18.1 Unfair Trade Practices and Unfair Claims Settlement

Two Model Acts, Two Different Sides

The national portion tests two National Association of Insurance Commissioners (NAIC) model laws that every state has adopted in some form. The Unfair Trade Practices Act (UTPA) governs marketing and sales conduct; the Unfair Claims Settlement Practices Act (UCSPA) governs claim handling after a loss. The exam writes answer choices that blur the two, so anchor each scenario to its phase: was a policy being sold, or was a claim being paid?

A recurring exam rule cuts across both acts: a single violation is generally a market-conduct matter, but a general business practice (a documented pattern) is what triggers the heaviest fines and license action.

UTPA: Prohibited Sales Conduct

• Misrepresentation — any false or misleading statement about policy terms, benefits, dividends, or the insurer's financial condition. It need not be intentional; a negligent misstatement counts.
• Defamation — false statements injuring another insurer or producer (written libel, spoken slander).
• Coercion, intimidation, and boycott — using threats or concerted refusals to restrain the business of insurance.
• False advertising and fictitious groups — deceptive ads or invented group affiliations to imply special rates.

Twisting vs. Churning

Both involve replacing an existing policy, but the boundary is one fact: which insurer issues the new policy.

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

Rebating and Unfair Discrimination

Rebating is offering anything of value not specified in the policy to induce a sale. It is prohibited in most states even when the customer requests it, because it gives one buyer something a similarly situated buyer does not.

Unfair discrimination keys on the word unfair. Pricing on protected classes (race, religion, national origin) is illegal; pricing on actuarial risk (claims history, driving record) is legal and required so rates are not unfairly discriminatory.

Unfair Trade Practices and Unfair Claims Settlement

The Unfair Trade Practices Act (adopted by states from the NAIC model) prohibits defined marketing and sales conduct. The most tested prohibited practices include misrepresentation, false advertising, defamation of a competitor, boycott/coercion/intimidation, rebating (giving the client an inducement not stated in the policy), twisting (misrepresenting facts to induce replacement of a policy), churning (replacing using values from the same insurer's existing policy), and unfair discrimination between similar risks.

The Unfair Claims Settlement Practices Act governs claims conduct: it bars misrepresenting policy provisions, failing to act promptly on communications, failing to adopt reasonable standards for investigation, not attempting good-faith settlement when liability is clear, compelling insureds to litigate by offering far less than the eventual recovery, and failing to provide a reasonable explanation for a denial.

Worked scenario: An adjuster delays a clearly covered $20,000 fire claim for months, offers $8,000, and forces the insured to hire a lawyer who later recovers the full $20,000. This pattern violates the Unfair Claims Settlement Practices Act (failure to settle promptly and in good faith when liability is reasonably clear) and exposes the insurer to regulatory penalties. Distinguishing a trade practice (sales/marketing, e.g., rebating) from a claims practice (handling losses) is a frequent exam trap.

UCSPA: How Claims Must Be Handled

Once a loss occurs, the Unfair Claims Settlement Practices Act controls. While exact deadlines vary by state, the sequence and typical windows are heavily tested.

The most-tested enumerated violations include: misrepresenting policy provisions; failing to acknowledge claim communications promptly; failing to adopt reasonable investigation standards; refusing to pay without a reasonable investigation; failing to affirm or deny coverage timely; and not attempting a good-faith, prompt, fair settlement when liability is reasonably clear.

A denial must come in writing and cite the specific policy provision, exclusion, or condition relied upon. A vague denial is a classic wrong-answer trap.

Good Faith, Undisputed Amounts, and Bad Faith

Good faith requires the insurer to pay the undisputed portion of a claim while it continues to investigate the disputed part. It may not freeze the entire payment because part of the claim is contested, and it may not make a lowball offer on a clear-liability claim to pressure acceptance.

Bad faith is the unreasonable denial, delay, or underpayment of a valid claim. It has two forms:

• First-party bad faith — mishandling the insured's own claim (denying a clearly covered fire loss without investigation).
• Third-party bad faith — in liability insurance, refusing a reasonable within-limits settlement, exposing the insured to an excess judgment.

Worked Example: Why Third-Party Bad Faith Hurts

An at-fault driver carries a $50,000 per-person bodily-injury limit. The injured claimant offers to settle for the $50,000 limit, but the insurer refuses and the case goes to a jury that awards $180,000. Because the insurer gambled with the insured's money by rejecting a reasonable within-limits offer, bad faith can make it liable for the entire $180,000 judgment, not just the $50,000 limit. The $130,000 excess is the bad-faith exposure that ordinary contract damages (capped at the limit) would never reach.

Common Exam Traps

• UTPA = sales; UCSPA = claims. Identify the phase before choosing an answer.
• Twisting vs. churning hinges on one fact: different insurer (twisting) versus the same insurer (churning).
• Rebating is illegal even if the customer asks for it in most states.
• Pay the undisputed amount now—an insurer cannot freeze the whole payment because part is contested.
• Bad faith is a tort in many states, so damages can exceed the policy limit, unlike an ordinary breach of contract.
• One violation vs. a pattern: a general business practice of violations triggers the most severe penalties.