4.1 Unfair Trade Practices

The Unfair Trade Practices Act

South Dakota's prohibited-practices rules live in South Dakota Codified Law (SDCL) Title 58, Chapter 33 — the Unfair Trade Practices Act (UTPA). The chapter defines specific deceptive acts and labels most of them misdemeanors, which the Division of Insurance (part of the Department of Labor and Regulation) enforces through cease-and-desist orders, fines, and license action. Many sections are framed as a Class 1 misdemeanor, punishable by up to one year in county jail and a $2,000 fine; some are Class 2 (up to 30 days and $500).

Unlike some states that enumerate unfair practices in a single list, South Dakota assigns each act its own section and its own criminal grade, so the exam often asks you to match a described behavior to the correct prohibited category rather than recite a statute number.

The practical enforcement path is layered. The director of insurance may first investigate a complaint, issue a statement of charges, and hold a hearing. If a violation is found, the director can order the practice stopped, impose administrative penalties, and pursue license suspension or revocation; willful or repeated conduct can also be referred for criminal prosecution by a state's attorney. A producer cannot avoid discipline by claiming ignorance — many UTPA violations require only that the act occurred, not that the producer intended to deceive.

Misrepresentation and False Advertising

Misrepresentation (SDCL 58-33-5, 58-33-6) is making, issuing, or circulating any statement that misrepresents:

• The terms, benefits, or advantages of any policy
• Dividends or the share of surplus to be received
• The financial condition of an insurer
• The true nature of the insurance transaction (e.g., calling a life policy a "savings plan" or "retirement account")

Defamation (58-33-7)

Making a false statement that is calculated to injure a competitor or another insurer is separately prohibited. Telling a prospect a rival carrier "is about to go bankrupt" without a factual basis is defamation, not legitimate comparison.

Rebating

Rebating is returning any part of the premium, or giving any valuable consideration not stated in the policy, to induce a sale.

Trap: Under SDCL 58-33-25, the insured who knowingly accepts a rebate also commits a misdemeanor — the prohibition is two-sided, not just on the producer.

The line between an illegal rebate and a permitted item turns on value and disclosure. A branded pen, a calendar, or a low-cost educational pamphlet is fine because its value is nominal and it is not tied to the purchase of a specific policy. Cash, gift cards, free airline tickets, or paying the client's first premium are inducements of real value and are illegal regardless of how small they seem relative to the premium. A producer may also not split or share commission with anyone who is not licensed for that line — paying a real-estate agent a "finder's fee" for an insurance referral is a rebating-style violation.

Twisting and Churning

Twisting (SDCL 58-33-8)

Twisting is using misrepresentation or incomplete comparison to induce a policyholder to lapse, forfeit, surrender, or replace an existing policy to the insured's detriment. Examples: falsely claiming the old policy "has no cash value," misstating surrender charges, or hiding new contestable and suicide periods that restart on a replacement.

Churning

Churning is replacing a client's policies — often using the same insurer's built-up cash value — primarily to generate new first-year commissions. Watch for a pattern across a book of business rather than one isolated swap.

Unfair Discrimination

South Dakota splits unfair discrimination by line of business:

• SDCL 58-33-12 — life insurance and annuities
• SDCL 58-33-13 — health insurance

Both prohibit discrimination between individuals of the same class and essentially the same hazard in premiums, rates, policy fees, dividends, or other terms.

Permitted (actuarially justified) underwriting still uses: age, sex (where allowed), tobacco use, health and claims history, occupation, and hazardous avocations. Prohibited: charging two identical 40-year-old nonsmoking males different rates for the same product, or refusing coverage based on a protected characteristic unrelated to risk.

The key analytical phrase is "same class and same hazard." Discrimination is only unfair when the two insureds present essentially equal risk yet are treated differently. A smoker paying more than a nonsmoker is fair discrimination because the hazard genuinely differs. Charging a diabetic a higher health premium is permitted if supported by sound actuarial data. What the law forbids is treating equal risks unequally — for example, refusing to write a policy because of the applicant's race, national origin, or marital status, none of which alter the underlying mortality or morbidity hazard.

The exam loves to test this by giving two nearly identical applicants and asking whether a rate difference is lawful.

Coercion, Boycott, and Unfair Claims Practices

Boycott, coercion, or intimidation that restrains trade (SDCL 58-33-32) is barred — e.g., a lender requiring the borrower to buy insurance from one named agency.

Unfair claims settlement practices (SDCL 58-33-66/67) include:

• Misrepresenting policy provisions to a claimant
• Failing to acknowledge or act promptly on a claim
• Denying a claim without a reasonable investigation
• Forcing litigation by offering substantially less than amounts ultimately recovered

Penalties