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Difficulty: HardUnfair Trade Practices

An independent producer approaches a client who has held a traditional ordinary life policy with a competing insurer for ten years. The producer strongly recommends that the client surrender the existing policy and use the accumulated cash value to purchase a new universal life policy through his agency. To persuade the client, the producer provides a detailed side-by-side presentation. However, the producer deliberately omits the fact that surrendering the current policy will subject the client to significant surrender charges and initiate a new two-year contestability period. The presentation solely emphasizes the new policy's higher projected interest rates.

According to state regulations, which statutory unfair trade practice has the producer committed?

  1. Twisting, because the producer used an incomplete and misleading comparison to induce the client to lapse an existing policy from a different insurer.Answer
  2. B
    Churning, because the producer is utilizing the cash value of an existing policy to fund a new policy primarily to generate a new commission.
  3. C
    Rebating, because the producer is utilizing the promise of higher projected interest rates as an unauthorized inducement outside the contract.
  4. D
    Defamation, because the producer's presentation maliciously implies that the competitor's existing policy is financially inferior.

Answer

The producer committed twisting by using an incomplete and misleading comparison to induce the surrender of a policy from a competing insurer.
The correct answer accurately identifies the act as twisting. Twisting occurs when a producer makes a false or incomplete comparison, or a misrepresentation, specifically to induce a policyholder to lapse, surrender, or forfeit an existing policy in order to buy a new one from a different insurer. By deliberately hiding the surrender charges and new contestability period, the producer made a misleading comparison to secure the replacement.

Step-by-Step Solution

1
Analyze the producer's deceptive conduct in the scenario.
The producer deliberately omitted negative consequences (surrender charges, new contestability period) while emphasizing positives to induce a policy replacement.
Identifying the specific deceptive action is required to classify the statutory violation.
2
Evaluate the institutional context of the policy replacement.
The replacement involves moving a policy from a 'competing insurer' to the producer's agency.
The source of the original policy is the key factor that distinguishes between similar replacement violations like twisting and churning.
3
Match the conduct and context to the correct statutory definition.
Misrepresenting or making incomplete comparisons to induce the lapse of a policy from a different insurer is legally defined as twisting.
This confirms the exact unfair trade practice committed under state regulations.

Key Concept

Twisting vs. Churning in Policy Replacement
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Topics

Unfair Trade Practices

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