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Regulation and Compliance

What Is an Insurance Model Law?

Aaron Lunt | May 17, 2019

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Writing laws with quill and ink

We all remember our experience in junior high school where we learned how the federal government works and how a bill becomes a law—inclusive of, perhaps, our respective state legislative process. In our learnings, did we ever discuss who drafts the language of individual bills? Who actually puts pen to paper and creates the language? I used to assume that actual members of Congress or state legislatures drafted the language, but this is seldom the case.

There are myriad ways and contributors, but one method, which has been routinely used in the insurance industry, is through the development of a model law. Since insurance is regulated at the state level, we'll focus our attention on model laws and how they are used by state legislatures.

What Is a Model Law?

As might be self-evident, a model law is truly what it says it is—a model or exemplar that can be looked to as a starting point for state legislation. It's a version that is designed to be copied and adopted by state legislatures.

Why Do States Need a Model Law?

Since insurance is regulated at the state level, 1 each state must have its own set of laws and rules (regulations) to govern the marketplace within its borders. It's been this way for decades, if not longer!

Since each state is its own sovereignty, it has the authority to pass legislation and regulations to guide the insurance marketplace and influence conduct. Most insurance legislation is designed to protect consumers and ensure insurer solvency and fair practices. Even though independent sovereignties, there's a certain degree of comity and consistency that can be seen across borders. Despite some similarities, there can be both subtle and dramatic differences. Creating a model law helps serve as a "starting point" for states to introduce, discuss, and ultimately pass legislation that governs certain topics.

Is There a Specific Structure Around Drafting a Model Law?

Specific to the insurance industry, there are two main forums that provide formality around the drafting of model laws: the National Council of Insurance Legislators (NCOIL) and the National Association of Insurance Commissioners (NAIC). The former is where various state legislators (mainly those assigned to insurance committees/subcommittees in their respective states) convene to discuss trends and industry practices; whereas the NAIC is a forum for insurance commissioners (regulators) and staff to meet and discuss trends, key issues, and share best practices.

Who Are the Actual People That Draft Model Laws?

Basically, anybody can draft a model law and work with respective committees and/or individuals at either NCOIL or the NAIC. The following are a few examples.

  • Trade associations or advocacy groups. There are several trade associations that support the insurance industry. These trades are organizations with insurance company and industry members that collectively pool issues and comments to advocate for certain public policy positions in states. Trade associations really serve as an "industry voice" on common issues and concerns, including the services of educating elected/appointed officials, advocating for industry-specific concerns, advocating for consumers, and a host of other items. Trade associations often will draft model laws, taking input and insight from member companies, sometimes in collaboration with other trade associations and interested parties.
  • Elected/appointed officials and or regulators. Certainly, those who are in charge of enacting and/or enforcing insurance laws can draft language (i.e., legislators themselves). They might have a unique background or possess specific knowledge on a key area, which could enable drafting. Typically, however, there might be a key staff member or employee who leads the drafting process.
  • Industry representatives. There might be industry experts who work for insurance companies with an acute understanding of an issue and/or topic who draft language to appear in a bill or regulation. There also could be a specific company that is leading an issue and desires to draft language to engage the broader industry in debate and serve as a thought leader.
  • Law firms or other technicians. Law firms represent insurance clients in a number of ways, and this positions them with a unique vantage point to understand technical and public policy issues that promote legislative drafting. Lawyers often possess the requisite skill sets to create clear, concise, and actionable language for the industry to consider.

There are many other possible sources to draft bills for introduction into state legislatures. The above, however, based on my experience, seem to serve as the main conduits specific to the insurance industry.

After a Bill Is Drafted, What's Next?

Just because there's a draft bill floating around doesn't mean much of anything. Until a bill is enacted (typically passed by both chambers of a state legislature and signed by the governor), it has no potency. A member of a state legislature would have to introduce the bill for consideration, which takes it down several procedural paths, including committee/subcommittee consideration, which is beyond the scope of this article. It's important to recognize, however, that a model law has no impact on the industry until it is formally enacted. Several model laws never make their way into state legislatures. Keep in mind, too, that each state would have to independently adopt a model law, which can create a staggered implementation. In addition, several states may introduce amendments or modifications, which can create differences in the law among the states.

What Are Some Examples of Model Laws?

There are several examples of model laws that can help illuminate this issue. The NAIC has a resourceful database of its model laws. The same goes for NCOIL. Let's, however, dive into the following specific examples at three different phases of implementation.

  • Phase I: Mature and successful model act (Example: Service Contract Model Act). Drafted in 1997, there was an area of law that needed clarification pertaining to service contracts. It was unclear as to whether a service contract should be considered insurance and, therefore, subject to all its requirements, or if different treatment was warranted. Through industry dialogue and a grassroots effort, a model act was drafted that provided better clarity on the treatment of service contracts and how it differed—and should be regulated differently—from traditional insurance. This model law subsequently was passed in some form in the majority of state legislatures. The model act served as a starting point or an exemplar that each state could independently adopt, modifying where appropriate.
  • Phase II: Model act making its way through state legislatures (Example: Insurance Data Security Model Act). Adopted by the NAIC in 2017, this model act is making its way through state legislatures, only having been passed in a small majority, including South Carolina (New York has a law that was enacted before the NAIC model act was developed). This is an example of a model act that is relatively new and slowly making its way through state legislatures with a lot of focus and attention. It will take several years to work its way through the states and likely may not get passed, or even introduced, in several states.
  • Phase II: Model act currently under consideration (Example: Model Act Regarding Interpretation of Insurance Policy). This is currently an idea, with draft language being actively discussed by the Property and Casualty Insurance Committee at NCOIL. Effectively an idea or concept, this model law is in draft mode and has no legal authority or influence over the marketplace at this time; it is still in the early formation phase.

Final Thoughts

A model law is a powerful tool that serves as a starting point for state legislatures to consider insurance legislation. Model laws often have a lot of visibility and interested stakeholders speaking into the process, so there is considerable vetting and visibility into a piece of legislation before it's ever introduced into a state legislature. The process can be slow, time-consuming, and a bit choppy at times, but it has proven to be an effective way to introduce new legislation that impacts a large swath of the insurance marketplace.

Disclaimer: The purpose of this article is to provide information, rather than advice or opinion. It is accurate to the best of the author's knowledge as of the date of the article. Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional. Any references to non-CNA websites are provided solely for convenience, and CNA disclaims any responsibility with respect to such websites.

To the extent this article contains any examples, please note that they are for illustrative purposes only and any similarity to actual individuals, entities, places, or situations is unintentional and purely coincidental. In addition, any examples are not intended to establish any standards of care, to serve as legal advice appropriate for any particular factual situations, or to provide an acknowledgment that any given factual situation is covered under any CNA insurance policy. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions, and exclusions for an insured. All CNA products and services may not be available in all states and may be subject to change without notice.

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1 The McCarran-Ferguson Act of 1945 delegated the regulation of the "business of insurance" to the states from the federal government.