18.3 Unfair Trade Practices and Unfair Claims Settlement
Key Takeaways
- The Unfair Trade Practices Act lists prohibited sales conduct: misrepresentation, twisting, churning, defamation, coercion, and rebating.
- Twisting usually moves a client to a different insurer; churning uses the same insurer's existing cash values; both rest on misrepresentation.
- Rebating is illegal even when the client requests it and even if offered equally, because it causes unfair discrimination.
- Unfair claims conduct becomes a violation when committed with such frequency as to indicate a general business practice.
- Commissioners enforce with cease-and-desist orders, per-violation fines, and license suspension or revocation after notice and hearing.
The Unfair Trade Practices Act
Nearly every state has adopted a version of the NAIC Unfair Trade Practices Act (UTPA), which lists conduct that is illegal in marketing and selling insurance. The act gives the commissioner authority to investigate, issue cease and desist orders, and impose fines and license actions. You must be able to identify each prohibited practice by its definition on the exam.
Prohibited Sales and Marketing Practices
| Practice | Definition |
|---|---|
| Misrepresentation | Making false or misleading statements about a policy's terms, benefits, or an insurer's finances |
| Twisting | Using misrepresentation to induce a policyholder to lapse or replace a policy to the client's detriment |
| Churning | Replacing a policy using the same insurer's existing cash values, to the client's detriment |
| Defamation | Making false, malicious statements about another insurer or producer |
| Boycott, coercion, intimidation | Forcing a transaction or restraining trade |
| Rebating | Giving any part of the premium or anything of value not stated in the policy to induce a sale |
Twisting vs. churning is a classic exam pair. Both involve a harmful replacement induced by misrepresentation. The difference: twisting typically moves the client to a different insurer, while churning uses the same insurer's existing values to generate a new sale and commission. Both are illegal because they put the producer's compensation ahead of the client's interest.
A producer convinces a client to surrender a policy and buy a new one from a DIFFERENT insurer by misstating the old policy's benefits, harming the client. This is best described as:
Rebating in Detail
Rebating means offering a prospect any inducement not specified in the policy — returning part of the commission, paying the first premium, or giving cash, gifts, or services of more than a nominal value. It is illegal because it leads to unfair discrimination between insureds of the same class. Note two nuances: (1) some states permit small advertising novelties under a fixed dollar cap; (2) rebating is illegal even when the client asks for it and even if the producer offers the rebate equally to everyone.
Unfair Discrimination and Redlining
Unfair discrimination is charging different rates or offering different terms to individuals of the same actuarial class and risk. Distinctions based on legitimate risk factors (age, health, occupation where allowed) are permitted; distinctions based on race, religion, national origin, or other protected traits are not. Redlining — refusing to write coverage in a geographic area without a sound actuarial basis — is a prohibited form of unfair discrimination.
Unfair Claims Settlement Practices
The NAIC Unfair Claims Settlement Practices Act governs how insurers handle claims after a loss. A practice becomes an actionable violation when it is committed with such frequency as to indicate a general business practice — a single isolated error is usually not a violation, but a pattern is. This frequency standard is a favorite exam point.
Prohibited claims conduct includes:
- Misrepresenting policy provisions relating to coverage at issue.
- Failing to acknowledge and act promptly on communications about a claim.
- Failing to adopt reasonable standards for prompt investigation of claims.
- Not attempting in good faith to settle a claim where liability is reasonably clear.
- Forcing insureds to litigate by offering substantially less than amounts ultimately recovered.
- Failing to provide a reasonable explanation for a denial.
Penalties and Enforcement
When a violation is found, the commissioner can impose escalating penalties: cease and desist orders, monetary fines per violation (often higher for knowing or willful conduct), license suspension or revocation, and restitution. Many statutes distinguish unintentional violations (lower per-act fines) from knowing violations (higher fines and possible criminal referral). The commissioner generally must give notice and an opportunity for a hearing before final discipline.
A Worked Penalty Scenario
Suppose a statute sets fines of $1,000 per unintentional unfair-claims violation and $25,000 per knowing violation, and an insurer is found to have improperly delayed 6 claims. If the delays were unintentional, exposure is 6 x $1,000 = $6,000; if regulators prove the conduct was knowing and a general business practice, exposure jumps to 6 x $25,000 = $150,000, plus possible suspension. The lesson: intent and frequency drive penalty severity far more than the raw number of claims.
Advertising and Sales Material
The UTPA framework also reaches advertising. Sales material must not be deceptive about benefits, dividends (which are never guaranteed), or an insurer's financial condition. Using the word "investment" to describe ordinary life insurance, implying coverage is "free," or presenting nonguaranteed values as guaranteed are all prohibited. Illustrations for cash-value products must clearly separate guaranteed from projected elements so the consumer is not misled.
Under the Unfair Claims Settlement Practices Act, when does claims-handling conduct generally become an actionable violation?