4.1 Unfair Trade Practices
Key Takeaways
- North Dakota's Prohibited Practices in the Insurance Business Act is codified at NDCC Chapter 26.1-04, enforced by the Insurance Commissioner.
- Rebating (NDCC 26.1-04-05) bars returning premium or giving inducements not stated in the policy; the insured who accepts a rebate also violates the law.
- Twisting is misrepresentation to induce a replacement; churning is replacing a client's own policies to generate commissions.
- Unfair claims-settlement practices include failing to acknowledge claims promptly or compelling litigation by lowball offers.
- Unfair discrimination bars charging different rates or refusing coverage between insureds of the same class and equal risk.
North Dakota Prohibited Practices in the Insurance Business Act
North Dakota's unfair trade practice rules live in Title 26.1, Chapter 26.1-04 of the North Dakota Century Code (NDCC), titled the Prohibited Practices in the Insurance Business Act. The Insurance Commissioner enforces it. After a hearing, the Commissioner may issue a cease-and-desist order, levy fines, and suspend or revoke a license. Violating a cease-and-desist order can trigger a penalty of up to $10,000 per violation, so exam questions often pair the practice with the enforcement consequence.
Misrepresentation and False Statements
NDCC 26.1-04-03 makes it an unfair practice to issue, circulate, or make any estimate or statement that is untrue, deceptive, or misleading about a policy or an insurer. Prohibited conduct includes:
- Misrepresenting policy benefits, terms, dividends, or the true nature of the contract
- Using a name or title that misrepresents the real character of the policy (e.g., calling a life policy a "savings plan")
- Misrepresenting an insurer's financial condition or its legal reserve system
- Making false or maliciously critical statements about a competitor (defamation)
| Statement to a Prospect | Why It Violates 26.1-04 |
|---|---|
| "This whole life policy is really a retirement savings account" | Misrepresents the true nature of the contract |
| "ABC Insurer is nearly insolvent—switch to mine" | False statement defaming a competitor |
| "Your dividends are guaranteed every year" | Dividends on participating policies are never guaranteed |
| "Sign today or the rate offer disappears forever" | Deceptive high-pressure misrepresentation |
False Advertising and Defamation
Advertising must be truthful and not misleading. A producer may not imply government endorsement, use fabricated testimonials, or omit the insurer's name. Boycott, coercion, and intimidation—for example, threatening to withhold a loan unless the borrower buys insurance from a named agency (illegal coercion of a debtor)—are separately prohibited.
A closely related trap is the misrepresentation of dividends. Dividends on participating policies are a return of overcharged premium and depend on the insurer's actual mortality, expense, and investment experience. Stating or implying that dividends are guaranteed, or projecting a specific future dividend as certain, is a prohibited misrepresentation even if the illustration's historical scale was once accurate. Producers must label projected values as not guaranteed and explain that the guaranteed column is the only contractual floor.
North Dakota also treats false financial statements and knowingly filing false reports with the Department as prohibited practices. A producer who tells a prospect that a competitor "will not be around next year" without a factual basis commits both defamation of the competitor and a misrepresentation to the consumer. The Commissioner can investigate on a complaint or on the Department's own initiative, hold an administrative hearing, and issue findings; a producer who disagrees may seek judicial review, but the cease-and-desist order generally remains in effect during the appeal.
Rebating, Twisting, Churning, and Unfair Discrimination
Rebating (NDCC 26.1-04-05)
Rebating is giving, or offering to give, any rebate of premium or any valuable consideration or inducement that is not specified in the policy to induce a purchase. Unlike most states, North Dakota's statute also penalizes the insured who knowingly accepts the rebate—both parties violate the law. Prohibited rebates include returning part of the commission, paying a non-licensed person for a referral, or giving gifts of real value tied to a sale. Permitted exceptions are narrow: policy-specified dividends, bona fide group discounts, and advertising/promotional items of nominal value (branded pens, calendars, magnets).
The exam trap: a gift card or cash-back "thank-you" is a rebate; a $2 branded pen is not.
Twisting vs. Churning
| Practice | Definition | Key Distinguisher |
|---|---|---|
| Twisting | Using misrepresentation or a misleading comparison to induce a client to lapse, surrender, or replace a policy to their detriment | The defining element is the deception - it can involve the same or a different insurer |
| Churning | A pattern of replacements, typically tapping a client's existing cash value (often with the same insurer), primarily to generate new commissions | The defining element is the commission-driven pattern, not any single misstatement |
Worked example: An agent tells a client her 10-year-old whole life policy is "worthless" and that surrendering it for a new policy will cost nothing. Both claims are false (the old policy has cash value; the new policy restarts surrender charges and contestability). This is twisting, and it can lead to license revocation plus restitution.
Unfair Claims Settlement Practices
Under NDCC 26.1-04-03, an insurer commits an unfair practice when, with such frequency as to show a general business practice, it:
- Fails to acknowledge and act reasonably promptly on claim communications
- Fails to adopt reasonable standards for prompt investigation
- Refuses to pay claims without conducting a reasonable investigation
- Offers substantially less than the amount ultimately recovered to compel litigation
- Misrepresents policy provisions relating to coverage
Unfair Discrimination
Insurers may not charge different rates or refuse to insure individuals of the same class and equal expectation of life or risk. Risk-based underwriting that is permitted relies on actuarially supported factors:
- Age, tobacco use, and documented health history
- Occupation and hazardous avocations (aviation, scuba)
- Claims history and lifestyle risk factors
What is never permitted: distinctions based on race, color, religion, or national origin, which are unfair discrimination regardless of any claimed actuarial basis.
A useful memory device for the exam is to separate how a producer sells (twisting, churning, rebating, coercion) from what an insurer does with claims (the unfair claims-settlement list) and who gets charged what (unfair discrimination). Many questions describe a fact pattern and ask you to name the single best-fitting violation.
The decisive cue for twisting versus churning is whether the wrong turns on misrepresentation used to induce the replacement (twisting) or on a commission-driven pattern of replacements (churning, often tapping the client's own cash value with the same insurer); the decisive cue for rebating is whether the inducement was specified in the policy and whether the item exceeds nominal value.
For claims-settlement violations, remember the qualifier that the conduct must occur with such frequency as to indicate a general business practice—a single honest error is not, by itself, an unfair practice, whereas a documented pattern is. Penalties escalate from warnings and fines on a first offense to license revocation and mandatory restitution for repeat violations or proven consumer harm, and the Commissioner may also order the violator to cease and desist the specific conduct going forward.
A North Dakota producer hands a prospect a branded ballpoint pen worth about two dollars while discussing a policy. Under NDCC 26.1-04, this is:
An agent persuades a client to surrender a whole life policy with Insurer A and buy a similar policy from Insurer B by falsely claiming the old policy has no cash value. This is best described as:
Which factor may a North Dakota insurer lawfully use to set different life insurance rates between two applicants?
An insurer routinely offers claimants far less than the amount it knows the claim is worth, hoping they will sue rather than accept. Under North Dakota's unfair claims settlement rules this conduct is: