18.1 Unfair Trade Practices and Unfair Claims Settlement

The Unfair Trade Practices Act

The Unfair Trade Practices Act (UTPA) is NAIC model legislation that nearly every state has adopted. It defines and prohibits deceptive marketing and sales conduct in insurance. The exam tests the named violations heavily because the wording is precise and the practices look superficially similar. Learn each definition by its distinguishing feature, not by a vague sense that it is "bad."

The commissioner enforces the UTPA through cease-and-desist orders, fines, and license suspension or revocation. A practice does not have to be habitual to be a violation, but the commissioner weighs frequency when setting penalties.

Marketing and Sales Violations

The Three Look-Alike Sales Violations

These three are the most-missed items on the national exam because all involve replacing or churning coverage. Memorize the trigger word for each.

• Twisting — Misrepresentation used to persuade a client to lapse, surrender, or replace a policy (often to a different insurer). The defining element is the false or misleading statement.
• Churning — Replacing a policy using the cash values of the client's existing policy with the same insurer, generating new commissions. Same company, client's own money.
• Sliding — Adding coverage or a fee the client did not request (e.g., charging for a rider the buyer never agreed to), or representing optional coverage as required.

Trap: A lawful, properly disclosed replacement is not twisting. Twisting requires misrepresentation. If the producer compares two policies honestly with full disclosure, it is legitimate even if a replacement results.

Rebating trap: Rebating is prohibited in most states even if the client requests it and even if both parties benefit. A few states permit small de-minimis gifts, but on the national exam treat any unfiled inducement as rebating.

Misrepresentation, False Advertising, and Defamation

Misrepresentation covers false statements about a policy's benefits, an insurer's financial condition, dividends, or premiums. Stating that "premiums will never increase" on an adjustable product, or that dividends are "guaranteed," are textbook examples. False advertising extends the same idea to printed, broadcast, or online material reaching the public.

Defamation is a false statement that harms another insurer's or producer's reputation. The exam splits it into libel (written) and slander (spoken). Falsely claiming a competitor is insolvent to capture its clients is defamation even if the speaker believes it.

Boycott, coercion, and intimidation are grouped because each restrains free trade: a concerted refusal to deal, the use of threats to compel a transaction, or the use of fear to influence a decision. Tying the sale of insurance to another product (a lender requiring its own coverage) can constitute illegal coercion.

Unfair discrimination is not all distinction-making. Insurers may classify risks; what is prohibited is charging different rates or offering different terms to individuals of the same actuarial class and equal expected risk, or refusing coverage based on protected characteristics unrelated to risk.

The Unfair Claims Settlement Practices Act

A separate model act, the Unfair Claims Settlement Practices Act (UCSPA), governs how insurers must handle claims in good faith. The exam expects you to recognize specific prohibited conduct and the typical timeframes states impose.

Prohibited Claims Conduct

Timeframe Benchmarks (Commonly Tested)

• Acknowledge receipt of a claim: usually within 10-15 days.
• Affirm or deny coverage: typically within 30 days of receiving proof of loss.
• Pay an undisputed claim: promptly once liability is reasonably clear.

A single isolated act can violate the UCSPA, but the act's heaviest penalties target practices performed "with such frequency as to indicate a general business practice." That phrase is a frequent multiple-choice answer.

Good Faith and Bad-Faith Consequences

The duty of good faith and fair dealing runs from the insurer to its insured. When an insurer unreasonably denies or delays a valid claim, the insured may have a bad-faith cause of action that can expose the insurer to damages beyond the policy limit. Producers should never advise a claimant to accept a settlement they know is unreasonably low, nor characterize a payable claim as excluded.

Watch the distinction between first-party claims (the insured's own life or health benefit) and third-party claims (liability owed to others). Life and health claims are predominantly first-party, so the analysis focuses on prompt acknowledgment, fair investigation, and timely payment of the benefit once proof of death or covered medical expense is furnished.

Finally, recognize the difference between a legitimate denial and an unfair one. An insurer may deny a claim that falls within a valid exclusion, was incurred during the contestable period and tied to a material misrepresentation, or lacks adequate proof of loss. The violation arises only when the denial is made without a reasonable basis or without the investigation the facts require.