Unfair Trade Practices

All states have adopted versions of the NAIC Unfair Trade Practices Act. These practices are PROHIBITED and can result in fines, license suspension, or revocation.

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Misrepresentation

Definition: Making false or misleading statements about:

• Policy terms, benefits, coverage, or exclusions
• Dividends or future returns
• Financial condition of insurer
• Premium amounts or payment terms
• Legal requirements to purchase insurance

Example: Telling a client that collision coverage includes mechanical breakdown (it doesn't).

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Twisting

Definition: Misrepresenting policy terms to induce a policyholder to lapse/cancel existing coverage and purchase a new policy from a DIFFERENT insurer.

Example: Falsely claiming a client's current policy "is about to be cancelled" to sell them a new policy.

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Churning

Definition: Repeatedly replacing policies with the SAME insurer to generate new commissions.

Example: Every few years, convincing a client to cash in their policy and buy a new one from the same company.

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Rebating

Definition: Offering anything of value not specified in the policy as an inducement to purchase.

Examples of Rebating (Prohibited)

• Returning part of commission to buyer
• Paying buyer's premium for a period
• Giving expensive gifts ($25-$100+ depending on state)
• Providing free services not available to all

Allowed Practices

• Policy dividends (specified in contract)
• Nominal promotional items (pens, calendars, typically <$25)
• Published rate reductions available to all

Why Prohibited: Rebating creates unfair discrimination—one buyer gets something others don't.

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Unfair Discrimination

Prohibited (Unfair) Discrimination

Legal Underwriting Discrimination

Exam Key: The word "unfair" is critical. Discrimination based on legitimate, actuarially-justified risk factors is permitted and necessary.

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Other Prohibited Practices

Defamation

Making false statements about another insurer or producer.

• Libel: Written defamatory statements
• Slander: Spoken defamatory statements

Coercion and Intimidation

• Threatening to cancel existing coverage unless additional coverage purchased
• Forcing mortgagor to buy from specific company
• Using threats to prevent policyholder from switching insurers

Controlled Business

Writing insurance primarily on own property, family, or business associates.

• Typically limited to 25-50% of total premiums
• Producer should serve general public, not just personal connections