If an insurance company or licensed insurance agent uses unfair or deceptive business practices to sell to their customers, it is not only unethical but against the law as well. When individuals or insurance companies profit unfairly from their customers, they are violating the Unfair Business Practices Act and may face legal consequences.
What is the Unfair Trade Practices Act?
The Unfair Business Practices Act was first created in the 1940s by the National Association of Insurance Commissioners (NAIC), and is model legislation that helps protect consumers from unethical business practices. While it has since been updated, the purpose of the law remains the same – to prevent companies from using deceptive and unfair means to make a profit when selling insurance policies.
What makes doing business unfair or deceptive?
While the name is unfair, the Unfair Business Practices Act defines business practices that are either unfair, deceptive, or both. But what makes the practice unfair or deceptive? In general, unfair practices are those that cause or have the potential to cause injury to a customer. For the practice of commerce to be unfair, its harm cannot be overcome by equal benefits to the consumer.
A deceptive business practice is one that misleads or is likely to mislead the consumer. If an insurance company distributes false information about a policy to its customers, it is doing a deceptive business practice. Unfair and deceptive business practices usually benefit the business or individuals who do them while harming the customer.
Why do we need the Unfair Trade Practices Act?
The Unfair Business Practices Act protects consumers of insurance from being taken advantage of by insurance companies or insurance agents acting in bad faith. Insurance is a for-profit business, and just like other money-making ventures, the temptation can be to push boundaries. While the majority of insurance professionals are ethically sound, some may be tempted to deny claims or misrepresent policy terms in an effort to save money or earn a higher profit.
As in any business, it is in the best interest of consumers to make informed decisions about purchasing insurance. When insurers or agents lie, deceive, or otherwise misrepresent their products or services, they are misleading their customers and can negatively influence their customers’ decision-making.
State by state guidelines
While the Unfair Trade Practices Act outlines 15 specific prohibited practices, any country that adopts this can still adjust and adjust legislation to better meet its own needs. Relying solely on NAIC form regulations and failing to adhere to state-specific rules (even inadvertently) can mean trouble for insurance companies, agencies, and agents. To avoid being open to regulatory action, insurance professionals and industry organizations should always check their own state requirements when managing compliance with unfair trading practices.
What are examples of unfair business practices in insurance?
The Unfair Business Practices Act states that any of the following practices are considered unfair if (1) they are committed grossly and willfully in disregard of the act or any rules thereunder and (2) they are committed with such frequency as to indicate a general act of practice to engage in this type of contact.
Unfair business practices as defined by the NAIC include:
- Misinformation and false advertising of policies
- False information and advertisements in general
- libel
- Boycott, coercion and intimidation
- False statements and entries
- Inventory operations and advisory board contracts
- Unfair discrimination
- discounts
- Joining prohibited groups
- Marketing and performance records are not kept
- Failure to maintain complaint handling procedures
- Misrepresentation of insurance claims
- Unfair financial planning practices
- Not providing or certifying information related to the approval or sale of long-term care insurance
- Failure to submit a claim history
- Violate any other sections of the state insurance laws regarding unfair practices
In the interest of time, we’ll explore just two of these unfair trade practices in more detail, misrepresentations and false advertising of policies and discounts.
1. Misrepresentation and false advertisement of policies
Misrepresentation or false advertising of any aspect of an insurance policy is an unfair business practice. Exaggerating the benefits, benefits, terms or conditions of a policy may lead the customer to purchase coverage that leaves him uninsured.
For example, suppose an agent tells a client that the homeowner’s policy they’re considering includes flood coverage at no additional charge when, in fact, it doesn’t. Heavy rain causes the customer’s house to flood, resulting in thousands of dollars in losses, but the customer is not too worried about the cost as he thinks his insurance policy will cover it.
Whether on purpose or not, the product that sold the customer the homeowners policy has engaged in an unfair business practice. Since the producer was not honest about the benefits of the policy, the customer now faces out-of-pocket payouts.
2. Rebates
In insurance, discounting refers to the act of returning a portion of a product’s commission to the insured in order to encourage a sale. Consumers get caught up in these deals (who doesn’t want to save some money?) and can be swayed by buying coverage that they don’t actually need or that isn’t in their best interest.
The deduction is a good example of the importance of always checking state-specific regulations. While the Unfair Trade Practices Act has anti-discount provisions, California and Florida have slightly different rules. Even when states allow it, insurers still have the final say on what they will allow in their contracts, and often don’t allow the deductible even if the state allows it.
What is the cost of non-compliance in insurance?
It is against the law to fail to comply with the provisions of the Unfair Trade Practices Act and state-specific regulations. The State Insurance Commissioner has the authority to investigate any insurance company or insurance agency/agent to determine if they have engaged in unfair business practices.
If the commissioner finds the insurance company 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 in willful disregard) or even have their license suspended. Both outcomes can negatively affect a product or agency’s reputation and growth potential.
Non-compliance can be costly but you can reduce the risk of encountering these costs by investing in modern insurance infrastructure. Learn how AgentSync helps insurers, agencies, and MGAs/MGUs streamline compliance so they can focus on growth.
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