18.1 Unfair Trade Practices and Unfair Claims Settlement

Two Model Acts That Anchor This Topic

The national P&C exam tests two NAIC model laws that nearly every state has adopted. The Unfair Trade Practices Act (UTPA) governs conduct in the marketing and sale of insurance. The Unfair Claims Settlement Practices Act (UCSPA) governs how an insurer handles a claim after a loss. Candidates lose points by mixing them up: if the scenario is about selling, it is UTPA; if it is about paying a claim, it is UCSPA.

A single isolated act may be a violation, but the harshest penalties attach when the conduct rises to a general business practice — a pattern shown by frequency. Memorize that distinction; exam writers reward it.

Enforcement runs through the state insurance commissioner (director or superintendent), who can issue cease and desist orders, levy fines per violation (often higher for knowing/willful acts), order restitution to harmed consumers, and suspend or revoke a producer's license. The federal McCarran-Ferguson Act (1945) keeps this authority at the state level, which is why the NAIC models, not a single federal code, define the offenses.

UTPA Prohibited Sales Practices

The UTPA enumerates named offenses. Read each fact pattern for the mechanism (false statement? thing of value? protected class? replacement target?).

Memory hook: Twisting = Two companies; Churning = same Company.

Fair vs. Unfair Discrimination

The operative word is unfair. Risk-based pricing is not only legal, it is required so that rates are not unfairly discriminatory.

• Prohibited (unfair): rating on race, color, religion, national origin; and in many states, gender or marital status for most coverages.
• Permitted (fair, actuarial): loss/claims history, driving record, occupation where risk-relevant, credit-based insurance score where allowed, territory by actual loss costs.

Exam Key: Charging two people in the same risk class different rates is unfair discrimination. Charging different rates to people in different risk classes is fair and expected.

Rebating boundaries

Prohibited rebates include returning part of a commission, paying the client's premium, or gifts above a statutory cap (commonly $25-$100). Allowed items: policy dividends stated in the contract, filed group/published rate discounts available to all, and nominal advertising items (pens, calendars) under the cap. A few states (notably California and Florida) have relaxed rebating bans, but treat rebating as prohibited on the exam unless told otherwise.

Two newer named practices round out the list. Sliding is adding coverage or products the customer did not knowingly request — for example, telling a buyer that towing or accidental-death coverage is "required" and slipping it onto the policy. Advertising "free" insurance as bait to sell something else is likewise a deceptive practice. Both join the classic offenses of misrepresentation, twisting, churning, rebating, defamation, boycott, coercion, and unfair discrimination.

UCSPA — How Claims Must Be Handled

Once a loss occurs, the UCSPA forces prompt, fair, good-faith handling. The model timeframes are heavily tested; learn the sequence and typical windows (exact numbers vary by state).

When denying, the insurer must give a written explanation citing the specific policy provision, exclusion, or condition relied upon. A vague denial is a classic wrong-answer trap.

Enumerated unfair claims acts include: misrepresenting policy provisions; failing to acknowledge communications promptly; refusing to pay without reasonable investigation; failing to affirm or deny within a reasonable time; not attempting good-faith settlement where liability is reasonably clear; and compelling insureds to litigate by offering substantially less than amounts later recovered.

Good Faith, Bad Faith, and Prompt Payment

Good faith requires paying the undisputed portion of a claim while continuing to investigate the disputed portion — an insurer cannot freeze the entire payment because part is contested, nor make a lowball offer on clear-liability claims.

Bad faith is the unreasonable denial, delay, or underpayment of a valid claim:

• First-party bad faith — mishandling the policyholder's own claim (denying a clearly covered fire loss with no investigation).
• Third-party bad faith — in liability insurance, failing to settle within limits when there was a clear opportunity, exposing the insured to an excess judgment.

Because bad faith is a tort in many states, damages can run beyond the policy limit — the full excess judgment, plus possible punitive damages and attorney fees, unlike an ordinary breach of contract capped at the limit. Prompt-payment statutes add a 30-60 day payment deadline with statutory interest (often 9-18% annual) on overdue amounts. Legitimate delay is allowed only for a genuine coverage dispute, missing information, or an active fraud investigation — not as a pretext.

Good-faith handling ultimately lives or dies in the claim file. Adjusters must document the investigation, the basis for the valuation, every communication with the claimant, and the reasoning behind any denial. Regulators review these files in market-conduct exams, and courts review them in bad-faith suits. A denial backed by a thorough, contemporaneous file is far more defensible than a conclusory one — "we denied it" without supporting notes is itself evidence of bad faith.