I. Introduction

• Library: The Law of Automobile Insurance in SC (SCBar) (2015 Ed.)

I. Introduction

Automobile insurance is one of the most regulated lines of insurance in the United States. It is part of a comprehensive system of financial security and financial responsibility aimed at providing financial protection for drivers and victims of automobile accidents. Most states (1) require automobile insurance or some other form of financial security as proof of financial responsibility to register and operate a motor vehicle; and (2) mandate the purchase of a minimum amount of liability insurance coverage.

Since the purchase of automobile insurance is required, all states, U.S. territories and the District of Columbia regulate the sale and delivery of automobile insurance products. States regulate the price and the content of automobile insurance contracts, as well as the people who offer the products for sale. This chapter addresses the regulation of automobile insurance in South Carolina. It provides a general overview of insurance regulation, the major activities that are regulated by the states, the regulatory changes and current trends affecting automobile insurance, and provides a general overview of the compulsory insurance and financial responsibility laws.

A. Overview of Insurance Regulation

Insurance regulation first developed at the state level. Insurers were initially established through statutes and special charters promulgated by state legislatures.¹ These first enactments prescribed the rules for the conduct of the business of insurance for specific companies. Although the initial enactments only applied to the companies created by statute, a pattern of rules emerged, and these rules formed the basis of early insurance regulation.²

The initial form of insurance regulation consisted of statutory mandates. Thus, the earliest form of insurance regulation involved statutes requiring the payment and reporting of premium taxes, or financial reporting.³ Although insurance can be traced back to the 17th Century, it did not begin to develop significantly until the mid-to late 19th Century as a result of the country's industrial expansion. One of the earliest recorded insurance companies was formed in Charleston, South Carolina.⁴

Unfortunately, some of the early insurers were not sufficiently capitalized or well managed and subsequently failed. Large fires pulled a number of insurers into insolvency in the 19th Century. Some state insurance boards and commissions were created in the 19th Century in direct response to these and other potential market failures.⁵

B. Power of the States to Regulate Insurance

Regulatory control over the business of insurance has rested primarily with the states as a result of some key court decisions and statutory enactments.⁶ Courts have long recognized that the insurance business is a business affected with a public interest. Therefore, under its police power to legislate for the common good, a state may regulate insurance to the extent deemed necessary to protect the public welfare. State regulation of insurance went unchallenged until the United States Supreme Court case of Paul v. Virginia.

1. Paul v. Virginia⁷

Paul v. Virginia represented one of the first significant legal challenges to state regulation of the business of insurance. The issue in Paul v. Virginia was whether the business of insurance constituted interstate commerce. Paul, an insurance producer, challenged the right of the states to require him to be licensed in order to sell insurance. The state denied Paul a license because the insurer either would not, or did not, comply with pertinent state law requiring a security deposit. Paul continued to sell insurance without a license and was subsequently arrested and fined. In 1869, the United States Supreme Court opined that the business of insurance was not interstate commerce, and therefore not subject to regulation by the federal government. State regulation of insurance was sanctioned by the United States Supreme Court.

2. United States v. South-Eastern Underwriters Association⁸

For 75 years following the Paul decision, insurance was regulated by the individual states without challenge. In 1944, however, the United States Supreme Court overruled its previous decision in Paul v. Virginia. In United States. v. South-Eastern Underwriters Association, the Supreme Court held that insurance was interstate commerce, and insurers were subject to the federal antitrust laws. The Supreme Court determined that Congress had not indicated that it intended to exempt insurers from the application of the Sherman Antitrust Act. The Court found that the federal officials in the South-Eastern case had appropriately applied the Sherman Antitrust Act to insurers, and thus, it appeared that insurance would be regulated by the federal government. Federal regulation of insurance did not materialize after the South-Eastern Underwriters decision, because the impact of the Court's decision was restricted by the passage of the McCarran-Ferguson Act.

