Unfair trade practices III: twisting, churning, rebating, and concealment

Four ways to sell dishonestly

This lesson covers four unfair trade practices that the exam groups together because each one uses a sale to harm the customer: twisting, churning, rebating, and concealment. Florida law bars anyone from engaging in any trade practice that its Unfair Insurance Trade Practices law defines as an unfair method of competition or an unfair or deceptive act or practice.

Twisting

Twisting is inducing a policyholder to lapse, forfeit, surrender, terminate, borrow against, or convert an existing policy, usually so they will buy a new one, by using misrepresentations or an incomplete or misleading comparison of the two policies. The classic case is a producer who talks a client out of a policy with another company by overstating the new policy's benefits and hiding what the client gives up: surrender charges, a new contestable period, higher premiums at an older age.

Replacing a policy is not itself illegal. What makes it twisting is the misrepresentation used to get the replacement.

Churning

Florida defines churning in detail. It is using the values in an existing life insurance policy or annuity, such as cash values, loan values, or dividend values, including values in riders, to buy another policy or contract with the same insurer in order to earn additional premiums, fees, or commissions, when any of the following is true:

• there is no objectively reasonable basis for believing the replacement will give the policyholder an actual, demonstrable benefit;
• it is done in a way that is fraudulent, deceptive, or misleading, or involves a deceptive omission;
• the applicant is not told that the existing policy's values will be reduced, forfeited, or used to buy the new contract; or
• the applicant is not told that the new contract is not paid-up and that more premiums will be due.

Churning by an insurer or an agent is an unfair practice. To prevent it, each insurer must give the applicant a disclosure form at the time of the offer showing whether, how, and how much of the old contract's values will be used, plus the new policy's premium, its death benefit, and the date the old values will run out of paying the new premiums. Each insurer must also adopt written procedures to reasonably avoid churning; failing to do so is itself an unfair practice.

Memory hook: twisting is the textbook term for misleading someone out of a policy, usually into a different company's; Florida's churning is burning the values of a policy to buy another from the same insurer.

Rebating

Rebating is offering something of value that is not stated in the policy as an inducement to buy it, for example giving back part of the commission, paying part of the premium, or giving a gift or special favor. It is unfair because the insurance ends up priced differently for customers in the same class. The general rule is that a rebate is lawful only where the insurance code expressly allows it, and only on the terms the code sets.

Florida is one of the few states where the code does allow it. Under s. 626.572 an agent may rebate part of the commission, but only if the rebate follows a rebating schedule filed with the insurer, is applied uniformly so every insured in the same actuarial class who buys the same policy gets the same percentage, is displayed in the agent's office and available on request, is not given on a policy from an insurer that prohibits rebating, and does not depend on age, sex, residence, race, nationality, ethnic origin, marital status or occupation. The agent keeps the schedules for 5 years. Separately, an agent may give gifts, including gift cards, worth up to $100 per person per calendar year (s. 626.9541(1)(m)).

Surplus lines is different: there, rebating is forbidden outright. The surplus lines agent must collect the 4.94 percent premium tax from the insured, and is prohibited from absorbing that tax or, as an inducement or for any other reason, rebating any part of the tax or of the agent's commission.

Concealment

Concealment is intentionally withholding a material fact, meaning a fact that would change a reasonable person's decision. It runs both ways. A producer who fails to mention surrender charges, exclusions, or the loss of existing coverage is deceiving the customer by omission. An applicant who hides a material fact from the insurer, such as a health condition or prior losses, may give the insurer grounds to void the policy. Florida's churning definition specifically names a deceptive omission as one form of the violation.

Penalties

Violating the unfair trade practices part generally brings a fine of up to $12,500 per nonwillful violation and up to $100,000 per willful violation. Twisting and churning carry heavier consequences: each is a first-degree misdemeanor, with an administrative fine of up to $12,500 per nonwillful violation or up to $187,500 per willful violation. A willful-violation fine for twisting or churning requires that the conduct involve fraud.