18.3 Unfair Trade Practices and Unfair Claims Settlement

The Unfair Trade Practices Act (UTPA) — based on the NAIC model — prohibits deceptive and dishonest practices in marketing and selling insurance. These are the most heavily tested ethics items because they describe specific named violations. The commissioner may issue cease-and-desist orders, levy fines, and suspend or revoke licenses for violations.

Named Unfair Trade Practices

Rebating, Twisting, and Churning

Three practices are constantly confused on the exam:

• Rebating — offering an inducement not stated in the policy (cash, gift cards, sharing commission) to get someone to buy. In most states both the producer who offers and the applicant who accepts can be penalized. A handful of states (e.g., Florida, California with limits) permit limited rebating.
• Twisting — using misrepresentation to persuade a policyholder to replace a policy (often with a different insurer) to the policyholder's detriment.
• Churning — replacing a policy using values from the existing policy of the same insurer (the producer's own company), again through misrepresentation.

Memory hook: Twisting crosses companies; churning stays within the same company.

Permitted vs. Prohibited Inducements

The line is whether the value is specified in the contract and offered equally to all in the same class.

Unfair Claims Settlement Practices Act

A companion model law, the Unfair Claims Settlement Practices Act, targets bad-faith claims handling. Prohibited acts include:

• Failing to acknowledge and act promptly on claim communications
• Failing to adopt reasonable standards for prompt investigation
• Not attempting in good faith to settle claims where liability is clear
• Compelling insureds to sue by offering substantially less than amounts ultimately recovered
• Misrepresenting pertinent facts or policy provisions relating to a claim
• Failing to provide a reasonable explanation for a denial

A single act may be a violation if it is part of a general business practice — and many states penalize even an isolated egregious act.

Penalties

Penalties escalate with intent and frequency. A typical statutory framework:

Unknowing violation: fine up to a per-act cap (e.g., $1,000 each, capped per year). Knowing violation: substantially higher fine (e.g., up to $25,000 each) plus possible license suspension or revocation. Criminal acts (fraud) can add imprisonment.

The commissioner generally must give notice and a hearing before imposing penalties — due process is built into the administrative process.

Coercion, Intimidation, and Boycott

Three related practices restrain free competition and are explicitly banned:

• Coercion - using physical or economic force to make someone buy insurance. A classic example is a lender requiring a borrower to buy insurance from a specific affiliated agency as a condition of the loan.
• Intimidation - threatening harm to compel an insurance transaction.
• Boycott - refusing to deal with, or pressuring others to refuse to deal with, a competitor.

Because these acts restrain or monopolize the business of insurance, they fall outside the McCarran-Ferguson antitrust exemption and can draw federal scrutiny in addition to state penalties.

Defamation in Detail

Defamation is making, publishing, or circulating a false, maliciously critical statement about the financial condition of an insurer or producer. The harm targeted is reputational damage that could drive business away from a competitor. Note the distinction: criticizing a rival's service is competition, but knowingly spreading false statements about solvency is defamation.

Distinguishing the Big Four Replacement Abuses

Sliding is adding coverage the applicant did not request, or stating that extra coverage is required by law when it is not, then charging for it. All four are prohibited, but the exam usually pivots on twisting vs. churning (different insurer vs. same insurer) and on whether misrepresentation was used.

Worked scenario: A producer at Insurer X tells a client her existing Insurer X whole life policy is 'obsolete' (false) and uses its cash value to fund a new Insurer X policy, generating a fresh commission and harming the client. Because the misrepresentation stays within the same insurer and taps the existing policy's values, this is churning, not twisting.