If an insurance company or licensed insurer is using unfair or deceptive business practices to sell to their customers it is not only illegal but also against the law. When individuals or insurance companies take unfair advantage of their customers, they are in violation of the Unfair Trade Practices Act and may face legal consequences.
What is the Unfair Trade Practices Act?
First drafted in the 1940s by the National Association of Insurance Commissioners (NAIC), the Unfair Trade Practices Act is a model law that helps protect consumers from unfair trade practices. Although it has been amended since then, the purpose of the act remains the same – to prevent businesses from using fraudulent and unfair means to make a profit when selling insurance.
What makes a business unfair or fraudulent?
Although unfair in name, the Unfair Trade Practice Act covers business practices that are either unfair, deceptive, or both. But what makes the practice unfair or fraudulent? In general, tortious conduct is anything that causes, or is likely to cause, harm to a customer. For a commercial practice to be unfair its harm cannot be outweighed by the equal benefit to the consumer.
A deceptive commercial practice is one that misleads, or is likely to mislead, consumers. If an insurer is distributing false policy information to their customers, they are engaging in fraudulent marketing. Unfair and deceptive business practices often benefit the business or individual who engages in them while harming the customer.
Why do we need the Law of Unfair Practices?
The Unfair Trade Practices Act protects insurance consumers from being taken advantage of by insurers or insurers who engage in unfair practices. Insurance is a for-profit business, and like other money-making businesses, it can lead to the temptation to jump the gun. Although most insurance professionals have good morals, some may be tempted to deny claims or bend the law in order to save money or make a bigger profit.
As in any business, it is important for consumers to make informed decisions about their insurance purchases. When insurance companies lie, misrepresent, or misrepresent their products or services, they mislead their customers and can affect their customers’ decisions.
State and federal laws
Although the Unfair Trade Practices Act defines 15 prohibited practices, any country that accepts it can change and modify the laws to meet their needs. Relying on the NAIC model rules alone and failing to follow state laws (even if unknowingly) can mean problems for insurers, agencies, and providers. In order to prevent this from happening, insurance professionals and insurance companies need to re-examine the government’s requirements for unfair trade practices.
What are some examples of unfair business practices in insurance?
The Unfair Trade Practices Act states that any of the following practices must be considered unfair if (1) they are done in secret and without disregard for the practice or any laws under it and (2) regularly committed to show ordinary business. try to associate with that type.
Unfair trade practices as defined by the NAIC include:
- Lies and false advertising of policies
- False information and frequent advertising
- Scorn
- Strikes, coercion, and threats
- False claims and documents
- Stock Systems and Advisory Board Contracts
- Unfair discrimination
- Discount
- Group registration prohibited
- Failure to keep records of sales and service
- Failure to maintain grievance procedures
- Making false statements in insurance applications
- The practice of unfair financial planning
- Failure to submit or verify information related to the acceptance or sale of term insurance
- Failure to provide background information
- Violation of any other section of the state insurance laws related to unethical practices
Over time, we’ll take a closer look at two types of unfair trade practices, false advertising and false advertising of points and discounts.
1. Impersonation and misrepresentation of policies
Misrepresentation or false advertising in any aspect of insurance is considered an unfair trade practice. Increasing the benefits, benefits, conditions, or terms of a policy can cause a customer to purchase coverage that leaves them uninsured.
For example, let’s say an agent tells a customer that the homeowner’s policy they are considering includes flood coverage at no additional cost when, in fact, it does not. Heavy rains cause a client’s home to flood, resulting in significant financial losses, but the client is less concerned about the cost because they think their insurance will cover it.
Whether intentional or not, the manufacturer who sold the customer a homeowner’s policy has engaged in an unfair trade. Because the manufacturer was not honest about the benefits of the policy, the customer now has to pay the damages out of pocket.
2. Return
In insurance, reimbursement refers to returning part of the producer’s work to the insurer to promote sales. Consumers are attracted to these products (who doesn’t want to save money?) and can be lured into buying things they don’t need or are not interested in.
Refunds are a good example of why it’s important to always check your state’s laws. Although the Unfair Trade Practices Act includes restrictions on refunds, California and Florida have slightly different laws. Even when states allow it, insurance carriers have the final say on what they can allow in their contracts, and often don’t allow coverage even if the state does.
What is the cost of non-compliance in insurance?
Failure to comply with the provisions of the Unfair Trade Practices Act and applicable state laws is against the law. The state insurance regulator has the power to investigate any insurer or organization / insurance agent to determine whether they have engaged in unfair business practices.
If the Commissioner finds an insurer or organization guilty of unfair trade practices, the violator can be fined up to $1000 per violation (and up to $25,000 for any negligent violation) or license suspension. All the consequences that can affect the reputation of the manufacturer or organization and its growth.
Non-compliance can be costly but you can reduce our risk of meeting these costs by investing in modern insurance policies. See how AgentSync helps insurance carriers, agencies, and MGA/MGUs manage compliance so you can focus on growth.
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