4.1 Unfair Trade Practices

The Unfair Competition and Practices Act

The Rhode Island Unfair Competition and Practices Act, codified at Title 27, Chapter 27-29 of the General Laws, is the backbone of insurance ethics on the state-specific portion of the exam. It identifies specific unfair methods of competition and unfair or deceptive acts, and authorizes the Director of the Department of Business Regulation (DBR) to investigate, hold hearings, and penalize violators. Memorize the enumerated list — exam items often ask you to pick which scenario is (or is NOT) a named violation.

Misrepresentation and False Statements

A producer commits misrepresentation by misstating the terms, benefits, dividends, or value of any policy, or the financial condition of any insurer. This covers spoken statements, written illustrations, and policy comparisons.

• Misstating premiums, dividends, or projected cash values
• Misrepresenting an insurer's financial condition or legal reserve status
• Using a name or title that misrepresents the true nature of a policy (e.g., calling life insurance a "savings plan")
• Misrepresenting any policy as shares of stock

Defamation, Boycott, Coercion, and False Financial Statements

Four additional enumerated practices appear regularly on exams:

• Defamation — making false, maliciously critical statements about the financial condition of another insurer.
• Boycott, coercion, intimidation — agreements that restrain or monopolize the business of insurance.
• False financial statements — filing or publishing a false statement of an insurer's financial condition.
• Stock operations and insurance company advisory board contracts intended to deceive.

False Advertising

Insurance advertising must be truthful and not deceptive. Ads cannot imply government endorsement, use non-genuine testimonials, or omit the insurer's true name. A common trap: an ad implying a policy is "approved" by the state. DBR approval of a policy form never means endorsement, and saying so is a deceptive act.

Rebating and Its Exceptions

Rebating is offering any valuable consideration or inducement not specified in the policy to induce a purchase. It is prohibited for both the producer and the applicant who knowingly accepts it. Watch the statutory exceptions — these are the answer to "which is permitted?" items:

Twisting vs. Churning

These two terms are constantly confused on the exam; the distinguishing factor is whether a second insurer is involved.

Twisting

Twisting is knowingly making misleading representations, or incomplete or fraudulent comparisons, of policies or insurers to induce a person to lapse, forfeit, surrender, terminate, retain, pledge, assign, borrow on, or convert a policy, or to take out a policy with another insurer. The key element is a deceptive comparison that moves a client from one company to another to their detriment.

Churning

Churning is the same harmful pattern but within the same insurer — using the cash value or dividends of an existing policy to fund a new one with the same company, generating fresh commissions and a new surrender-charge period without genuine benefit to the client.

Insurer Written-Procedure Mandate

Under R.I. Gen. Laws 27-29-4.7, each insurer shall adopt written procedures reasonably sufficient to avoid twisting and churning of its issued policies. Failure to adopt those procedures is itself an unfair method of competition — a frequently tested standalone rule.

Exam Tip: If the fact pattern keeps the client at the same company and starts a new policy funded by the old one's values, the answer is churning, not twisting.

Unfair Claims Settlement Practices

Rhode Island's unfair claims rules require prompt, good-faith handling. A single egregious act, or a general business pattern, can be a violation. Prohibited acts include:

• Misrepresenting pertinent facts or policy provisions to a claimant
• Failing to acknowledge and act promptly on communications about claims
• Failing to adopt reasonable standards for prompt investigation
• Refusing to pay claims without conducting a reasonable investigation
• Offering substantially less than the amount ultimately recovered
• Compelling insureds to litigate by offering far less than owed

Unfair Discrimination

Insurers may not unfairly discriminate between individuals of the same class and equal expectation of life in rates, dividends, or benefits, nor refuse coverage solely on a prohibited basis such as race, religion, or national origin. Risk-based distinctions remain lawful — age, health history, occupation, and tobacco use are legitimate underwriting factors.

Penalties and Enforcement

The DBR Director may issue a cease-and-desist order, and may impose civil penalties per violation (with higher caps where the conduct was knowing). Persistent or flagrant violations support license suspension or revocation and restitution to harmed consumers. The DBR also enforces notice requirements: insureds must receive clear written notice before adverse premium or coverage changes so they can shop alternatives.