Unfair Trade Practices in Hawaii

Hawaii law prohibits unfair and deceptive trade practices in the insurance industry to protect consumers and maintain market integrity. Producers must understand and avoid these prohibited practices.

Hawaii Unfair Trade Practices Law

Article 13 of Chapter 431 (HRS §431:13)

Unfair Insurance Trade Practices Act prohibits:

• Misrepresentation and false advertising
• Unfair discrimination
• Rebating and inducements
• Unfair claim settlement practices
• Twisting and churning
• Other deceptive practices

Exam Tip: Article 13 of Chapter 431 (HRS §431:13) is Hawaii's comprehensive unfair trade practices law. Most exam questions about prohibited practices reference this statute.

Misrepresentation and False Advertising

Prohibited Misrepresentations

Producers may NOT:

1. Misrepresent Policy Terms

   • False statements about coverages, benefits, or exclusions
   • Exaggerating policy benefits
   • Minimizing or hiding exclusions or limitations
   • Incorrect statements about premiums or dividends

2. Misrepresent Financial Condition

   • False statements about insurer's financial strength
   • Misleading statements about insurer's ratings or stability
   • Hiding insurer financial problems

3. Misrepresent Legal Requirements

   • False statements about what coverage is legally required
   • Misrepresenting licensing or certification requirements
   • Falsely claiming policy is government-approved or required

4. Misrepresent Competitor Products

   • False statements about competitors' policies
   • Unfair comparisons between policies
   • Disparaging competitors with false information

False Advertising

Prohibited Advertising Practices:

• Using misleading headlines or descriptions
• Failing to disclose material policy limitations
• Advertising coverage not actually available
• Using testimonials that misrepresent typical results
• Failing to disclose that advertiser is insurance producer

Example Violations:

• "Guaranteed Approval - No Medical Exam" (when underwriting required)
• "Cheapest Auto Insurance in Hawaii" (without supporting data)
• "Full Coverage for $50/month" (no such thing as "full coverage")
• "Hurricane Coverage Available" (when coverage severely limited or excluded)

Exam Tip: Producers are responsible for all advertising they use, including online ads, social media posts, flyers, and business cards. Misleading advertising can result in license suspension even if producer didn't intend to mislead.

Unfair Discrimination

What Constitutes Unfair Discrimination

Prohibited:

• Refusing to insure based on race, religion, national origin, or ancestry
• Different rates or terms based on protected characteristics
• Discriminatory underwriting or claims practices
• Geographic redlining without actuarial justification

Permitted Distinctions:

• Rate differences based on sound actuarial principles
• Underwriting based on legitimate risk factors
• Geographic rating based on loss experience
• Age-based rating (if actuarially justified)

Hawaii-Specific Discrimination Issues

Lava Zones:

• Permitted: Higher rates or coverage limitations in Lava Zone 1-2 (actuarially justified risk)
• Prohibited: Refusing all coverage solely due to lava zone without individualized assessment

Coastal Properties:

• Permitted: Hurricane and flood exposure-based rating
• Prohibited: Blanket refusal to insure all coastal properties

Protected Classes Under Hawaii Law:

• Race, color, religion, ancestry, national origin
• Sex, gender identity, sexual orientation
• Age (except actuarially justified insurance distinctions)
• Disability or HIV status
• Marital status

Rebating and Inducements

What Is Rebating?

Rebating is offering any inducement or benefit not specified in the policy to encourage insurance purchase.

