Prohibited Practices in South Carolina

South Carolina law, particularly Title 38, Chapter 73 (Unfair Trade Practices), prohibits various activities by insurance producers and insurers.

Unfair Trade Practices

Rebating

Definition: Rebating is offering or giving any valuable consideration or inducement not specified in the policy as an incentive to purchase or renew insurance.

Prohibited Activities:

• Offering cash rebates or premium refunds
• Offering gifts, prizes, or merchandise
• Providing services not specified in policy
• Sharing commissions with policyholders
• Any inducement to purchase or renew

Exceptions:

• Promotional items of minimal value (under $25)
• Educational materials related to insurance
• Normal business courtesies
• Discounts approved in policy rates

Penalties for Rebating:

• Administrative fine up to $1,000 per violation
• License suspension or revocation
• Criminal penalties for willful violations
• Restitution to affected parties

Exam Tip: Rebating is strictly prohibited in South Carolina. Offering anything of value not specified in the policy as an inducement to purchase insurance violates state law.

Twisting

Definition: Twisting is misrepresenting or incompletely comparing existing insurance to induce a policyholder to lapse, forfeit, surrender, or replace their current coverage.

Examples of Twisting:

• Misrepresenting benefits of proposed policy
• Failing to disclose disadvantages of replacement
• Exaggerating defects in existing coverage
• Omitting material facts about current policy
• Making unfair comparisons between policies

Replacement Requirements:

When replacing existing coverage, producers must:

• Provide replacement notice to applicant
• Submit notice to existing insurer
• Compare coverages fairly and accurately
• Disclose all material differences
• Ensure replacement is in client's best interest

Penalties:

• Administrative fines
• License suspension or revocation
• Requirement to pay restitution
• Civil liability for damages

Churning

Definition: Churning is replacing insurance policies repeatedly for the primary purpose of generating new commissions without benefit to the policyholder.

Characteristics:

• Frequent policy replacements
• No substantial benefit to policyholder
• Motivated by producer commission
• Pattern of repeated replacements
• Disregard for client interests

Consequences:

• Severe penalties including license revocation
• Restitution of commissions
• Civil liability to client
• Potential criminal charges

Misrepresentation

Definition: Making false, misleading, or deceptive statements about:

• Policy terms and conditions
• Benefits and coverages
• Dividends or policy performance
• Financial condition of insurer
• Legal requirements

Types of Misrepresentation:

Material Misrepresentation:

• False statements affecting policyholder decision
• Misrepresenting policy coverages or exclusions
• Overstating policy benefits
• Understating policy costs

Twisting-Related Misrepresentation:

• Miscomparing existing vs. proposed coverage
• Falsely claiming existing policy inadequate
• Exaggerating benefits of replacement

Company-Related Misrepresentation:

• False statements about insurer financial condition
• Misrepresenting company ratings
• False claims about company history

Penalties:

• License suspension or revocation
• Fines up to $15,000 per violation
• Restitution to affected parties
• Criminal charges if fraudulent

Unfair Discrimination

Prohibition: Insurers and producers cannot unfairly discriminate between individuals of the same class and equal expectation of loss in:

• Rates charged
• Coverage offered
• Policy terms and conditions
• Claims handling

Permitted Discrimination:

• Risk-based pricing using actuarial data
• Underwriting based on loss experience
• Classification by legitimate risk factors
• Geographic rating where justified

Prohibited Discrimination:

• Discrimination based on race
• Discrimination based on religion
• Discrimination based on national origin
• Discrimination based on sexual orientation
• Arbitrary refusal to insure

Fiduciary Responsibilities

Premium Handling

Fiduciary Duty: Insurance producers act as fiduciaries with respect to premium funds:

Requirements:

• Maintain separate trust account for premiums
• Do NOT commingle premiums with personal funds
• Remit premiums promptly to insurers
• Maintain accurate accounting records
• Provide accounting upon request

Trust Account Rules:

Misappropriation Penalties:

• Immediate license revocation
• Criminal charges (theft, embezzlement)
• Restitution to victims
• Civil liability
• Potential imprisonment

Exam Tip: Premium funds are held in a fiduciary capacity and must be kept in a separate trust account. Commingling premium funds with personal funds is a serious violation.

Record Keeping

Required Records:

Producers must maintain for at least 5 years:

• Policy applications and documents
• Premium payment records
• Commission statements
• Client correspondence
• Claim files
• Complaints and resolutions
• Replacement notices
• Errors and omissions insurance documentation

Access Requirements:

• Records must be available for Department inspection
• Produce records within reasonable timeframe upon request
• Maintain records in organized, accessible format
• Electronic records acceptable if properly maintained

Penalties and Enforcement

Administrative Penalties

The Director may impose penalties for violations:

Fine Structure:

Factors Affecting Penalty Amount:

• Severity of violation
• Harm to consumers
• Whether violation was willful
• Producer's disciplinary history
• Cooperation with investigation
• Corrective action taken

License Actions

Types of License Actions:

Suspension:

• Temporary removal of license authority
• Specified duration (30 days to 1 year typically)
• Must satisfy conditions for reinstatement
• Cannot transact insurance during suspension

Revocation:

• Permanent termination of license
• Cannot reapply for specified period (often 3-5 years)
• Must demonstrate rehabilitation for future licensing
• Severe penalty for serious violations

Refusal to Renew:

• Department denies license renewal application
• Based on ongoing compliance issues
• Equivalent to revocation at renewal

Probation:

• License continues with conditions
• Supervision and monitoring required
• Regular reporting to Department
• Violation of probation leads to suspension/revocation

Criminal Penalties

Insurance Fraud:

South Carolina criminal penalties under Title 38, Chapter 55 (Insurance Fraud):

Penalties Based on Dollar Amount:

Types of Insurance Fraud:

• False claim submission
• Material misrepresentation in application
• Staging accidents or losses
• Submitting false documents
• Provider fraud (inflated billing)
• Premium theft or misappropriation

Prosecution:

• South Carolina Attorney General prosecutes
• Department of Insurance investigates
• Fraud Bureau coordinates cases
• Civil and criminal penalties can both apply

Professional Conduct Standards

Duty to Clients

Producers owe clients duties including:

Competence:

• Maintain knowledge of insurance products
• Stay current with laws and regulations
• Complete continuing education
• Recommend appropriate coverage

Diligence:

• Respond promptly to client inquiries
• Process applications timely
• Follow up on pending matters
• Maintain organized files

Confidentiality:

• Protect client personal information
• Comply with privacy regulations
• Limit disclosure to necessary parties
• Secure client records

Loyalty:

• Act in client's best interest
• Disclose conflicts of interest
• Avoid self-dealing
• Provide objective advice

Disclosure Obligations

Required Disclosures:

Producers must disclose:

• Commission compensation
• Conflicts of interest
• Limited company appointments
• Ownership interests in agencies
• Any limitations on ability to serve client

Privacy Notices:

• Provide privacy policy at relationship start
• Explain information collection practices
• Describe information sharing
• Provide opt-out for certain disclosures
• Annual privacy notice updates

Exam Tip: Producers have a fiduciary duty to clients and must disclose conflicts of interest, commission arrangements, and any limitations on their ability to serve the client's best interests.