4.1 Unfair Trade Practices

The Statutory Framework: AS 21.36

Alaska Statutes (AS) 21.36 — Trade Practices and Frauds is the heart of insurance ethics law on the exam. It exists because the McCarran-Ferguson Act leaves insurance regulation to the states, so Alaska — not a federal agency — polices unfair competition and deceptive acts in insurance. AS 21.36.020 makes it illegal to commit any practice the chapter defines as unfair, even if the consumer suffers no actual loss.

The Director of Insurance (head of the Alaska Division of Insurance) enforces AS 21.36 through a graduated set of tools: a cease-and-desist order, administrative fines, license suspension or revocation, and referral for criminal prosecution. Knowing which practice a fact pattern describes — misrepresentation vs. rebating vs. twisting — is the most heavily tested skill in this chapter.

Misrepresentation and False Statements

Under AS 21.36.030, a producer or insurer may not make, issue, or circulate a statement that misrepresents the terms, benefits, dividends, or value of a policy. Prohibited conduct includes:

• Misstating policy terms, the share of dividends, or projected values
• Using a deceptive policy illustration that is not clearly labeled as non-guaranteed
• Misrepresenting the financial condition of an insurer
• Making a false statement that an insurer is a member of, or protected by, the guaranty association (also a 4.3 rule)

False Advertising and Defamation

Advertising must be truthful and not deceptive. A producer may not publish an ad that is untrue, misleading, or that disparages a competitor's business, financial standing, or management — that last act is the separate offense of defamation under AS 21.36.040. Testimonials must be genuine, government endorsement may not be implied, and the same standards apply to social media posts, which must identify the producer and may not make unsubstantiated claims. A worked trap: an agent who posts "State-approved retirement plan — better than any bank" commits both false advertising and misrepresentation of a government endorsement.

Rebating (AS 21.36.120)

Rebating is offering any inducement to buy insurance that is not plainly expressed in the policy. The classic example is returning part of the commission or premium to the client. Alaska is unusual in that the statute makes both sides liable: the producer who offers a rebate and the insured who knowingly accepts a rebate, discount, abatement, credit, special favor, or valuable consideration both violate the law.

Prohibited under AS 21.36.120

• Returning part of the premium or commission to the buyer
• Sharing a commission with an unlicensed person
• Paying a fee for an insurance referral
• Offering prizes, gifts, or services of more than nominal value as an inducement

Permitted (not rebating)

• Paying commissions to a properly licensed producer
• Lawful dividends, savings, or unabsorbed premium returned to participating policyholders
• Marketing items of nominal value — pens, calendars, magnets
• Bona fide group plan premium discounts

Exam tip: A "$25 gift card to anyone who buys today" is rebating; a $2 logo pen is not. The line is nominal value and whether it is an inducement to buy.

Twisting vs. Churning

Twisting (AS 21.36.060) is using misrepresentation or an incomplete comparison to induce a client to replace a policy from a different insurer. Churning is the same abuse but the replacement uses values from the client's existing policy with the same insurer (often draining cash value to fund a new sale).

Neither is automatically illegal because replacement is sometimes proper; what makes them violations is the misrepresentation and lack of suitable disclosure.

Tied Sales and Boycott

The sale of insurance may not be tied to another transaction. A lender may not condition a loan on the borrower buying insurance from a specific agent or insurer — the borrower must be free to choose. Related prohibited acts under AS 21.36 include boycott, coercion, and intimidation intended to restrain or monopolize the business of insurance. A bank that says "we will only approve your mortgage if you buy the homeowner policy through our affiliated agency" has committed an illegal tied sale.

Unfair Claims Settlement Practices

Alaska adopts the Unfair Claims Settlement Practices standard (AS 21.36.125). A single act can violate the law, but the Director generally treats a general business practice of these acts as the most serious offense. Prohibited insurer conduct includes:

• Misrepresenting pertinent facts or policy provisions to a claimant
• Failing to acknowledge and act reasonably promptly on communications about a claim
• Refusing to pay a claim without conducting a reasonable investigation
• Not attempting in good faith to settle a claim where liability is reasonably clear
• Offering substantially less than the amount ultimately recovered, to force the claimant into litigation
• Compelling insureds to sue by routinely offering far less than policy value

Unfair Discrimination (AS 21.36.090 and AS 21.36.120)

Insurers may not unfairly discriminate between individuals of the same class and equal expectation of life, or between risks of essentially the same hazard, in premium rates, dividends, or other policy terms. The key tested distinction is fair vs. unfair discrimination.

Permitted risk-based underwriting factors include age, documented health and claims history, occupation hazard, and lifestyle factors such as smoking or skydiving. What is never permitted is treating two people of the same risk class differently, or using a protected characteristic as the basis for rating or denial.