18.1 Unfair Trade Practices and Unfair Claims Settlement

Two Model Laws You Must Separate

The National portion tests two distinct NAIC model laws that students constantly blur together. The Unfair Trade Practices Act (UTPA) governs conduct in the marketing and sales of insurance. The Unfair Claims Settlement Practices Act (UCSPA) governs conduct in the handling of claims after a loss. The mental test is simple: if the wrongdoing happens before the sale (during solicitation), it is a trade practice; if it happens after a loss (during settlement), it is a claims practice.

Both are administered by the state insurance commissioner (also titled director or superintendent), who may issue cease-and-desist orders, levy fines, and suspend or revoke licenses.

Prohibited Unfair Trade Practices

The UTPA lists specific banned acts. Commit these to memory because the exam asks you to label a fact pattern with the correct term.

Rebating in Depth

Rebating is offering a customer anything of value not specified in the policy—cash, a gift card, free services—to induce a purchase. Most states ban it because it leads to unequal treatment of policyholders. A few states (notably Florida and California) have legalized limited rebating, but on the National portion, treat rebating as prohibited unless a question specifies a state exception. The recipient who knowingly accepts the rebate can also be penalized, not just the producer.

Exam Key: TWISTING = replace with a DIFFERENT company through misrepresentation. CHURNING = replace within the SAME company. Both deprive the consumer of value through unnecessary replacement and new acquisition costs.

Unfair Claims Settlement Practices

The UCSPA forces insurers to act in good faith once a claim is filed. Violations include:

• Failing to acknowledge and act promptly on communications about a claim.
• Failing to adopt reasonable standards for prompt investigation.
• Refusing to pay claims without a reasonable investigation.
• Not affirming or denying coverage within a reasonable time (often 30 days after proof of loss).
• Compelling insureds to litigate by offering substantially less than the amount ultimately recovered.
• Attempting to settle for less than a reasonable person would expect from the advertising.
• Failing to provide a prompt, reasonable explanation for a denial.

Single Act vs. General Business Practice

This is the single most-tested nuance in this section. Under the UTPA, a single act of an enumerated practice can be a violation. Under the classic UCSPA framing, many violations must occur with such frequency as to indicate a general business practice before the commissioner treats them as a systemic violation. A general business practice means the conduct is repeated—not an isolated employee error. Repeated violations escalate penalties dramatically.

Penalties

After notice and a hearing, the commissioner may issue a cease-and-desist order. Continuing to violate it triggers stiffer fines. A typical schedule:

1. Per act, not a general practice: fine commonly up to $1,000 per act (capped, e.g., $10,000 aggregate).
2. General business practice: fine commonly up to $25,000 per act (much higher aggregate cap, e.g., $250,000).
3. Willful violations of a cease-and-desist order: additional fines and license revocation.

The distinction between an isolated act and a pattern is what moves a fine from the hundreds into the tens of thousands of dollars.

Special Inducement and Unfair Discrimination

Two more enumerated UTPA offenses round out the list. Illegal inducement is offering any valuable consideration—stock, dividends, profits, or special favors—not stated in the policy to persuade a purchase; it overlaps with rebating but extends to non-cash inducements. Unfair discrimination is treating insureds in the same class and with the same hazard differently in rates, dividends, or benefits. Charging two identical risks different premiums for no actuarial reason is illegal; charging different premiums for genuinely different risk characteristics is lawful risk classification.

Exam Key: Discrimination is only UNFAIR when it is between insureds of the SAME class and EQUAL expectation of loss. Rate differences justified by real, measurable risk factors are permitted underwriting—not unfair discrimination.

How Enforcement Begins

The enforcement chain is also testable. The commissioner who believes an insurer or producer is committing a prohibited practice issues a statement of charges and sets a hearing (typically with at least 10 days' notice). After the hearing, the commissioner issues a written order—dismissing the charge or requiring the party to cease and desist. Only after a cease-and-desist order is violated do the largest penalties and possible court enforcement attach. Knowing this sequence—charges, hearing, order, then escalating penalties—lets you answer procedural questions that otherwise look unfamiliar.

Putting It Together

When you read a fact pattern, first ask sales or claims? to pick the right Act, then name the specific practice (twisting, churning, rebating, low-ball settlement, failure to investigate), and finally judge single act vs. general business practice to scale the penalty. That three-step read answers nearly every unfair-practices question on the National portion.