6.3 Marketing Practices: Unfair Methods of Competition, Claims Practices, Rebating, Discrimination, and Fraud

6.3 Marketing Practices: Unfair Methods of Competition, Claims Practices, Rebating, Discrimination, and Fraud

The outline's marketing-practices block lists ten prohibited practices: claims methods and practices, false advertising, misrepresentation, defamation, controlled business, rebating, unfair discrimination, fraud, unfair comparison, and boycott, coercion, and intimidation. Texas Insurance Code Chapter 541 makes these practices unlawful for any "person" in the business of insurance, a term that expressly includes agents, brokers, and adjusters (TIC §§ 541.002-.003). Surplus lines agents are held to the same standards as admitted-market agents.

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1. Claims Methods and Practices

Unfair Settlement Practices (TIC § 541.060)

With respect to a claim by an insured or beneficiary, it is unlawful to:

• Misrepresent a material fact or policy provision relating to the coverage at issue;
• Fail to attempt in good faith to effect a prompt, fair, and equitable settlement once liability has become reasonably clear;
• Fail to promptly give a reasonable explanation of the basis for a denial or compromise offer;
• Fail within a reasonable time to affirm or deny coverage, or to submit a reservation of rights;
• Refuse to pay a claim without conducting a reasonable investigation; or
• Enforce a full release when only a partial payment has been made, unless the payment compromises a doubtful or disputed claim.

TIC § 542.003 separately lists unfair claim settlement practices by insurers, such as failing to acknowledge claim communications with reasonable promptness, failing to adopt reasonable standards for prompt investigation, and compelling policyholders to sue by offering substantially less than they ultimately recover. TDI's claim-settlement rules (28 TAC §§ 21.201-21.205) implement these standards.

Prompt Payment of Claims: Surplus Lines Deadlines Differ

• Delay penalty: An insurer liable for a claim that does not comply is liable for the claim plus 18% per year interest as damages and reasonable attorney's fees. In property-damage actions governed by Chapter 542A, the rate is instead the judgment interest rate plus 5% (TIC § 542.060).
• Catastrophes: For a weather-related catastrophe or major natural disaster as defined by the commissioner, the claim-handling deadlines are extended an additional 15 days (TIC § 542.059(b)).

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2. False Advertising (TIC § 541.052)

It is unlawful to make, publish, or circulate an advertisement, announcement, or statement containing an untrue, deceptive, or misleading assertion about the business of insurance or a person in the insurance business. The rule covers newspapers, mailings, radio, television, the Internet, or any other medium. TDI's advertising rules (28 TAC §§ 21.111, 21.115) add detail.

Surplus lines application: A surplus lines agent may advertise its ability to place surplus lines insurance permitted by Chapter 981 (TIC § 981.219). It may not claim that a surplus lines insurer is licensed or admitted, is approved by TDI, or is backed by the guaranty association.

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3. Misrepresentation (TIC §§ 541.051, 541.061)

Prohibited misrepresentations include:

• Misrepresenting a policy's terms, benefits, or advantages, or dividends to be received;
• Misrepresenting an insurer's financial condition;
• Using a policy name that misrepresents its true nature;
• Misrepresenting to induce a policyholder to let a policy lapse or surrender it; and
• Misrepresenting a policy by an untrue statement of material fact, by omitting a material fact needed to keep other statements from misleading, by a statement that would mislead a reasonably prudent person, by a material misstatement of law, or by failing to make a disclosure required by law (§ 541.061). Omitting the § 981.101(b) surplus lines notice is an example of the last category.

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4. Defamation (TIC § 541.053)

It is unlawful to make, publish, or circulate, or to aid or encourage, any oral or written statement that is false or maliciously critical of, or derogatory to, the financial condition of an insurer and is calculated to injure a person in the insurance business. Falsely telling a prospect that a competitor's eligible insurer "is about to be liquidated" is defamation.

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5. Controlled Business and Intent to Engage in Business (TIC § 4001.104)

TDI may not license an agent unless the applicant intends to be actively engaged in soliciting or writing insurance for the general public, and the application is not made to evade the laws against rebating and discrimination. An applicant must intend that, in any calendar year, at least 25% of total premium volume comes from persons other than the applicant and from property the applicant does not control through ownership, mortgage, sale, family relationship, or employment. Violating this rule, or getting a license mainly to insure oneself, family, or business associates, is a ground for discipline (TIC § 4005.101(b)(10)-(11)).

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6. Rebating

• A surplus lines agent may not rebate all or part of the surplus lines tax or its commission as an inducement or for any other reason, and may not absorb the tax (TIC § 225.010).
• For casualty insurance and bonds, an insurer, agent, or broker may not give a rebate, discount, special favor, or valuable consideration not specified in the policy, and an insured may not knowingly accept one (TIC § 1806.104). TIC § 1806.153 prohibits similar special favors and inducements in fire insurance.
• Offering or giving a rebate of premium or commission is a ground for license discipline (TIC § 4005.101(b)(9)).
• Promotional advertising items, educational items, or traditional courtesies worth $25 or less are permitted (for example, TIC § 4005.053(d)).

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7. Unfair Discrimination (TIC § 544.002)

A person may not refuse to insure, refuse to continue to insure, limit coverage, or charge a different rate for the same coverage because of an individual's race, color, religion, national origin, age, gender, marital status, geographic location, disability, or partial disability. Insurers may consider marital status when defining eligibility for dependent benefits. Chapter 1806 separately bars unjust discrimination through special favors in commissions or dividends (TIC § 1806.153).

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8. Fraud (TIC Chapter 701)

• A fraudulent insurance act is a violation of a penal law committed or attempted in the business of insurance, in support of an insurance transaction, or as part of an attempt to defraud an insurer (TIC § 701.001).
• Duty to report: Within 30 days after a person determines or reasonably suspects that a fraudulent insurance act has been or is about to be committed in Texas, the person must report it in writing to TDI's insurance fraud unit (TIC § 701.051).
• Immunity: A person who furnishes information about suspected fraud to TDI, law enforcement, the NAIC, or an insurer's special investigative unit is immune from civil liability, including libel and slander, unless the person acted with malice, fraudulent intent, or bad faith (TIC § 701.052).
• Engaging in fraudulent or dishonest acts is a ground for license discipline (TIC § 4005.101(b)(5)), and insurance fraud is a crime under Texas Penal Code Chapter 35.

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9. Unfair Comparison (Twisting)

Making or issuing a statement that misrepresents, or makes incomplete comparisons of, the terms of an insurance or annuity contract to induce the owner to forfeit, surrender, or let it lapse so that it can be replaced is a ground for license discipline (TIC § 4005.101(b)(7)). Misrepresenting to induce lapse or surrender is also an unfair practice under TIC § 541.051(5).

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10. Boycott, Coercion, and Intimidation (TIC § 541.054)

It is unlawful to commit, through concerted action, or to agree to commit, an act of boycott, coercion, or intimidation that results in or tends to result in an unreasonable restraint of, or a monopoly in, the business of insurance. Example: several wholesalers agree not to accept any business from a retail agency unless it stops using a competing wholesaler.

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Summary Table and Remedies

Remedies: TDI may examine, investigate, and hold hearings (TIC §§ 541.101-.103), issue emergency cease and desist orders for unfair acts (Chapter 83), and impose Chapter 82 and 84 sanctions. A person who sustains actual damages from a Subchapter B unfair practice, or from a relied-upon deceptive practice enumerated in the Texas DTPA, may sue for those damages (TIC § 541.151).