Unfair Trade Practices & Unfair Claims Settlement
Key Takeaways
- Unfair trade practices include misrepresentation, twisting, churning, rebating, defamation, coercion, unfair discrimination, and false advertising.
- Twisting uses misrepresentation to induce replacing a policy; rebating gives something of value not in the contract to induce a sale.
- Unfair claims settlement practices prohibit delaying, lowballing, denying without investigation, and failing to explain denials.
- These offenses are enforced by the state regulator and form the basis of the Ohio prohibited-practices rules.
Unfair Trade Practices
State insurance codes prohibit unfair trade practices, and the exam tests the defined offenses by name because the Ohio ethics chapter applies the same list with Ohio statutes. These practices distort the market or mislead consumers and can result in fines, license action, and orders to cease.
| Practice | Definition |
|---|---|
| Misrepresentation | False statements about a policy's terms, benefits, or an insurer |
| Twisting | Misrepresentation to induce replacing a policy |
| Churning | Replacing using values from the insured's existing policy with the same insurer |
| Rebating | Giving something of value not in the contract to induce a purchase |
| Defamation | False statements harming an insurer's reputation |
| Boycott, coercion, intimidation | Restraint of trade |
| Unfair discrimination | Different terms/rates for the same risk without basis |
| False advertising | Misleading statements in advertising |
The Most-Tested Offenses
Misrepresentation is making false or misleading statements about a policy or insurer. Twisting is misrepresentation used to induce a client to drop one policy and buy another, often to the client's detriment. Rebating is giving a client something of value (a gift, cash, or part of the commission) not specified in the policy to induce the sale; it is prohibited in most states because it leads to unfair discrimination, though a few states have narrowed it. Unfair discrimination is charging different rates or offering different terms to insureds of the same class and risk without an actuarial justification.
The exam tests recognizing each practice from a short scenario.
Unfair Claims Settlement Practices
A separate, heavily tested category is unfair claims settlement practices, which govern how insurers must handle claims. Prohibited practices include:
- Misrepresenting policy provisions relating to a claim
- Failing to acknowledge and act promptly on claim communications
- Failing to adopt reasonable standards for prompt investigation
- Refusing to pay claims without a reasonable investigation
- Not attempting in good faith to settle claims where liability is reasonably clear
- Compelling insureds to litigate by offering substantially less than amounts ultimately recovered
- Failing to provide a reasonable explanation for a denial
These standards exist so insurers treat claimants fairly, and a pattern of violations exposes the insurer to regulatory action and, in some cases, bad-faith liability. The exam tests recognizing an unfair claims practice from an insurer's conduct.
Applying the Practices on the Exam
When a scenario describes a producer lying about a policy (misrepresentation), persuading a client to replace a policy through misstatements (twisting), offering a gift or cash to close a sale (rebating), or charging different rates for the same risk without basis (unfair discrimination), name the specific practice. When an insurer delays, lowballs, denies without investigation, or fails to explain a denial, name the unfair claims settlement violation.
Because the Ohio ethics chapter enforces these same offenses under Ohio law, with the Superintendent empowered to investigate, hold hearings, fine, and order cease-and-desist, mastering the defined practices here lets you answer both the national ethics questions and the Ohio prohibited-practices questions that build on them.
A producer convinces a client to drop an existing life or property policy and buy a new one by misrepresenting the old policy's terms. This practice is:
An insurer refuses to pay a claim without conducting any reasonable investigation. This is an example of:
Naming the Prohibited Practice
State codes prohibit defined unfair trade practices, and the exam tests recognizing each by name. Misrepresentation is false statements about a policy or insurer; twisting uses misrepresentation to induce a client to replace a policy; churning replaces using values from the insured's existing policy with the same insurer; rebating gives something of value not in the contract to induce a sale; unfair discrimination charges different rates or terms for the same class and risk without basis; and defamation, false advertising, and coercion round out the list.
A separate, heavily tested category is unfair claims settlement practices, governing how insurers handle claims. Prohibited conduct includes failing to acknowledge and act promptly, failing to investigate before denying, not attempting good-faith settlement where liability is clear, lowballing to force litigation, and failing to explain denials.
| Practice | Trigger |
|---|---|
| Misrepresentation | False statement about a policy/insurer |
| Twisting | Misstatement to induce replacement |
| Rebating | Value not in the contract to induce sale |
| Unfair discrimination | Different terms, same risk, no basis |
| Unfair claims settlement | Delay, lowball, deny without investigation |
When a scenario describes a producer lying about a policy (misrepresentation), replacing a policy through misstatements (twisting), offering a gift to close a sale (rebating), or charging unequal rates for the same risk (unfair discrimination), name the practice. When an insurer delays, lowballs, denies without investigation, or fails to explain a denial, name the unfair claims violation.
Because the Ohio ethics chapter enforces these same offenses under Ohio law with the Superintendent's investigation, hearing, fine, and cease-and-desist powers, mastering the defined practices here answers both the national and Ohio questions.
Recognize each prohibited practice by name: misrepresentation (false statements about a policy or insurer), twisting (misstatements to induce replacing a policy), churning (replacing using existing values with the same insurer), rebating (value not in the contract to induce a sale), unfair discrimination (different terms for the same risk without basis), defamation, false advertising, and coercion. Separately, unfair claims settlement practices prohibit delaying, failing to investigate before denial, lowballing to force litigation, and failing to explain denials.
These offenses are enforced by the state regulator and form the basis of the Ohio prohibited-practices rules tested later.