II. Automobile Insurance Regulation in South Carolina

LibraryThe Law of Automobile Insurance in SC (SCBar) (2015 Ed.)

II. Automobile Insurance Regulation in South Carolina

South Carolina, like most states, has a compulsory automobile insurance system. When legislatures made automobile insurance compulsory, public attitude about this type of coverage changed. Automobile insurance is not only viewed as a form of protection against liability, but also as a form of protection for accident victims. Consumers believe that if they are required to have this type of coverage it must be available at affordable prices. Previously, the increasing costs of automobile insurance made it one of the more politically sensitive social issues in this state. Before automobile insurance reform, it was a perennial political issue on the agenda of the South Carolina General Assembly. As of the date of this publication, the South Carolina automobile insurance market is considered very competitive.

A. History of Automobile Insurance in South Carolina

From 1974 to 1997, all automobile insurers transacting business in the state were required to write every risk. This was known as the "mandate to write."97 Under the mandate to write, insurers were not allowed to turn away customers regardless of the driving record of the insured. Insurers were permitted to cede some of their worst risks to the residual market. The South Carolina Reinsurance Facility was the residual market mechanism during this time. A reinsurance facility is an unincorporated, nonprofit entity, through which auto insurers provide coverage and service claims.98 After issuing a policy, an insurer decides whether to handle the policy as part of its regular "voluntary business" or transfer it to the reinsurance facility or pool. An insurer is permitted to transfer or "cede" to the pool a percentage of its policies. Premiums for this portion of business are sent to the pool and companies bill the pool for claims payments and expenses. Profits or losses are generally shared by all auto insurers licensed in the state. Losses are then recovered through the payment of recoupment fees.99

Additionally, state law authorized "designated" producers to cede all of their policies to the Facility.100 Premiums charged for the policies ceded to the Reinsurance Facility were inadequate; and consequently, the Facility lost money every year it was in operation. Moreover, at its height, the South Carolina Reinsurance Facility wrote more than 40% of all automobile insurance policies sold in South Carolina. The Legislative Audit Council concluded that the Facility was large because insurers were required to charge the same premiums to high and low risk drivers.101

B. Automobile Insurance Reform: 1997 S.C. Act No. 154

1. Residual Market Changes

a. The South Carolina Reinsurance Facility

In 1997, the South Carolina General Assembly responded to rising consumer concerns about "good risk" drivers subsidizing the cost of insurance of "bad risk" drivers through the payment of recoupment fees, and the rising costs of automobile insurance in South Carolina, by enacting South Carolina Act No. 154 of 1997 (commonly referred to as Act No. 154).102 Via 1997 S.C. Act No. 154, the South Carolina General Assembly reformed the market delivery system for automobile insurance in South Carolina from the former system where insurers were required to take all comers to a system that permitted insurers to underwrite the risk subject to certain conditions. Act No. 154 completely changed the automobile insurance delivery system created by 1974 S.C. Act No. 1177. It eliminated several things, including the following: (1) the mandate to write; (2) the designated agency system; (3) the S.C. Reinsurance Facility as the alternative market mechanism; (4) Uniform Class, Territorial and Merit Rating Plans; further, it allows companies to file their own rates. The system envisioned by Act No. 154 was designated to replace a government dominated system with a competitive system where market forces would help regulate rates.

b. The South Carolina Associated Auto Insurers Plan

Assigned risk plans are a common type of residual market mechanism for automobile insurance. Forty-three states have assigned risk plans as the automobile insurance residual market. Under an assigned risk plan structure, insurers or agents are able to submit an application for insurance coverage to the assigned risk plan if they are unable to secure coverage in the voluntary market. These applications are assigned to servicing carriers in proportion to the amount of voluntary insurance business each company writes in the state for each line of business for the assigned risk plan. South Carolina's assigned risk plan is known as the Associated Auto Insurers Plan. The servicing carriers for the Associated Auto Insurers Plan may be competitively bid as provided for in §§ 38-77-810 et seq. The assigned company must write and service the policy and is responsible for all losses. Less than 5% of the market is in the assigned risk plan.

