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For many months, a NAIC1 working group has been drafting model legislation aimed at preventing unfair discrimination against victims of domestic violence. Current efforts are focused on provision of homeowner's and other types of property and casualty insurance. Similar legislation is being debated in many state legislatures and has been introduced in the U.S. Congress.2
The NAIC working group's efforts, however, have been hampered by the group's inability to clearly state whether it intends to confer preferential treatment on subjects of abuse. On numerous occasions, regulators have attempted to clarify their stance, stating that their goal was to produce non-discriminatory legislation, not to create a preference for victims. But the working group has repeatedly proven itself incapable of putting those words into model language if it has meant rejecting the admittedly sympathetic and emotional arguments put forth by victims' advocates.
Alice in Insuranceland. As a result, legislation emerging from the working group would likely create a special class of insureds -- a class that is superior to race, gender, and religion. It would create a class that could not be denied coverage, have their premiums raised, their policies cancelled, or their claims denied if any of the information or conditions that would have triggered such action from an insurer could be deemed abuse-related. It would put the NAIC on the road to sanctioning an Alice in Insuranceland scenario, where a criterion is not a criterion, a claim is not a claim, an intentional act is not an intentional act, and a subsidy is not a subsidy if abuse is at all involved. If enacted at the state or federal level, the impending NAIC model law would constitute government mandated social engineering that undermines the fundamental principles of risk-based insurance, which ultimately hurts consumers by making insurance both less affordable and less available.
The NAIC has spent the past several years drafting and debating model legislation that addresses unfair discrimination against subjects of domestic abuse in insurance. In doing so, it has been responding to some well-publicized cases and several formal surveys of life, health and accident insurers by state insurance departments. Those surveys indicated that one-quarter of the insurers surveyed used domestic violence (to varying degrees) as an underwriting criterion in determining whether to issue or renew insurance policies.3 The NAIC has already adopted model laws barring discrimination in the provision of life, health and disability insurance, and now is drafting model legislation for property and casualty insurers.
Property and casualty insurers. The only formal survey that includes the underwriting practices of property and casualty insurers toward subjects of abuse was conducted in 1996 by the Oregon Insurance Department. None of the property and casualty companies responding to Oregon's survey (which included all ten of the state's top insurance companies selling auto and homeowner insurance) reported using an individual's history of being a subject of domestic abuse as a factor in the marketing, rating or underwriting of any insurance policy. Moreover, none of the companies surveyed reported receiving any complaints or inquiries from an individual alleging that the insurer had taken abuse status into account in the marketing, rating or underwriting of insurance.4 Nevertheless, victims' advocates have provided anecdotal stories of what they believe are unfairly discriminatory acts -- the denial of abuse-related claims or the failure to renew the insurance policy of a women's shelter, for example -- on the part of these insurers.5
Property and casualty insurers argue they do not have policies that single out victims of abuse in their underwriting process, and either have contested or had difficulty substantiating a number of the anecdotal stories cited by victims. Of those cases insurers have been able to verify, property and casualty insurers claim they either involved an incident where a company simply treated a victim of abuse like they would have treated anyone else, or involved an individual employee who took note of a victim's abuse status, even the though the company did not have a policy in place that required them to do so.
General goal of legislation. The legislation being considered at the NAIC and in many state capitals differ in form and degree. The general goal, however, is to prohibit insurer's from denying or canceling insurance, demanding a greater premium, limiting coverage, or denying a claim because a person has been a victim of abuse. In addition, most legislation also attempts to establish record-keeping requirements and procedures, protocols, and enforcement provisions regarding insurance company interaction with those individuals who are, have been, or may be subjects of abuse.
State activity. Approximately half of the states have considered legislation directed at insurer treatment of victims of domestic violence. Once again, the scope and reach of the legislation that has passed into law differs from state to state. A handful of states have passed legislation that applies to all lines of insurance. Other states have limited the reach of their legislation to life, health or disability insurance, or some combination of the three. Numerous states, however, have chosen not to include property and casualty insurance under such laws.
