Unfair Trade Practices

Although states have long exercised control over certain unfair practices especially misrepresentation, twisting, rebating, and unfair discrimination. The impact of the South Eastern Underwriters Association (SEUA) decision and the McCarran-Ferguson Act led all jurisdictions to adopt the NAIC Model Unfair Trade Practices Act. The act was designed to be sufficiently comprehensive to oust the Federal Trade Commission from jurisdiction over these matters. Usually, these acts give the commissioner the power to investigate and examine and, after notice and hearing, to issue cease and desist orders with penalties for violations. The acts are designed to prevent numerous activities deemed to be unfair.
Rebating is an inducement to buy insurance that is not specified in the contract. The practice of an agent returning a portion of the premium (e.g., the agent’s commission) to an insurance applicant is the most common rebate. Rebating historically has been illegal. Anti-rebating statutes evolved decades ago in response to perceived marketplace abuses. Traditional arguments against rebating have focused on concerns about insurer solvency, about unfair discrimination, and about the unique nature of insurance. Critics of anti-rebating statutes claim that the prohibition unfairly prevents buyers from negotiating fully with sellers a result that is offensive in a competitive system. The states of Florida and California allow rebating, although guidelines for rebating generally require no unfair discrimination in the granting of rebates.
Twisting refers to the practice by an agent of inducing a policy owner through misrepresentation to discontinue an existing life insurance policy in order to purchase a new one. In contrast to simple replacement discontinuing one policy to purchase another twisting is illegal. The purchase of a life insurance policy can be a complicated transaction. The consumer easily could be misled, either intentionally or unintentionally, by an agent. In recognition of this fact, several states have promulgated versions of the NAIC Model Replacement Regulations, which require the disclosure of certain information considered pertinent to the proposed replacement decision. Agents often handle large amounts of their policy owners’ money. Misappropriation or misuse of these funds even on a temporary basis is illegal. Related to misappropriation is the practice of commingling of funds. Agents are not to combine monies belonging to policy owners with their own funds. The NAIC has developed model regulations to deal with life insurance replacements, sex discrimination, discrimination on the basis of blindness, and discrimination on the basis of physical or mental handicaps. The NAIC also is focusing on the broader subject of classification of risks and on sex-based rate differentials in health insurance.