Chapter 11: Unfair Trade Practices & Ethical Violations
Learning Objectives
Understand:
- Illegal practices to NEVER do
- Discrimination rules and exceptions
- What constitutes fraud
- Penalties for violations
Illegal Practices: NEVER Do These!
1. FALSE ADVERTISING
What it is:
- Lying about insurance terms or coverage
- Misrepresenting what the policy covers
- Hiding important information in fine print
Examples of FALSE ADVERTISING:
- “This policy covers everything!” (when it doesn’t)
- “No exclusions!” (when there are many)
- “Guaranteed approval!” (when not guaranteed)
Why it’s illegal:
- Misleads consumers
- Unfair competition
- Violates consumer protection laws
2. MISREPRESENTATION
What it is:
- Making false statements about insurance
- Can be innocent or intentional
Examples:
- “This policy covers accidents” (when it doesn’t)
- “No waiting period” (when there is one)
- “Best rates in the state” (when not true)
Difference from False Advertising:
- False Advertising = advertising/marketing level
- Misrepresentation = individual level statement
Can result in:
- Claim denial
- Policy cancellation
- License suspension
- Criminal charges if intentional
3. TWISTING ⭐ (VERY IMPORTANT!)
What it is:
- Inducing a customer to give up one policy and buy another UNETHICALLY
- Using deception or lies about competitor’s policy
Key word: UNETHICAL means using lies or unfair tactics
Difference from Replacement:
- Replacement = Customer switches policies fairly and ethically
- Twisting = Customer switches through deception
Examples of TWISTING:
- “Your current policy is worthless; buy this one instead” (false)
- Lying about competitor’s coverage to make yours look better
- Making false promises about the new policy
- Hiding important differences to pressure switch
Why it’s illegal:
- Harms customers financially
- Unfair competition
- Damages trust in insurance
Penalties:
- License suspension/revocation
- Fines ($1,000-$5,000 per violation)
- Criminal charges possible
4. MISDEMEANOR vs. MALFEASANCE
Misdemeanor:
- Unethical behavior (not legal violation)
- Example: Promising a rebate but not delivering it
- Not providing promised service
Malfeasance:
- Illegal action
- Actual violation of law
- Example: Fraud, intentional misrepresentation
Key difference:
- Misdemeanor = ethical issue
- Malfeasance = legal violation
5. DEFAMATION
What it is:
- Making false statements about someone that damage their reputation
In insurance context:
- Making false statements about competitors
- Damaging agent or company reputation with lies
Examples:
- “Competitor X cheated customers” (if false)
- “Agent Y committed fraud” (if false and you know it’s false)
Why it’s illegal:
- Unfair business practice
- Damages reputation
- Unfair competition
6. BOYCOTT/COERCION/INTIMIDATION
What they are:
- Threaten or pressure customers to buy
- Blackmail or intimidation
- Preventing competitors from doing business
Examples of BOYCOTT/COERCION/INTIMIDATION:
- “Buy from me or I’ll hurt your business”
- Threatening a customer to force a sale
- Intimidating competitors
- Preventing other agents from selling
Why it’s illegal:
- Unfair competition
- Harms consumers
- Violates business law
7. REBATING ⭐ (VERY IMPORTANT!)
What it is:
- Offering something of VALUE not in the policy to induce a sale
- Giving something extra to make customer buy
Examples of REBATING (NOT ALLOWED):
- “Buy this policy and I’ll give you $200 cash back”
- “Buy from me and get a free TV”
- “Buy this policy and I’ll give you a discount not in the policy”
- “Refer a customer and I’ll pay you beyond normal commission”
Examples of NOT REBATING (Allowed):
- Policy built-in discounts
- Legitimate commission structure
- Non-contingent referral fees
Misdemeanor in context of rebating:
- Promising a rebate but not delivering it
Why it’s illegal:
