tionnaires to policyholders for that period in order to determine cases of misclassification. This period of January 1, 1950, to June 30, 1955, was apparently selected because the insurance company had no records prior to January 1, 1950, and after June 30, 1955, adopted classification procedures which eliminated the possibility of misclassification. "The insurance commissioner advised me that the Service Fire Insurance Co. was the only firm with which they had had trouble. They reported no difficulty with the other insurance companies affiliated with automobile finance firms. The Emmco Insurance Co., connected with Associated Discount Corp., of course is an Indiana outfit with offices at South Bend. Apparently the insurance commissioner has done some checking with Emmco about the situation but doesn't feel that Emmco has done any misclassifying. "Getting back to the Service Fire Insurance Co., on instructions from the insurance commissioner, that firm mailed out 7,067 letters to policyholders. The insurance company received 1,115 replies of which 617 required a premium adjustment. The amount of money refunded totaled $24,338.10. "On the matter of the Association of Insurance Commissioners resolution, I was informed that Indiana did not vote on this resolution. According to the insurance commissioner, the resolution was drawn up by a subcommittee of the association composed of insurance commissioners from Michigan, New Hampshire, Maryland, Texas, Tennessee, Rhode Island, New York, West Virginia, Minnesota, California, New Mexico, Missouri, Oregon and Virginia. "The way the insurance commissioner explained it, work of subcommittees is usually adopted by the association almost automatically. "The Indiana Insurance Commissioner did say that he thought the resolution had loopholes in it and that was why in the case of the Service Fire Insurance Co. they required the firm to check with policyholders anytime from January 1, 1950, to June 30, 1955." IOWA INSURANCE DEPARTMENT OF IOWA, CHICAGO BETTER BUSINESS BUREAU, Chicago, Ill. (Attention: Mr. Kenneth Barnard, chairman, committee on installment contracts, Association of Better Business Bureaus, Inc.) DEAR MR. BARNARD: This is to acknowledge receipt of your inquiry of February 24th relative to a recent resolution of the National Association of Insurance Commissioners with respect to premium charges by insurance companies writing finance business. Following are answers to your inquiries, in order: 1. As far as we can determine, the misclassification of risks arose through the failure of the automobile dealers involved in procure proper information from the applicants. Consequently, the proper rate was applied by the insurance carrier based upon the information furnished. In our State the automobile dealer is not licensed as an insurance agent, but acts as the agent of the purchaser of the automobile in procuring coverage for him. 2. Our understanding is that any insured is entitled to a refund if an overcharge has been made, regardless of the date of his policy. However, the company known to be principally involved has agreed to individually solicit all persons holding policies as of June 30, 1955, to determine whether or not correct rates were applied. The average policy for this company runs for a period of about 22 months, so that on the average this solicitation will pick up policies substantially back of the June 30, 1955, date. It might be pointed out, too, that this extends back to a time when rate differentials within the classes involved were not great. The date limits with respect to the individual inquiry is dictated largely because of the unavailability of records going back to 2 or 3 years ago. 3. As indicated, all policyholders who have paid excessive premiums are entitled to refunds. 4. Service Fire Insurance Co. 5. We have no way of making such an estimate. 6. In Iowa we require that all refunds be paid to the policyholders and our understanding is that this is to be done in all States. The exception might be in some States in the case in which premiums were advanced as a part of the loan for which there has been default in payment by the borrower. 7. We have no evidence of other insurers misclassifying business. 8. We do not believe that the Service Fire Insurance Co. admits that it willfully misclassified assureds, but rather properly classified them based upon information provided which was admittedly inaccurate. Based upon these improper charges, it is now in the process of making refunds. 9. In our judgment a settlement should not condone a violation of the law. However, it is our understanding that in the considered judgment of the national association investigating committee there were not sufficient facts developed to substantiate a criminal intent on the part of the principal insurer involved. We do not believe that a resolution of the National Association of Insurance Commissioners is binding on any State, and should be considered only as a recommendation by a responsible committee that fully investigated the facts. We have made a considerable investigation of the situation in Iowa and find that overcharges were made in many cases prior to July 1, 1955, but that a newly installed procedure has corrected this situation since that date. I might add that our investigation was commenced prior to the adoption of the resolution referred to. We believe this insurer should have known that it was issuing policies upon improper information although the fact appears to be that because of the limited information the overcharges would not be apparent from a casual examination of any specific records. Respectfully yours, SAMUEL E. OREBAUGH, Deputy Commissioner. STATE OF KANSAS, Re NAIC resolution on classified collision risks on financed automobile policies. Mr. KENNETH BARNARD, President, Chicago Better Business Bureau, Chicago, Ill. DEAR MR. BARNARD: Your letter-questionnaire on the above subject of February 24, 1956, has been received. A reply to your questions involves a general interpretation of the meaning of the NAIC resolution, which was adopted at its meeting in New York City last December. I wish to suggest that you write either the president, Hon. C. Lawrence Leggett, of Missouri, or Hon. Joseph A. Navarre, of Michigan, chairman of the NAIC executive committee. With reference to some of the questions which pertain to our Kansas situation, I wish to state that a study is being made at this time and we would be glad to give you a report when it is completed. Very truly yours, FRANK SULLIVAN, Commissioner of Insurance. KENTUCKY While