DC Ethics and Unfair Practices in Insurance 1 — Questions and Answers
Question 1: What is 'rebating' in DC insurance law?
- Filing a fraudulent claim with the insurer
- Inducing a policyholder to lapse coverage by misrepresenting a new policy
- Offering a prospect something of value not specified in the policy as an inducement to purchase insurance (Correct answer)
- Refusing to pay a valid claim
Correct answer: Offering a prospect something of value not specified in the policy as an inducement to purchase insurance
Rebating involves offering or giving anything of value (cash, gifts, services) not specified in the policy as an inducement to purchase insurance.
DC's unfair trade practices law prohibits rebating because it creates price discrimination and gives some buyers an unfair advantage. Allowable exceptions include items of minimal value (generally under $25) and certain promotional activities. Both the giver and receiver can face penalties.
Question 2: Which of the following best describes 'unfair discrimination' in DC insurance?
- Charging higher premiums to a higher-risk class of insureds
- Charging different premiums to insureds with identical risk profiles based on non-actuarial factors such as race or religion (Correct answer)
- Declining to insure a building in a flood zone
- Requiring a medical exam before issuing life insurance
Correct answer: Charging different premiums to insureds with identical risk profiles based on non-actuarial factors such as race or religion
Unfair discrimination means treating insureds differently based on prohibited characteristics (race, religion, national origin, sex in some lines) rather than actuarial risk factors.
Insurance laws permit rate differences based on legitimate actuarial factors (age, credit score in some lines, claims history). What is prohibited is charging different premiums to insureds who present identical actuarial risk solely because of race, religion, or other protected characteristics.
Question 3: Under DC insurance regulations, which of the following is an example of a 'material misrepresentation' on an insurance application?
- Rounding up age to the nearest year
- Failing to disclose a prior DUI conviction when applying for auto insurance (Correct answer)
- Estimating annual mileage within 1,000 miles
- Providing a slightly different spelling of a street name
Correct answer: Failing to disclose a prior DUI conviction when applying for auto insurance
Failing to disclose a DUI conviction on an auto application is a material misrepresentation because it directly affects the underwriting decision and premium.
A misrepresentation is material if, had the insurer known the truth, it would have declined the application or charged a higher premium. A DUI conviction significantly affects auto insurability—failing to disclose it is a material misrepresentation that can void the policy.
Question 4: What is the purpose of DC's insurance guaranty association?
- To guarantee investment returns on insurance premium funds
- To protect DC policyholders when a licensed insurer becomes insolvent (Correct answer)
- To regulate premium rates charged by DC insurers
- To manage DC's residual market for high-risk drivers
Correct answer: To protect DC policyholders when a licensed insurer becomes insolvent
The DC Life and Health Insurance Guaranty Association and the DC Insurance Guaranty Association protect policyholders from losses due to an insolvent insurer.
DC maintains guaranty associations for property/casualty and life/health lines. If a licensed insurer becomes insolvent, the association covers claims up to statutory limits (e.g., $300,000 for life insurance death benefits). This protects DC consumers from total loss of coverage.
Question 5: Which prohibited practice involves an agent convincing a client to replace a suitable existing policy with a new one primarily to generate commissions?
- Twisting
- Churning (Correct answer)
- Rebating
- Sliding
Correct answer: Churning
Churning involves repeatedly replacing or modifying an insured's existing coverage for the purpose of generating new commissions, not to benefit the client.
While twisting uses misrepresentation to replace one policy with another, churning involves a pattern of replacements within the same company or by the same agent for commission purposes. Both are prohibited under DC's unfair trade practices laws.
Question 6: An agent in DC 'slides' additional coverage onto a client's policy without their knowledge. What is this practice called?
- Rebating
- Sliding (Correct answer)
- Twisting
- Churning
Correct answer: Sliding
Sliding involves adding unrequested coverage or products to a policy without the insured's knowledge or informed consent.
Sliding is a deceptive sales practice where an agent adds optional coverages, products, or services to a policy without explaining them clearly or obtaining proper consent, often in hopes the customer won't notice. It violates DC's unfair trade practices regulations and the agent's duty of good faith.
DC Ethics and Unfair Practices in Insurance 1
What is 'rebating' in DC insurance law?