New York unfair and prohibited practices: misrepresentation, false advertising, defamation, unfair discrimination, and rebating

Why New York polices trade practices

New York regulates how insurance is sold, not just what is sold. Insurance Law article 24 exists to define and prohibit every unfair method of competition and every unfair or deceptive act or practice in the business of insurance, exercising the power Congress left to the states in Public Law 15, the McCarran-Ferguson Act. The core rule is one sentence: no person may engage in New York in a trade practice that is a defined violation or a determined violation.

• A defined violation is an act already prohibited by a section that article 24 lists by number. The list includes the producer rules on advertising (section 2122) and misrepresentation (section 2123), the general rebating section (2324) and the life, accident and health discrimination and rebating section (4224).
• A determined violation is any other unfair or deceptive practice that the superintendent decides, after a hearing, is unfair. This is the catch-all: a practice does not have to be on a list to be stopped.

The five practices you must recognize

Misrepresentation. Misstating the terms, benefits, advantages or dividends of a policy, or making a misleading comparison of policies, to sell coverage or to persuade someone to drop, lapse or replace a policy. Using misrepresentation to induce a replacement is called twisting. In New York, producer misrepresentation is a defined violation.

False advertising. Any advertisement, announcement or statement, in print, broadcast or online, that is untrue, deceptive or misleading about an insurer, a policy or the business of insurance. The test is the impression created, not whether each word is literally true.

Defamation. Making, publishing or circulating a false, maliciously critical or derogatory statement about the financial condition of an insurer, calculated to injure it. Running down a competing company to win a sale is the classic exam fact pattern.

Unfair discrimination. Treating people of the same class and, for life insurance, equal expectation of life differently in rates, premiums, dividends, benefits or policy terms. In life insurance, sorting applicants into different risk classes is lawful when the classes rest on sound actuarial principles or experience and use factors the law permits (some, such as a PrEP prescription alone, are barred); charging different prices within one class is not.

Rebating. Giving the buyer anything of value that is not stated in the policy as an inducement to buy, such as part of the commission, a premium refund, a special dividend favor or stock.

New York's rebating rules

Section 2324 covers property and casualty lines; section 4224 covers life, annuities and accident and health, and section 2324 expressly does not apply to policies subject to section 4224. The two share the same core:

• No rebate of premium, no sharing of commission with the insured, no special favor in dividends, and no valuable consideration not specified in the policy.
• The main safe harbor is a gift worth no more than $25, such as merchandise or a magazine subscription. Section 4224 also lists a few narrow exceptions, such as medical examinations and nursing services for policyholders under reasonable rules.
• The buyer is liable too: the insured may not knowingly receive a rebate or special favor.
• Offering stocks, bonds or other securities as an inducement is prohibited.

Section 2324 also allows a producer to keep the usual commission on insurance on his own property or risks, as long as those commissions total no more than 5 percent of his net commissions for the calendar year. A producer that is a subsidiary or affiliate of the insured that collects commission on the insured's policy is treated as sharing commission with the insured. It is not rebating to pay policyholder dividends from surplus, to pay commissions to a licensed broker, or for one licensed broker to split a commission with another licensed broker who helped place the business. Each section 2324 violation carries a $500 penalty on top of other penalties.

New York's discrimination rules

Under section 4224, a life or accident and health insurer may not refuse, limit or surcharge coverage solely because of a physical or mental disability or its history, unless the difference is permitted by law and based on sound actuarial principles or actual or reasonably expected experience. Even then the applicant must be told of the right to receive the specific reasons, directly or through a designated medical professional. An insurer may not refuse, limit or surcharge solely because the person was prescribed PrEP to prevent HIV. Tying insurance to the purchase of goods, securities, housing or services is also generally prohibited.

How enforcement works

The superintendent may examine any person's affairs. If a violation is suspected, the person is served with charges and notice of a hearing at least 10 days later and may appear personally or with counsel. A defined violation leads to a cease and desist order; violating a final order costs up to $5,000 per violation, with wilfulness weighed. For a determined violation that continues, the superintendent acts through the attorney general to seek an injunction. These powers are in addition to every other penalty in the law.