None of the states have enacted legislation that creates the type of preference that the NAIC working group is now considering for its property and casualty model law. Most every state that has passed legislation concerning property and casualty insurers has simply established a standard of non-discrimination (i.e., victims of abuse cannot be singled out for negative treatment, but can be held to the same standards as everybody else).6
Arguments for Model Legislation
Victims' advocates drafted the model legislation that served as the working group's starting point when it began work over a year ago, and they insist that compelling public policy reasons necessitate its adoption. Society, they argue, has recognized that abuse is an enormous problem, and has made great progress in combating it over the past twenty-five years. But the insurance industry is interfering with society's efforts and undermining the progress that has been made on behalf of victims of abuse.
How are insurer's undermining society's progress and harming victims of abuse? The advocates say the companies are looking at the claims histories of victims of abuse when determining whether to issue and cancel policies, or increase premiums. In addition, insurers are enforcing traditional policy exclusions -- such as not paying for actions intentionally committed by the insured -- in determining whether to pay claims.
What if an insurer does not look for and is unaware of a victim's abuse status in the underwriting process? For instance, an insurer may raise rates for all people who have a certain number of claims -- regardless of whether they were related to abuse. That does not really matter, according to Terry Fromson of the Women's Law Project, because "if an insurer is able to look at abuse-related claims then an insurer is, in essence, looking at the abuse status" of a victim.7
For example, a company may have a policy that it will not renew an individual's policy if that individual filed three claims (two broken windows and a fire, for example) within a one-year period. If the claims that led to that determination were not abuse-related, the company would have no problem in taking that action. If those three claims occurred as a result of domestic abuse, however, then victim's advocates would argue that the company should be prohibited from canceling the policy because it would be guilty of taking a victim's abuse status into account. So, even though the company may be applying the same standard for cancellation to both policyholders -- one in an abusive situation and one not -- its practice would be acceptable in the case of the policyholder not in an abusive relationship, but discriminatory and wrong if that same standard was applied to a victim of abuse.
Fromson and others argue that "[d]omestic violence is a crime -- not a career, a lifestyle, or a choice."8 According to this reasoning, insurers are guilty of treating victims of abuse as though they have control over their lives. Well, victims do not have control over their lives, advocates proclaim. They are locked-in to the abusive relationships that bedevil them. All insurer's are doing is punishing them for being victims. In short, they are victimizing them a second time.
Advocates insist that prohibiting insurers from taking into account abuse-related claims when considering the policy status of victims does not constitute special treatment. Again, they assert that since victims are, by definition, not responsible for the situations in which they find themselves, they cannot be held accountable for the losses that are the consequence of abuse. Moreover, "if insurer use of abuse-related claims is allowed, such claims could be used as 'a proxy for looking at abuse-status.'" Consequently, as Ms. Fromson stated at the most recent NAIC quarterly meeting, "'I would like the model to say that abuse-related claims can't be considered,' with no exceptions."9
Critiques of Model Legislation
One cannot deny that victims' advocates produce a politically potent argument that brims with the sympathy and emotion this issue inspires. But a well-intentioned public policy, one that at first blush appears to be driven by benevolence and need, can still be misguided and unfair. This is especially true of the legislation victims' advocates support, as their arguments do not:
accurately reflect how the concepts of responsibility, choice and risk relate to insurance;
realistically correspond to the fundamental principles that underlie how insurance companies operate in a private, risk-based insurance market; or
take into account the impact such legislation would have on other consumers.
Responsibility, Choice and Risk
Most people do not choose to have bad things happen to them. A couple that lives in a gang-infested neighborhood and has their home shot-up by random gunfire or has objects thrown through their windows by marauding teens certainly doesn't choose to have such things happen to them any more than does a victim of domestic abuse. Nor, as victims of crime, can they be said to be responsible for such occurrences.