- Unfair competition
- Can’t compete on value, only price
- Protects market integrity
8. DISCRIMINATION ⭐ (CRITICAL FOR MICHIGAN!)
What it is:
- Refusing to insure or charging more based on protected characteristics
Protected characteristics:
- Age
- Sex
- Race
- Religion
- National origin
- Other protected classes
MICHIGAN-SPECIFIC RULE:
- Cannot refuse to insure solely because person is age 70
- Age 70 is specifically protected in Michigan
- Can use age as a factor (charging more), but cannot deny based solely on age
Exception - Actuarially Sound Differences:
- CAN charge more for smokers (based on risk, not discrimination)
- CAN charge more for high-risk occupations
- CAN use age in rate calculation
- BUT cannot deny solely because of protected characteristic
Examples of ILLEGAL DISCRIMINATION:
- “We don’t insure Black people” ✗ ILLEGAL
- “We don’t insure women” ✗ ILLEGAL
- “No insurance for people over 70” ✗ ILLEGAL in Michigan
- “We won’t insure based on religion” ✗ ILLEGAL
Examples of LEGAL differentiation:
- “Smokers pay more” ✓ (based on risk)
- “High-risk occupations pay more” ✓ (based on risk)
- “Using age in calculation” ✓ (actuarially sound)
9. CONCEALMENT
What it is:
- Hiding important information
- Not telling the company something they need to know
- Deliberately withholding facts
Illegal because:
- Prevents company from making informed decision
- Unfair to company and other policyholders
Example:
- Customer hides pre-existing condition from health insurer
- Agent hides customer’s criminal history from underwriter
10. FRAUD
What it is:
- Intentionally lying to get someone to buy
- Deliberate deception with intent to harm
Can result in:
- Criminal charges
- Prison time
- Large fines
- Permanent license revocation
Examples:
- Forging a customer’s signature
- Lying about coverage to close a sale
- Creating fake documents
- Stealing customer money
PENALTIES FOR VIOLATIONS
PER VIOLATION FINES
| Circumstance |
Fine |
| Unknown/Not Discovered |
$1,000 per violation |
| Known/Discovered |
$5,000 per violation |
Example:
- Twisting customer (not caught): $1,000
- Twisting customer (caught): $5,000
- Multiple instances: Multiply accordingly
CEASE AND DESIST ORDER VIOLATION
Cease and Desist Order: Official command to stop illegal activity
Violation fine: $20,000
What happens:
- DIFS issues order: “Stop this illegal activity immediately”
- You continue doing it: $20,000 fine per violation
- DIFS takes enforcement action
INSURANCE FRAUD
Classification: FELONY (criminal charge, not civil)
Penalties:
- Prison: Up to 4 years
- Fine: Up to $50,000
- Both possible
Examples of fraud:
- Forging documents
- Filing false claims
- Stealing premium payments
- Intentional misrepresentation on large scale
Discrimination: The Michigan Age 70 Rule ⭐
The Rule:
- Cannot refuse to insure SOLELY because person is age 70
What this means:
- Cannot deny coverage just because someone is 70
- CAN charge higher premiums for age
- CAN use age in rate calculations
- But CANNOT deny just because of age
Example:
- LEGAL: “We charge more for people over 70”
- LEGAL: “We calculate rates using age as factor”
- ILLEGAL: “We don’t insure anyone 70 or older”
Why Michigan included this:
- Protects seniors from age discrimination
- Allows underwriting based on risk, not age category
Key Definitions
- False Advertising: Lying in advertising
- Misrepresentation: False statements about insurance
- Twisting: Unethical inducement to switch policies
- Defamation: False statements damaging reputation
- Boycott: Preventing business unfairly
- Coercion: Threatening to force action
- Intimidation: Threatening to cause harm
- Rebating: Offering value not in policy to induce sale
- Discrimination: Refusing/charging based on protected characteristic
- Concealment: Hiding important information
- Fraud: Intentional deception with criminal intent
CHAPTER 11 QUIZ
Question 1
What is “Twisting”?
- A) Ethically replacing one policy with another
- B) Unethically inducing replacement by lying about competitor’s policy
- C) Rotating between insurance companies
- D) Changing policy numbers
Show Answer
**Answer: B**
Twisting = unethically inducing replacement through deception or lies about competitor's policy. Illegal.
Question 2
What is “Rebating”?
- A) Reducing the premium price
- B) Offering something of value not in the policy to induce a sale
- C) Refunding part of premium
- D) Negotiating the price
Show Answer
**Answer: B**
Rebating = offering something of value to induce a sale. "Buy this and get $200 cash back" = rebating (illegal).
Question 3
Is age discrimination illegal in Michigan?
- A) No, age doesn’t matter
- B) Yes, cannot refuse to insure solely due to age 70
- C) Only for life insurance
- D) Only for disability insurance
Show Answer
**Answer: B**
Age 70 is protected in Michigan. Cannot refuse to insure solely because someone is 70. CAN charge more, but NOT deny.
Question 4
What is the difference between “Misdemeanor” and “Malfeasance”?
- A) They mean the same thing
- B) Misdemeanor = unethical; Malfeasance = illegal act
- C) Misdemeanor = illegal; Malfeasance = unethical
- D) Only misdemeanor is punishable
Show Answer
**Answer: B**
Misdemeanor = unethical behavior; Malfeasance = illegal action
Question 5
Is “Boycott/Coercion/Intimidation” allowed in insurance sales?
- A) Yes, it’s a normal sales technique
- B) No, it’s completely illegal and unethical
- C) Only against competitors
- D) Only if the customer agrees
Show Answer
**Answer: B**
Boycott, coercion, and intimidation are all illegal and unethical. Cannot threaten or pressure.
CRITICAL NUMBERS (from Chapter 11)
- Fine per violation (unknown): $1,000
- Fine per violation (known): $5,000
- Cease & Desist violation: $20,000
- Insurance Fraud (Felony): Up to 4 years + $50,000
Summary
In this chapter you learned:
- 10 illegal/unethical practices to NEVER do
- Twisting is unethical inducement to switch
- Rebating is offering value to induce sale
- Discrimination prohibited; Age 70 specifically protected in Michigan
- Penalties range from $1,000-$20,000+ per violation
- Fraud is a felony with prison time possible
- Act ethically and honestly in all business dealings
Next: Chapter 12: Controlled Business & Michigan Rules