Prohibited Trade Practices
Insurers and insurance producers may NOT engage in any trade practice that is defined as, or determined to be, an unfair method of competition or an unfair or deceptive act or practice in the business of insurance.
When Does It Become Unfair?
It is an unfair trade practice to knowingly engage in an unfair method of competition with enough frequency that the commission of unfair marketing practices indicates a general business practice.
What Happens After a Violation?
Hearing
Department conducts a hearing
Order
Cease and desist order issued
Penalties
Fines and other penalties imposed
1. Misrepresentation
What is Misrepresentation?
It is ILLEGAL to issue, publish, or circulate any illustration or sales material that is false, misleading, or deceptive as to policy benefits or terms, or the payment of dividends. This also applies to verbal statements!
Example Scenarios:
"This policy will definitely cover all your flood damage!"
✗ MISREPRESENTATION - if flood isn't actually covered
"You'll receive guaranteed dividends every year of $500!"
✗ MISREPRESENTATION - dividends cannot be guaranteed
2. False Advertising
Advertisements cannot include any untrue, deceptive, or misleading statements that apply to the business of insurance or anyone who conducts it. This applies to ALL forms of advertising:
Newspapers
Magazines
Television
Internet
False/Deceptive Advertising Includes Misrepresenting:
Terms, benefits, conditions, or advantages of any policy
Dividends to be received or previously paid
Financial condition of any person or the insurance company
True purpose of an assignment or loan against a policy
Also Prohibited:
Representing an insurance policy as a share of stock
"Buy this whole life policy - it's like owning stock in our company! You'll get dividends just like shareholders!"
ILLEGAL - Insurance policies are NOT investments/stocks, even if they pay dividends
Using names that misrepresent the true nature of a policy
Calling a basic liability-only auto policy the "Complete Auto Protection Plan"
ILLEGAL - The name suggests full coverage when it only has liability
Using a name that suggests the entity is an insurer (when it's not)
A small insurance agency naming itself "Garden State Mutual Insurance Company" or "Atlantic Indemnity Underwriters"
ILLEGAL - Words like "Mutual," "Indemnity," "Underwriters," or "Insurance Company" make customers think they're dealing with an actual insurer, not just an agent/broker
Misrepresenting the true purpose of an assignment or loan
Agent to homeowner after storm damage: "Just sign this Assignment of Benefits form - it's only to help with the insurance paperwork."
ILLEGAL - The TRUE purpose is often to give the contractor full control of the claim so they can inflate costs or sue the insurer
3. Rebating and Inducement
What is Rebating?
Any inducement offered to the insured in the sale of insurance products that is NOT specified in the policy. Both the offer AND acceptance of a rebate are ILLEGAL!
Rebates May Include:
Rebates of premiums
Returning part of the premium
Special favors or services
Not available to all policyholders
Advantages in dividends/benefits
Promising extra benefits
Stocks, bonds, securities
And their dividends or profits
New Jersey Exception!
In New Jersey, promotional materials, articles of merchandise, or gifts that have a redeemable value of less than $100 are NOT considered "valuable consideration" and are ALLOWED.
Specifically Prohibited Rebates/Inducements:
- ✗ Payments of cash or cash equivalents greater than $100
- ✗ Provision of tickets to concerts or events valued greater than $100
- ✗ For health insurance: COBRA, HRA, HSA, and FSA administration services offered ONLY to new customers who agree to change producers or insurers (not provided to in-force accounts)
4. Boycott, Coercion, Intimidation
It is ILLEGAL to be involved in any activity of boycott, coercion, or intimidation that is intended to restrict fair trade or to create a monopoly. This includes unfair behavior influencing clients AND competing agents/brokers.
Boycott
Refusing to deal with or conduct business with certain parties to restrict trade
"Several large insurers agree together: 'None of us will do business with ABC Reinsurance Company until they raise their rates.'"
ILLEGAL - Companies working together to freeze out a competitor
Coercion
Requiring, as a condition to a loan, that the applicant purchase insurance from a specific insurer
Bank loan officer: "I'll approve your mortgage, but ONLY if you buy your homeowners insurance through our partner, XYZ Insurance. No other insurer is acceptable."
ILLEGAL - Banks can require you to HAVE insurance, but cannot force you to buy from a specific company
Intimidation
Using threats or force to influence insurance decisions
Agent to business owner: "If you don't renew with me, I might have to mention to the fire marshal about some 'concerns' I have about your building..."
ILLEGAL - Using threats to force someone to buy or keep insurance
Remember B.C.I.!
Boycott, Coercion, Intimidation are so serious that federal antitrust laws STILL apply to them under McCarran-Ferguson Act!
5. Stock Operations and Advisory Board Contract
Insurers and their agents may NOT issue or deliver:
- • Agency company stock or other capital stock
- • Shares in any common-law corporation
- • Securities of any kind promising returns and profits
...as an inducement to insurance.