But these things do happen, and insurance companies must take them into account when assessing the risks to them and their other customers if they choose to offer homeowners insurance to that couple in that specific neighborhood.
The same realities and understandings of responsibility, choice and risk apply to life insurance or health insurance. Take someone diagnosed with a disease like multiple sclerosis, for example. Surely, they too can be considered victims. But victims of multiple sclerosis are not personally responsible for their condition and do not choose to have the disease. Nor do they choose to incur the potentially exorbitant costs that living with the disease will entail. Nevertheless, insurance companies must take those victims' medical condition into account when determining the appropriate premiums such individuals should pay when offered insurance.
The same realities and understandings should apply to victims of domestic abuse. They may not choose to be abused. They may not be responsible for the criminal activity perpetuated against them by a spouse or mate. Nevertheless, the abuse that takes place is real. It has real costs and represents real risk. Consequently, in order to fairly and accurately assess the risk that those individuals pose to a company, it must be allowed to take into account the past claims that have arisen from such situations. To do otherwise would mean the insurance company would not stay in business for long, or would make other policyholders pay for those losses through cross-subsidies.
Creating a Special Class of Insureds
Victims' advocates fear subjects of abuse are being singled-out and discriminated against by insurance companies based solely on their abuse status. However, instead of ensuring that victims be treated like every other policyholder, the NAIC model legislation goes beyond a standard of non-discrimination and accords victims a special status. It would grant subjects of abuse a preference that is not offered equally to other victims (i.e., those who suffer losses due to gang violence). In fact, it would offer them a special status that supersedes the protections against unfair discrimination accorded any other class or group. For example:
A member of a racial minority can be denied insurance if his past claims history is determined to pose too high a risk; he cannot simply be denied solely on the grounds he is a minority.
A woman can have her premiums raised because of increased claims activity that indicate she is a higher risk than previously determined; she cannot simply have her premiums raised solely because she is woman.
A member of a religious minority can have her insurance cancelled because of the frequency and severity of her claims; she cannot simply be cancelled solely because of her religious beliefs.
But in an obvious leap beyond the doctrine of non-discrimination, the model legislation pending at the NAIC would prohibit insurers from undertaking any of the above actions "on the basis of the abuse status10 or abuse-related claims of the applicant or insured." In effect, we will have arrived at an Alice in Insuranceland scenario, where things are not really as they are, but rather as the government declares them to be.
A Challenge to Risk-Based Insurance
Ultimately, the arguments advanced by victims' advocates in the NAIC working group provide nothing less than a fundamental challenge to the existing principles of risk-based insurance. These principles are what make insurance available and affordable to consumers. In particular, this model legislation would restrict or throw into doubt traditional insurance underwriting and rating standards, as insurers cannot realistically or accurately underwrite or rate a risk that they are not allowed to acknowledge.
Principles of insurance. For literally ages, insurance has been a contract that promises to indemnify people for certain types of losses. Traditionally, property and casualty insurers have written into those contracts certain policy exclusions that serve the purpose of protecting companies and their policyholders from having to cover the costs of certain intentional acts that are not considered to be insurable risks.
Moreover, the very nature of writing insurance has always entailed discrimination. Who you are and what risks you carry are the basis upon which insurers classify you, determine your premium, and then pool your risks among similarly situated individuals.
The importance of risk classification. If insurers cannot manage their business and vary their prices according to risk, both theory and practice teaches us that several things occur.11 First, insurers will suffer increased losses. Next, those losses (read: mandated costs of doing business) will be passed on to other policyholders (read: mandated cross-subsidies). Finally, if rates rise to the level where they no longer accurately reflect an insured's risk, lower-risk individuals will decide it is not in their economic interest to purchase insurance (thus reducing the insurance pool and further raising prices), or insurers will try to avoid high-risk individuals altogether (thus restricting availability). The end result is that consumers will find insurance more costly and harder to obtain.
Negative Impact on Other Consumers
The model legislation would impose additional burdens and costs on insurance companies and their customers by requiring the adoption of new internal and external administrative procedures and protocols. In fact, one of the ironies of this legislation is that property and casualty insurers, which currently do not single out subjects of abuse in their data collection and record keeping, may be forced to do so in order to abide by the strictures of this model legislation. The combination of increased administrative costs and the inevitable increase in litigation this model will inspire will further drive up the cost of insurance, as companies strive not to violate an act that will treat a single incident of prohibited conduct as an intentional general business practice.
Increasing the incidence of fraud. Yet another additional cost for consumers would come from increased insurance fraud -- already a billion-dollar industry that costs the average American household hundreds of dollars a year. In defining "abuse status" as "the fact or perception that a natural person is, has been, or may be a subject of abuse, irrespective of whether the natural person has incurred abuse-related claims,"(12) and then mandating that all abuse-related claims be paid, this model law will have the practical effect of restricting the ability of insurance companies to determine whether such claims are legitimate or fraudulent. It creates an economic incentive for fraudulent, criminal behavior, tempting not just the inveterate criminal but the couple that might be in a financial bind and can rationalize that they need to lie just this one time (after all, "it's only the rich insurance company").
How much will it cost? Nobody really knows how much this type of legislation will increase the cost of insurance -- neither those who support, nor those who oppose this legislation. But estimates of domestic abuse range from 2,000,000 to 4,000,000 cases a year. Of course, not every case of abuse would involve a property and casualty insurance claim. Nevertheless, when you combine the inability to legitimately underwrite, classify risk, increase premiums, or deny claims with the increased potential for fraud and litigation this type of legislation will encourage, its costs may be substantial.
A hidden tax. Legislation addressing unfair discrimination against subjects of abuse in property and casualty insurance constitutes yet another hidden tax -- a government imposed, personal, unfunded mandate, if you will -- that will be added to what is an already high overall tax burden imposed by government on the average American.
Misplaced Responsibility and Unwise Social Policy
In addition to being economically harmful, the legislation being considered would be unwise social policy. It could send the wrong message, and perhaps even perpetuate the cycle of abuse.
A personal and vexing issue. No one denies that subjects of abuse suffer terrible wrongs. The abhorrent acts of abusers should be treated as serious criminal violations. But domestic violence remains an incredibly personal and vexing issue. It is not a problem that is going to be solved by insurance companies and their policyholders, nor should they indirectly be assigned such responsibility by legislators or regulators.
The professional and personal responsibility to intervene in abusive situations lies elsewhere. It begins with law enforcement agencies and our criminal justice system. Family, friends, religious and community organizations also play important roles.
Sending the wrong message. Ultimately, we should also feel justified in insisting that victims of abuse are doing all they can to extricate themselves from their abusive situations. To fashion a social policy that even hints at sending a contrary message is not only unwise, but it can be dangerous both in message and effect. Yet, it can be argued that the NAIC's model law would do just that. As Robert Detlefsen, senior research fellow at the Competitive Enterprise Institute, has observed, "[i]n setting up victims of abuse as a protected minority group, [the model law] sends the message that, rather than being an aberration, being abused is an immutable characteristic akin to race, gender, or disability."13
Paying abusers and perpetuating the cycle of abuse. Another trenchant criticism of the unfair discrimination against subjects of abuse model law is offered by Anita Blair, executive vice president and general counsel at the Independent Women's Forum. Blair takes strong issue with the message she believes the model legislation delivers, as well as its potential impact on both abusers and their victims. Speaking before the National Conference of State Legislators in May of this year, Blair said:
The most recent proposal to require property and casualty insurers to cover deliberate criminal acts of abuse certainly won't prevent abuse. And it certainly won't punish abusers. Indeed, it's the very opposite of prevention and punishment -- it tells abusers, 'Go ahead. Do your worst. The insurance will pick up the tab.' This is the worst possible message you can send to a batterer.
