Insurers are faced with a rather daunting challenge when it comes to compliance issues.

As a general matter, they're subject not only to all the laws and regulations that every other business is subject to, but they're also subject to special insurance-specific laws and regulations applicable to every part of the insurance function, including marketing and sales, underwriting and payment of claims. In addition, because insurers are regulated at the state level, companies that operate in a number of states can be subject to a wide variety of standards in each state.

The point here is not to feel sorry for insurance companies having this burden, but to recognize that compliance is indeed a challenge and that insurers should be allowed to engage in practices that facilitate their compliance. This is especially true when one considers that the laws and regulations that insurers must comply with are generally meant to protect consumers.

A particularly effective means of ensuring compliance is a self-audit. However, conducting such an evaluation carries its own risks if the product of the exercise can be used against the company in a lawsuit — particularly in costly class-action litigation.

States enact privilege laws

In recognition of this dilemma, a number of states have enacted “the self-evaluative privilege” for insurers providing that the product of a self-audit cannot be used against the insurer in court proceedings.

The general idea of self-evaluative privilege has its roots in the medical field, where a court held that medical peer-review materials were not subject to discovery in litigation. Courts have also recognized such privilege in the areas of employment practices, product liability and environmental practices. Courts have generally not recognized the privilege for insurers, however, so its enactment has come about in the form of statutory enactments by legislatures.

The first state to enact the privilege for insurers was Illinois in 1997. Around that time, the issue was taken up by the National Conference of Insurance Legislators, which adopted the Insurance Compliance Self-Evaluative Privilege Model Act the following year. Since the adoption of the model, nine more states and the District of Columbia have enacted the privilege. New Jersey and North Dakota did so in 1999, Michigan and Oregon in 2001, the District of Columbia in 2003, Kansas and Texas in 2005, Hawaii in 2007, and Oklahoma in 2012. Arizona became the latest in 2014.

When New Jersey adopted the privilege, lawmakers included in the law the following legislative findings that do an excellent job of explaining the purpose of the privilege and providing solid ground for other states to follow suit:

The Legislature finds and declares that it is in the public interest for insurance carriers in this State to conduct voluntary internal reviews and audits of their operations, practices and procedures for the purpose of discovering and correcting any operations, practices or procedures which do not comply with applicable law or regulation or which do not comply with recognized industry standards or with the insurance carrier's own standards and for the purpose of preventing continuing and more serious violations. However, if studies and reports beyond those legally required are available to third parties other than regulators and potentially can result in the insurance carrier's liability to such third parties, the insurance carrier may be discouraged from making these additional efforts and from sharing these results with regulators. A legal structure that promotes self-policing programs can achieve improved compliance effectively at less cost to the State and to the insurance carriers. Voluntary compliance review, when properly conducted and implemented, results not only in improved compliance with law, but in the adoption of procedures and policies by the insurance carriers that exceed minimum legal requirements, and that save money by benefiting customers, lowering costs and reducing potential liabilities.

NAIC consideration

The National Association of Insurance Commissioners also took up the issue and in 2000 adopted a white paper titled, “Regulatory Access to Insurer Information: The Issues of Confidentiality and Privilege.” The paper was generally supportive of the privilege, noting the importance of internal compliance audits and stating that the privilege “can be crafted so that it protects such analysis against third-party access while continuing to allow for regulatory access.”

Thus, as a policy measure, the self-evaluative privilege for insurers has been through thorough analysis by state legislators and regulators. Its adoption by a number of states is a favorable development; however, this experience suggests that states should adopt the privilege to promote compliance by insurance companies.

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Self-evaluation: It's a privilege

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