18.3 Unfair Trade Practices and Unfair Claims Settlement
Key Takeaways
- The Unfair Trade Practices Act bars misrepresentation, twisting, churning, defamation, illegal inducements, and unfair discrimination.
- Rebating is giving a prospect something of value not stated in the contract to induce a sale; it is generally prohibited.
- Twisting misrepresents facts to induce a replacement; churning is the same with the same insurer's policies.
- The Unfair Claims Settlement Practices Act requires prompt, good-faith, consistent claims handling and bars lowball or coercive tactics.
- A single act can be a violation; a general business practice (a pattern) triggers heavier penalties.
Unfair trade practices
The NAIC Unfair Trade Practices Act (UTPA), adopted in some form by every state, lists marketing and sales conduct that is prohibited. Memorize the named practices; the exam tests them by scenario.
| Practice | Definition |
|---|---|
| Misrepresentation | Making a false or misleading statement about a policy's terms, benefits, dividends, or an insurer's financial condition. |
| False advertising | Untrue or deceptive statements in any advertisement of insurance. |
| Defamation | False statements that damage another insurer or producer. |
| Boycott / coercion / intimidation | Forcing or restraining insurance transactions through threats. |
| Unfair discrimination | Charging different rates or terms to people of the same class and risk. |
| Rebating | Offering anything of value not specified in the policy to induce a purchase. |
| Defamation | False statements that injure another in the insurance business. |
Twisting, churning, and rebating up close
These three trip up the most candidates.
- Twisting — using misrepresentation or incomplete comparison to convince a policyowner to drop one policy and replace it with another, to the owner's detriment. The hallmark is the misleading inducement.
- Churning — twisting where the same insurer's existing policy values fund the new policy (often using cash value to buy a new contract), generating commission without real benefit to the client.
- Rebating — giving the prospect something of value not stated in the contract (cash, a gift card, a share of commission) to induce the sale. A handful of states now permit limited rebating, but the exam treats it as prohibited unless told otherwise.
Trap: Replacement itself is legal when done properly with disclosure (see 18.4). It becomes twisting only when driven by misrepresentation. Distinguish the lawful, disclosed replacement from the deceptive one.
A producer tells a client that her current whole life policy is 'worthless' and uses a misleading benefit comparison to get her to surrender it and buy a new policy. This is best described as:
Unfair claims settlement practices
The NAIC Unfair Claims Settlement Practices Act (UCSPA) governs the back end — how insurers handle and pay claims. The duty is prompt, fair, good-faith handling. Prohibited conduct includes:
| Prohibited practice | Example |
|---|---|
| Misrepresenting policy facts | Telling a claimant a covered benefit is excluded. |
| Failure to acknowledge promptly | Not responding to claim communications within required time. |
| No reasonable investigation | Denying a claim without investigating. |
| Unreasonable delay | Stalling payment of an undisputed claim. |
| Lowball offers | Offering substantially less than the amount due to force a compromise. |
| Forcing litigation | Compelling insureds to sue by routinely offering less than owed. |
| No reasonable explanation | Denying without citing the policy basis. |
Proper claims flow and the timelines
A compliant claim follows: notice of claim -> claim forms furnished -> proof of loss submitted -> investigation -> decision (pay or deny with reasons). Standard health-policy timing provisions support this flow:
- Notice of claim: usually within 20 days of loss (or as soon as reasonably possible).
- Claim forms: insurer must furnish them within 15 days of notice.
- Proof of loss: typically within 90 days of loss.
- Payment of claims: benefits paid promptly upon receipt of proof; periodic benefits at least monthly.
Single act vs. general business practice
A single violation can draw a penalty, but the heavier sanctions attach when the conduct is a general business practice — a pattern of unfair handling. The exam distinguishes an isolated mistake from a frequent-enough pattern that shows intent or systemic disregard.
Producer-specific prohibitions to recognize
Several UTPA-related acts target producer conduct directly and appear constantly in scenarios:
- Misrepresentation of the policy — overstating dividends (which are never guaranteed), describing a non-guaranteed projection as guaranteed, or calling a life policy an 'investment' or 'savings plan.'
- Sliding — adding coverage or fees the applicant did not request and did not knowingly authorize.
- Coercion (tie-in sales) — conditioning a loan or service on buying insurance from a particular producer.
- Fraudulent application — knowingly recording false information, or completing an application the applicant never reviewed.
Exam Tip: Dividends are never guaranteed. Any statement promising a specific future dividend, or implying the policy will 'pay for itself,' is a misrepresentation under the UTPA.
Penalties and the consumer remedy
Violations are enforced administratively by the Commissioner, not by the NAIC. Typical consequences escalate with severity and pattern:
| Action | When applied |
|---|---|
| Cease-and-desist order | To stop an ongoing prohibited practice. |
| Monetary fine | Per violation; larger for a knowing or general business practice. |
| License suspension | For serious or repeated misconduct. |
| License revocation | For fraud, conversion, or egregious patterns. |
Separately, an insured harmed by an insurer's bad-faith claims handling may have a private civil action for damages beyond the policy limit — a remedy distinct from the regulator's administrative penalties. A producer who commits an unfair practice also risks the federal 1033 dishonesty bar covered in 18.2.
Under the Unfair Claims Settlement Practices Act, an insurer that repeatedly offers claimants far less than the clearly owed amount to pressure them into accepting reduced settlements is engaging in:
Defining the Big Three Sales Violations
| Practice | Definition |
|---|---|
| Twisting | Misrepresentation to induce a consumer to lapse/replace a policy |
| Churning | Replacing using the same insurer's existing policy values to fund the new sale |
| Rebating | Giving any inducement not in the contract (cash, gifts) to buy |
Twisting and churning both harm the consumer through unnecessary replacement; the difference is whether a different insurer (twisting) or the same insurer's values (churning) are involved. Rebating is illegal in most states even if the consumer wants it though some states have repealed rebating bans.
A producer convinces a client to drop an existing policy and buy a new one from a different company by misrepresenting the old policy's terms. This is:
Unfair Claims Settlement Practices
State law lists prohibited unfair claims behaviors, including:
- Failing to acknowledge and act promptly on claim communications
- Not adopting reasonable standards for prompt investigation
- Refusing to pay without a reasonable investigation
- Compelling litigation by offering substantially less than amounts ultimately recovered
- Failing to provide a prompt, reasonable explanation for a denial
A single act may be a violation; a general business practice of such acts brings heavier penalties (fines, license suspension/revocation).
Exam Tip: Coercion, boycott, and intimidation, plus defamation of another insurer and false financial statements, are also enumerated unfair trade practices remember the list, not just twisting/churning/rebating.