18.1 Unfair Trade Practices and Unfair Claims Settlement

The Unfair Trade Practices Act (UTPA) is NAIC model legislation that every state has adopted in some form. It empowers the insurance commissioner to investigate, hold hearings, issue cease-and-desist orders, and impose fines, license suspension, or revocation against insurers and producers who engage in defined unethical conduct. The UTPA is the backbone of exam questions on ethics.

Memorize the named practices and the precise definition of each, because the exam tests recognition of behavior, not just terminology. A typical item describes a producer's action and asks you to name the violation. The commissioner's enforcement powers are themselves tested: orders to cease and desist, civil penalties per act and per willful act, restitution to harmed consumers, and probation or revocation of a license. Penalties escalate for willful conduct.

The Named Unfair Trade Practices

A practice is unlawful only when it is knowingly committed or so frequent as to indicate a general business practice. A single inadvertent error is usually not a UTPA violation; a pattern is. This frequency element is the single most common distractor on the exam, so read fact patterns for words signaling repetition.

Unfair discrimination is nuanced: insurers may charge different rates based on legitimate actuarial factors such as age, health, and tobacco use. What is prohibited is unequal treatment of people in the same class with the same risk — for example, charging two healthy 40-year-old nonsmokers different premiums based on race, religion, national origin, or other non-actuarial characteristics.

Rebating, Twisting, Churning, Sliding

These four sales-side abuses are the most heavily tested. Distinguish them carefully:

• Rebating — returning part of the commission or offering cash, gifts, or anything of value not specified in the contract to induce a sale. In most states it is illegal even if offered equally to all applicants, and both the producer who offers and the consumer who knowingly accepts may be penalized. Advertising specialties of nominal value (e.g., a $10 calendar) are usually exempt.
• Twisting — using misrepresentation or incomplete comparisons to convince a policyholder to lapse, surrender, or replace an existing policy to the insured's detriment.
• Churning — twisting using values from the same insurer's policies, replacing one company policy with another (often funded by stripping cash value) to generate a new commission.
• Sliding — representing that an ancillary coverage is required by law, or charging for coverage the applicant did not request.

Unfair Claims Settlement Practices

The Unfair Claims Settlement Practices Act prohibits insurers from mishandling claims. As with the UTPA, isolated mistakes are not violations — the conduct must be committed flagrantly or with such frequency as to indicate a general business practice. The act protects insureds and claimants from delay, lowball offers, and stonewalling. Tested prohibited acts include:

• Misrepresenting pertinent facts or policy provisions relating to coverage.
• Failing to acknowledge and act reasonably promptly on communications about claims.
• Failing to adopt reasonable standards for prompt investigation of claims.
• Refusing to pay claims without conducting a reasonable investigation.
• Not attempting in good faith to effectuate prompt, fair, and equitable settlement of claims in which liability is reasonably clear.
• Compelling insureds to litigate by offering substantially less than amounts ultimately recovered.
• Failing to promptly provide a reasonable explanation for a denial or compromise.

Many states layer on a prompt-payment statute requiring clean claims to be paid within a set number of days (commonly 30 to 45) or interest accrues. Bad-faith claim handling can also expose an insurer to civil liability beyond the policy limits, separate from regulatory penalties.

Worked Example: Pattern vs. Isolated Act

An adjuster delays one claim 45 days while requesting a missing death certificate — not a violation, because requesting needed documentation is a reasonable investigation step. The same insurer routinely lowballs 8 of 10 disability claims to force settlements — a clear unfair claims settlement practice because it shows a general business practice.

On the exam, look for the words "repeatedly," "as a matter of practice," "routinely," or a stated frequency to flag a true violation. If the scenario describes a one-time act with a legitimate explanation, the correct answer is usually that no violation occurred.

Common Exam Traps

Watch for recurring distractors. First, rebating questions often add the phrase "offered equally to everyone" to tempt you into thinking equal treatment cures the offense — it does not, because the inducement still falls outside the policy terms. Second, defamation requires a false statement about another insurer; a true statement about a competitor's financial weakness, however unkind, is not defamation.

Coercion and boycott questions hinge on restraint of trade, not mere aggressive selling. Finally, distinguish unfair discrimination (non-actuarial, same class) from lawful rate differences based on age, health, or tobacco use, which are permitted because they reflect genuine differences in risk.