Texas General Lines — Property and CasualtyGeneral InsuranceHard
A state insurance department is investigating an insurer for allegedly engaging in unfair discrimination by charging significantly different rates to individuals with identical risk profiles based solely on their geographic location within the same city. This practice violates which insurance principle?
- AUtmost Good Faith
- BAdhesion
- CReasonable Expectations
- DFair Discrimination
Show answer & explanationAnswer & explanation
Correct answer: D. Fair Discrimination
Insurance allows for discrimination (charging different rates) as long as it is fair and based on actuarial data reflecting actual risk differences. Unfair discrimination occurs when rates are varied for similar risks without a sound actuarial basis, such as solely on location within the same risk-rated area without further justification.
Why the other options are wrong
- A. Utmost good faith requires honesty and full disclosure from both parties in an insurance contract.
- B. A contract of adhesion means one party (insurer) dictates terms, and the other (insured) accepts or rejects.
- C. The doctrine of reasonable expectations states that policyholders are entitled to coverage they reasonably expect.
Fair vs. Unfair Discrimination
Insurance rates can vary based on actual risk differences (fair discrimination), but it is illegal to charge different rates for individuals with substantially similar risk factors (unfair discrimination).
- Fair discrimination: actuarially justified rate differences.
- Unfair discrimination: arbitrary rate differences.
- Prohibits discrimination based on protected classes or arbitrary factors.
Memory trick: ACID is a principle of UTMOST good faith and REASONABLE expectations, but FAIR discrimination is key.