11.1 Prohibited Trade & Claims Practices

The NAIC Unfair Trade Practices Act

Almost every state has adopted some version of the NAIC Unfair Trade Practices Act (model law), which enumerates specific acts or practices in the business of insurance that are declared unlawful if committed flagrantly and with such frequency as to indicate a general business practice. The state insurance commissioner is empowered to investigate, hold hearings, issue cease-and-desist orders, impose fines, and refer criminal violations for prosecution. While the model law sets the floor, many states add stricter local prohibitions, so a producer must always verify the rule in the state of the transaction.

The model statute's prohibited practices most relevant to an accident & health (A&H) producer include:

• Misrepresentation — false statements about the terms, benefits, or financial condition of a policy.
• False advertising — misleading ads, claims, or comparisons.
• Defamation — making false statements maliciously to injure another insurer or producer.
• Boycott, coercion, and intimidation — combining with others to force unfair terms or to exclude a competitor.
• Unfair discrimination — charging different rates or offering different benefits for the same class of risk without actuarial justification.
• Rebating — giving anything of value not in the policy as an inducement.
• Twisting — misrepresentation to induce replacement.
• Unfair claims settlement practices — unreasonable delay or denial.

Twisting

Twisting is a specific form of misrepresentation that occurs when a producer, by misrepresenting the terms, benefits, or conditions of an existing policy or of the proposed new policy, induces an insured to lapse, forfeit, surrender, or replace an existing policy with a new one to the insured's detriment. Twisting is distinct from a lawful replacement because the trigger is the misrepresentation — without it, an objectively suitable replacement is permissible. Classic twisting tactics include misrepresenting the cash value of an existing life policy, the waiver of premium in a disability contract, or the renewal provisions of a health policy.

Rebating

Rebating occurs when a producer or insurer returns, credits, or gives any portion of the premium, or any other thing of value not specified in the policy itself, as an inducement to purchase, continue, or renew an insurance contract. Examples include cash kickbacks, gifts above a nominal value, paying the first month's premium for the client, or offering a free service not in the contract. Rebating is prohibited in most states (Florida permits limited rebates under a narrow safe harbor; California permits sharing commissions with the insured's employer under strict conditions). A lawful practice that producers confuse with rebating is the return of premium rider — a contractual provision filed and approved in the policy that returns premium if no claims are filed — which is permissible because it is in the policy and not an inducement separate from the contract.

Coercion, Intimidation, and Boycott

Coercion is the use of physical or economic force to compel an applicant or insured to buy, continue, or lapse a policy. Intimidation is the threat of adverse action — for example, threatening to cancel an existing line of coverage unless the insured also buys a health product from the same producer. A boycott occurs when two or more persons combine to refuse to deal with another party in order to force unfair terms. For an A&H producer, a typical violation is conditioning the sale of a desirable group health policy on the employer's also buying unrelated ancillary products.

Misrepresentation and False Advertising

Misrepresentation is any false or misleading statement about the benefits, terms, cost, or financial condition of a policy. False advertising extends the prohibition to marketing materials, websites, and social media. A common A&H violation is advertising "guaranteed acceptance" for a product that is medically underwritten, or describing a limited-benefit indemnity plan as "major medical" with full ACA protections.

Defamation

Defamation in insurance regulation is making, publishing, or circulating any false statement maliciously calculated to injure another insurer, producer, or agent. Truth is a defense, and opinion is generally not defamation — but maliciously spreading rumors about a competing insurer's solvency to switch business is a textbook violation.

Unfair Discrimination

Unfair discrimination is charging different premiums, offering different benefits, or refusing coverage to insureds of the same class and hazard for reasons not actuarially justified. Note this is distinct from lawful risk classification — an insurer may charge a 60-year-old more than a 30-year-old for individual disability income because age correlates with morbidly anticipated claim frequency, and it may decline an applicant who fails underwriting in a medically underwritten product. Post-ACA, individual health insurance is guaranteed issue and may only vary premium by age (3:1 ratio), tobacco use (1.5:1), geography, and family size — so most individual A&H discrimination questions collapse into the ACA market-reform rules rather than the unfair-trade-practices act.

Unfair Claims Settlement Practices

The NAIC Unfair Claims Settlement Practices Act (model) prohibits specified claim-handling practices if committed with such frequency as to indicate a general business practice:

• Attempting to settle claims for less than the amount a reasonable person would believe owed based on advertising or written materials.
• Failing to acknowledge or act reasonably promptly on communications about claims.
• Failing to adopt and implement reasonable standards for the investigation and processing of claims.
• Refusing to pay claims without conducting a reasonable investigation.
• Failing to explain in writing the basis for denial or compromise settlement, including the policy language, law, or regulation relied upon.
• Delaying investigation or payment by requiring duplicative or unnecessary documentation.

Enforcement

State insurance departments investigate violations through market conduct examinations, consumer complaints, and producer audits. Sanctions include fines, restitution orders, license suspension or revocation, and criminal referral. A producer who is the subject of a disciplinary action is entitled to due process, including notice and a hearing, before the commissioner.

Quick Reference: Prohibited Practices