12.3 Unfair Trade Practices

Property & Casualty Insurance Exam

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1 Introduction

0.1 About the Property & Casualty Exam 0.2 How to Use This Course

2 Chapter 1: Insurance Fundamentals

1.1 Risk and Risk Management 1.2 Types of Risk 1.3 Principles of Insurance 1.4 The Insurance Contract 1.5 Policy Structure and Components

3 Chapter 2: Property Insurance Concepts

2.1 Property Coverage Basics 2.2 Perils, Hazards, and Exclusions 2.3 Valuation Methods 2.4 Coinsurance and Insurance to Value 2.5 Deductibles and Policy Limits

4 Chapter 3: Dwelling Policies

3.1 Dwelling Policy Overview 3.2 Dwelling Policy Forms (DP-1, DP-2, DP-3) 3.3 Dwelling Property Coverages 3.4 Dwelling Exclusions and Conditions

5 Chapter 4: Homeowners Policies

4.1 Homeowners Policy Overview 4.2 Homeowners Policy Forms (HO-2 through HO-8) 4.3 Section I: Property Coverages 4.4 Section II: Liability Coverages 4.5 Homeowners Exclusions 4.6 Homeowners Conditions 4.7 Common Homeowners Endorsements

6 Chapter 5: Personal Auto Policy

5.1 Personal Auto Policy Overview 5.2 Part A: Liability Coverage 5.3 Part B: Medical Payments Coverage 5.4 Part C: Uninsured/Underinsured Motorists 5.5 Part D: Physical Damage Coverage 5.6 PAP Exclusions 5.7 No-Fault Insurance and PIP

7 Chapter 6: Liability Insurance Concepts

6.1 Liability Insurance Basics 6.2 Negligence and Tort Law 6.3 Types of Legal Liability 6.4 Personal Umbrella Policies

8 Chapter 7: Commercial Property Insurance

7.1 Commercial Package Policy (CPP) 7.2 Building and Personal Property Coverage Form 7.3 Causes of Loss Forms 7.4 Business Income Coverage 7.5 Businessowners Policy (BOP)

9 Chapter 8: Commercial General Liability

8.1 CGL Policy Overview 8.2 Coverage A: Bodily Injury and Property Damage 8.3 Coverage B: Personal and Advertising Injury 8.4 Coverage C: Medical Payments 8.5 CGL Exclusions 8.6 CGL Limits and Conditions

10 Chapter 9: Commercial Auto Insurance

9.1 Business Auto Policy Overview 9.2 Covered Auto Designation Symbols 9.3 BAP Liability Coverage 9.4 BAP Physical Damage Coverage 9.5 Garage and Truckers Coverage Forms

11 Chapter 10: Workers Compensation

10.1 Workers Compensation Overview 10.2 Part One: Workers Compensation Insurance 10.3 Part Two: Employers Liability 10.4 Workers Compensation Exclusions 10.5 Other States and USL&H Coverage

12 Chapter 11: Other Commercial Lines

11.1 Inland Marine Insurance 11.2 Ocean Marine Insurance 11.3 Commercial Crime Insurance 11.4 Surety Bonds 11.5 National Flood Insurance Program 11.6 Professional Liability Insurance 11.7 Commercial Umbrella and Excess Liability 11.8 Boatowners and Personal Watercraft Insurance 11.9 Farm and Ranch Insurance 11.10 Mobile Home and Manufactured Housing Insurance 11.11 Title Insurance

13 Chapter 12: Insurance Regulations and Ethics

12.1 Producer Licensing 12.2 Producer Authority and Responsibilities 12.3 Unfair Trade Practices 12.4 Claims Settlement Practices 12.5 State Insurance Department 12.6 Penalties and Disciplinary Actions

12.3 Unfair Trade Practices

Key Takeaways Explain This Topic AI

All states adopt versions of the NAIC Unfair Trade Practices Act, which lists prohibited marketing and sales conduct

MISREPRESENTATION is any false or misleading statement about policy terms, dividends, or the insurer's financial condition

TWISTING uses misrepresentation to induce replacement with a DIFFERENT insurer; CHURNING is replacement with the SAME insurer to generate new commissions

REBATING is offering anything of value not stated in the policy as an inducement to buy—illegal in most states regardless of who initiates it

UNFAIR discrimination (race, religion, national origin) is illegal; FAIR discrimination based on actuarial risk (driving record, claims history) is legal and necessary

Last updated: June 2026

The NAIC Unfair Trade Practices Act

Every state has adopted a version of the NAIC Unfair Trade Practices Act (UTPA) , which defines and prohibits deceptive or abusive conduct in the marketing and sale of insurance. (A companion model, the Unfair Claims Settlement Practices Act , governs the claims side and is covered in 12.4.) The exam loves to test the precise boundaries between these named offenses, so memorize the definitions exactly—the distinctions are subtle and the answer choices are written to exploit confusion.

