The heart of regulatory efforts to assure appropriate market conduct is the Act Relating to Unfair Methods of Competition and Unfair and Deceptive Acts and Practices in the Business of Insurance, more recently renamed as the Unfair Trade Practices Act. A general overview of the Act, which applies to all lines of insurance, will be presented here with its applicability to specific situations discussed thereafter.

States have long exercised regulatory control over certain unfair trade practices such as misrepresentation, rebating, and discrimination. In response to the McCarran Act’s invitation to preempt federal insurance regulation under the "regulated by the state law" proviso, to assure the ouster of FTC jurisdiction, the NAIC developed and, in some form, all states enacted the model Unfair Trade Practices Act. (However, there can be considerable variations among the states.) Since then the Act has been amended several times, most recently in 1992. Such amendments have been widely adopted. They broaden the scope of proscribed conduct, expand enforcement authority and establish commissioner rule-making authority.

The Act’s basic prohibition is that it is an unfair trade practice for an insurer or agent to commit a defined practice if (a) such practice is committed flagrantly and in conscious disregard of the Act or any rule promulgated thereunder or (b) such practice is committed with such frequency to indicate a general business practice.

The Act goes on to define proscribed conduct in such areas as (1) misrepresentation and false advertising of insurance policies, (2) false information and advertising generally, (3) defamation, (4) boycott, coercion and intimidation, (5) false financial statements and entries, (6) stock operations and advisory board contracts, (7) unfair discrimination, (8) rebates, (9) prohibited group enrollments, (10) failure to maintain marketing and performance records, (11) failure to maintain complaint handling procedures, (12) misrepresentations in insurance applications, and (13) unfair financial planning practices. In addition, the Act contains a separate section directly aimed at prohibiting coercion in credit insurance. And after a notice and hearing, the commissioner may promulgate rules and regulations to identify specific methods of competition or practices which are prohibited generally in the above areas.

The commissioner is empowered to examine and investigate the affairs of any person (insurer or agent) engaged in the business of insurance in the state to determine whether such person(s) has been or is engaging in proscribed unfair practices. Whenever the commissioner has reason to believe that such has occurred or is occurring, after an appropriate hearing, he or she may issue a cease and desist order and may, at his or her discretion, (1) order monetary penalties specified in the Act and/or (2) suspend or revoke the person’s license if such person knew or should have known that such conduct was in violation of the Act. Violations of cease and desist orders incur further monetary penalties. As an aid in enforcement, not only does failure to comply with defined practices (10) and (11) above constitute unfair trade practices, but also state insurance departments (both individually and collectively through the NAIC) carry out market conduct examinations separate from but akin to the examinations for financial solidity.

Whereas the above enforcement provisions are specifically to be effectuated by the insurance commissioner, most of the state unfair trade practices acts are silent as to whether violation of the Act gives rise to a private cause of action by the injured party. Seven states have addressed this issue by statute. Three of these permit some private actions, two expressly bar them and two permit a private remedy only as an adjunct to a regulatory proceeding. In those states having a statute which is silent on the issue, courts in a few states permit private causes of action for statutory violations. However, courts in other states have held that no private right of action may be implied from the Unfair Trade Practices Act.

In effect, the Model Act establishes a code of ethics for the insurance business. It has proven to be a comprehensive and flexible tool in regulatory efforts over insurer market conduct. In more recent years, the NAIC has developed model regulations under the Model Act to more specifically deal with areas covered by the Act. Several of these are considered immediately below.