Unfair Claims Practice: What it is, How it Works, Examples

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Michelle P. Scott is a New York attorney with extensive experience in tax, corporate, financial, and nonprofit law, and public policy. As General Counsel, private practitioner, and Congressional counsel, she has advised financial institutions, businesses, charities, individuals, and public officials, and written and lectured extensively.

What Is Unfair Claims Practice?

Unfair claims practice is the improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims practices, an insurer tries to reduce its costs. However, this is illegal in many jurisdictions.

Key Takeaways

• An unfair claims practice is what happens when an insurer tries to delay, avoid, or reduce the size of a claim that is due to be paid out to an insured party.
• Insurers that do this are trying to reduce costs or delay payments to insured parties, and are often engaging in practices that are illegal.
• Many states have passed unfair claims practices laws to protect insured parties from bad behavior on the part of insurers in the claims settlement process.
• Unfair Claims Settlement Practices Acts (UCSPA) are enforced by individual states, rather than the federal government, and vary state-by-state.

Understanding Unfair Claims Practice

The National Association of Insurance Commissioners (NAIC) has created a model of unfair claims practice legislation that mandates claims be handled fairly and that there be clear communication between the insurer and the insured. States, not the federal government, regulate insurance; many jurisdictions have implemented unfair claims practices laws modeled after the NAIC's model act.

Also, most states have enacted a version of this model law. Called the Unfair Claims Settlement Practices Act, it protects insurance buyers from unjust behavior by insurers in the claims settlement process. Specifics of the law vary from state to state. Unfair Claims Settlement Practices Acts (UCSPA) are not federal law; instead, they are enforced by individual state insurance departments.

Example of Unfair Claims Practice

Consider a small business owner that insures his company's building and business personal property under a commercial property policy. Unfortunately, a fire broke out in the building, causing $100,000 in property damage. The insurance company delays payment, rendering the business owner unable to repair any of the damage. The insurance company continues using delay tactics to avoid making a payment. For example, the claims representative keeps "forgetting" to send the claim forms. Also, the adjuster says he needs another proof of loss, but the small business owner has already submitted proof of loss twice. These are the types of situations that unfair claims practice laws are designed to prevent.

Other Examples of Unfair Claims Practice

• Misrepresenting relevant facts or policy provisions. For instance, your commercial property policy states that Building Ordinance coverage is included, but your insurer insists the coverage is excluded.
• Making a significant alteration in an application without your consent and then settling a claim based on the alteration. For instance, in your application, you requested a $50,000 limit for Utility Interruption coverage, but your insurer reduced the limit to $10,000 without telling you. The insurer then refuses to pay more than $10,000 for a loss.
• Settling claims for less than what you would reasonably expect based on a written advertisement you received. For instance, an ad announces a $50,000 limit for damage caused by flooding. However, the ad doesn't mention anywhere that this coverage is provided only if the insured pays an additional premium beyond the premium stated in the ad.