Unfair Trade Practices: Misrepresentation, Advertising and Defamation
Nearly everything a client believes about a policy, they learned from something a person said, printed or posted. Chapter 20 of the Michigan Insurance Code, titled “Unfair and Prohibited Trade Practices and Frauds,” polices those messages. This lesson covers its rules on honesty: what you may say about a policy, a competitor, an insurer’s finances and your own business.
The Uniform Trade Practices Act
Sections 2001 to 2050 of the chapter are “the uniform trade practices act” (MCL 500.2001). The chapter continues through section 2093 with stand-alone prohibitions, many of which carry their own penalties, so one statement can violate the act and a later section at the same time.
The act regulates insurance trade practices in line with the intent of Congress in the act of March 9, 1945 (Public Law 15, 79th Congress). It defines, or provides for determining, which practices are unfair methods of competition or unfair or deceptive acts or practices, and prohibits them (MCL 500.2002). A person shall not engage in a practice that chapter 20 defines or describes, or that is determined under the chapter to be unfair or deceptive (MCL 500.2003(1)). The list of named practices “is not exclusive or restrictive” (MCL 500.2050), so conduct can be unlawful even if no section names it.
“Person” is broad. The code’s general definition covers an individual, insurer, company, association, partnership, corporation and any other legal entity (MCL 500.114). Chapter 20 adds that a person includes an insurance producer, solicitor, counselor, adjuster or nonprofit dental care corporation. The one exclusion is the property and casualty guaranty association (MCL 500.2003(2)). These duties are yours personally. You and your agency are each a “person.”
Misrepresentation
MCL 500.2005 reaches making, issuing or circulating an estimate, illustration, circular, statement, sales presentation or comparison. It also reaches “causing” one to be made or circulated, so having someone else send the flyer does not put you outside the rule.
The communication must misrepresent through an “omission of a material fact or incorrect statement of a material fact.” Chapter 20 does not define “material.” In plain terms, it is a fact that matters to the decision at hand. Every sentence you say can be true, and you can still violate this section by leaving out the fact that changes the picture.
| Subdivision | What may not be misrepresented | Example |
|---|---|---|
| (a) | The terms, benefits, advantages or conditions of a policy | Saying a policy covers every water loss when it excludes some |
| (b) | Dividends or share of surplus to be received | Presenting a dividend as a sure thing |
| (c) | Dividends or surplus previously paid | Overstating last year’s dividend |
| (d) | The financial condition of a person in the insurance business, or a life insurer’s legal reserve system | Calling a struggling insurer “the strongest in the state” |
| (e) | The true nature of a policy, through its name or title | Naming a limited accident policy so it sounds like full health coverage |
| (f) | Anything, to induce or tend to induce a lapse, forfeiture, exchange, conversion or surrender | See twisting, below |
| (g) | Anything, to effect a pledge, assignment or loan against a policy | Misstating what a policy loan will cost |
| (h) | A policy as being a security | Selling whole life as if it were a mutual fund |
| (i) | Coverage from the Michigan life and health insurance guaranty association or the property and casualty guaranty association | Saying “the state guarantees this policy, no matter what” |
Under (e), a policy the Director has approved is conclusively presumed not to misrepresent its true nature. Under (h), the rule does not apply to a policy that must be registered as a security under state or federal law.
The separate ban in section 2064
MCL 500.2064(1) sits outside the act and speaks directly to insurers and their officers, directors, agents and solicitors. None of them may issue, circulate or use “any written or oral statement or circular” that misrepresents a policy’s terms, misrepresents the benefits or privileges promised, or estimates the future dividends payable. What you say across a kitchen table counts as much as what you print. Life advertising rules separately control how dividends may be illustrated (R 500.1377(9)(b)).
Twisting
Twisting is the industry’s word for using a misrepresentation to move a client out of an existing policy. Michigan’s statutes do not use the word. They describe the conduct in three places.
- MCL 500.2005(f) covers a misrepresentation made to induce, or tending to induce, a lapse, forfeiture, exchange, conversion or surrender.
- MCL 500.2005a(a) covers knowingly making a misleading representation, or an incomplete or fraudulent comparison, of policies, certificates or contracts of insurers, health care corporations or health maintenance organizations. The purpose must be to induce someone to lapse, forfeit, surrender, terminate, retain, pledge, assign, borrow on or convert one, or to take one out with another of those organizations.
- MCL 500.2064(2) bars any insurer, officer, director, agent, solicitor, or other person, firm, association or corporation from a misrepresentation or “incomplete comparison of policies, oral, written or otherwise” made to anyone insured in any insurer to induce that person to take out a policy, or to induce a policyholder to lapse, forfeit or surrender and buy from another like insurer.
An incomplete comparison can be enough. Suppose Marcus, a life producer, shows a client that a term policy costs less than her whole life policy, and never mentions the cash value she gives up by surrendering. Each number is accurate. The comparison is still incomplete.
Purpose matters, not the result. The statutes say inducing “or tending to induce.” A client who sees through the pitch does not undo the violation.
