If an insurer or licensed insurance agent uses unfair or deceptive business practices to sell to their clients not only is it unethical but it’s also against the law. When individuals or insurance businesses profit unfairly off of their clients, they violate the Unfair Trade Practices Act and could face legal consequences.
What is the Unfair Trade Practices Act?
First created in the 1940s by the National Association of Insurance Commissioners (NAIC), the Unfair Trade Practices Act is model legislation that helps protect consumers from unethical business practices. While it’s been updated since, the purpose of the act remains the same – to prohibit businesses from using deceptive and unfair means to make a profit when they sell insurance policies.
What makes a business practice unfair or deceptive?
While unfair is in the name, the Unfair Trade Practice Act outlines business practices that are either unfair, deceptive, or both. But what makes a practice unfair or deceptive? In general, unfair practices are any that cause, or are likely to cause, injury to a customer. For a trade practice to be unfair its detriment can’t be outweighed by equal benefit to the consumer.
A deceptive trade practice is one that misleads, or is likely to mislead, a consumer. If an insurer is distributing false information about a policy to their clients, it’s performing a deceptive trade practice. Unfair and deceptive trade practices usually benefit the business or individual performing them while harming the customer.
Why do we need the Unfair Trade Practices Act?
The Unfair Trade Practices Act protects insurance consumers from being taken advantage of by insurers or insurance agents acting in bad faith. Insurance is a for-profit business, and like other money-making ventures, can lead to the temptation to push boundaries. While a majority of insurance professionals are morally sound, some may be tempted to deny claims or misrepresent the terms of a policy in an attempt to save money or earn a higher profit.
Like in any business, it’s in consumers’ best interest to make informed decisions about their insurance purchase. When insurance companies or agents lie, deceive, or otherwise misrepresent their products or services, they mislead their customers and could negatively influence their clients’ decision making.
State by state guidelines
While the Unfair Trade Practices Act outlines 15 specific prohibited practices, any state that adopts it can still amend and tweak the legislation to better meet their own needs. Relying only on the NAIC model regulations and failing to adhere to state-specific rules (even unknowingly) can mean trouble for insurers, agencies, and agents. To avoid opening themselves up to regulatory action, insurance professionals and industry organizations should always double check their state-specific requirements when managing unfair trade practice compliance.
What are examples of unfair trade practices in insurance?
The Unfair Trade Practices act states that any of the following practices are to be deemed unfair if they are (1) committed flagrantly and in conscious disregard of the act or any rules under it and (2) committed with such frequency to indicate a general business practice to engage in that type of contact.
Unfair trade practices as outlined by the NAIC include:
- Misrepresentations and false advertising of policies
- False information and advertising generally
- Boycott, coercion, and intimidation
- False statements and entries
- Stock operations and advisory board contracts
- Unfair discrimination
- Prohibited group enrollments
- Failure to maintain marketing and performance records
- Failure to maintain complaint handling procedures
- Misrepresentation in insurance applications
- Unfair financial planning practices
- Failure to file or to certify information regarding the endorsement or sale of long-term care insurance
- Failure to provide claims history
- Violating any other sections of the state’s insurance laws regarding unfair practices
In the interest of time, we’ll explore just two unfair trade practices in more detail, misrepresentations and false advertising of policies and rebates.
1. Misrepresentation and false advertising of policies
The misrepresentation or false advertising of any aspect of an insurance policy is considered an unfair trade practice. Overstating the benefits, advantages, conditions, or terms of a policy could cause a client to purchase coverage that leaves them underinsured.
For example, say an agent informs a client that the homeowners policy they’re considering includes flood coverage at no additional charge when, in reality, it doesn’t. Heavy rains cause the client’s house to flood, resulting in thousands of dollars in damages, but the client isn’t too worried about the cost because they think their insurance policy will cover it.
Whether intentional or not, the producer who sold the client the homeowners policy has engaged in an unfair trade practice. Because the producer was not honest about the benefits of the policy, the client now faces paying the damages out of pocket.
In insurance, rebating refers to the act of returning a portion of the producer’s commision to the insured in order to encourage a sale. Consumers are reeled in by these deals (who doesn’t want to save some money?) and could be influenced into purchasing coverage they don’t actually need or that isn’t in their best interest.
Rebating is a good example of why it’s important to always check your state-specific regulations. While the Unfair Trade Practices Act includes anti-rebating provisions, California and Florida have slightly different rules. Even when states allow it, insurance carriers still have the final say in what they’ll allow in their contracts, and they often don’t allow rebating even if a state does.
What is the cost of noncompliance in insurance?
Failure to comply with the legislation laid out in the Unfair Trade Practices Act as well as state-specific regulations is against the law. The state insurance commissioner has the power to investigate any insurer or insurance agency/agent to determine whether they have engaged in unfair trade practices.
If the commissioner finds an insurer or agency guilty of engaging in unfair trade practices, the violator could be fined up to $1000 per violation (and up to $25,000 per violation for acts committed in conscious disregard) or even have their license suspended. Both consequences of which could negatively affect a producer or agency’s reputation and growth potential.
Noncompliance can be expensive but you can reduce your risk of facing these costs by investing in modern insurance infrastructure. See how AgentSync helps insurance carriers, agencies, and MGAs/MGUs streamline compliance so you can focus on growth.