18.1 Unfair Trade Practices and Unfair Claims Settlement

The NAIC Model Acts Behind the Exam

Two NAIC model laws drive nearly every "prohibited practice" question on the national exam: the Unfair Trade Practices Act (UTPA) and the Unfair Claims Settlement Practices Act (UCSPA). The UTPA targets how policies are marketed and sold; the UCSPA targets how claims are paid. Both empower the state commissioner to issue cease-and-desist orders, levy fines, and suspend or revoke licenses.

A practice violates the UTPA only when it is a general business practice (a repeated pattern) or is committed with such frequency that it shows an intent to deceive. An isolated, good-faith error usually is not a violation. The exam loves this distinction: one late claim payment is not a UCSPA violation; a pattern of late payments is.

Marketing and Sales Violations

Twisting vs. Churning

The single most-tested contrast: twisting moves a policy to a different insurer using misrepresentation; churning replaces a policy with one from the same insurer, typically draining the old policy's cash value to fund the new one. Both restart the two-year contestability and suicide clocks and may impose new surrender charges, harming the consumer.

Rebating Detail

Rebating is offering anything of value not stated in the policy to induce a sale. Returning part of a commission, paying the first premium, or gifting an expensive item are all rebates. Permitted: contractual dividends, filed premium discounts, and nominal advertising items (a pen or calendar typically under a small dollar threshold). A few states (notably Florida and California) have relaxed anti-rebating rules, but for the national exam, treat rebating as prohibited.

The Catalog of Unfair Trade Practices

The UTPA names specific prohibited acts the exam expects you to recognize on sight. Misrepresentation (false statements about a policy's terms or an insurer's financial condition), false advertising, defamation of a competitor, boycott/coercion/intimidation, unfair discrimination (different rates for individuals of the same class and risk), rebating (giving any inducement not specified in the policy), twisting, and churning all violate the act.

Unfair Claims Settlement Practices

The UCSPA bars insurers from misrepresenting policy provisions, failing to acknowledge or act on claims promptly, failing to adopt reasonable claims standards, not attempting good-faith prompt settlement when liability is clear, compelling litigation by lowball offers, and denying claims without a reasonable investigation. A single act may not be a practice; a general business pattern triggers the act.

Worked Violation Analysis

An insurer that is clearly liable on a death claim delays payment for months hoping the beneficiary accepts a reduced settlement. If this reflects a general business practice of forcing claimants to litigate for amounts due, it violates the UCSPA, exposing the insurer to fines and orders, even though delaying one isolated claim might be addressed as a complaint rather than a statutory practice.

Enforcement Powers

The commissioner may issue cease-and-desist orders, levy fines per violation, and suspend or revoke licenses for UTPA/UCSPA breaches.

Additional Exam Traps

• Rebating is any inducement not stated in the contract -- even a gift above a nominal limit.
• The UCSPA usually requires a general business practice, not one isolated act.
• Unfair discrimination means different terms for the same class and risk, not all rate differences.

Unfair Claims Settlement Practices

The UCSPA governs how insurers handle claims after a loss. The prohibited acts are practical and frequently tested as fact patterns. An insurer commits an unfair claims practice when, as a general business practice, it:

• Misrepresents pertinent facts or policy provisions to a claimant
• Fails to acknowledge and act reasonably promptly on communications (commonly 15 working days to acknowledge under many state versions)
• Fails to adopt reasonable standards for prompt investigation of claims
• Refuses to pay claims without conducting a reasonable investigation
• Fails to affirm or deny coverage within a reasonable time after proof of loss
• Offers substantially less than the amount ultimately recovered (lowballing)
• Compels insureds to litigate by offering far less than the claim's value
• Fails to provide a prompt, reasonable written explanation for a denial

The Proper Claims Sequence

Exam Tip: Requesting a valid proof of loss, ordering medical records to verify a disability claim, or denying a genuinely excluded peril are all legitimate. The violation is created by unreasonable delay, no investigation, or no written explanation — not by the request for documentation itself.

Good Faith and Bad Faith

Beyond regulatory penalties, an insurer that mishandles a claim may face a bad-faith civil suit. Bad faith can expose the insurer to damages beyond the policy limits (consequential and sometimes punitive damages), which is why prompt, documented, good-faith handling matters.

Worked Timeline Example

Suppose a life claim is filed January 5 and proof of death (a certified death certificate) is received January 12. Under a 15-working-day acknowledgment rule, the insurer must confirm receipt by roughly January 26. Because death claims rarely involve disputed liability once the policy is past the two-year contestable period, the insurer should pay promptly after verifying the policy is in force and the beneficiary designation is current.

If the insurer instead repeatedly requested duplicate documents it already had, in order to stall, the pattern of such requests across many claims would constitute an unfair claims settlement practice — a single request would not.