How the Unfair Business Practices Act can affect your insurance business

If an insurer or licensed insurance agent uses unfair or deceptive business practices to sell to their customers, it is not only unethical but also against the law. When individuals or insurance companies take unfair advantage of their customers, they are violating the Unfair Trade Practices Act and may face legal consequences.

What is the Unfair Business 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. Although it has been updated since then, the purpose of the law remains the same – to prohibit companies from using deceptive and unfair means to make a profit when selling insurance.

What makes a business practice unfair or deceptive?

Although unfairness is in the name, the Unfair Trade Act describes business practices that are either unfair, deceptive, or both. But what makes a practice unfair or deceptive? Generally, unfair practices are those that cause, or are likely to cause, injury to a customer. For a commercial practice to be unfair, its disadvantage cannot be outweighed by equal benefits to the consumer.

A deceptive trade practice is one that misleads or is likely to mislead a consumer. If an insurer distributes false information about a policy to its customers, it is engaging in a deceptive trade practice. Unfair and deceptive trade practices usually benefit the company or individual engaging in them while harming the customer.

Why do we need the Unfair Business Practices Act?

The Unfair Business 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 any other money-making venture, can lead to the temptation to push the limits. While a majority of insurance professionals are morally sound, some may be tempted to deny claims or distort the terms of a policy in an attempt to save money or earn a higher profit.

As in all businesses, it is in the best interests of consumers 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 can negatively affect their customers’ decision making.

State-by-state guidelines

Although the Unfair Trade Practices Act outlines 15 specific prohibited practices, each state that adopts it can still change and adjust the legislation to better meet its own needs. Relying only on the NAIC model regulations and not following state-specific regulations (even unwittingly) can create problems for insurers, agencies and agents. To avoid opening themselves up to regulatory action, insurance professionals and trade associations should always double-check their state-specific requirements when dealing with unfair trade compliance.

What are examples of unfair trading practices in insurance?

The Unfair Trade Practices Act states that any of the following practices shall be considered unfair if they (1) are committed in flagrant and willful disregard of the act or any rules thereunder and (2) are committed with such frequency as to indicate a general business practice of engaging in that kind of contact.

Unfair trade practices described by the NAIC include:

1. Misrepresentations and false advertising of policies
2. False information and advertising in general
3. Defamation
4. Boycott, coercion and threats
5. False claims and records
6. Share operations and agreement on advisory board
7. Unfair discrimination
8. Discounts
9. Group registration prohibited
10. Failure to maintain marketing and performance records
11. Failure to maintain complaint handling procedures
12. Misrepresentation in insurance applications
13. Unfair methods of financial planning
14. Failure to file or to certify information regarding the acceptance or sale of long-term care insurance
15. Failure to provide claim history
16. Violations of other parts of state insurance laws regarding unfair practices

In the interest of time, we will examine just two unfair trade practices in more detail, misrepresentations and false advertising of policies and discounts.

1. Misrepresentation and false advertising of policies

Misrepresentation or false advertising of any aspect of an insurance policy is considered an unfair trade practice. Exaggerating the benefits, benefits, terms or conditions of an insurance policy can lead a client to purchase coverage that leaves them underinsured.

For example, say an agent informs a client that the homeowner’s policy they are considering includes flood protection at no extra cost when in reality it does not. Heavy rains cause the customer’s house to flood, resulting in thousands of dollars in damage, but the customer is not too concerned about the cost because they believe their insurance will cover it.

Whether intentional or not, the producer who sold the customer the home owner policy engaged in an unfair trade practice. Because the producer was not honest about the benefits of the policy, the customer is now faced with paying the damages out of pocket.

2. Discounts

In insurance, rebate refers to the act of returning a portion of the producer’s commission to the insured to encourage a sale. Consumers get hooked on these deals (who doesn’t want to save a little money?) and can be swayed into buying coverage they don’t actually need or aren’t in their best interest.

Rebates are a good example of why it’s important to always check your state-specific regulations. While the Unfair Trade Practices Act contains provisions against discounting, California and Florida have slightly different rules. Even when states allow it, insurance companies still have the final say in what they allow in their contracts, and they often don’t allow discounts even if a state does.

What is the cost of not following insurance policies?

Failure to comply with the Unfair Business Practices Act and government regulations is against the law. The state insurance commissioner has the authority to investigate any insurer or insurance agent/agent to determine whether they have engaged in unfair trade practices.

If the Commissioner finds an insurer or agency guilty of having engaged in unfair trade practices, the violator may be fined up to $1,000 per violation (and up to $25,000 per violation for acts committed with willful disregard) or even have their license suspended. Both consequences can negatively affect a producer’s or agency’s reputation and growth potential.

Non-compliance can be expensive but you can reduce the risk of facing these costs by investing in modern insurance infrastructure. See how AgentSync helps insurers, agencies and MGAs/MGUs streamline compliance so you can focus on growth.