Prohibited Rebating Practices

Examples of Illegal Rebating:

1. Cash Rebates

   • "Buy this policy and I'll give you $100 back"
   • Sharing commissions with policyholders
   • Refunding part of premium to client

2. Gifts and Prizes

   • Offering gift cards, electronics, or merchandise for purchasing policy
   • Prize drawings contingent on buying insurance
   • Free services (car wash, lawn care) for policy purchase

3. Reduced Premiums

   • Waiving premium payments
   • Paying part of policyholder's premium
   • Offering "special discounts" not available to all similarly situated clients

4. Other Inducements

   • Offering employment or business referrals
   • Providing free services unrelated to insurance
   • Any benefit not specified in the policy contract

Permitted Practices (NOT Rebating)

Allowed:

• Standard policy discounts available to all similarly situated insureds (multi-policy, good driver, etc.)
• Advertising specialties of nominal value (pens, calendars, keychains under $25)
• Educational materials and information
• Premium financing at market rates
• Normal business courtesies (birthday cards, thank you notes)

Exam Tip: The key question is whether the inducement is available to all similarly situated customers and specified in the policy or company guidelines. Special favors to individual customers to induce purchase = rebating.

Twisting and Churning

Twisting

Twisting is inducing a policyholder to lapse, forfeit, or replace existing coverage for the producer's financial benefit.

Elements of Twisting:

1. Misrepresentation: False statements about existing or proposed policy
2. Inducement: Encouraging policyholder to drop existing coverage
3. New Policy: Purchasing replacement policy
4. Producer Benefit: Producer gains commission at policyholder's expense

Examples of Twisting:

• Exaggerating defects of existing policy to sell replacement
• Hiding disadvantages of replacement policy (new waiting periods, exclusions)
• Misrepresenting that replacement is required or necessary
• Failing to disclose surrender charges or loss of benefits

Red Flags for Twisting:

• Frequent policy replacements (every 1-2 years)
• Replacement when existing coverage adequate
• Incomplete comparison of existing vs. new coverage
• Focus on commission rather than client benefit

Churning

Churning is repeatedly replacing policies to generate new commissions without benefit to client.

Characteristics:

• Pattern of frequent replacements
• Replacement policies substantially similar to replaced policies
• No material benefit to policyholder from replacements
• Producer receives new first-year commissions repeatedly

Policy Replacement Requirements

When recommending policy replacement, Hawaii producers must:

1. Full Disclosure

• Provide written comparison of existing and proposed policies
• Disclose all material differences in coverage
• Explain costs of replacement (surrender charges, new contestability period)
• Compare premiums and benefits side-by-side

2. Suitability Analysis

• Document why replacement benefits client
• Consider client's circumstances and needs
• Analyze whether existing policy adequately serves client
• Alternative solutions if replacement not necessary

3. Replacement Forms

• Complete insurer-required replacement forms
• Notify existing insurer of replacement application
• Provide client with replacement notice disclosures
• Document client acknowledgment of replacement

Exam Tip: Hawaii requires producers to provide written comparison of existing and proposed policies when recommending replacement. Failure to disclose material differences is evidence of twisting.

Unfair Claim Settlement Practices

Hawaii law (HRS §431:13-103) prohibits unfair claim settlement practices.

Prohibited Claim Practices

1. Misrepresenting Policy Provisions

• Making false statements about coverage
• Misrepresenting exclusions or limitations
• Failing to disclose relevant policy provisions

2. Failing to Acknowledge Claims Promptly

• Not responding to claims communications within reasonable time
• Failing to acknowledge receipt of claim
• Unreasonable delays in claim investigation

3. Failing to Investigate Claims Properly

• Inadequate investigation of claim facts
• Ignoring available evidence
• Failing to conduct reasonable investigation before denying claim

4. Failing to Settle Claims Promptly

• Unreasonable delay in settling claim after liability established
• Forcing claimant to sue to recover undisputed amounts
• Delaying payment without justification

5. Offering Unreasonably Low Settlements

• Lowball settlement offers when liability clear
• Failing to explain basis for settlement offer
• Using pressure tactics to force acceptance of inadequate settlement

6. Requiring Unnecessary Documentation

• Demanding excessive documentation not required by policy
• Requesting irrelevant information to delay claim
• Imposing unreasonable burdens on claimant

