Prohibited Practices and Consumer Protection

Unfair Trade Practices

North Dakota Century Code Title 26.1 prohibits various unfair trade practices in the insurance industry. Understanding these prohibited practices is essential for maintaining your license.

Misrepresentation

What is Misrepresentation?

Misrepresentation is making false, misleading, or incomplete statements to induce someone to purchase insurance:

Forms of Misrepresentation

1. False Statements - Actively lying about policy features
2. Half-Truths - Telling only part of the truth
3. Omissions - Failing to disclose material information
4. Misleading Comparisons - Unfair comparisons to other products

Consequences

Rebating

What is Rebating?

Rebating is offering anything of value not specified in the policy as an inducement to purchase or renew insurance:

Prohibited Rebates

Permitted Practices

Not everything is rebating - these are allowed:

Exam Tip: The key distinction is whether the inducement is specified in the policy or filed with the state. If not, it's likely rebating.

Twisting

What is Twisting?

Twisting is misrepresenting policy terms or conditions to induce a policyholder to replace existing insurance:

Examples of Twisting

Twisting vs. Legitimate Replacement

Churning

What is Churning?

Churning is the practice of replacing insurance policies primarily to generate commissions:

Signs of Churning

• Multiple replacements in short time
• No meaningful benefit to client
• Similar coverage at higher cost
• Pattern of rapid policy turnover
• Commission-driven motivation

Churning vs. Legitimate Activity

Unfair Discrimination

What is Unfair Discrimination?

Unfair discrimination is treating similarly situated individuals differently based on factors unrelated to risk:

Prohibited Factors

Permitted Underwriting Factors

Unfair Claims Settlement Practices

Prohibited Claims Practices

North Dakota prohibits these unfair claims practices:

Required Claims Handling Standards

North Dakota Insurance Guaranty Association

Purpose

The North Dakota Insurance Guaranty Association (NDIGA) protects policyholders when P&C insurers become insolvent:

How It Works

1. Insurer Insolvency - Insurance company is declared insolvent
2. NDIGA Activated - Association steps in
3. Claims Paid - Covered claims paid from fund
4. Assessments - Member insurers assessed to fund payments

Coverage Limits

Exclusions

NDIGA does not cover:

• Surplus lines policies
• Self-insurance
• Ocean marine insurance
• Portions of claim above limits
• Claims by affiliates of insolvent insurer

Producer Responsibilities

Producers must:

• Not misrepresent guaranty association coverage
• Not use guaranty coverage as selling point
• Understand limitations of coverage
• Explain that guaranty coverage is last resort

Important: It is a prohibited practice to use the existence of guaranty association coverage as an inducement to purchase insurance.

Disciplinary Actions and Penalties

Grounds for Discipline

The Commissioner may discipline a producer for:

Penalties Available

Due Process Rights

Producers facing discipline have rights:

• Written notice of charges
• Opportunity to respond
• Administrative hearing
• Right to counsel
• Appeal to state court

Reporting Requirements

Changes to Report

Producers must report to the Department within 30 days:

Failure to Report

Failure to report required changes:

• Is grounds for discipline
• May result in fines
• Could affect license status
• Demonstrates untrustworthiness

Summary: The Ethical Producer

Characteristics of an Ethical North Dakota Producer

An ethical producer:

• Acts with honesty and integrity in all dealings
• Puts client interests first, always
• Provides clear, accurate information
• Discloses all material facts
• Maintains professional competence through continuing education
• Protects client confidentiality
• Complies with all laws and regulations
• Takes responsibility for mistakes
• Treats all clients fairly and without discrimination
• Seeks help when facing situations beyond their expertise
• Documents all transactions properly
• Avoids conflicts of interest or discloses them
• Never engages in rebating, twisting, or churning

Exam Tip: Know the definitions and distinctions between misrepresentation, rebating, twisting, and churning. These are commonly tested on both the national and state portions of the exam.