4.1 Unfair Trade Practices
Key Takeaways
- California Insurance Code Section 790.03 is the Unfair Insurance Practices Act, listing prohibited acts including misrepresentation, false advertising, boycott/coercion/intimidation, false financial statements, and rebating.
- Twisting is inducing a policyholder to drop one policy and buy another through misrepresentation; rebating is giving anything of value not specified in the policy as an inducement to buy.
- Section 790.03(h) lists 16 unfair claims settlement practices that violate the law when done knowingly once or with such frequency as to indicate a general business practice.
- Under the Fair Claims Settlement Practices Regulations (10 CCR 2695), insurers must acknowledge a claim within 15 calendar days and accept or deny it within 40 calendar days after receiving proof of claim.
- The Insurance Commissioner enforces the Unfair Insurance Practices Act through cease-and-desist orders and civil penalties up to $5,000 per act, or $10,000 per willful act.
The Unfair Insurance Practices Act (Section 790.03)
The heart of California's market-conduct law is the Unfair Insurance Practices Act (UIPA), codified at Insurance Code Section 790.03. It applies to insurers, agents, brokers, and other licensees, and it lists specific acts that are defined as unfair methods of competition or unfair or deceptive acts in the business of insurance. Memorizing the categories is heavily tested on the California P&C exam.
The principal prohibited acts under 790.03 are:
| Subsection | Prohibited Act | Plain-language meaning |
|---|---|---|
| (a) | Misrepresentation & false advertising | Misstating policy terms, benefits, dividends, or an insurer's financial condition |
| (a) | Defamation | Making false or maliciously critical statements about another insurer that injure its business |
| (b) | False statements / misleading advertising | Disseminating any untrue, deceptive, or misleading assertion to the public |
| (c) | Boycott, coercion, intimidation | Acts that unreasonably restrain or monopolize the business of insurance |
| (d)–(e) | False financial statements & false entries | Filing or recording false financial information with intent to deceive |
| (f) | Unfair discrimination | Charging different rates to individuals of the same class and equal risk |
| (g) | Rebating | Giving any unspecified inducement to buy |
| (h) | Unfair claims settlement practices | A list of 16 prohibited claims-handling behaviors |
A single knowing violation, or a pattern frequent enough to show a general business practice, can trigger enforcement.
Twisting, Rebating, and Other Producer Misconduct
Several named offenses appear repeatedly on the exam because producers commit them in the field.
Twisting is the act of inducing a policyholder to lapse, surrender, or replace an existing policy and buy a new one through misrepresentation or incomplete comparison. The replacement itself is legal; the misrepresentation used to drive it is what makes it twisting. A near-cousin is churning, which is twisting that replaces a policy with another issued by the same insurer.
Rebating is offering or giving any valuable consideration or inducement not specified in the policy — cash, a gift, a share of commission, paid services — to persuade someone to buy insurance. Both the producer who offers a rebate and the consumer who knowingly accepts one can be penalized. California permits ordinary advertising items of nominal value and certain value-added services, but a split commission to the insured is a classic rebate.
Misrepresentation covers false statements about a policy's terms, benefits, premiums, or an insurer's financial standing. Defamation under 790.03(a) is making false, maliciously critical statements about another insurer. Boycott, coercion, and intimidation under 790.03(c) target anti-competitive conduct — for example, an agency forcing a customer to buy unwanted coverage as a condition of getting the coverage they need.
Watch the distinction: unfair discrimination is charging different premiums to two insureds of the same class and equal risk, while charging different rates for genuinely different risk is lawful underwriting.
Other named practices include false advertising (any untrue, deceptive, or misleading public statement about a policy or insurer) and knowingly making false entries in an insurer's books. Each stands on its own as a violation; a producer does not have to profit from the act for it to be prohibited. The common thread is that the conduct distorts the consumer's informed choice or fair competition among insurers.
Unfair Claims Settlement Practices & Fair Claims Regulations
Section 790.03(h) lists 16 unfair claims settlement practices. They become violations when committed knowingly on a single occasion, or with such frequency as to indicate a general business practice. Frequently tested examples include:
- Misrepresenting pertinent facts or policy provisions relating to a coverage at issue
- Failing to acknowledge and act reasonably promptly on claim communications
- Failing to adopt reasonable standards for prompt investigation of claims
- Failing to affirm or deny coverage within a reasonable time after proof of loss
- Not attempting in good faith to reach a prompt, fair, equitable settlement where liability is reasonably clear
- Compelling insureds to litigate by offering substantially less than amounts ultimately recovered
The Fair Claims Settlement Practices Regulations (Title 10, CCR Section 2695) put hard deadlines on these duties. The most-tested timeframes are:
| Action | Deadline |
|---|---|
| Acknowledge receipt of a claim / respond to a communication needing reply | 15 calendar days |
| Begin investigation after notice of claim | Within 15 calendar days |
| Accept or deny the claim, in whole or in part, after receiving proof of claim | 40 calendar days |
| Pay an accepted claim after agreement is reached | 30 calendar days |
| Written notice if more time is needed to accept/deny | Every 30 calendar days |
Violations of the UIPA are enforced by the Insurance Commissioner through cease-and-desist orders, license suspension or revocation, and civil penalties of up to $5,000 per act — or up to $10,000 per act committed willfully.
Why the timeframes matter
The 15-day and 40-day deadlines are not mere guidelines; a missed deadline can itself be evidence of an unfair practice. If the insurer needs more time to decide, it must send the claimant written notice every 30 days explaining the delay and what is still needed. Insurers must also provide claim forms and instructions promptly, must not ask for information already provided, and must explain in writing any denial or partial denial, citing the policy provision or legal basis. 03(h).
A frequent exam trap is confusing the two clocks: acknowledge within 15 days, decide within 40 days after proof of claim.
A producer convinces a client to surrender a paid-up homeowners policy and buy a new one by falsely claiming the existing policy excludes water damage when it does not. What practice is this?
Under the Fair Claims Settlement Practices Regulations, within how many calendar days must an insurer accept or deny a claim after receiving proof of claim?
An agent offers to refund part of her commission directly to a prospect as cash if the prospect buys a commercial auto policy. This is an example of: