18.3 Unfair Trade Practices and Unfair Claims Settlement
Key Takeaways
- The Unfair Trade Practices Act prohibits misrepresentation, false advertising, defamation, coercion, twisting, churning, rebating, and unfair discrimination.
- Twisting switches between different insurers via misrepresentation; churning replaces within the same insurer.
- Rebating is giving consideration outside the contract to induce a sale and is prohibited even if the client requests it.
- The Unfair Claims Settlement Practices Act requires prompt acknowledgment, fair investigation, and good-faith settlement of claims.
- Violations can lead to cease-and-desist orders, fines, and license suspension or revocation.
Most states have adopted versions of the NAIC Unfair Trade Practices Act (UTPA), which lists practices that are prohibited in the marketing and sale of insurance. The exam expects you to recognize each prohibited act by name and by example. These rules protect consumers from deceptive sales conduct and price discrimination.
Prohibited unfair trade practices
| Practice | Definition |
|---|---|
| Misrepresentation | Making false or misleading statements about a policy's terms, benefits, or dividends |
| False advertising | Untrue, deceptive, or misleading ads about coverage or the insurer |
| Defamation | Making false statements that injure another insurer or producer |
| Boycott, coercion, intimidation | Restraining or monopolizing the business of insurance |
| Twisting | Misrepresentation to induce a policyholder to lapse or switch policies |
| Churning | Using values from an existing policy with the same insurer to fund a new one through misrepresentation |
| Rebating | Giving any valuable consideration not stated in the contract to induce a sale |
| Unfair discrimination | Differing rates/terms among individuals of the same class and risk |
Twisting vs. churning vs. rebating
These three are the most-confused terms:
- Twisting = replacing one insurer's policy with another insurer's policy via misrepresentation.
- Churning = replacing within the same insurer using the old policy's values via misrepresentation.
- Rebating = sharing commission or giving a gift/cash to induce a purchase. Most states prohibit rebating even if the client requests it; small advertising novelties under a set dollar limit are usually allowed.
Unfair Claims Settlement Practices
The NAIC Unfair Claims Settlement Practices Act governs how insurers handle claims. A single act may be a violation; a general business practice of these acts is a more serious offense. Prohibited acts include:
- Misrepresenting facts or policy provisions relating to a claim.
- Failing to acknowledge and act promptly on claim communications.
- Failing to adopt reasonable standards for prompt investigation.
- Not attempting in good faith to effect prompt, fair settlement once liability is clear.
- Compelling insureds to litigate by offering substantially less than amounts ultimately recovered.
- Failing to provide a reasonable explanation for denying a claim.
Penalties and worked scenario
Violations can bring cease-and-desist orders, fines per violation, and license suspension or revocation. Example: A producer tells a client her current whole life policy from another company is "worthless" and convinces her to surrender it for a new policy, omitting surrender charges. Because the producer misrepresented the old policy to induce a switch to a different insurer, this is twisting — a UTPA violation distinct from a proper, disclosed replacement.
Exam trap: If the new and old policy are with the same company, the same misconduct is churning, not twisting.
More prohibited conduct
Beyond the headline practices, the Unfair Trade Practices Act also reaches:
- Failure to maintain complaint records — insurers must keep a record of consumer complaints.
- Misrepresentation in applications — knowingly making a false statement on an application to defraud the insurer.
- Improper use of dividends — implying that dividends on a participating policy are guaranteed.
Exam trap: Dividends on a participating whole life policy are not guaranteed; calling them guaranteed is misrepresentation.
Coercion, boycott, and defamation in practice
These practices usually surface in dealings between businesses rather than with consumers. Boycott, coercion, and intimidation mean using pressure to restrain trade, such as a lender forcing a borrower to buy insurance from a specific agency.
Defamation is publishing false statements that injure another insurer's or producer's reputation or business. Both are full violations of the Unfair Trade Practices Act and can trigger cease-and-desist orders.
Penalty mechanics
When the commissioner believes a violation has occurred, the typical process is a hearing, followed by a written order. A cease-and-desist order stops the conduct; ignoring it adds penalties.
- Fines are commonly assessed per violation, so a pattern can be costly.
- A producer may also face license suspension or revocation and restitution to harmed consumers.
A producer persuades a client to surrender an existing whole life policy from Insurer A and buy a new one from Insurer B by falsely claiming the old policy pays no dividends. This is:
Which is an Unfair Claims Settlement Practice?
The Classic Unfair Trade Practices
The NAIC Unfair Trade Practices Act (adopted by the states) prohibits specific sales and marketing abuses. Memorize the named offenses:
| Practice | Definition |
|---|---|
| Misrepresentation | False statements about policy terms, dividends, or an insurer's financial condition |
| Twisting | Misrepresentation to induce a policyholder to lapse and replace a policy |
| Churning | Using a policy's own values to fund a new policy with the same insurer |
| Rebating | Giving any inducement not in the contract (cash, gifts) to buy |
| Defamation | False statements harming another insurer |
| Coercion / Boycott | Forcing insurance terms via unfair pressure |
| Unfair discrimination | Different rates/terms for individuals of the same class and risk |
Twisting vs. churning is the perennial trap: twisting involves a different company; churning recycles values within the same company. Both are illegal replacements driven by producer commission, not client benefit.
Unfair Claims Settlement Practices
The Unfair Claims Settlement Practices Act bars insurers from mishandling claims. Prohibited acts include:
- Failing to acknowledge claims communications promptly.
- Not adopting reasonable standards for prompt investigation.
- Failing to affirm or deny coverage within a reasonable time.
- Forcing litigation by offering substantially less than amounts ultimately recovered.
- Failing to provide a reasonable explanation for a denial.
A practice generally must occur with such frequency as to indicate a general business practice to constitute a statutory violation — though a single egregious act can still draw regulatory action. Penalties include fines, cease-and-desist orders, and license suspension or revocation by the commissioner.