3. The McCarran-Ferguson Act⁹

The McCarran-Ferguson Act was drafted by the National Association of Insurance Commissioners (NAIC)¹⁰ and became law on March 9, 1945. In McCarran-Ferguson, Congress reaffirmed the right of the state government to regulate insurance. While Congress also has the authority to regulate insurance under its power to regulate interstate commerce, it has chosen to defer to state regulation of the industry. In the 1945 McCarran-Ferguson Act, Congress declared that the business of insurance is subject to the regulatory and tax laws of the several states. Further, no federal law may be construed to supersede, invalidate, or impair any state insurance regulatory or tax law, unless the federal law specifically relates to the business of insurance. Consequently, except where Congress has specifically acted to pre-empt state insurance law,¹¹ regulation of the insurance industry in the United States falls within the jurisdiction of the states.¹²

The McCarran-Ferguson Act provided an antitrust exemption for the insurance industry to the extent it is regulated by state law. To ensure state laws would not be preempted, state legislatures enacted comprehensive regulatory laws in order to obtain the antitrust exemption and permit the continued operation of rating bureau activity. Despite the provisions of the McCarran-Ferguson Act, the Sherman Antitrust Act continues to apply to boycotts, coercion, or intimidation. As a consequence of the McCarran-Ferguson Act, federal trade practices laws are "applicable to the business of insurance to the extent that such business is not regulated by state law."¹³ Most states have unfair trade practices statutes.¹⁴

C. Insurance Regulatory Structure

Each state has an insurance department or commission that is charged with the responsibility of implementing and enforcing the insurance laws of that state governing the purchase and sale of insurance.¹⁵ Various groups influence the insurance regulatory system. These groups include, but are not limited to (1) state legislatures; (2) the courts; (3) the executive branch; (4) insurers; (5) producers, brokers, and other people transacting the business of insurance; (6) consumers; (7) trade associations and other interest groups; and (8) the federal government. The following discussion summarizes the role of these groups in insurance regulation.

1. Role of State Legislatures

Legislatures play the most critical role in the insurance regulatory structure. Each state's legislature enacts laws governing the regulation and transaction of the business of insurance in that state. State laws prescribe the rules for licensure of insurers, producers and brokers; insurer solvency; rates; the content of policy forms; contract interpretation and enforcement and market practices. State laws also create and prescribe the rules for residual insurance markets. These laws form the Insurance Law.¹⁶ The legislature impacts the regulation and transaction of insurance business by codifying regulatory policies and philosophies of the state. Legislatures also establish insurance departments or commissions and provide for their funding.

2. Role of the Judiciary

The judicial branch interprets the laws that govern the business of insurance. Courts will invalidate statutes that are overbroad, vague, or unconstitutional and criminal penalties may be imposed by the courts for certain violations of the insurance laws.¹⁷ Insurance transactions are also sometimes subject to litigation or court review. Some of these decisions have significantly affected the business of insurance. Additionally, the court's role is to enforce the regulatory actions of the various departments of insurance. Courts also adjudicate disputes between the parties (insurer and insured) and jurisdictions (state and federal government) defining individual rights and regulatory authority.

3. Role of the Executive Branch

Typically, the executive branch is represented by an insurance department or commission, which is managed by a director, commissioner or superintendent ("director").¹⁸ In most states, the director is the person appointed by the governor, or is an elected official, who is charged with the responsibility of administering the insurance laws of the state, implementing the insurance laws enacted by the state legislature, and supervising the conduct of insurers. Insurance departments have broad administrative, quasi-legislative, and quasi-judicial powers over the business of insurance.

a. The South Carolina Department of Insurance

Like most states, the administrative agency responsible for regulating the insurance industry in South Carolina is the South Carolina Department of Insurance.¹⁹ The Department is an agency within the Governor's cabinet and is led by a Director serving at the pleasure of the Governor.²⁰ The Director serves as the Department's executive officer, and it is his or her duty to see that all laws relating to the business of insurance are faithfully executed.²¹

The...