providing the product or service offered, the insurer or producer must ensure that the customer is provided with contact information to assist the customer with questions regarding the product or service.
(v) The commissioner may adopt regulations when implementing the permitted practices set forth in this statute to ensure consumer protection. Such regulations, consistent with applicable law, may address, among other issues, consumer data protections and privacy, consumer disclosure, and unfair discrimination.
(vi) The availability of the value-added product or service must be based on documented objective criteria and offered in a manner that is not unfairly discriminatory. The documented criteria must be maintained by the insurer or producer and provided upon request by the Department.
(vii) If an insurer or producer does not have sufficient evidence but has a good-faith belief that the product or service meets the criteria in H(2)(e)(ii), the insurer or producer may provide the product or service in a manner that is not unfairly discriminatory as part of a pilot or testing program for no more than one year. An insurer or producer must notify the Department of such a pilot or testing program offered to consumers in this state prior to launching and may proceed with the program unless the Department objects within twenty-one days of notice.
(f) An insurer or a producer may:
(i) Offer or give non-cash gifts, items, or services, including meals to or charitable donations on behalf of a customer, in connection with the marketing, sale, purchase, or retention of contracts of insurance, as long as the cost does not exceed an amount determined to be reasonable by the commissioner per policy year per term. The offer must be made in a manner that is not unfairly discriminatory. The customer may not be required to purchase, continue to purchase, or renew a policy in exchange for the gift, item, or service.
(ii) Offer or give non-cash gifts, items, or services including meals to or charitable donations on behalf of a customer, to commercial or institutional customers in connection with the marketing, sale, purchase, or retention of contracts of insurance, as long as the cost is reasonable in comparison to the premium or proposed premium and the cost of the gift or service is not included in any amounts charged to another person or entity. The offer must be made in a manner that is not unfairly discriminatory. The customer may not be required to purchase, continue to purchase, or renew a policy in exchange for the gift, item, or service.
(iii) Conduct raffles or drawings to the extent permitted by state law, as long as there is no financial cost to entrants to participate, the drawing or raffle does not obligate participants to purchase insurance, the prizes are not valued in excess of a reasonable amount determined by the commissioner, and the drawing or raffle is open to the public. The raffle or drawing must be offered in a manner that is not unfairly discriminatory. The customer may not be required to purchase, continue to purchase, or renew a policy in exchange for the gift, item or service.
(3) An insurer, producer, or representative of either may not offer or provide insurance as an inducement to the purchase of another policy or otherwise use the words “free,” “no cost,” or words of similar import, in an advertisement.
At its essence, the 2020 version of Model Act 880 retains the general prohibition but expands the exceptions as follows:
The NAIC summarized its own intent behind the 2020 amendment as follows: “While the genesis for drafting this revised language was primarily the need to clarify intentions related to the acceptability of the offering of things of value in the best interests of the consumer and to mitigate risk associated with what is being underwritten, value-added products and services . . . , the group also took on drafting clarifying language related to producer and insurer marketing including non-cash gifts meals, charitable donations on behalf of a customer, raffles, and drawings, [and] Section H(2)(f).”
Recall that a model law has no effect and states are not obligated to adopt it. So, with the first major rewrite of Model Law 880 (at least the anti-rebate section) in seventy-three years completed via the 2020 version, what does the world actually look like four years later? As of the summer of 2024, the NAIC reported that not a single jurisdiction had implemented the new model law in a manner materially similar to the model proposed. [Thud.] That view appears slightly overcritical, though, as several states have arguably taken some nibbles at it. However, it is understandable, given the 100% adoption of the previous version of the model law, how the tepid reception by states of the new version might seem underwhelming by the body tasked with attempting to bring coordination to the various jurisdictions. Given the lack of meaningful adoption of the 2020 version of Model Rule 880, the state of the law can now be summarized as follows:
Every state except California and Florida maintains the broad general prohibition against unlawful inducements.
California continues to largely be rebate-free other than its three major exceptions as noted above.
Florida continues to maintain a “partial” unlawful inducement law as noted above but with a clear anti-inducement backdrop given the repeated strike downs of the rule by courts in the state.
The remaining forty-nine jurisdictions maintain a host of nuanced exceptions running the gamut and often inconsistent or even contradictory with each other, e.g.,
Abatement of life insurance premium due to surplus from nonparticipating insurance;
The amount of bona fide savings on certain administrative efficiencies;
Reduction in premium on policies for insurer employees to account for commission savings;
Installment payment plans;
Participating dividends;
Adjustments for prior year’s loss experience;
Wellness programs;
Risk-management activities;
Items under certain thresholds considered de minimis (ranging from $5 to $250);
Promotional items of de minimis value;
Donations to charities;
Education events and materials;
Raffles;
Claim or loss-related services;
Benefits administration services; and
Compliance assistance services.
Over time, broader adoption of the 2020 version of Model Rule 880 may occur and would greatly simplify the rule across the various states but, until then, we remain bound by the same fragmented landscape that existed prior to the 2020 version of Model Rule 880.
So, where does that leave us after 150 years? Basically, there are more than fifty sets of rules, many of which contradict each other and make any type of national promotion of insurance extraordinarily difficult. One has to wonder whether any of the rationales enunciated for the rule in the first place (protecting the mechanisms that facilitate the spreading of insurance risk) are realistically being achieved when the resulting system is so fragmented. One also wonders how Senators McCarran or Ferguson would feel if they saw how disjointed the state of the law is after they promoted so heavily the idea that insurance should be regulated by the states and could effectively be coordinated by the NAIC. While many in the insurance industry argue for federal regulation of insurance to address the issues created by these types of fractured state regulatory systems, one can imagine that the industry might accept any of more than fifty state versions of the rule today at least to create a meaningful step toward uniformity of state regulation through adoption of the model rules. At least with uniformity, the industry would only be battling disjointedness in enforcement, rather than the chaotic free-for-all that has become the regulation of inducements under the current hydra that makes up the regulatory kaleidoscope of rules.
