Insurtech innovations have recently prompted the NAIC to make rebate-friendly amendments to its model act, but the California Department of Insurance is bucking the trend. The NAIC’s amendments expand insurers’ and insurance producers’ ability to offer rebates to insurance customers, but the California Department of Insurance has doubled down on its historical dislike of the practice, even though rebating is largely permitted under California’s insurance laws. This article gives an overview of California law on rebating and then discusses how a recent enforcement action underscores the Department’s desire to limit the practice to the fullest extent permitted by law.
In general, rebates involve giving a policyholder material consideration in return for buying insurance, and this practice was prohibited in California up until the 1980s. But when Proposition 103 was passed by the voters in the 1988, the Proposition not only instituted a prior approval rate filing structure for property and casualty products, it also repealed existing laws that prohibited rebates . Since that time, California has had only a few insurance statutes that explicitly address rebates, and these laws are limited in scope. The result is that California law on rebates operates differently than in most of the rest of the country.
The first relevant statute is California Insurance Code 750, which appears in the article of the insurance code that addresses unlawful referrals. Section 750 applies to any person or entity that handles insurance claims, and bars them from offering or receiving any “rebate, refund, commission or other consideration” to or from a person for the referral or procurement of clients, cases, patients or customers. Violation of the statute is a crime punishable with jail time of up to a year, a fine of up to $50,000, or both. However, Section 750 further expressly specifies that it in no way limits insurance agents and brokers from rebating their commissions. The California Department reads this statute broadly, interpreting its scope to include insurers (because they process or negotiate insurance claims). However, the fact that the statute only prohibits insurers from paying someone to refer them clients or procure clients for them is generally understood by the industry and the courts to allow an insurer to pay rebates directly to an insured or insurance applicant.
California’s next anti-rebating statute specifically applies to home protection companies: California Insurance Code 12760 prohibits the payment of a commission to any person as an inducement or compensation for the issuance, purchase or acquisition of a home protection contract. However, the statute allows the payment of commissions and marketing fees to employees and commission sales agents of the home protection company, provided that the recipient of the commission is not sharing with or affiliated with a real estate broker. This state law does not reference any prohibitions that might exist by virtue of the federal Real Estate Settlement Procedures Act (“RESPA”).
Finally, California Insurance Code section 12404 makes is unlawful for any title insurer, underwritten title company or controlled escrow agent to pay any commission, compensation or other consideration to any person as an inducement for the placement or referral of title business. The statute goes on to provide some details regarding the types of activities that are prohibited. However, as was the case with the home protection statute, the statute prohibiting rebates in the title context also does not reference RESPA.
In January of 2020, while an NAIC drafting group was crafting revisions to the Model Law on rebating, the California Department launched an action for alleged violations of Section 12404. The action named both an underwritten title company and its employee, and arose out of that employee’s activities. The employee owned a company that marketed housing reports to realtors. The housing reports provided data on the local housing market and served as leads for realtors. The Department alleged that the employee “paid, directly or indirectly, a commission or compensation as an inducement for the placement of title business” and that his actions constituted grounds for the restriction, suspension or revocation of his certificate of registration.
The employee’s company had no corporate affiliation with the underwritten title company. However, the Department’s pleading noted that the title insurer had ethical guidelines that required its employees to comply with state anti-inducement laws, and alleged that the employee had acted in contravention of this guideline. The Department alleged that the violation of the guidelines by an employee who was at all times an agent for the insurer demonstrated that the insurer itself had violated Section 12404’s prohibitions on inducements. The Department went on to allege that these actions constituted grounds to restrict or suspend the insurer’s license.
Both respondents contested the claims, but ultimately settled the actions against them. The settlements were separately documented, and the last settlement was adopted by the Commissioner in January, 2021. The employee surrendered any rights to a certificate of registration while the insurer paid a $25,000 fine and $25,000 in costs. A few weeks later, the Department issued a press release that announced the resolution of the action against the insurer. The press release emphasized the scope of the anti-inducement law.
The action against the title insurer and its employee was the first time in more than a decade that the Department brought under Section 12404. The timing of both the initiation of the action – while the NAIC was considering a loosening of rebate rules — and the settlement orders — shortly after the NAIC adopted the revisions to the model act and allowed additional rebates — could be viewed as significant. Altogether, the Department has signaled a desire to enforce the anti-rebating rules that are within its authority, even though these rules are quite narrow in application. Consequently, the industry would be prudent to ensure that any rebating activities that occur in the state are clearly outside the prohibitions of the remaining anti-rebating statutes.
Reprinted with permission from the March 23, 2021 edition of Insurance Coverage Law Center © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected].