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Ensuring auto claim compliance: assessing regulatory changes and enforcement activity.


With a number of recent regulatory changes impacting the area of automobile claims, insurers should take stock of the requirements to help ensure they continue to remain compliant.

The insurance industry witnessed a high level of legislative and regulatory activity last year, including significant activity related to automobile claims. Various states made changes in areas such as required total loss disclosures and processes, fraud warnings on claim forms, and liability limits disclosures. As a result, automobile insurers have been required to implement claim system changes to incorporate new or revised forms and process steps in order to remain compliant.

As you assess your organization's compliance with changes that have occurred over the past year, it can be helpful to break down some of the most noteworthy activity by claim topic.

Total Loss Procedures

From a total loss perspective, Oregon achieved a noteworthy advance by adding transparency to the total loss process. With a backdrop of a high level of consumer complaints relating to motor vehicle total loss settlements, the Oregon Division of Insurance was interested in providing enhanced levels of clarity, transparency, and structure to this aspect of the claim process.

The state's enactment of HB 2190, effective Jan. 1, 2010, requires insurers to make many changes. Division regulatory rulemaking produced a new "Vehicle Total Loss Notice" which insurers are required to provide to the insured or thirdparty claimant when electing to make a cash settlement. This notice defines total loss; provides information on consumer choices; offers explanations concerning the determination of the vehicle's value and the insurance claim payment; and indicates not only what actions the consumer can take upon disagreement with the insurer, but also how to contact the Division for assistance.

Consistent with the statutory requirements, revised rules also require the insurer to provide copies of the information used by the insurer to the insured or third-party owner for the purpose of determining the amount of the cash settlement; to reimburse for reasonable appraisal costs; and to pay any undisputed amount of the totaled vehicle in advance of the completion of negotiations regarding any undisputed amounts.

Effective Aug. 21, 2009, the Office of the Insurance Commissioner took some regulatory steps with the addition of two new sections to the Washington Administrative Code. With the goal of enhancing clarity in the settlement of total loss vehicle claims, one new section provides that unless an agreed value is reached, insurers must adjust and settle vehicle total losses using the methods set forth in this new section.

Furthermore, another new section, WAC 284-30-392, establishes required content in the insurer's total loss vehicle valuation report. Among other requirements of this section, the insurer's total loss vehicle valuation report must include:

* All information collected during the initial inspection assessing the condition, equipment, and mileage of the loss vehicle.

* All information the insurer used to determine the actual cash value of the loss vehicle.

* A list of the comparable motor vehicles used by the insurer to arrive at the actual cash value.

Disclosure-Related Statutory Changes

Arkansas was one state that took action in the area of new disclosure to insureds about possible criminal liability in the use of insurance property damage payments. Effective July 31, 2009, motor vehicle property damage claim payments must include the following written notice to the insured:

"Failure to use the insurance proceeds in accordance with a security agreement between you and a lienholder, if any, may constitute the criminal offense of defrauding a secured creditor in violation of Arkansas Code Section 5-37-203. If you have any questions, [then] contact your lienholder"

Two additional disclosure-related statutory changes last year were in Connecticut and Maine. The Connecticut provisions, effective October 1, 2009, require time-sensitive disclosure of an insured's automobile insurance policy limits after receipt of a request. It further provides that the request for disclosure be accompanied by a letter from an attorney stating specific facts related to claim. The insurer's disclosure must indicate all private passenger automobile coverage provided by the insurer to the insured, including any applicable umbrella or excess coverage.

While Connecticut's new requirements specifically address automobile insurers, Maine's newly enacted provisions apply to all liability lines of insurance. The state now requires insurers, upon written request by either the claimant or the claimant's attorney, to provide the liability coverage limits within 60 days of receipt of that written request.

Driving Fraud Reform

Anti-fraud initiatives in 2009 included not only the sweeping fraud reform bill in Hawaii, but also new fraud language in Rhode Island and Maryland's implementation of a revised fraud warning.

While Hawaii's former fraud provisions applied solely to automobile insurance, the new provisions are applicable to all lines of business except workers' compensation. Interestingly enough, those former fraud provisions required a fraud warning on all automobile claim forms. The fraud reform bill, effective July 1, 2009, repealed that statutory section and did not include any requirement to place fraud warning language on any claim forms.

On the other side of the country, Rhode Island now mandates required fraud language on most claim forms, including those used in the processing of automobile claims. Effective Jan. 1, 2010, Rhode Island requires that claim forms must contain the following statement, or a substantially similar statement:

"Any person who knowingly presents a false or fraudulent claim for payment of a loss or benefit or knowingly presents false information in an application for insurance is guilty of a crime and may be subject to fines and confinement in prison"

Maryland's compliance date for that state's revised fraud warning language was April 1, 2009. While the effective date of the underlying statute was Oct. 1, 2008, the state provided a six-month timeframe for insurers to achieve compliance with the new fraud language requirement. Claim forms applicable to that state, regardless of the form of transmission, must include the following statement or a substantially similar statement which reads: "Any person who knowingly and willfully presents a false or fraudulent claim for payment of a loss or benefit or who knowingly and willfully presents false information in an application for insurance is guilty of a crime and may be subject to fines and confinement in prison."

Proper Implementation

Legislative and regulatory activity needs to be analyzed not only for impact to the organization, but also to determine proper implementation steps. With that in mind, it's useful to take a look at state regulatory actions that focused on apparent missed opportunities in implementing recent regulatory changes.

Although not new or revised requirements last year, the Maryland Insurance Administration (MIA), during 2009, investigated insurers' total loss settlements proper inclusion of fees and taxes. The Maryland Motor Vehicle Administration applicable fees and the sales tax increased in 2008. These increases needed to be accounted for in insurers' total loss calculations of the actual cash value of the vehicle for settlement purposes. The MIA determined that many insurers were not including these higher fees and tax amounts in their total loss claims processing. This resulted in insurance companies providing lower settlement amounts to claimants. Insurer penalties assessed by the MIA consisted of fines and restitution.

The MIA also investigated insurers' compliance with their new Maryland fraud warning language referenced earlier in this article. Orders issued in 2010 indicate that examiners determined that multiple companies failed to include the fraud disclosure notice on one or more claim forms, thus violating the new requirements of [section] 27-805. There were also some findings that even though steps to implement fraud warning changes were taken, they were deficient in that the fraud disclosure language on the claim form was not sufficiently similar to the language found in [section] 27-805.

Key highlights of recent legislative and regulatory activity, as well as a review of results from some focused enforcement activity, allow insurers opportunities to check their own processes for sustainable compliance. Should problems exist in full implementation of these new requirements, it is important to identify the problem areas and develop internal corrective action plans to mitigate future enforcement actions. Legislative and regulatory changes, as can be seen in this snapshot review, most definitely impact an insurance company's operations.


New Jersey also took action to remind insurers about correct and complete motor vehicle total loss procedures. The state issued Bulletin 09-23 on July 23, 2009 outlines existing sales tax obligation in total losses. This was a result of the Department's findings that some insurers were not calculating and adding New Jersey state sales tax to the salvage retention deductions during the total loss claims settlement processes.

Under the bulletin, failure to include the tax amounts results in total loss claim valuations to insureds and third-party claimants that include underpayments of the New Jersey sales tax related to the salvage retention deduction.

Kathy Donovan is senior compliance counsel of insurance at Wolters Kluwer Financial Services, which offers compliance tools and consulting services to address the regulatory compliance requirements of the insurance, securities, banking, and indirect lending markets. For more information, visit https://insurance.
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Title Annotation:Feature Story
Author:Donovan, Kathy
Date:Jun 1, 2010
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