18.1 Unfair Trade Practices and Unfair Claims Settlement
Key Takeaways
- Twisting is inducing a replacement through misrepresentation (usually a different insurer); churning uses values from a policy with the same insurer to generate new commissions.
- Rebating is giving any valuable consideration not in the contract to induce a sale; in most states both the producer and the consumer who knowingly accepts can be penalized.
- The Unfair Claims Settlement Practices Act applies when prohibited conduct occurs with such frequency as to indicate a general business practice, not for an isolated good-faith error.
- Insurers must provide a written explanation of a claim denial citing the policy provision relied upon; denying without a reasonable investigation or unexplained delay when liability is clear is an unfair practice.
- Coercion (often tying a loan to insurance), boycott, intimidation, and defamation (false statements harming a competitor) are distinct prohibited acts that restrain free competition.
The Unfair Trade Practices Act Framework
Every state has adopted some version of the NAIC Unfair Trade Practices Act, which gives the insurance commissioner authority to define, investigate, and penalize unfair or deceptive acts in the business of insurance. The act does not list every prohibited act; it sets categories and lets the commissioner issue cease-and-desist orders, levy fines, and suspend or revoke licenses. On the national portion, expect to identify a described scenario by its correct term. The trap is that several practices look similar (twisting vs. churning, rebating vs. sliding), so you must key on who is involved and what the producer concealed.
The Marketing-Practice Vocabulary You Must Memorize
These terms appear on nearly every L&H exam. Read each definition with its distinguishing feature in mind:
| Practice | Definition | Distinguishing key |
|---|---|---|
| Misrepresentation | Making false or misleading statements about a policy's terms, benefits, or dividends | A false statement about the product |
| Twisting | Inducing a replacement through misrepresentation | Replacement + misrepresentation, usually a different insurer |
| Churning | Inducing replacement using values from a policy with the same insurer | Same company, often to generate new commissions |
| Rebating | Giving any valuable consideration not in the contract to induce a sale | Sharing commission, paying premium, gifts of value |
| Sliding | Adding coverage/charges without the applicant's knowledge or consent | Concealed add-on |
| Defamation | False statements harming a competitor's or insurer's reputation | Attack on a competitor |
| Coercion / boycott | Using economic force to restrain trade | Pressure tactics, e.g. tying a loan to insurance |
A classic distractor: a producer offers to share part of the first-year commission so the client pays a lower effective price. That is rebating, not good service, and in most states both the producer and the consumer who knowingly accepts it can be penalized.
Two more terms round out the marketing list. Coercion is using physical or economic force to pressure a purchase—most often tying, where a lender conditions a loan on buying insurance from a particular source. Boycott, coercion, and intimidation are grouped because they all restrain free competition. A false financial statement—knowingly filing or publishing a misleading statement of an insurer's financial condition—is a separate prohibited act that protects the solvency-disclosure system regulators rely on.
Unfair Claims Settlement Practices
The Unfair Claims Settlement Practices Act targets how insurers handle claims. A single isolated error is generally not a violation; the act applies when an insurer commits the act with such frequency as to indicate a general business practice. That phrase is a high-frequency exam point. Prohibited conduct includes:
- Misrepresenting pertinent facts or policy provisions relating to a claim.
- Failing to acknowledge and act reasonably promptly upon communications about claims.
- Failing to adopt and implement reasonable standards for prompt investigation.
- Refusing to pay claims without conducting a reasonable investigation.
- Not attempting in good faith to effectuate prompt, fair, and equitable settlement once liability is reasonably clear.
- Compelling insureds to litigate by offering substantially less than amounts ultimately recovered.
- Failing to provide a written explanation of a denial that cites the policy provision relied upon.
Proper Claims Flow
The expected order: (1) claimant submits notice of claim, (2) insurer supplies claim forms / proof-of-loss instructions, (3) insurer investigates, (4) insurer pays, denies in writing with reasons, or requests more information within statutory timeframes. Note the difference between a legitimate denial (excluded peril, lapsed policy, material misrepresentation discovered during contestability) and an unfair denial (no investigation, unexplained delay when liability is clear). Requiring proof of loss or ordering medical records to verify a disability claim is proper—never an unfair practice.
A related concept is good faith. When an insurer denies or delays a claim without a reasonable basis after liability is clear, it may face a bad-faith action, which can expose the insurer to damages beyond the policy limit. Producers should counsel insureds to submit timely notice of claim and proof of loss, because most policies set deadlines, and failure to comply can be a legitimate ground for denial that is not an unfair practice.
A producer persuades a client to surrender a whole life policy and buy a new one from a different insurer, using exaggerated claims about the new policy's returns. This is best described as:
Under the Unfair Claims Settlement Practices Act, a single delayed claim payment generally becomes a violation when the conduct occurs:
The Statutory List of Unfair Claims Acts
The Unfair Claims Settlement Practices Act enumerates specific prohibited insurer behaviors, and the exam asks which listed act a fact pattern describes. Learn the recurring entries.
| Prohibited claims act | Example |
|---|---|
| Failing to acknowledge claims promptly | Ignoring a claimant's communications |
| Misrepresenting policy provisions | Denying a covered loss on false grounds |
| No reasonable investigation | Denying without reviewing the facts |
| Forcing litigation by low offers | Offering far below clear value to make suing necessary |
| Not affirming/denying in reasonable time | Sitting on a clear claim |
Boycott, Coercion, and Intimidation
Beyond marketing abuses, the Act bars boycott, coercion, and intimidation that restrain or monopolize the business of insurance — for example, a lender requiring a borrower to buy insurance from a specific affiliated agency as a condition of a loan (tie-in sales / coercion). Distinguish this from rebating (giving the buyer something of value) and defamation (false statements harming a competitor). Sorting these vocabulary terms — twisting, churning, rebating, coercion, defamation, boycott — into the correct scenario is the single highest-yield skill in the ethics chapter.