Rebating, fraud, discrimination, commission sharing and the guaranty association

Prohibited Inducements, Rebates, and Unfair Discrimination

The purpose of Chapter 1702 is to set forth uniform standards of prohibited acts and practices for life insurance, annuity contracts, accident and health insurance, and health care plans (Tex. Ins. Code §1702.001(1)). Under this chapter, an agent includes a person authorized to act as an insurance agent under Section 4001.003 or a third-party administrator authorized under Chapter 4151 (Tex. Ins. Code §1702.002(1)). An insurer includes a reciprocal or interinsurance exchange, mutual insurance company, capital stock company, Lloyd's plan, fraternal benefit society, group hospital service corporation, or other legal entity authorized to engage in life, accident, or health insurance or annuities in Texas (Tex. Ins. Code §1702.002(4)). A consumer includes a policyholder, certificate holder, insured, contract holder, enrollee, or applicant (Tex. Ins. Code §1702.002(2)).

Chapter 1702 applies to stock, mutual, and stipulated premium life insurers, fraternal benefit societies, and third-party administrators acting on their behalf (Tex. Ins. Code §1702.003(a)-(b)). It also applies to accident and health insurers, Lloyd's plans, reciprocal exchanges, multiple employer welfare arrangements holding certificates of coverage, health maintenance organizations operating under Chapter 843, and their third-party administrators (Tex. Ins. Code §1702.004(a)-(b)). Except as provided by Chapter 1702, an insurer, health maintenance organization, or agent may not offer insurance, an annuity, or health care coverage as an inducement to purchase another policy or contract, nor use 'free,' 'no cost,' or words of similar meaning in an advertisement (Tex. Ins. Code §1702.052(1)-(2)). Nothing in Chapter 1702 permits conduct that is an unfair method of competition or a deceptive practice under Chapter 541 (Tex. Ins. Code §1702.005(1)).

In life insurance and annuities, an insurer or agent may not offer or allow a premium rebate or unspecified valuable consideration, nor give, sell, or purchase corporate stocks, bonds, or securities as an inducement (Tex. Ins. Code §1702.102(a)(2)-(3)(A)). Life insurers cannot permit agents to deliver company stock or advisory board contracts promising returns or profits as inducements (Tex. Ins. Code §1702.102(b)). Similarly, accident and health insurers, health maintenance organizations, and agents may not offer premium rebates, unspecified special favors, or stock and advisory board contracts promising returns as inducements (Tex. Ins. Code §1702.152(a)(2), (b)). Except as otherwise provided by the applicable subchapter, insurers, insurer employees, brokers, and agents may not knowingly issue policies or charge, demand, or receive premiums contrary to applicable filings; a named insured or the insured's employee may not knowingly accept the prohibited premium reductions or other inducements described in Section 1806.104(c) (Tex. Ins. Code §1806.104(a), (c)).

Except as specifically permitted, insurers and health maintenance organizations may not make distinctions or unfair discrimination between individuals of the same class and equal life expectancy regarding rates, dividends, benefits, or policy terms (Tex. Ins. Code §1702.103; Tex. Ins. Code §1702.153). For example, if David and Marcus present identical risk classes and equal life expectancies, an insurer cannot charge David a higher rate or grant Marcus a special dividend preference.