4.1 Unfair Trade Practices

The Unfair Trade Practices Act

Unfair trade practices in Virginia are governed by Code of Virginia Title 38.2, Chapter 5 (sections 38.2-500 through 38.2-516). The statute defines specific acts that are illegal whether committed by an insurer or by a licensed producer (the term Virginia uses for an agent or broker). The State Corporation Commission (SCC) Bureau of Insurance enforces these rules. On the Virginia state-law portion of the licensing exam (40 scored questions, 70% to pass, administered by Prometric for a $35 fee), unfair-practice items appear repeatedly, so memorize the named acts.

Misrepresentation (38.2-502)

Misrepresentation is making an untrue, deceptive, or misleading statement about a policy or insurer. It covers the application stage AND the in-force stage.

• Misstating benefits, terms, dividends, or projected returns
• Using a policy illustration that overstates non-guaranteed values
• Misrepresenting an insurer's financial condition or rating
• Falsely claiming an organization endorses the policy
• Misnaming a policy (calling whole life a "retirement plan" or "savings account")

False Advertising (38.2-503) and Defamation (38.2-507)

Advertising must be truthful in substance and not deceptive by omission. A claim is judged by the net impression on an ordinary consumer, not by literal word parsing. Testimonials must be genuine and currently held. Defamation under 38.2-507 prohibits false, malicious statements about a competitor's financial condition — calling a rival insurer "about to go broke" is a per-se violation.

Coercion and boycott (38.2-505)

A producer or insurer may not coerce, intimidate, or boycott to restrain trade — for example, a bank conditioning a mortgage approval on the borrower buying insurance from a particular agency. This is a classic exam distractor paired with rebating; coercion involves a threat, rebating involves an inducement.

Rebating (38.2-509 and 38.2-510)

Rebating is offering any valuable consideration or inducement that is NOT specified in the insurance contract to persuade someone to buy. Both the producer who offers and the consumer who knowingly accepts a rebate can be penalized.

Prohibited as rebating

• Returning or paying part of the premium back to the buyer
• Sharing commission with an unlicensed person
• Giving cash, gift cards, prizes, or stock as a purchase inducement
• Paying a per-policy "referral fee" to an unlicensed lead source

Narrow Virginia exceptions (NOT rebating)

• Policy-defined dividends, surplus, or abatement of premium
• Bonuses to policyholders paid under a participating contract
• Articles of merchandise or educational materials of nominal value (Virginia generally treats items branded for advertising as acceptable)
• Free informational seminars and prizes that are not contingent on a purchase

Exam tip: The test of rebating is "is it in the contract?" A dividend printed in the policy is legal; the same dollar amount handed back as a check to close a sale is illegal rebating.

Twisting and Churning

Worked scenario: An agent tells a client her 12-year-old whole life policy is "worthless" and uses its $9,000 cash value to buy a new policy from the same carrier. The false "worthless" claim is twisting; using the existing policy's value to fund the same-company replacement is churning. Both can occur in one transaction.

Unfair Claims Settlement Practices (38.2-510)

The Unfair Claims Settlement Practices Act lists prohibited acts including misrepresenting policy provisions, failing to acknowledge claims promptly, not adopting reasonable investigation standards, and offering substantially less than a reasonable settlement to force litigation. A single act usually is not enough; Virginia requires the act be committed with such frequency as to indicate a general business practice.

Penalties (38.2-218)

Unfair Discrimination (38.2-508)

Virginia prohibits unfair discrimination — treating individuals of the same class and equal expectation of life differently in premium, benefits, or terms. The key phrase is same class and equal risk. Charging two 40-year-old non-smokers in identical health different life premiums solely because of race, national origin, or religion is unfair discrimination. Underwriting that reflects a real, actuarially supported risk difference is permitted.

Permitted (risk-based) vs. prohibited (arbitrary)

Virginia specifically bars refusing coverage or charging more solely because an applicant is blind or has a physical disability unrelated to the actual risk. Sex- and marital-status-based distinctions are tightly restricted; gender may be an allowable rating factor for life and annuity mortality but may not be used to deny coverage arbitrarily.

Putting It Together: Common Exam Traps

1. Rebating vs. coercion — rebating is an inducement (a benefit offered); coercion is a threat (intimidation). Watch the verb.
2. Twisting vs. churning — churning is the same-company subset of replacement abuse; twisting can be any insurer if misrepresentation drives the replacement.
3. Misrepresentation vs. false advertising — misrepresentation targets an individual transaction; false advertising targets the public through media.
4. Single act vs. pattern — most unfair claims violations require a general business practice, unlike misrepresentation, which can be one statement.
5. Defamation — must be about a competitor's financial condition, made falsely and maliciously.

Quick-reference checklist of named prohibited acts

• Misrepresentation and false statements (38.2-502)
• False advertising (38.2-503)
• Defamation of insurers (38.2-507)
• Boycott, coercion, intimidation (38.2-505)
• Unfair discrimination (38.2-508)
• Rebating (38.2-509)
• Unfair claims settlement practices (38.2-510)
• False financial statements and stock manipulation (38.2-511 and 38.2-512)

Every one of these is enforceable by cease-and-desist order, fine up to $5,000 per willful act, and license revocation. When a question describes conduct, name the specific statute family and the penalty range, and you will answer correctly.