7. Failing to Provide Claim Status

• Not responding to claimant inquiries about claim status
• Failing to explain delays or reasons for denial
• Lack of communication with claimant

8. Pattern of Claim Abuses

• Systematic underpayment of claims
• Company pattern of forcing litigation
• Routine denial of valid claims

Timeframes for Claim Handling

While Hawaii doesn't specify exact timeframes for all claim actions, reasonable and prompt handling is required:

Best Practices:

• Acknowledge claim: Within 5 business days of receipt
• Begin investigation: Immediately upon acknowledgment
• Request additional information: Within 10 days of identifying need
• Make claim decision: Within 30 days of receiving all necessary documentation
• Pay claim: Within 10 days of settlement agreement

Delays must be justified - insurers/producers must explain reasons for any delays beyond standard timeframes.

Producer Duties to Clients

Duty of Good Faith and Fair Dealing

All insurance transactions involve implied duty of good faith and fair dealing:

Producers Must:

• Act in client's best interest
• Provide honest, accurate information
• Disclose material information
• Avoid conflicts of interest
• Maintain client confidentiality

Duty of Reasonable Care

Producers have duty to exercise reasonable care in:

1. Assessing Client Needs

• Understanding client's insurance needs and circumstances
• Asking appropriate questions
• Considering client's financial situation and risk tolerance

2. Recommending Appropriate Coverage

• Recommending coverage that meets identified needs
• Explaining coverage options and limitations
• Advising of gaps in coverage

3. Placing Coverage Properly

• Binding coverage with appropriate insurer
• Ensuring application is complete and accurate
• Following through to policy issuance

4. Servicing the Policy

• Processing endorsements and changes promptly
• Reminding clients of renewal dates
• Advising of coverage changes or market conditions

Special Duties for Hawaii Risks

Hawaii producers must:

Hurricane Coverage:

• Explain hurricane coverage limitations and exclusions
• Discuss HHRF eligibility for high-value properties
• Advise of separate hurricane deductibles

Volcanic Hazards:

• Disclose lava zone classification and impact on coverage
• Explain volcanic exclusion in standard policies
• Discuss volcanic eruption endorsement availability

Flood and Tsunami:

• Recommend flood insurance for coastal and tsunami-zone properties
• Explain that standard policies exclude flood/tsunami
• Facilitate NFIP policy placement

Condo Associations:

• Review master policy adequacy
• Advise on gaps requiring unit owner coverage (HO-6)
• Discuss loss assessment coverage needs
• Stay current on HHRF for condo properties

Penalties for Unfair Trade Practices

Administrative Penalties

Insurance Commissioner May:

1. Issue Cease and Desist Order

   • Immediate order to stop prohibited conduct
   • Violation of order subjects producer to additional penalties

2. Suspend License

   • Temporary suspension (30 days to 1 year typical)
   • Cannot transact insurance during suspension
   • Must complete remedial education to reinstate

3. Revoke License

   • Permanent revocation
   • Severe violations (fraud, misappropriation, pattern of violations)
   • Cannot reapply for specified period (often 3-5 years minimum)

4. Impose Fines

   • Up to $10,000 per violation
   • Each act of unfair practice is separate violation
   • Multiple violations = substantial fines

5. Require Restitution

   • Repayment to harmed consumers
   • Refund of premiums or commissions
   • Compensation for damages

Criminal Penalties

Certain unfair practices may result in criminal prosecution:

Fraud:

• Felony charges for insurance fraud
• Penalties: Up to 5 years imprisonment, $10,000+ fines
• Restitution to victims

Misappropriation:

• Stealing premium funds or client money
• Felony charges: Imprisonment and substantial fines
• License revocation permanent

Civil Liability

Policyholders may sue for:

• Damages from misrepresentation or fraud
• Economic losses from inadequate coverage
• Emotional distress damages
• Punitive damages for egregious conduct
• Attorney fees and costs