the Kentucky Insurance Department did not reply directly to the questionnaire, it has supplied information to the Better Business Bureau of Louisville and has issued extensive newspaper publicity informing Kentuckians of the existence of collision insurance overcharges and of the department's continuing efforts to correct the situation. On March 14, 1956, Insurance Commissioner Cad P. Thurman publicly announced that "very substantial overcharges" had been ordered refunded in Kentucky. He said he had directed all companies writing collision insurance sold on conditional sales contracts to send questionnaires, intended to determine whether there had been misclassification, to each individual holder of a policy in force on January 1, 1954, or since. (He subsequently advised that the directive had been sent to Service Fire Insurance Co., Calvert Fire Insurance Co., Emmco Insurance Co., and all other companies specializing in that type of coverage.) Commissioner Thurman said that refunds ranging from $25 to $70 a person would be made to those found to have been misclassified. In a statement issued May 9, 1956, Commissioner Thurman said a study of practices of certain "well-known automobile insurance-writing companies" showed automobile owners had been overcharged to a larger extent than first thought. The figure might run as high as $750,000, he said, and the overcharging practice had gone on for about 5 years. Thurman's announcement said refunds have been figured on more than 1,600 risks and the amounts vary from a few dollars to as much as $100. On September 26, 1956, Commissioner Thurman raised his estimate to $2,286,000 as the amount overcharged Kentucky motorists since January 1952. He said that more than $150,000 in excess premiums had been refunded to motorists, based on their replies to questionnaires their insurance companies were directed to send them. But only 18 percent of the questionnaires mailed out have been answered by policyholders, Thurman said. DEAR MR. BARNARD: Your letter of February 24 has been referred to me by Commissioner Martin, as I was his represnetative at the meeting of the National Association of Insurance Commissioners at which the particular resolution referred to was adopted. At the time this resolution was adopted by the NAIC, this State did not have in effect the seven-class plan; therefore, it was not necessary that any action be taken by this department on any overpayments that may have been made to insurance companies. Since that time, the seven-class plan has been adopted and the casualty and surety division of the Louisiana Insurance Rating Commission is charged with the responsibility of stamping all policies issued. In the event of any excess charges made in Louisiana under the seven-clsas plan, the adjustment of such overpayments would, of course, be subject to State law in respect to the manner in which those adjustments should be made. Yours very truly, KENNETH BARNARD, MAINE D. A. GUGLIELMO, Deputy Insurance Commissioner. STATE OF MAINE, INSURANCE DEPARTMENT, Augusta, February 27, 1956. Chairman, Committee on Installment Contracts, Association of Better DEAR MR. BARNARD: Due to the sudden death of the assistant attorney general attached to this department our efforts to investigate the acivities of insurance companies writing automobile physical damage insurance in Maine have bogged down temporarily. There is some question right now as to whether or not we are to have a replacement from the attorney general's office, according to a memorandum from our governor received last week. We are not in a position at present to furnish you with the information you desire. We are working on the matter under a great handicap because of our inadequate examining staff and limited funds. It may be necessary for us eventually to retain a firm of commercial insurance examiners to supplement our own investigation but to do this we will be compelled to ask the governor and seven-man executive council for money from their contingent fund to defray the heavy expense involved. This department works with the Portland (Maine) Better Business Bureau in many matters. I expect to have the complete support of Donald P. Libby, executive director of that organization, in this particular investigation. When we are in a position to answer your queries I shall communicate with you again. We are definitely not supplying such information to anyone at the present time. I might add that this department does not feel bound to limit its investigation in the manner outlined in the NAIC resolution of December 1955. Very truly yours, GEORGE F. MAHONEY, Commissioner. MARTAND STATE INSTRance DepartMENT OF MARTYAND, Mr. KENNETH BARNARD. Chairman, Committee on Installment Contracta, Chicago Better Business Bureau, Chicago, Ill. DEAR MR. BARNARD: This will acknowledge receipt of your inquiry of February 24 with reference to the misclassification of risks by insurance companies. We are replying to your questions categorically as follows: 1. No. Certain insurance companies, and most particularly insurance companies owned or controlled by finance factors, interpreted the rating rules with respect to collision coverages to mean that if the insured failed to furnish adequate information with respect to the classification of his risk that the company should protect itself by charging the highest rate. In our opinion, the company's conclusion is entirely wrong because the company is guilty of violating the antidiscrimination statute if it fails to obtain proper information and to charge ail risks in the same classification the rate applicable to such classification. 2. The resolution provides that the companies shall attempt to reclassify the risks which were covered by policies in force as of June 30, 1955. It appears that some of these companies destroy their underwriting records within 6 months after the expiration of the policy so that the companies would have no records of policies which had expired more than 6 months prior to the date of the resolution. In some instances it appears that the companies have no record of the address of the policy or certificate holder and if the policy has expired and no further payments are being made under the finance agreement it is difficult to locate the former policyholder. Our preliminary information indicates that the most of the abuses started after rate revisions which were approved by a number of States in November and December of 1953. The most of these policies appeared to have been written for a period of 18 months or longer so that these contracts would still be in force at June 30, 1955. While we have no brief for the insurance companies which engaged in these illegal practices, there is a practical problem as to how much time, effort, and money should be expended on the correction of past evils and whether or not it might not be wiser to devote our efforts to the prevention of further abuses in this field. The resolution has no legal bearing on the obligation of the insurance company to refund an excess premium when confronted with proper evidence that an excess charge has been made. 3. Our information indicates that most of the abuses occurred in 1954 and early 1955, but if any policyholder can show that he was overcharged in a prior period, it is our considered opinion that the company must promptly refund any excess premium or it may be charged with violation of the antidiscrimination statute and the rate regulation statute. 