18.1 Unfair Trade Practices and Unfair Claims Settlement

The Two NAIC Model Acts

The National Association of Insurance Commissioners (NAIC) drafts model laws that states adopt with local variations. Two models dominate this topic. The Unfair Trade Practices Act (UTPA) governs marketing and sales conduct. The Unfair Claims Settlement Practices Act (UCSPA) governs how an insurer investigates, negotiates, and pays claims.

Exam writers exploit the overlap between the two. A clue word like advertise, induce, or replace points to UTPA; words like investigate, deny, settle, or delay point to UCSPA.

Marketing Offenses Under the UTPA

Misrepresentation is any false or misleading statement about a policy's terms, benefits, dividends, or about the financial condition of the insurer. Intent is not required; a negligent misstatement still counts.

False advertising is misrepresentation directed at the public through media. Defamation is making a false statement that injures a competitor's reputation or financial standing.

Boycott, coercion, and intimidation are agreements that unreasonably restrain trade in the business of insurance — for example, refusing to write a property risk unless the insured also buys an unrelated line.

More Named UTPA Offenses

The model act also names several offenses the exam tests by short scenario:

• Unfair financial planning practices — holding out as a financial planner to sell insurance without proper qualification.
• Failure to maintain complaint records — insurers must log consumer complaints and their disposition.
• Improper claim of free insurance — advertising insurance as a 'free' gift tied to another purchase.
• Illegal inducements / special favors rooted in unfair discrimination between like risks.

Clue word strategy: if the statement is made to sell a policy, suspect a UTPA marketing offense rather than a claims-act violation.

Twisting vs. Churning

Both involve replacing coverage, but the target differs.

Memory hook: Twisting = Two companies; Churning = same Company. Both are driven by a producer chasing a fresh first-year commission, and both harm the consumer through new contestable periods and surrender costs.

Rebating and Unfair Discrimination

Rebating is offering anything of value not specified in the policy as an inducement to buy — returning commission, paying the client's premium, or giving a gift above a statutory cap (often $25 to $100). It is illegal in most states even when the buyer requests it, because it creates unfair treatment of otherwise identical buyers.

Unfair discrimination means treating risks of the same class and essentially the same hazard differently in rate or terms. Discrimination by race, religion, or national origin is prohibited. Pricing by loss history or driving record is legal because it reflects actuarial risk.

Claims Offenses Under the UCSPA

The UCSPA lists prohibited claims conduct, including:

• Misrepresenting pertinent facts or policy provisions at issue in a claim
• Failing to acknowledge or act promptly on claim communications
• Failing to adopt reasonable investigation standards
• Not attempting a good-faith, prompt, fair settlement once liability is clear
• Compelling insureds to sue by offering substantially less than amounts ultimately recovered
• Failing to provide a reasonable written explanation for a denial

The 'General Business Practice' Threshold

A single mistake is usually not a UCSPA violation. The model act penalizes conduct committed with such frequency as to indicate a general business practice — a pattern, not an isolated error. This distinction is a favorite trap: an exam scenario describing one late payment is typically not a sanctionable claims-act violation, whereas a described pattern is.

Remedies include cease-and-desist orders, monetary penalties per violation, and license suspension or revocation. Some states layer bad-faith civil liability on top of the regulatory penalties.

Comparing the Two Acts

Keeping the two model acts straight is half the battle on this topic.

A worked penalty example: if a state fines $5,000 per willful violation and an insurer's pattern produced 8 willful violations, the exposure is 8 x $5,000 = $40,000, separate from any policyholder bad-faith damages.

The Fourteen Unfair Claim Settlement Practices

The NAIC Unfair Claims Settlement Practices Act (mirrored in most state codes, including Connecticut's CGS 38a-816) enumerates specific prohibited claim behaviors.

The most-tested include: misrepresenting policy provisions; failing to acknowledge and act promptly on communications; failing to adopt reasonable standards for prompt investigation; refusing to pay without conducting a reasonable investigation; failing to affirm or deny coverage within a reasonable time; not attempting good-faith, prompt, equitable settlement once liability is clear; compelling insureds to litigate by offering substantially less than amounts ultimately recovered; and attempting to settle for less than a reasonable person would expect based on the insurer's own advertising.

The recurring exam theme is promptness, good faith, and reasonableness - and that a violation generally requires conduct performed with such frequency as to indicate a general business practice, not a single isolated error.

Exam Tip: Unfair trade practices target the sales process (twisting, rebating, defamation, coercion); unfair claims practices target claim handling (delay, lowball, failure to investigate). A single bad claim is usually a contract dispute; a pattern is a market-conduct violation.