6.3 Unfair Trade Practices Act

UTPA Authority

The NAIC Unfair Trade Practices Act (UTPA, MDL-880), first issued in 1947, is the model nearly every state adopted. It empowers the commissioner to investigate suspected unfair practices, hold administrative hearings, issue cease-and-desist orders, impose penalties (commonly around $1,000 per violation and up to $25,000 for willful violations, higher in many states), and suspend or revoke licenses.

The Named Unfair Trade Practices

1. Misrepresentation and false advertising

Circulating estimates, illustrations, or statements that misrepresent policy terms, benefits, dividends, an insurer's financial condition, or the true purpose of a transaction; or using a misleading name or title.

2. Defamation

Making a false, maliciously critical statement about another insurer's financial condition. This is an insurer-to-insurer offense, not consumer slander.

3. Boycott, coercion, and intimidation

Agreements that produce an unreasonable restraint of, or monopoly in, the business of insurance. These three acts are carved out of the McCarran-Ferguson antitrust exemption, so the Sherman Act applies to them directly.

4. Unfair discrimination

Charging different rates, fees, or terms to two applicants in the same actuarial class based on a non-actuarial factor.

• Always protected: race, color, creed, religion, national origin.
• Commonly protected: sex/gender, marital status, sexual orientation, gender identity, disability, and age (with limited exceptions).
• Newer protections: domestic-violence survivor status, genetic information, and state-specific limits on credit history.

This is not the same as legitimate underwriting. Charging more for a documented loss history or a genuine catastrophe-exposure difference is fair. Charging more based on a protected characteristic, or a proxy with no actuarial support, is unfair discrimination.

5. Rebating

Offering anything of value as an inducement to buy that is not specified in the policy — returning part of the commission, paying the first premium, gifts, etc. Most states still prohibit it outright. A handful permit nominal-value gifts (e.g., capped around $25–$100) or value-added services offered uniformly to all similarly situated clients. For the exam, assume rebating is illegal.

6. Twisting vs. churning

Both are illegal. Churning was added to the model after late-1990s life-insurance scandals.

7. Unfair claim settlement practices

The NAIC addresses these in the separate Unfair Claims Settlement Practices Act (UCSPA, MDL-900): misrepresenting policy provisions to a claimant, failing to acknowledge claim communications promptly (about 10–15 days), failing to adopt reasonable claim-handling standards, not attempting good-faith settlement when liability is clear, compelling insureds to litigate, and failing to give a written explanation for a denial.

8. Failure to maintain records

Insurers must keep complaint records (commonly 3 years), claim files, and advertising files available for examination.

9. Prohibited inquiries

• Genetic information (state UTPAs and the federal Genetic Information Nondiscrimination Act, GINA).
• Domestic-abuse survivor status (NAIC MDL-896).
• Lawful off-duty conduct in some states (e.g., legal firearm or cannabis use).

Sherman Antitrust and McCarran-Ferguson

McCarran-Ferguson exempts the business of insurance from federal antitrust only to the extent it is state-regulated and only when the conduct is not boycott, coercion, or intimidation. Practical applications:

• Joint rate-making and loss-data sharing through an advisory organization such as the Insurance Services Office (ISO) — exempt.
• A group of insurers agreeing to refuse a class of risks to drive out a competitor — not exempt; the Sherman Act reaches it.

Worked Scenario: Sorting the Practices

Exam questions usually present a fact pattern and ask you to name the violation. Work through these quickly:

• A producer tells a prospect a competitor "won't be around to pay your claim" with no basis — defamation.
• A producer offers to pay the client's first month of premium out of the commission — rebating.
• A producer persuades an insured to drop a policy and rewrite it with a different company using an inflated savings figure — twisting.
• The same misleading rewrite, but staying with the same company for a fresh commission — churning.
• Two insurers agree they will both refuse to quote a new low-cost competitor's referrals — boycott, reachable under the Sherman Act.

Why Unfair Discrimination Is Subtle

The most missed UTPA topic is the line between lawful underwriting and unfair discrimination. Insurers are expressly permitted to classify and price risk using actuarially supported factors. What the UTPA forbids is treating people in the same risk class differently for reasons unrelated to expected loss. Consider auto rating:

A producer who steers an applicant toward a higher tier because of a protected characteristic, or who applies a surcharge with no filed actuarial basis, commits unfair discrimination even if the conduct was not malicious.

Penalties and Cure

When the commissioner finds a violation after a hearing, remedies escalate from a cease-and-desist order, to monetary penalties (the per-violation and willful-violation caps above), to restitution to harmed consumers, and ultimately to license suspension or revocation. Violating a cease-and-desist order is itself a separate, often more serious, offense, and many states treat knowing UTPA violations as misdemeanors carrying possible imprisonment in addition to the administrative penalties.