Example:
"If you buy your business insurance through us, we'll give you 100 shares of stock in our insurance agency! You'll earn dividends as the company grows!"
ILLEGAL - You can't offer stocks, securities, or investment returns to convince someone to buy insurance
6. False Financial Statements
What Are They?
Statements intended to deceive public officials or the general public about the financial condition of an insurer.
This often occurs when an important fact about the financial status of an insurer is deliberately withheld to present the company in a more favorable light.
Example 1:
Insurance company tells the state Department: "We have $50 million in reserves" but hides that they owe $45 million in unpaid claims
ILLEGAL - Hiding liabilities to look financially healthy
Example 2:
Agent tells customers: "ABC Insurance is rock-solid financially!" when they know the company is actually on the verge of insolvency
ILLEGAL - Deceiving the public about an insurer's true financial condition
7. Defamation
What is Defamation?
An oral or written statement that is intended to injure a person engaged in the insurance business. This also applies to statements that are maliciously critical of the financial condition of any person or company.
"Don't buy from XYZ Insurance - they're going bankrupt!" (when false) = DEFAMATION
8. Unfair Discrimination
Discrimination in rates, premiums, or policy benefits for persons within the same class or with the same life expectancy is ILLEGAL.
No Discrimination May Be Made Based On:
Marital Status
Race
National Origin
Gender Identity
Sexual Orientation
Creed
Ancestry
Unless the distinction is made for a business purpose or required by law.
ILLEGAL Example:
"Your auto insurance premium is $200/month." vs. another person with the identical driving record, same car, same age, same location: "Your premium is $300/month" - and the only difference is their national origin
UNFAIR DISCRIMINATION - Same risk class must get same rates
LEGAL Example (Business Purpose):
Charging a 20-year-old driver more than a 40-year-old driver for auto insurance
ALLOWED - Age-based pricing is permitted because statistics show younger drivers have more accidents (legitimate business purpose)
9. Failure to Maintain Complaint Handling Procedures
Insurers must maintain a complete record of ALL complaints received since the date of last examination by the Department.
Records Must Include:
Note: "Complaint" refers to any written communication expressing a grievance.
10. Unfair Claim Settlement Practices
The following are unfair claims settlement practices if committed openly and in conscious disregard of rules, or if committed with such frequency as to indicate a general business practice:
Communication & Investigation Failures
Failing to acknowledge claims promptly
Example: You file a claim and the insurer doesn't respond for 3 months - no phone calls, no emails, nothing
Refusing to pay without reasonable investigation
Example: Insurer denies your theft claim immediately without ever sending an adjuster or asking for a police report
Requiring duplicate paperwork to delay
Example: You already submitted a detailed claim form, but they make you fill out another form asking the exact same questions
Bad Faith Settlement Tactics
Not settling in good faith when liability is clear
Example: Their driver clearly ran a red light (on camera), but the insurer drags out settlement for 2 years
Lowballing to force lawsuits
Example: Your car damage is clearly $15,000, but they offer $3,000 hoping you'll give up or can't afford a lawyer
Settling for less than advertised coverage
Example: Ads say "full replacement value!" but they only offer you depreciated value when you file a claim
Using altered applications against you
Example: They deny your claim citing something on your application that YOU never wrote - someone changed it
Other Violations
Misrepresenting policy provisions
Example: Adjuster says "Your policy doesn't cover water damage" when it actually does
Payments without explanation
Example: They send you a check for $2,000 with no letter explaining what it's for or how they calculated it
Threatening to appeal arbitration
Example: "Accept our $5,000 offer now, or we'll appeal and tie this up in court for years"
Holding one claim hostage for another
Example: "We won't pay your property damage claim until you agree to settle your injury claim too"
No explanation for denials
Example: Claim denied letter just says "DENIED" with no reason given
Quick Reference: Prohibited Practices
Misrepresentation
False statements (written or verbal) about policies
False Advertising
Untrue, deceptive statements in any advertising
Rebating
Inducements not in policy (>$100 in NJ)
B.C.I.
Boycott, Coercion, Intimidation
Defamation
Statements to injure competitors
Unfair Discrimination
Based on protected characteristics
Exam Tips
Tip #1: The $100 Rule
In NJ, promotional items under $100 are NOT rebating. Cash/tickets over $100 = ILLEGAL rebating!
Tip #2: Both Offer AND Acceptance
Remember: BOTH offering and accepting a rebate are illegal. It takes two to tango!
Tip #3: Coercion Definition
Requiring insurance from a specific insurer as a condition for a LOAN = coercion. Classic exam question!
Tip #4: Protected Classes
Memorize: Marital status, race, national origin, gender identity, sexual orientation, creed, ancestry