4.1 Unfair Trade Practices
Key Takeaways
- The Arkansas Unfair Trade Practices Act (Ark. Code Ann. § 23-66-201 et seq.) lists the specific acts that are illegal in the business of insurance
- Rebating, twisting, churning, defamation, boycott/coercion, and unfair claims practices are all named statutory violations
- Rebating is prohibited, but dividends, filed discounts, and gifts of nominal value (Arkansas commonly cites a $100 ceiling) are not rebates
- Twisting requires a misrepresentation to induce replacement; churning is replacement within the same insurer mainly to generate commission
- The Commissioner may impose penalties up to $1,000 per non-willful act (aggregate $10,000), rising to $5,000 per knowing act (aggregate $50,000 per six-month period), plus suspension or revocation
The Unfair Trade Practices Act
Arkansas regulates conduct in the business of insurance through the Unfair Trade Practices Act (Ark. Code Ann. § 23-66-201 et seq.). The Act gives the Insurance Commissioner authority to define, investigate, and penalize "unfair methods of competition" and "unfair or deceptive acts." The state-law portion of the exam tests whether you can identify a named act and distinguish it from a lookalike term, so memorize the definitions, not just the labels.
Misrepresentation
Misrepresentation is any false, deceptive, or misleading statement about an insurance policy or insurer. It includes misstating policy benefits, terms, dividends, or the financial condition of an insurer, and using a misleading policy illustration. A producer who tells a client an indexed universal life policy "is guaranteed to earn 8%" has misrepresented — the illustrated rate is not guaranteed.
| Prohibited statement | Why it violates the Act |
|---|---|
| "This policy covers every illness" | No health policy is unlimited; exclusions exist |
| "Your premium can never increase" | False as to most non-guaranteed products |
| "The dividend is guaranteed each year" | Dividends are never guaranteed |
| "Buy today or you lose this rate forever" | False urgency to force a sale |
False Advertising and Defamation
False advertising covers any untrue, deceptive, or misleading advertisement in a newspaper, mailer, website, or broadcast. Ads must not imply government endorsement and must not misuse the word "free." Defamation is making a false statement — oral, written, or broadcast — designed to injure another insurer or producer, such as falsely claiming a competitor "is about to go bankrupt."
Boycott, coercion, and intimidation are also named acts: agreeing to restrain trade or forcing a transaction (for example, a lender requiring a borrower to buy insurance from one specific agency).
Rebating
Rebating is offering any valuable inducement that is not specified in the policy to persuade a person to buy or keep insurance — returning part of the commission, paying the first premium, or giving a gift of real value. Rebating is prohibited in Arkansas, and a person who accepts a rebate is equally guilty.
The following are NOT rebates and remain legal:
- Policy dividends (return of divisible surplus) on a participating policy
- Filed rate discounts approved by the Department (for example, nonsmoker or group rates)
- Gifts of nominal value — advertising novelties; Arkansas study materials commonly use a $100 ceiling for promotional items
- Educational materials and value-added services tied to the product
Twisting vs. Churning
These two replacement violations look alike and are deliberately paired on the exam. The key difference is whose policy is replaced and whether a misrepresentation occurred.
| Element | Twisting | Churning |
|---|---|---|
| Misrepresentation required? | Yes — a false/misleading statement | Not necessarily |
| Whose policy is replaced? | Usually a competitor's policy | The same insurer's existing policy |
| Core motive | Induce a lapse/replacement through deceit | Generate new commissions from values built up in the old policy |
| Example | Telling a client his old policy "has no cash value left" when it does | Repeatedly using a client's cash value to buy a new policy from the same company |
Twisting = misrepresentation to induce replacement. Churning = replacement (often internal) primarily to manufacture commissions, frequently without proper replacement disclosure. Both can trigger license action and require completion of replacement-notice forms when an existing life policy is involved.
Unfair Claims Settlement Practices
Arkansas adopts the NAIC model of Unfair Claims Settlement Practices. A single act may not be enough; many of these become violations when committed "with such frequency as to indicate a general business practice."
| Prohibited practice | Plain-language meaning |
|---|---|
| Misrepresenting facts or policy provisions | Denying a valid claim by twisting the contract language |
| Failing to acknowledge/act promptly | Ignoring claim communications |
| No reasonable investigation | Denying before investigating the facts |
| Not attempting prompt, fair settlement | "Low-balling" when liability is clear |
| Forcing litigation by underpaying | Offering far less than amounts ultimately recovered |
| Failing to give a reasonable explanation | Denying without stating the policy basis |
Unfair Discrimination
Arkansas prohibits unfair discrimination — charging different rates or refusing coverage among individuals of the same class and equal expectation of life or risk. Distinctions must be actuarially justified.
- Prohibited basis: race, color, religion, national origin; and sex/marital status except where actuarially supported and legally permitted
- Permitted (actuarial) factors: age, tobacco use, documented health status (for non-ACA products), and occupation/avocation hazard
Sliding and Other Named Acts
Two additional named acts appear on the Arkansas state portion. Sliding is adding coverage or a fee to a policy without the applicant's informed consent — for example, quietly bundling an accidental-death rider into an auto-debit premium and claiming it is required. Coercion in the lending context (forcing a borrower to buy insurance from a named agency as a loan condition) and fictitious grouping (creating a sham group only to obtain group rates an individual would not qualify for) are likewise prohibited.
Distinguish sliding from rebating: rebating gives the client something of value, while sliding charges the client for something not knowingly requested.
Penalties
The Commissioner first holds a hearing and, on finding a violation of the trade-practices sections, issues a written cease-and-desist order. Under Ark. Code Ann. § 23-66-210, the Commissioner may also order a monetary penalty. The dollar figures turn on the producer's state of mind:
| Violation | Per act/violation | Aggregate cap |
|---|---|---|
| Did not know / non-knowing | up to $1,000 | up to $10,000 total |
| Knew or reasonably should have known | up to $5,000 | up to $50,000 in any six-month period |
A knowing violation may also bring suspension or revocation of the license under § 23-66-210(a)(2). Separately, violating the cease-and-desist order itself exposes the person to a penalty of up to $10,000 per act under § 23-66-211. Knowing insurance fraud may also be referred for criminal prosecution.
Because penalties are assessed per act, a pattern of identical misrepresentations across many policies can multiply toward the aggregate cap, which is why "general business practice" language matters so much in the claims-settlement rules above. Watch the trap: a candidate who memorizes a single flat number will miss that the per-act ceiling quadruples from $1,000 to $5,000 once the producer knew or should have known of the violation, and that the six-month $50,000 aggregate applies only to that knowing tier.
A producer tells a client her existing whole life policy "is worthless and has no cash value" — which is false — to convince her to buy a new policy from a different company. Which prohibited practice is this?
Which of the following is PERMITTED under the Arkansas Unfair Trade Practices Act?
Under Ark. Code Ann. § 23-66-210, what is the maximum monetary penalty PER ACT when a producer knew or reasonably should have known of an Unfair Trade Practices Act violation?