18.3 Unfair Trade Practices and Unfair Claims Settlement
Key Takeaways
- The Unfair Trade Practices Act lists prohibited marketing conduct; violations bring fines, cease and desist orders, and license suspension or revocation.
- Twisting uses misrepresentation to replace coverage between insurers; churning replaces within the same insurer using its values; rebating offers value not stated in the contract.
- Rebating is generally prohibited for both the producer offering it and the consumer accepting it; policy dividends and nominal-value items are allowed.
- The Unfair Claims Settlement Practices Act targets claim-handling abuses committed flagrantly or as a general business practice.
- Consumer-side application and claims fraud are distinct offenses, potentially federal under 18 U.S.C. 1033, while unfair practices are primarily state regulatory violations.
The Unfair Trade Practices Act
Every state has adopted a version of the NAIC's Unfair Trade Practices Act (UTPA), which lists prohibited conduct in the marketing and sale of insurance. Violations expose the producer and insurer to fines, license suspension or revocation, and cease and desist orders.
The exam tests whether you can recognize the named offense from a fact pattern. Learn the definitions precisely, because several offenses sound similar but differ in the mechanism of the abuse.
The Core Prohibited Practices
| Practice | Definition |
|---|---|
| Misrepresentation | Issuing false or misleading statements about a policy's terms, benefits, dividends, or an insurer's financial condition |
| Twisting | Using misrepresentation to persuade a policyowner to lapse or surrender existing coverage and replace it |
| Churning | Replacing coverage using values from the same insurer's existing policy, to generate new commissions |
| Rebating | Giving the client any inducement not stated in the contract (cash, gifts above small limits, shared commission) to buy |
| Defamation | Making false, derogatory statements about another insurer's financial condition |
| Boycott, coercion, intimidation | Restraining trade or forcing insurance through unfair pressure |
| Unfair discrimination | Differing rates/terms among people of the same class and risk |
| False advertising | Misleading ads, including improper use of the guaranty association |
Twisting vs. Churning vs. Rebating — the Classic Trap
These three are the most-missed items:
- Twisting uses misrepresentation to move a client from one insurer to another.
- Churning moves a client within the same insurer, often using the existing policy's cash value to fund a new one.
- Rebating is offering something of value not in the contract to induce a sale.
Scenario: A producer surrenders a client's whole-life policy at Company A and uses its cash value to buy a new policy at Company A, earning fresh commission with no real benefit to the client. That is churning (same insurer), not twisting.
Rebating Nuances
Most states prohibit rebating, but watch the exceptions:
- Permitted: items of nominal value (e.g., branded pens, calendars), and benefits actually built into the contract such as policy dividends.
- Prohibited: sharing commission with the buyer, paying a premium for the client, or gifts above the nominal threshold.
Trap: in most states, both the producer who offers a rebate and the consumer who knowingly accepts it can be penalized — rebating is not a victimless act. A handful of states have legalized rebating, but the exam tests the general prohibition.
Unfair Claims Settlement Practices Act
A separate model law, the Unfair Claims Settlement Practices Act, governs how insurers handle claims. A practice generally becomes a violation when it is committed flagrantly or with such frequency as to indicate a general business practice. Prohibited conduct includes:
- Misrepresenting pertinent facts or policy provisions relating to a claim.
- Failing to acknowledge and act promptly on communications about claims.
- Failing to adopt reasonable standards for prompt investigation.
- Not attempting in good faith a prompt, fair, equitable settlement once liability is clear.
- Compelling insureds to litigate by offering substantially less than amounts ultimately recovered.
- Delaying payment by demanding duplicative documentation.
Fraud Versus Unfair Practice
Distinguish the insurer/producer offenses above from consumer-side insurance fraud:
- Application fraud — an applicant lies on the application (e.g., concealing tobacco use).
- Claims fraud — a beneficiary or insured files a false or inflated claim.
Fraud involving insurance can be a federal crime under 18 U.S.C. 1033, and dishonesty felons need 1033 consent to work in the business. Unfair trade and claims practices, by contrast, are primarily state regulatory violations enforced by the Commissioner through fines, orders, and license action.
Distinguishing twisting, churning, and rebating
The Unfair Trade Practices Act enumerates prohibited marketing conduct. Three replacement/inducement offenses are constantly confused on the exam:
| Offense | What happens | Between whom |
|---|---|---|
| Twisting | Misrepresentation induces a replacement | Different insurers |
| Churning | Replacement funded by the policy's own values | Same insurer |
| Rebating | Offering value not stated in the contract to induce a sale | Producer ↔ consumer |
Rebating is prohibited for both the producer who offers it and the consumer who accepts it. Permitted exceptions are narrow: policy dividends, and items of nominal value bearing the insurer's name (pens, calendars). Other unfair practices include misrepresentation, false advertising, defamation of a competitor, boycott/coercion/intimidation, and unfair discrimination between insureds of the same class and risk.
A producer convinces a client to surrender a policy at Insurer A and replace it with a new policy at Insurer A, using the old policy's cash value, generating a new commission with no real benefit to the client. This is best described as:
Under the Unfair Claims Settlement Practices Act, an insurer's conduct generally rises to a violation when it is: