18.1 Unfair Trade Practices and Unfair Claims Settlement

The Two Governing Acts

Nearly every state has adopted two NAIC model laws that the national exam tests heavily. The Unfair Trade Practices Act (UTPA) is patterned on NAIC Model 880 and governs how insurance is marketed and sold. The Unfair Claims Settlement Practices Act (UCSPA) is patterned on NAIC Model 900 and governs how claims are handled after a loss. Together they convert the broad duty of good faith and fair dealing into a checklist of specifically prohibited acts the commissioner can enforce.

Prohibited Trade Practices (UTPA)

Memorize the enumerated practices; the exam pairs a fact pattern with the correct label.

Rebating, Twisting, and Churning

These three are confused constantly, so anchor them precisely:

• Rebating - returning any part of the premium, or giving anything of value not specified in the contract, to induce a purchase. Many states allow nominal gifts (often a $25-$100 cap) that are not contingent on a sale.
• Twisting - using misrepresentation or incomplete comparison to convince a policyholder to lapse, surrender, or replace an existing policy to the insured's detriment.
• Churning - the same harmful replacement, but funded by the same insurer's existing values (e.g., using built-up cash value to buy a new policy).

Trap: a legitimate, fully disclosed replacement that benefits the client is not twisting. The violation lies in the misrepresentation, not the replacement itself.

Unfair Claims Settlement Practices (UCSPA)

The UCSPA lists conduct that, especially when done with such frequency as to indicate a general business practice, is illegal. The exam loves the single-violation versus pattern distinction: one slip can be an unfair act, but a pattern is what triggers market-conduct exams and the steepest penalties.

Commonly prohibited acts include:

• Misrepresenting pertinent facts or policy provisions.
• Failing to acknowledge and act promptly on communications (statutory windows are often 10-15 days).
• Failing to adopt reasonable standards for prompt 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.

Timelines and the Good-Faith Standard

Though exact days vary by state, candidates should know the typical pattern: acknowledge within ~10-15 days, affirm or deny coverage within ~15-30 days of receiving a proof of loss, and pay within ~5-30 days after agreement. Missing these creates a bad-faith exposure separate from the contract claim itself.

Good-faith settlement means the insurer must put the insured's interests on at least equal footing with its own. A first-party bad-faith claim can expose the insurer to extra-contractual damages beyond the policy limit, and in many states punitive damages for willful conduct.

Penalties and Enforcement

The commissioner enforces both acts through cease-and-desist orders, administrative fines (frequently up to $1,000-$5,000 per non-willful violation and $10,000-$25,000 per willful violation, with annual aggregates), and license suspension or revocation. Violating a cease-and-desist order multiplies the fines. Severe or repeated misconduct surfaces in periodic market-conduct examinations, the regulator's audit of how an insurer treats consumers.

Worked example: an insurer that willfully shorts 8 claimants, each a separate willful violation at $20,000, faces $160,000 in fines plus restitution and possible license action - far exceeding any short-term savings from the lowball offers.

Defining the Prohibited Practices the Exam Names

The exam expects precise definitions of the named unfair practices:

Trap: twisting uses misrepresentation to replace a different insurer's policy; churning replaces policies within the same insurer using existing values. Both harm the consumer for the producer's gain, but the source of the replaced policy distinguishes them.