Insurtech innovations have recently prompted the NAIC to make rebate-friendly amendments to its model act, but the California Department of Insurance is bucking the trend. The NAIC's amendments expand insurers' and insurance producers' ability to offer rebates to insurance customers, but the California Department of Insurance has doubled down on its historical dislike of the practice, even though rebating is largely permitted under California's insurance laws.
Insurtech innovations have recently prompted the NAIC to make rebate-friendly amendments to its model act, but the California Department of Insurance is bucking the trend. The NAIC’s amendments expand insurers’ and insurance producers’ ability to offer rebates to insurance customers, but the California Department of Insurance has doubled down on its historical dislike of the practice, even though rebating is largely permitted under California’s insurance laws. This article gives an overview of California law on rebating and then discusses how a recent enforcement action underscores the Department’s desire to limit the practice to the fullest extent permitted by law.
In general, rebates involve giving a policyholder material consideration in return for buying insurance, and this practice was prohibited in California up until the 1980s. But when Proposition 103 was passed by the voters in the 1988, the Proposition not only instituted a prior approval rate filing structure for property and casualty products, it also repealed existing laws that prohibited rebates . Since that time, California has had only a few insurance statutes that explicitly address rebates, and these laws are limited in scope. The result is that California law on rebates operates differently than in most of the rest of the country.
The first relevant statute is California Insurance Code 750, which appears in the article of the insurance code that addresses unlawful referrals. Section 750 applies to any person or entity that handles insurance claims, and bars them from offering or receiving any “rebate, refund, commission or other consideration” to or from a person for the referral or procurement of clients, cases, patients or customers. Violation of the statute is a crime punishable with jail time of up to a year, a fine of up to $50,000, or both. However, Section 750 further expressly specifies that it in no way limits insurance agents and brokers from rebating their commissions. The California Department reads this statute broadly, interpreting its scope to include insurers (because they process or negotiate insurance claims). However, the fact that the statute only prohibits insurers from paying someone to refer them clients or procure clients for them is generally understood by the industry and the courts to allow an insurer to pay rebates directly to an insured or insurance applicant.
California’s next anti-rebating statute specifically applies to home protection companies: California Insurance Code 12760 prohibits the payment of a commission to any person as an inducement or compensation for the issuance, purchase or acquisition of a home protection contract. However, the statute allows the payment of commissions and marketing fees to employees and commission sales agents of the home protection company, provided that the recipient of the commission is not sharing with or affiliated with a real estate broker. This state law does not reference any prohibitions that might exist by virtue of the federal Real Estate Settlement Procedures Act (“RESPA”).
Finally, California Insurance Code section 12404 makes is unlawful for any title insurer, underwritten title company or controlled escrow agent to pay any commission, compensation or other consideration to any person as an inducement for the placement or referral of title business. The statute goes on to provide some details regarding the types of activities that are prohibited. However, as was the case with the home protection statute, the statute prohibiting rebates in the title context also does not reference RESPA.
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