Misrepresentation

Misrepresentation is making a false or misleading statement about an insurance product or company. It includes false statements about:

Policy terms, benefits, coverage, conditions, or exclusions
Dividends or projected future returns
The financial condition of the insurer
The true purpose, premium, or value of a policy
A false statement that insurance is required by law when it is not

Example: Telling a buyer that personal auto collision coverage "includes mechanical breakdown" when it does not. The statement need not be intentional to be a violation—negligent misstatements count.

Twisting vs. Churning

Both involve replacing an existing policy, but the exam draws a bright line between them.

Offense Replacement Target Mechanism
Twisting A DIFFERENT (competing) insurer Misrepresentation induces the lapse and rewrite
Churning The SAME insurer Existing policy values fund a new policy

Twisting uses misrepresentation to convince a policyholder to drop one insurer's policy and buy from a different company—generating a new first-year commission.

Churning is internal: the producer repeatedly replaces the customer's policy with another policy from the same insurer , often by siphoning the old policy's values, again to create fresh commissions.

Memory hook: T wisting = T wo companies; C hurning = same C ompany (think "churning the same butter").

Rebating

Rebating is offering anything of value not specified in the policy as an inducement to buy. It is illegal in most states even when the buyer requests it .

Prohibited (Rebating) Generally Allowed
Returning part of the commission to the buyer Policy dividends stated in the contract
Paying the client's premium Published rate discounts available to all

Expensive gifts (often over a $25-$100 statutory cap) Nominal advertising items (pens, calendars) under the cap

Free services not offered to everyone Group rates filed and approved

Rebating is banned because it creates unfair discrimination : one buyer receives something a similarly situated buyer does not. A handful of states (notably California and Florida) have relaxed or repealed rebating bans, but treat rebating as prohibited on the exam unless the question says otherwise.

Unfair Discrimination

The critical word is unfair . Discrimination based on protected classes is illegal; discrimination based on actuarial risk is legal and is the foundation of fair pricing.

Factor Status
Race, color, religion, national origin PROHIBITED (unfair)
Gender (most coverages) PROHIBITED in many states
Loss/claims history LEGAL (fair, risk-based)
Driving record (auto) LEGAL
Occupation, where risk-relevant LEGAL
Credit-based insurance score, where permitted LEGAL

Exam Key: Charging two people in the SAME risk class different rates is unfair discrimination. Charging different rates to people in DIFFERENT risk classes is fair and required.

Other Prohibited Practices

Defamation — false statements that injure another insurer or producer; libel is written, slander is spoken.

Coercion and intimidation — using threats or economic pressure (for example, a lender forcing a borrower to buy insurance from a specific affiliated agency).

Boycott — agreeing with others to restrain or monopolize the business of insurance.

Controlled business — writing insurance primarily on the producer's own property, family, or business associates; usually capped at 25-50% of total premium volume so producers serve the general public.

False advertising — deceptive ads, false financial-strength claims, or fictitious-group representations.

Violations of the UTPA can produce cease and desist orders , fines per violation, and license suspension or revocation, plus restitution to harmed consumers.

Replacement Done Right vs. Replacement Done Wrong

Not all replacement is illegal. A producer may legitimately recommend replacing a policy if it genuinely benefits the client—broader coverage, a lower premium for equal protection, or a more financially sound insurer. The line is crossed when misrepresentation or incomplete comparison is used to drive the sale. Most states require a replacement notice or comparison disclosure so the client can make an informed choice.

The exam test is intent and honesty: was the customer misled, and did the producer benefit at the customer's expense? If yes, it is twisting (different insurer) or churning (same insurer); if the comparison was honest and documented, it is lawful replacement.

Sliding, Coverage Stuffing, and Free Insurance

Newer prohibited practices the exam may reference include sliding —adding coverage or products the customer did not knowingly request (for example, telling a buyer that towing coverage is "required" and slipping it onto the policy)—and advertising "free" insurance as an inducement to buy something else, which is treated as a deceptive practice. These join the classic list of misrepresentation, twisting, churning, rebating, defamation, boycott, coercion, and unfair discrimination.

Common Exam Traps

Rebating is illegal even if the customer asks for it in most states—the producer cannot "give back" part of the commission.

"Unfair" is the operative word in discrimination —risk-based pricing is not only legal, it is required to keep rates not unfairly discriminatory .

Twisting vs. churning hinges on one fact: different insurer (twisting) versus the same insurer (churning).

Defamation can target a company, not just a person —falsely calling a competitor "about to go bankrupt" is prohibited.

Because the UTPA offenses are defined by precise elements, read each scenario for the mechanism (false statement? thing of value? protected class? replacement target?) before choosing an answer.

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