18.1 Unfair Trade Practices and Unfair Claims Settlement

The Unfair Trade Practices Act (UTPA)

The Unfair Trade Practices Act is an NAIC model law adopted, with variations, by every state. It defines and prohibits unfair methods of competition and deceptive acts in the business of insurance. Authority to enforce it rests with the state insurance commissioner (sometimes titled director or superintendent), not the producer's company.

A recurring exam distinction: a single act can be a violation if it is flagrant and in conscious disregard of the law, but most claims-handling violations require a frequency indicating a general business practice. Memorize that phrase — answer choices often hinge on "one isolated mistake" versus "a pattern."

Prohibited marketing and sales practices

Rebating, twisting, churning, and sliding

These four are the most-confused terms on the exam:

• Rebating — Offering anything of value (cash, gifts, sharing commission) not specified in the policy. Filed dividends and published rate reductions are NOT rebates. Most states prohibit rebating because it is a form of unfair discrimination; a few (e.g., CA, FL) have modified rules.
• Twisting — Inducing a policyholder to lapse or replace coverage through misrepresentation. The misrepresentation element is essential — honest, fully disclosed replacement is legitimate, not twisting.
• Churning — Replacing a policy with a new one from the same insurer, typically funding the new premium from the old policy's cash value, to generate a new commission.
• Sliding — Adding coverage or charging for a product the applicant did not request, often by representing it as required or free.

Exam trap: Twisting and churning both involve replacement. The wire that separates them is which insurer issues the new policy. Same insurer = churning; different insurer + misrepresentation = twisting.

The Unfair Claims Settlement Practices Act (UCSPA)

The Unfair Claims Settlement Practices Act sets standards for how insurers must investigate, communicate about, and pay claims. The act lists specific prohibited acts; in most states a violation requires that the act occur with such frequency as to indicate a general business practice.

Prohibited claims practices

• Misrepresenting pertinent facts or policy provisions relating to a claim
• Failing to acknowledge and act promptly on communications (model acts commonly cite acknowledgment within 15 days)
• Failing to adopt reasonable standards for prompt investigation
• Refusing to pay claims without conducting a reasonable investigation
• Failing to affirm or deny coverage within a reasonable time after proof of loss
• Not attempting in good faith to make a prompt, fair, equitable settlement once liability is reasonably clear
• Compelling insureds to litigate by offering substantially less than amounts ultimately recovered
• Failing to provide a prompt, reasonable written explanation for a denial or compromise offer

Worked timing example

Suppose a disability claimant files a complete proof of loss on March 1. The model act expects acknowledgment within 15 days (by March 16) and a coverage decision within a reasonable period after investigation. If the insurer sits on the file for 90 days with no contact and no documented investigation — and does so routinely — that pattern is an unfair claims settlement practice, exposing the carrier to fines and a possible bad-faith civil suit on top of the claim itself.

Penalties

Key point: "Bad faith" is a court remedy available to the insured, separate from the commissioner's administrative penalties. A single egregious denial can support bad faith even where the UCSPA requires a 'general business practice.'

Coordination with state law and consumer remedies

Because both model acts are adopted state by state, exact timeframes vary; the exam tests the concepts (prompt acknowledgment, reasonable investigation, fair settlement) rather than one state's day count. Where a consumer is harmed, the layered remedy structure matters: the commissioner pursues administrative fines and license action, while the insured pursues contract damages and, in egregious cases, extra-contractual bad-faith damages in court.

Discrimination versus permitted classification

Unfair discrimination is prohibited only between insureds of the same class and equal risk. Charging different premiums based on legitimate, actuarially sound factors (age, health, tobacco use) is not unfair discrimination. The trap answer presents lawful underwriting distinctions as if they were illegal — read for whether the risk classes are genuinely the same.

Defamation, Boycott, and Defined Terms

Beyond rebating and twisting, the UTPA names several other prohibited acts the exam tests by definition: defamation (false statements harming an insurer's reputation), boycott/coercion/intimidation (restraining fair trade), and misrepresentation of policy terms. Each is a distinct violation with its own definition.

Trap: rebating is often illegal even if the consumer benefits, because it distorts fair pricing — though a few states have relaxed anti-rebating rules. Know the act, not just whether the client gained.