18.1 Unfair Trade Practices and Unfair Claims Settlement

The Unfair Trade Practices Act

Every state adopts a version of the NAIC Unfair Trade Practices Act (UTPA), which lists specific acts that are illegal in the business of insurance. The commissioner enforces it and may issue cease-and-desist orders, fines, and license suspension or revocation. The exam expects you to recognize each prohibited act by its definition, not just its name. Memorize the act, then learn the one-line trap that distinguishes it from a similar-sounding act.

The core prohibited practices are:

Rebating and unfair discrimination in depth

Rebating is returning part of the premium or giving any valuable consideration (cash, gifts above a small statutory limit, shares of dividends, anything of value) that is not specified in the policy as an inducement to buy. Because the inducement corrupts the buying decision, most states make rebating a two-party offense: both the producer who offers and the applicant who knowingly accepts can be penalized. A few states have repealed anti-rebating laws, but on the national portion treat rebating as prohibited.

Unfair discrimination does not mean charging different people different prices. It means charging different rates or offering different terms to individuals of the same class and equal expectation of life. Insurers may and must distinguish by sound actuarial factors such as age, health, and occupation. The violation occurs only when two risks that are actuarially identical are treated differently for an improper reason.

Use this quick test: if a price difference reflects a real difference in risk, it is lawful classification; if it does not, it is unfair discrimination.

Also watch for defamation versus misrepresentation. Defamation is making a false statement that maligns the financial condition of an insurer, harming the company. Misrepresentation is misstating the terms or benefits of a policy to a consumer. Boycott, coercion, and intimidation cover threats that unreasonably restrain free competition or force a transaction, such as a lender requiring the borrower to buy life coverage from one specific producer.

Twisting and churning

Two replacement-related abuses are specifically named. Twisting is inducing a policyowner to lapse, surrender, or replace a policy through misrepresentation or incomplete comparison so the producer can write a new policy, usually with a different insurer. The harm is that the client gives up contestability and suicide-clause time already earned and may pay higher premiums based on older age.

Churning is the same abuse confined to one insurer: the producer uses existing policy values (cash value or dividends) to fund a new policy with that same company, generating a fresh commission while eroding the client's accumulated value.

Both are forms of unfair trade practice. The exam contrasts them by the insurer involved: twisting crosses companies, churning stays within one. Legitimate replacement is allowed when the producer follows the state replacement regulation, delivers required disclosure and comparison forms, and the change genuinely benefits the client.

Penalties for these acts escalate. A first finding may bring a cease-and-desist order and a fine; repeated or knowing violations bring larger fines plus license suspension or revocation. Because twisting and churning strip earned contestability and suicide-clause time from the consumer, regulators treat them seriously even when the new policy appears comparable on price.

The Unfair Claims Settlement Practices Act

The NAIC Unfair Claims Settlement Practices Act (UCSPA) governs how insurers handle claims. Prohibited conduct includes:

• Misrepresenting pertinent facts or policy provisions relating to a claim
• Failing to acknowledge and act reasonably promptly on claim communications
• Failing to adopt reasonable standards for prompt investigation of claims
• Refusing to pay claims without conducting a reasonable investigation
• Not attempting in good faith to effect prompt, fair, equitable settlement when liability is reasonably clear
• Compelling insureds to litigate by offering substantially less than amounts ultimately recovered
• Failing to provide a prompt, reasonable written explanation for a denial

The critical exam distinction: a single isolated error is usually not a UCSPA violation. The statute requires the act to be committed flagrantly, in conscious disregard, or with such frequency as to indicate a general business practice (a "pattern"). One late check is a service lapse; a repeated pattern of delay is a statutory violation subject to penalty.

A related concept is the duty of good faith and fair dealing the insurer owes its insureds. When an insurer denies or delays a clearly valid claim without a reasonable basis, it may face not only UCSPA penalties from the regulator but also a private bad-faith action by the insured for damages beyond the policy limit. The producer's role in claims is limited but real: report claims promptly, give accurate information, and never advise a client to misstate facts.