4.1 Unfair Trade Practices
Key Takeaways
- Hawaii's Unfair Methods of Competition law lives in HRS Article 431:13, sections 431:13-102 (prohibition) and 431:13-103 (the defined list of unfair acts)
- Rebating is prohibited under 431:13-103, but filed dividends, abatements from nonparticipating surplus, and value-added services under $25 are lawful exceptions
- Twisting induces replacement through misrepresentation; churning is internal replacement within the same insurer to harvest commissions
- Hawaii's Unfair Claims Settlement Practices law (431:13-103(a)(11)) lists 14 distinct prohibited claims behaviors
- The Insurance Commissioner can impose penalties up to $10,000 per nonwillful and $25,000 per willful violation under 431:13-201
Where the Rules Come From
Hawaii's unfair trade practice rules are codified in the Hawaii Revised Statutes (HRS) Article 431:13, the Unfair Methods of Competition law. Two sections carry the weight on the exam. HRS 431:13-102 is the umbrella prohibition: no person may engage in any practice defined as an unfair method of competition or an unfair or deceptive act in the business of insurance. HRS 431:13-103 then lists the specific banned acts. Enforcement belongs to the Insurance Division of the Department of Commerce and Consumer Affairs (DCCA), led by the Insurance Commissioner.
Misrepresentation (431:13-103(a)(1))
Misrepresentation is any false, deceptive, or misleading statement about a policy, an insurer, or a competitor. The statute reaches both spoken sales talk and written illustrations. Prohibited conduct includes:
- Misstating policy benefits, terms, dividends, or projected returns
- Using a misleading policy illustration that overstates non-guaranteed values
- Making false statements about an insurer's financial condition
- Defamation — false or maliciously critical statements about a competitor
| Producer Statement | Why It Violates 431:13-103 |
|---|---|
| "This whole life policy is really a savings account that pays 8% guaranteed." | Misrepresents nature of contract and overstates guaranteed values |
| "Brand X insurer is nearly bankrupt — switch to us." | Defamation if untrue; misstating financial condition |
| "Your premium can never increase." | False guarantee on a non-guaranteed element |
False Advertising and Deceptive Naming
Hawaii bars advertising that is untrue, deceptive, or misleading in any material respect (431:13-103(a)(2)). An advertisement must not imply government endorsement, must not use fabricated testimonials, and must not use a trade name that implies the producer is an official government agency (a tactic regulators call "misleading naming").
Rebating — The Most-Tested Trap
Rebating is offering any valuable inducement not specified in the policy to persuade someone to buy. It is prohibited because it lets producers compete on side payments instead of price and service, and it can mask unfair discrimination. Banned examples:
- Returning part of the commission or premium to the insured
- Paying for referrals to unlicensed persons
- Giving gifts or prizes tied to a purchase above the nominal threshold
Lawful Exceptions (memorize these)
| Lawful Practice | Authority/Reason |
|---|---|
| Paying dividends (divisible surplus) on participating policies | Contractual, not an inducement |
| Premium abatement from nonparticipating surplus, if fair and equitable | Expressly excluded by 431:13-103 |
| Filed and approved discounts in the rate manual | Available to all similarly situated insureds |
| Promotional items / value-added services of nominal value (under $25) | Not deemed an inducement |
Trap: offering a $40 gift card "just for taking a quote" is rebating; a $10 branded planner is not.
Twisting vs. Churning
These two replacement abuses are constantly confused on the exam, so anchor on the difference. Twisting (431:13-103(a)(1)(C)) is inducing a policyholder to lapse, surrender, or replace a policy through misrepresentation — the deception is the core element, and it can occur between two different companies. Churning is the repeated replacement of a customer's policies, typically within the same insurer, using the existing policy's cash value to fund a new sale primarily to generate fresh commissions.
| Feature | Twisting | Churning |
|---|---|---|
| Trigger | Misrepresentation to induce a switch | Pattern of unnecessary replacements |
| Companies involved | Often a competitor's policy | Usually the same insurer |
| Harm | Consumer deceived into worse coverage | Cash values drained by surrender charges and new acquisition costs |
| Required proof | A false or misleading statement | A volume/pattern showing commission motive |
Both are sanctionable, and both trigger Hawaii's replacement disclosure rules: the producer must give the applicant the required replacement notice and a side-by-side comparison so the consumer sees surrender charges, new contestable periods, and lost accumulated values.
Unfair Claims Settlement Practices (431:13-103(a)(11))
Hawaii lists 14 specific claims behaviors that, when committed flagrantly or with such frequency as to indicate a general business practice, become violations. High-yield items:
| Prohibited Practice | What It Looks Like |
|---|---|
| Misrepresenting policy facts | Quoting an exclusion that does not apply |
| Failing to act promptly on communications | Ignoring a claimant's letters and calls |
| No reasonable investigation before denial | Denying without reviewing the file |
| Not affirming or denying coverage in a reasonable time | Stalling a clear claim |
| Lowballing — forcing litigation by offering far less than owed | $2,000 offer on a $10,000 documented loss |
| Failing to give a reasonable written explanation for a denial | A one-word "denied" letter |
Unfair Discrimination
Unfair discrimination (431:13-103(a)(7)) bans charging different rates or denying coverage between individuals of the same class and equal expectation of life for reasons not supported by sound actuarial data. Insurers may underwrite on actuarially justified factors — age, tobacco use, occupation hazard, health history on non-ACA products — but may not discriminate on race, color, religion, ancestry, or national origin.
Penalties (431:13-201)
| Conduct | Maximum Penalty |
|---|---|
| Nonwillful violation | Up to $10,000 per violation |
| Willful violation | Up to $25,000 per violation |
| Continued conduct after a cease-and-desist order | Additional fines plus suspension or revocation |
| Fraud | Referral for criminal prosecution |
The Commissioner may issue a cease-and-desist order after a hearing before imposing fines, and may suspend or revoke the producer license for repeated or willful conduct.
A Hawaii producer offers a prospect a $40 restaurant gift card simply for sitting through a life insurance presentation. Which statute does this most directly violate?
Which scenario describes churning rather than twisting?
What agency enforces Hawaii's unfair trade practice statutes under HRS Article 431:13?