11.1 Prohibited Trade & Claims Practices
Key Takeaways
Twisting is the misrepresentation of a policy's terms or benefits to induce an insured to replace an existing policy with a new one, to the insured's detriment.
Rebating is returning or crediting any portion of the premium, or giving anything of value not specified in the policy, as an inducement to purchase; it is prohibited in most states.
The NAIC Unfair Trade Practices Act model defines 16 prohibited practices including coercion, intimidation, misrepresentation, false advertising, defamation, and unfair discrimination.
Unfair claims settlement practices include unreasonable delays, denial without reasonable investigation, and failure to explain coverage positions in writing.
State insurance commissioners investigate violations and may impose fines, license suspension or revocation, and restitution orders against producers and insurers.
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
| Practice | Definition | A&H Example |
|---|---|---|
| Twisting | Misrepresentation to induce replacement | Misstating an existing health policy's renewal to switch the insured |
| Rebating | Anything of value not in policy to induce sale | Paying the client's first premium out of producer pocket |
| Coercion | Force or threats to compel purchase | Threatening to cancel group life unless health is added |
| Misrepresentation | False statement about policy terms | Calling a fixed indemnity plan "major medical" |
| Defamation | Malicious false statement injuring competitor | Spreading false rumor about rival insurer's solvency |
| Unfair discrimination | Different terms for same class without actuarial basis | Charging two similarly situated groups different rates absent risk difference |
| Unfair claims delay | Unreasonable delay or denial without investigation | Denying a hospital claim without requesting medical records |
Which act is the defining element that makes a policy replacement a prohibited "twisting" violation?
The producer uses misrepresentation of policy terms or benefits to induce the replacement
The replacement results in a higher premium for the insured
The insured is over age 65 and replacing a Medicare Supplement policy
The replacement is reported to the existing insurer on the required notice form
A producer offers to refund $50 of her commission to an applicant if the applicant buys the health policy today. This practice is best described as:
A lawful commission-sharing arrangement permitted in all states
Twisting, because it induces the applicant to replace existing coverage
Rebating, because the refund is something of value not specified in the policy and used as an inducement to purchase
A permissible return-of-premium rider because it is tied to the sale
Under the NAIC Unfair Claims Settlement Practices Act, an insurer's act typically becomes a prohibited "unfair claims practice" only when:
It occurs even a single time against any policyholder
The claim involves a group health plan subject to ERISA
It is committed flagrantly or with such frequency as to indicate a general business practice
The insurer fails to pay within 10 business days of receiving the claim
Which of the following is NOT an example of the prohibited practice of defamation under the NAIC Unfair Trade Practices Act?
Maliciously telling an employer that a competing insurer is insolvent when it is not
Circulating a false rumor that a rival producer has been convicted of fraud
Making a false statement calculated to injure another insurer's reputation
Publishing a truthful, actuarially supported comparison of two policies' premium rates
An insurer charges two employer groups with identical census and risk profile different premium rates for the same insured health product, with no actuarial justification. This is best characterized as:
Lawful risk classification because group underwriting permits variance
Unfair discrimination, because the groups are in the same class and hazard and the rate difference is not actuarially justified
Rebating, because the lower-charged group is receiving an inducement
Twisting, because the rate variance induces one group to replace
Sections you finish are checked off in the contents.