It's also the worst message you can send to a victim. It teaches her to forgive and forget, to passively accept violent behavior because he says he's sorry and will make it up to her. It tells victims, 'Stick around. The insurance will pay. We'll start fresh and he'll be better from now on.' This is exactly the opposite of what she should be thinking, which is, 'I must take action now to get away from this creep.'14
The current form of model legislation being drafted by an NAIC working group regarding unfair discrimination against subjects of abuse in property and casualty insurance is an extreme and seriously flawed piece of model legislation. In the short term, it would create an unprecedented preference for subjects of abuse and raise the costs of insurance for other policyholders. In the long term, it undermines the principles of risk-based insurance that guide our private insurance market, which as a result would make insurance less affordable for and available to consumers. Perhaps even worse, it could send the wrong message regarding domestic abuse, focusing attention away from the root causes of this critical social problem. In its current form, the model bill fails to serve as a realistic model for either state or federal legislation.
1 The NAIC is an organization of state insurance regulators. One of its purposes is to serve as a national incubator for ideas on how to regulate insurance. But the NAIC also adopts model legislation that may guide the actions of state insurance commissioners, be enacted by state legislatures or be referenced in state or federal statutes.
2 The "Victims of Abuse Insurance Protection Act" has been introduced in the Senate (S. 467) by Paul Wellstone (D-MN) and in the House of Representatives (H.R. 1117) by Bernard Sanders (I-VT).
3 See the Women's Law Project and the Pennsylvania Coalition Against Domestic Violence, "Insurance Discrimination Against Victims of Domestic Violence," January 1997 (revised).
4 Oregon Department of Consumer and Business Services, Insurance Division, "Survey of Domestic Abuse as a Factor in Oregon Insurance Practices," http://www.cbs.state.or.us/external/ins/docs/ domabuse.htm, August 12, 1997.
5 Women's Law Project and the Pennsylvania Coalition Against Domestic Violence, January 1997 (revised).
6 An example would be Oregon's law, which prevents insurers from singling out abuse status as an underwriting or rating criterion, but which does not prevent an action that "is taken in the same manner and to the same extent with respect to all insureds and prospective insureds without regard to whether the insured or prospective insured is a victim of domestic violence." Oregon Statute 746.015, sec. 1 (1997).
Only Massachusetts has enacted legislation that comes close to creating a special preference for subjects of abuse, but its law is confusing in that it appears to create a preference in one sentence and then deny the just created preference in the next.
The Massachusetts law reads: "The practices prohibited under this section shall include not only those overtly discriminatory but also practices and devices which are fair in form but discriminatory in practice. Nothing in this section shall be construed as creating a special class of insureds who have been victims of abuse ." Mass. Gen. L., ch. 175, sec. 95B (1996).
7 Terry Fromson, speaking before the NAIC's Unfair Discrimination Models Working Group, June 9, 1997.
8 Women's Law Project and Pennsylvania Coalition Against Domestic Violence, January 1997 (revised).
9 L.H. Otis, "No Compromise on Abuse Model Law," National Underwriter, June 16, 1997, p. 15.
10 The most recent NAIC draft model law, dated July 7, 1997, defines abuse status as "the fact or perception that a natural person is, has been, or may be a subject of abuse, irrespective of whether the natural person has incurred abuse-related claims."
11 Also see Leah Braesch and Michael Harrold, "Risky Business: Insurance, Risk Classification and the Consumer," CSE Foundation, Capitol Comment, No. 162, June 25, 1997.
12 Revised draft of the NAIC's "Unfair Discrimination Against Subjects of Abuse in Property and Casualty Insurance Model Act," July 7, 1997.
13 Robert Detlefsen, "Insurance Abuse," The Washington Times, August 6, 1997, p. A17.
14 Anita K. Blair, remarks before the National Conference of State Legislators, May 10, 1997.