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Difficulty: MediumUnfair Claims Settlement Practices

A regional accounting firm suffers a ransomware attack and files a claim under its commercial cyber liability policy. Two weeks later, the insurer sends a short letter to the firm stating that the claim has been denied because "the loss falls outside the scope of covered perils." The letter does not cite any specific policy provision, exclusion, or legal basis for the denial.

Under the NAIC Unfair Claims Settlement Practices Act, which of the following statements best describes the insurer's action?

  1. A
    It is a compliant procedure under the Fair Credit Reporting Act (FCRA), which permits insurers to keep proprietary coverage determinations confidential.
  2. B
    It is legally acceptable as long as the insurer issued the denial letter within the state's mandated procedural timeframe for resolving claims.
  3. It is an unfair claims settlement practice because the insurer failed to provide a reasonable explanation referencing specific policy provisions.Answer
  4. D
    It is a legitimate claims practice if the adjuster suspects a moral hazard, granting the insurer the right to withhold specific investigation details.

Answer

The insurer's action is an unfair claims settlement practice because it failed to provide a reasonable explanation referencing specific policy provisions.
Under the NAIC Unfair Claims Settlement Practices Act, insurers must provide a reasonable explanation of the basis for a claim denial, specifically referencing the relevant facts, applicable law, or policy provisions. A vague statement that a loss 'falls outside the scope' without citing an exact exclusion is a direct violation of this statutory requirement.

Step-by-Step Solution

1
Analyze the scenario to identify the insurer's specific action regarding the claim.
The insurer denied a claim using a vague statement without citing any specific policy provision or exclusion.
Understanding the exact nature of the insurer's communication is necessary to evaluate it against statutory regulations.
2
Recall the NAIC Unfair Claims Settlement Practices Act regulations regarding claim denials.
The Act requires insurers to promptly provide a reasonable explanation of the basis in the insurance policy, in relation to the facts or applicable law, for denial of a claim.
Applying the relevant state regulations determines compliance.
3
Compare the insurer's action to the statutory requirement.
The insurer's failure to cite a specific provision constitutes a direct violation of the requirement to provide a reasonable, policy-based explanation.
This confirms whether the action classifies as an unfair practice.

Key Concept

Unfair Claims Settlement Practices - Claim Denial Explanations
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Topics

Unfair Claims Settlement Practices

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