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The right of an insurer to arbitrate market conduct decisions that it disputes has regulators and the industry on opposite sides of the issue just 2 weeks before a model act comes up for possible adoption by legislators.

The National Conference of Insurance Legislators, Albany, N.Y., has put its Market Conduct Surveillance model act draft on a fast track for adoption. The group of insurance legislators maintains that a model act enacted by state legislatures is an effective way to quell criticism that states are not effectively regulating insurers market conduct activities.

Toward that end, a vote is possible at the organizations spring meeting in San Antonio, Texas, later this month.

Companies are concerned that an insurance department has the potential to be a “prosecutor, judge and jury,” according to Don Cleasby, assistant vice president and assistant general counsel with the Property Casualty Insurers Association of America, Des Plaines, Ill. In such cases, there is a cost to litigate a dispute, he continues, so there needs to be an avenue of redress that is “short of full-scale litigation.”

Such a system would not be a delegation of a commissioners authority because it could only be used if a component of a market conduct review was outside of that authority, he explains.

Cleasby notes the precedent of such a provision in Florida. However, Sen. Steven Geller, D-Hallandale Beach, Fla., said the language under discussion is a lot broader than the Florida arbitration provision.

In fact, the commissioner in Florida actually is trying to have the arbitration law repealed, Geller noted.

“I trust you are not saying that if there is a finding of actual wrongdoing, that you should toss out that finding of wrongdoing,” Geller said.

Checks currently exist and include a hearing and court process, says Joel Ario, Oregon insurance administrator and Secretary-Treasurer of the National Association of Insurance Commissioners, Kansas City, Mo.

If arbitration is included in the model, then there is the potential for the loss of uniformity because arbitrators could reach different conclusions on similar issues, he adds.

Geller said that if the insurance industry is looking for guidance, arbitration would eliminate guidance established by court decisions that create a precedence of law.

But insurers countered that if an insurance company needs to wait for a year or more before a market conduct report is concluded, there is not proper redress if a commissioner acts outside of his authority. A question was raised over why arbitration was after the fact rather than when the exam is in process and any alleged activity exceeding authority is being conducted.

The courts in any state would say that if authority is exceeded, the department could not continue that action, Ario says.

The issue of a regulator taking action within his authority, but considered excessive, was also raised by companies.

It comes down to a discussion of who is the appropriate decision-maker, Ario responded. “You want an arbitrator and I want a court of law. These kinds of discussions give me heartburn and would give the NAIC enormous heartburn.”

Arbitration would affect regulatory authority and raise concern among regulators, he continued. Ario added that there is a “disconnect” on this issue since many times regulators have been asked to weigh in on cases against insurers. In such instances, he said, the argument put forth is that regulators should be granted more deference.


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 20, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.