Guides
Market conduct exams and regulatory fines
How state insurance departments audit home insurers through market conduct exams, what fines and consent orders mean for you, and how to find an exam report.
A market conduct exam is a state insurance department's audit of how an insurer treats customers: how it sells, underwrites, prices and cancels policies, and above all how it handles claims. Examiners pull a sample of files, test them against the state's laws, and write a report; violations can end in a fine, a corrective plan or a formal enforcement case. A fine is paid to the state, not to you, but the file samples and the findings can be used in your own complaint.
How a market conduct exam works
The financial side of regulation asks whether an insurer can pay claims. Market conduct asks whether it does so correctly and fairly. A market conduct exam is the main tool, and states usually run them under authority in their insurance code, often following the NAIC's Market Regulation Handbook as a guide. Not every state follows it in the same way, and some set a minimum interval between full exams.
Exams come in two kinds:
- Comprehensive. Reviews most areas of the company: sales and advertising, underwriting and rating, policyholder service, claims and complaint handling.
- Targeted. Looks at one line of business or one practice, often because complaints or data pointed to a problem. After a catastrophe, a targeted exam of claims handling is typical.
States also run multistate exams, in which several departments coordinate and share the review under a lead state's direction, and market analysis, which scans complaint and data trends to decide whom to examine. Your department of insurance may choose an insurer for review because complaint volume is high; see How to use the NAIC complaint index to compare home insurers for how complaint ratios are measured.
What examiners look for
In a homeowners exam, the sampled files commonly get tested against questions like these:
- Was the claim acknowledged within the state deadline?
- Was it decided and paid on time, and did the insurer send status letters when it needed more time?
- Did a denial letter cite the policy provision relied on and tell you the department can review it?
- Were replacement cost, depreciation and holdback calculated as the policy and state rules require?
- On the underwriting side, were rates applied as filed, were required notices (a hurricane deductible notice, say) sent, and were nonrenewals sent with proper notice?
The yardstick is largely the state's version of the claims practices rules in unfair claims settlement practices laws. Because that model law applies to "a general business practice," examiners sample enough files to show a pattern, not one late letter.
A recent example: State Farm General in California
The California Department of Insurance published a targeted exam of how State Farm General handled claims from the January 2025 Los Angeles wildfires. According to the department, examiners reviewed a sample of 220 claims and found 398 violations of state law across 114 of them. On May 4, 2026, the commissioner filed an accusation and order to show cause, the first step toward a hearing before an administrative law judge, adding 34 violations drawn from consumer complaints. The department's announcement and the Insurance Journal report describe problems such as unanswered policyholders and missing status letters. Insurance Journal reports that penalties under Insurance Code section 790.035 can reach $5,000 per violation, or $10,000 per willful violation.
State Farm disagrees with the findings, according to that report. It rejects the idea of a general practice of mishandling claims, and says it has handled more than 11,300 claims and paid more than $5.7 billion. As of the May 2026 reports, the matter was at the accusation stage with no final order. The example shows the process more than it proves an outcome: an exam is an allegation tested through a hearing, and the insurer can contest, negotiate or settle it.
From finding to fine
After the report, there are usually several possible outcomes:
| Step | What happens |
|---|---|
| Draft report | The insurer reviews and responds in writing |
| Final report | The department adopts it, often publishing it |
| Corrective action plan | The insurer commits to fix procedures, with follow-up |
| Restitution | The insurer re-reviews files and pays what was underpaid |
| Consent order or stipulation | The insurer agrees to a penalty without admitting liability |
| Contested proceeding | A hearing before an administrative law judge, then a commissioner order |
Many exams end in a consent order. In July 2024, for example, the Texas Department of Insurance entered a consent order in which Homeowners of America Insurance Company agreed to an administrative penalty of $60,000 after a market conduct exam, according to TDI's disciplinary order. That order was a negotiated settlement.
How to read the size of a fine
Penalties are set by state statute, usually per violation, and sometimes capped. A headline number may look small next to a company's premiums, and that raises a fair debate. Regulators say that restitution, corrective plans and public reports change behavior more than the dollars do. Critics say modest fines can become a cost of doing business. Both can be true; a few thousand dollars is not the same as an order to reopen every sampled claim. Look at what the order requires, not only the penalty.
What it means for you
Regulatory findings do not automatically pay you. A fine goes to the state's general fund or to a designated account. If a report shows a pattern of underpayment, the department may order the insurer to review claims and pay more, but not always. For your own claim, the steps are the same whatever the exam found:
- Check whether your insurer has a published exam or consent order. Search your department's site for "market conduct" or "enforcement actions," or try the home insurance rules by state to find your regulator.
- If the report describes the problem you are having, such as missed deadlines or unexplained denials, cite it in your how to file a complaint with your state insurance department letter. A complaint that matches a known pattern is easier for staff to act on.
- Keep your own timeline: date of loss, date of notice, every letter and call.
- For money damages, a complaint is not a lawsuit. Consider mediation, the appraisal clause: settling a claim value dispute or an attorney. See suing your home insurer: when and how and class actions against home insurers.
A clean exam does not mean a clean claim, and a bad exam does not mean your claim was handled wrongly. Treat the report as context.
Where to find exam reports
Many departments post final reports and orders on their sites. The NAIC publishes a Market Regulation Handbook and its consumer search shows complaint data (see What the NAIC does). Reports are a public record in many states, but some departments post only summaries or keep drafts confidential until final. If you cannot find one, ask your department's public records office.
Key takeaways
- A market conduct exam audits how an insurer sells, prices, underwrites and settles claims, by testing a sample of files against state law.
- Findings can lead to corrective plans, restitution, consent orders and fines, though many consent orders are settlements without admitted liability.
- Fines go to the state, not to policyholders; restitution is what returns money, and only when ordered.
- A recent California exam of State Farm General's wildfire claims was at the accusation stage in May 2026, and the insurer disputes the findings.
- If an exam report describes your problem, cite it in your complaint to your state insurance department.