If a licensed insurer or insurance agent uses unfair or deceptive business practices to sell to their customers, it is not only unethical but also illegal. When individuals or insurance companies take unfair advantage of their customers, 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 it is model legislation that helps protect consumers from unethical business practices. Although it has since been updated, the purpose of the law remains the same: to prohibit companies 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 name, the Unfair Trade Practices Act describes business practices that are unfair, deceptive, or both. But what makes a practice unfair or misleading? In general, unfair practices are those that cause, or are likely to cause, injury to a customer. For a trade practice to be unfair, its detriment cannot be outweighed by an equal benefit to the consumer.
A deceptive business practice is one that misleads, or is likely to mislead, a consumer. If an insurer distributes false policy information to its customers, it is engaging in a deceptive business practice. Unfair and deceptive business practices often benefit the business or individual doing the business and harm 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 for-profit ventures, it can be tempting to push the envelope. While most 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 make a bigger profit.
As in any business, it is in the best interest of consumers to make informed decisions about purchasing their insurance. When insurance companies or agents lie, mislead, or misrepresent their products or services, they mislead their customers and can negatively influence their customers’ decision-making.
While the Unfair Trade Practices Act outlines 15 specific prohibited practices, any state that adopts it can still amend and modify the legislation to better meet its own needs. Relying solely on NAIC model standards and not adhering to state-specific standards (even without knowing it) can spell trouble for insurers, agencies and agents. To avoid exposure to regulatory action, insurance professionals and industry organizations should always double check their state’s specific requirements when managing unfair trade practice compliance.
What are examples of unfair business practices in insurance?
The Unfair Trade Practices Act states that any of the following practices will be considered unfair if (1) they are committed flagrantly and in knowing disregard of the law or the rules established therein and (2) are committed with such frequency they indicate a general business practice to engage in that type of contact.
Unfair business practices outlined by the NAIC include:
- Policy misrepresentations and misleading advertising
- False information and advertising in general
- Boycott, coercion and intimidation
- False statements and entries
- Stock trading contracts and advisory boards
- unfair discrimination
- Group Enrollments Prohibited
- Not keeping marketing and performance records.
- Failure to maintain complaint handling procedures.
- False insurance applications
- Unfair Financial Planning Practices
- Failing to submit or certify information regarding the endorsement or sale of long-term care insurance
- Failure to provide claims history
- Violate any other section of the state insurance laws regarding unfair practices
In the interest of time, we will explore just two unfair business practices in more detail, misrepresentations and misleading advertising of policies and refunds.
1. Misrepresentation and misleading advertising of policies
Misrepresentation or misleading advertising of any aspect of an insurance policy is considered an unfair trade practice. Exaggerating the benefits, perks, conditions, or terms of a policy could cause a customer to purchase coverage that leaves them without enough coverage.
For example, suppose an agent informs a customer that the homeowners policy they are considering includes flood coverage at no additional charge when, in fact, it does not. Heavy rain causes the client’s home to flood, resulting in thousands of dollars in damage, but the client isn’t overly concerned about the cost because he believes his insurance policy will cover it.
Whether intentional or not, the producer who sold the customer 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 out-of-pocket for damages.
In insurance, rebate refers to the act of returning a portion of the producer’s commission to the insured in order to encourage a sale. Consumers are lured in by these deals (who doesn’t want to save some money?) and may be influenced to buy coverage they don’t really need or want.
Reimbursement is a good example of why it’s important to always check your state’s specific regulations. Although the Unfair Trade Practices Act includes anti-refoulement provisions, California and Florida they have slightly different rules. Even when states allow it, insurance companies still have the final say on what they will allow in their contracts and often do not allow reimbursement even if a state does.
What is the cost of insurance default?
Failure to comply with the laws set forth in the Unfair Trade Practices Act, as well as state-specific regulations, is illegal. The state insurance commissioner has the power to investigate any insurer or insurance agency/agent to determine if they have engaged in unfair business practices.
If the commissioner finds an insurer or agency guilty of engaging in unfair business practices, the violator could be fined up to $1,000 per violation (and up to $25,000 per violation for acts committed with knowing contempt) or even have their license suspended. Both consequences could negatively affect the reputation and growth potential of a producer or agency.
Default can be costly, but you can reduce our risk of facing these costs by investing in a modern insurance infrastructure. To see how AgentSync helps insurers, agencies, and MGA/MGUs streamline compliance so you can focus on growth.
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