On March 1, 1999, the South Carolina Reinsurance Facility ceased accepting new business. Insurers could renew policies in the Facility until October 1999. The South Carolina Associated Auto Insurers Plan, a joint underwriting association, replaced the South Carolina Reinsurance Facility as the automobile residual market mechanism. Generally, under this system, each producer or broker has access to a company that has been designated a servicing company for high-risk drivers. The servicing carriers for the Joint Underwriting Association (JUA) were Companion Property and Casualty Insurance Company, Bankers Insurance Company and South Carolina Insurance Company. The JUA was a temporary residual market mechanism and under the general supervision of the South Carolina Department of Insurance.103

To avoid the issues associated with the operation of the South Carolina Reinsurance Facility, very specific eligibility criteria were established for the operation of this mechanism. First, the JUA by law had to be self-supporting. It set rates that were required to be adequate to cover losses incurred. Second, applicants had to meet eligibility criteria before they may be placed in the JUA. In order to place a risk in the JUA, the producer had to demonstrate that the prospective applicant has been denied coverage in the voluntary market within the previous 60 days. This was a prerequisite to receiving coverage through the Association. These criteria were established to prevent overutilization of the JUA and fraud. South Carolina law required the conversion of the JUA to an Assigned Risk Plan effective March 1, 2003.104 Effective the same date, the JUA ceased to exist. The Director was responsible for promulgating reasonable standards for the assignment of risks to insurance carriers and servicing carriers, and an assigned risk plan.

2. Anti-discrimination Provisions

a. Decisions to Nonrenew or Not to Write Cannot be Based On Unfair Discriminatory Criteria

To protect applicants from the types of unfair discriminatory treatment that necessitated the enactment of 1974 S.C. Act No. 1177, Act 154 included a number of prohibitions against unfair discrimination. No insurer can refuse to issue an automobile insurance policy as defined in § 38-77-30, based upon the age, sex, location of residence in this state, race, color, creed, national origin, ancestry, marital status or income level.105 Insurers do not have to write every automobile insurance risk, but they must for a period of three years retain copies of all of the applications for which they have refused coverage.106 These applications must be produced upon request of the Director or his designee.

Additionally, an insurer could not refuse to issue coverage because the individual had previously purchased a policy from the Associated Auto Insurers Plan or had been refused insurance coverage previously by another insurer. Similarly, insurers cannot discriminate on the basis of lawful occupation. However, nothing prohibits the insurer from limiting the issuance of policies to persons engaged in a particular profession or occupation, or to persons who are members of a particular religious sect. The rates for such coverage must be set in accordance with relevant actuarial data.

It is also unlawful to consider race, color, creed, religion, national origin, ancestry, location of residence in this state, economic status or income level in establishing premium rates. Decisions to nonrenew coverage or refusals to write also cannot be based upon the aforementioned factors. In addition, § 38-5-200 prohibits discrimination against producers or insureds who use premium financing.107

b. Penalties for Violation of the Anti-Discrimination Provisions

Insurers that violate the anti-discrimination provisions are subject to the penalties provided in § 38-2-10. Also, if the Director or his designee finds that an insurer or producer is participating in a pattern of unfair discrimination, the Director may impose a fine of up to $200,000. Both a producer and insurer could be held liable for such a violation. The insurer would only be subject to the penalty if the discriminatory conduct was company policy and the producer reported the pattern of unfair discrimination to the department. Failure to timely report discriminatory conduct could subject the producer to liability under this section.108

Likewise, § 38-77-123 establishes similar criteria prohibiting the refusal of insurance or renewal of insurance coverage based upon factors such as sex, location of residence, race, color, creed, national origin, etc. In addition to those factors, insurers cannot refuse to renew a policy because of: (1) lawful occupation, (2) lack of driving experience or number of years of experience, (3) lack of supporting business or lack of the potential for acquiring such business, (4) one or more accidents or violations that occurred more than 36 months immediately preceding the upcoming anniversary date; (5) one or more claims submitted under the uninsured...

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