4. Insofar as Maryland is concerned, we are inquiring of all companies as to their practices with respect to the insuring of pledged property, and at this writing, we are not prepared to name any particular companies as having violated our antidiscrimination or our rate regulatory statutes. 5. We have reached no conclusion as to the amount of overcharges which may have been made in Maryland. 6. In some instances, the finance company obtained a master contract and borrowers were given a certificate of insurance so that the finance company and not the borrower is the policyholder. Some finance companies require the borrower to execute a power of attorney appointing the finance company as the borrower's attorney-in-fact to handle all insurance coverage on the pledged property. In all instances that have come to our attention, there is an assignment from the borrower to the lender of all benefis which may become due under the insurance contract. This includes loss payments and return premiums on canceled contracts, and it seems reasonable to assume that it would also include the return of any excess charges as a result of the reclassification of the risk. It, of course, must be assumed that any such amounts so received by the finance company from the insurance company are credited to the unpaid balance due from the debtor to the creditor. If the indebtedness has been paid in full, there is no question in our minds about the legal obligation of the insurance company to return the excess charge to the former borrower whether he be policyholder or certificate holder. 7. Because the charge for insurance is such a small part of the total amount involved in the purchase of an automobile. The purchaser seems to be interested only in the total amount he must pay per month in order to obtain a motor vehicle, and he seems to pay little, if any, attention to that part of the total cost which represents insurance coverages. As it is captive business and as the practices of the insurance company are usually dictated by the controlling finance company there appears to have been no one interested in seeing that the policyholder got the most that was available to him for his premium dollar. Where the insured is free to obtain his own coverage, and goes to his own broker or agent, he is shopping for insurance only, and he usually wants to know what he is getting and what he is paying for what he gets. Knowledge of insurance laws and regulations and keen competition compel his broker or agent to properly rate the risk. 8. Yes. (We expect similar admissions from other companies. One company which has been requesting reclassification information from its insureds advises us that an independent investigation of a small number of the answers which it received indicated that 18 percent of the insureds investigated had erroneously replied to the reclassificaion questionnaire in an apparent attempt to obtain a reclassification refund for which the risk could not qualify under rating rules. So that the problem is more complicated than would appear on the surface.) 19 We have no brief for the insurance companies involved. Speaking for Maryland, this department has no jurisdiction over the acts of finance companies and our investigation indicates that the insurance companies are less culpable than the finance companies, and that the violations were more the result of carelessness on the part of auomobile salesmen than for any other cause. This department can, of course, impose fines on the insurance companies for each violation of the rating law, but whether it is more important to impose a fine than it is to impress upon the company the necessity for complying with the rating laws in the future is a matter upon which we have not reached a final conclusion. In Maryland, discrimination against a policyholder by an insurance company or a representative of an insurance company is a misdemeanor, and misdemeanors must be prosecuted by the several policyholders in the courts, as this department has no authority to conduct trials of criminal infractions of the law which fall in his category. Frankly, with all the publicity that these misclassifications have received, we have not received one complaint from a policyholder, and it is a little difficult to fight for a cause where the persons who were overcharged as the result of the misclassifications of their risks appear to be completely disinterested in the situation. May we have permission to furnish copies of your letter and of our reply, to other organizations which may be interested in this subject? Very truly yours, KENNETH BARNARD, CHARLES S. JACKSON, Commissioner. THE COMMONWEALTH OF MASSSCHUSETTS, President, Chicago Better Business Bureau, Chicago, Ill. DEAR MR. BARNARD: In answer to your letter of February 24, may I state that at this time, the Department is engaged in a complete investigation of the entire subject matter of misclassification and the general handling of insurance on financed automobiles purchased in this Commonwealth. It may interest you to know that the Massachusetts department has been engaged in probing this field for a long period of time preceding the disclosure of misclassification and, inasmuch as impending actions of a legal nature are in prospect, we are not in a position to answer the questions you propound at this time. I assure you, however, that we have always enjoyed the complete cooperation of the Boston Better Business Bureau under Ken Backman and Ed Gallagher, and I have talked with Ed recently on this subject matter. You will appreciate the resolution adopted by the National Association of Insurance Commisisoners is general in nature and in no way precludes inde |