Key Takeaways
- Alabama Title 27 prohibits misrepresentation, false advertising, and unfair claims practices
- Rebating is generally prohibited in Alabama with limited exceptions
- Twisting and churning are prohibited practices subject to license revocation
- Unfair discrimination based on protected characteristics is prohibited
- Violations can result in fines up to \$1,000 per violation and license revocation
Unfair Trade Practices
Alabama Title 27 regulates unfair trade practices in the business of insurance. Understanding these prohibitions is essential for ethical insurance practice.
Misrepresentation
Producers and insurers are prohibited from:
False Statements
- Making false statements about policy terms or benefits
- Misrepresenting the financial condition of an insurer
- Using misleading policy illustrations
- Making false statements about competitors (defamation)
- Misrepresenting the nature of the insurance transaction
Examples of Misrepresentation
| Prohibited Statement | Why It's Misrepresentation |
|---|---|
| "This policy covers everything" | No policy covers all losses |
| "Your rates will never increase" | Rates can and do change |
| "This company is the largest" | If not true, it's false |
| "You must buy today" | False urgency |
False Advertising
Alabama prohibits deceptive insurance advertising:
- Ads must be truthful and not misleading
- Must clearly identify as insurance advertisement
- Cannot use testimonials that are not genuine
- Cannot imply government endorsement
- Must include insurer's name
Advertising Standards
| Requirement | Details |
|---|---|
| Truthful | All advertising must be accurate |
| Clear | Terms must be understandable |
| Complete | Cannot omit material information |
| Documented | Must maintain advertising records |
Rebating
Rebating is offering inducements not specified in the policy to purchase insurance:
What Is Prohibited
- Returning part of premium to insured
- Offering gifts or prizes of significant value
- Paying for referrals to individuals
- Sharing commission with non-licensed persons
- Providing special favors or valuable consideration
What the Insured Cannot Do
An insured may not knowingly receive or accept:
- A rebate, discount, abatement, credit, or reduction of premium
- Special favor or advantage
- Valuable consideration or inducement
Limited Exceptions
Alabama allows:
- Return of divisible surplus (dividends)
- Legitimate policy discounts filed with state
- Promotional items of nominal value (pens, calendars)
- Group premium discounts
Exam Tip: Rebating is generally prohibited in Alabama. Remember the limited exceptions.
Twisting
Twisting is making misrepresentations to induce replacement of existing insurance:
| Element | Requirement |
|---|---|
| Misrepresentation | False or misleading statements |
| Intent | To cause policy change |
| Harm | Consumer is disadvantaged |
Examples of twisting:
- Falsely claiming existing policy is worthless
- Misrepresenting surrender values
- Hiding costs of replacement
- Exaggerating benefits of new policy
Churning
Churning is excessive replacement of policies to generate commissions.
Indicators include:
- Multiple replacements in short periods
- Same client replacing policies repeatedly
- Pattern across producer's book of business
- Surrender charges not disclosed
Unfair Claims Practices
Alabama requires insurers to handle claims fairly and promptly:
Prohibited Practices
| Practice | Description |
|---|---|
| Unreasonable Denial | Denying claims without investigation |
| Delay | Failing to act promptly on claims |
| Low-balling | Offering significantly less than owed |
| Misrepresenting Coverage | Denying based on false policy interpretation |
| Threatening | Intimidating claimants |
| Failure to Explain | Not providing denial reasons |
Required Claims Practices
- Prompt investigation of claims
- Fair evaluation of claims
- Timely payment of valid claims
- Clear communication with claimants
- Reasonable settlement offers
Unfair Discrimination
Alabama prohibits unfair discrimination in insurance:
Prohibited Basis for Discrimination
- Race, color, or national origin
- Religion
- Sex (with limited actuarial exceptions)
- Disability (with limited actuarial exceptions)
Permitted Underwriting Factors
Risk-based underwriting using:
- Age (actuarially justified)
- Health status (for non-ACA plans)
- Occupation
- Geographic location
Penalties for Violations
| Violation Level | Penalty |
|---|---|
| Minor First Offense | Warning, corrective action |
| Repeated Violations | Fines up to $1,000 per violation |
| Pattern of Conduct | License suspension |
| Willful Violations | License revocation |
| Fraud | Criminal prosecution |
Which of the following is generally PERMITTED in Alabama insurance sales?
Which practice involves inducing a policyholder to replace coverage through misrepresentation?
Is rebating generally permitted in Alabama?