The rule runs in both directions. Because section 2005a(a) includes “retain,” a misleading comparison used to keep a client in a policy is treated like one used to move the client out.
Staying with the same insurer is no defense. Section 2005(f) and the first part of section 2005a(a) do not depend on the replacement coming from another company.
Replacing a policy is not itself unlawful. An honest replacement lays out what the client gains and what the client gives up.
Consequences under section 2064
On satisfactory evidence of a violation, the Director “shall forthwith revoke” the certificate of authority or license, after the procedure in section 2068, and none may be issued within 1 year from the date of revocation (MCL 500.2064(3)). A violation is also a misdemeanor, with a fine of not more than $2,000 for each violation or, in the court’s discretion, county jail (MCL 500.2064(4); MCL 500.2069).
Pressure and Disguised Solicitation
Two marketing practices are unfair even if every statement in them is true.
A method of marketing may not have the effect of, or tend to induce, a purchase “through force, fright, or threat, whether explicit or implied, or undue pressure” (MCL 500.2005a(b)). The test looks at effect, so “I never meant to scare her” does not answer it. A mailer warning that a family will lose its home unless it replies by Friday is the kind of thing this reaches. Separately, no person may sell or attempt to sell insurance by intimidation or threats, express or implied (MCL 500.1207(13)).
A method of marketing must also disclose “in a conspicuous manner” both that a purpose of it is solicitation of insurance and that contact will be made by an insurance agent or insurance company (MCL 500.2005a(c)). If returning a card headed “Claim your free retirement guide” brings an agent to the door, the card has to say so, and fine print on the back is not conspicuous.
False Advertising
MCL 500.2007 makes it unfair to publish or place before the public an advertisement, announcement or statement about the business of insurance, or about any person in the conduct of an insurance business, that is “untrue, deceptive or misleading.” The section lists print, mail and radio, then closes with “or in any other way.” A website, an email and a social media post all fit those words.
Because it covers statements about a person’s insurance business, it applies to what you say about yourself: “the lowest rates in the county” must be true. It also covers “causing, directly or indirectly,” so hiring someone else to run the ad does not help. Life insurance and accident and sickness insurance also have detailed advertising rules of their own (R 500.1371 to R 500.1387; R 500.651 to R 500.668).
The insurer’s true identity
A client is entitled to know who carries the risk. No insurer, department or general agency of an insurer, or its officers or agents, may use a false or misleading advertisement, sign, card, letterhead or other stationery tending to conceal or misrepresent the true identity of the insurer carrying the liability. Advertising may not give a department or general agency the appearance of a separate insuring organization, and the name of the company assuming the risk must appear more conspicuously than the department’s or general agency’s (MCL 500.2057(1)).
A postcard from Fennimore General Agency with its own name in large type and Wexcombe Mutual, the insurer on the risk, in small print has the sizes backward. A violation is a misdemeanor, with a fine of not more than $500 (MCL 500.2057(3)). A fire insurance company’s representative may still advertise his or her own individual business (MCL 500.2057(2)).
Defamation
MCL 500.2009 prohibits making, publishing or circulating an oral or written statement, pamphlet, circular, article or literature that is false, or maliciously critical of, or derogatory to the financial condition of a person engaged in the business of insurance, and that is calculated to injure a person in that business. Aiding, abetting or encouraging such a statement is also covered.
- It protects more than insurers. The target is any “person engaged in the business of insurance,” which includes a competing agency or producer.
- It requires aim. “Calculated to injure” separates a rumor spread to hurt a competitor from a fair discussion of a published rating.
If Renee baselessly tells a client “Birchmere Life is about to go under, so cash out and buy this one instead,” she may have violated sections 2009, 2005(f) and 2064(2) with one sentence.
Boycott, Coercion and Intimidation
It is unfair to enter into an agreement to commit, or by concerted action to commit, any act of boycott, coercion or intimidation that results or tends to result in “unreasonable restraint of the business of insurance” (MCL 500.2012). The key words are “agreement” and “concerted action.” One agency deciding on its own to stop placing business with an insurer is not concerted action. Three agencies agreeing to send it nothing until it restores a commission schedule is what this section targets.
A narrower rule bars fire, fire and marine, and marine and inland insurers not organized under Michigan law, and their agents, from arrangements whose object or effect is to prevent open and free competition (MCL 500.2075(1), (2)).
False Financial Statements and Records
It is unfair to file with a public official, or publish or deliver to anyone, a false material statement of the financial condition of a person engaged in the business of insurance (MCL 500.2014(a)). It is also unfair to make a false entry of a material fact in such a person’s book, report or statement, or to omit a true entry of a material fact (MCL 500.2014(b)). That reaches ordinary bookkeeping, such as backdating a premium entry to hide a late remittance.
MCL 500.2055 targets an insurer that falsely represents its capital stock, accumulations or financial condition. Every participating director or officer commits a misdemeanor, with a fine of not more than $100, county jail of not more than 3 months, or both (MCL 500.2055(1)). Money the insurer then takes for insurance is treated as received without consideration. The directors, and any officer or agent receiving it, are jointly and severally liable to repay it, and are liable to the insured for the amount of the insurance (MCL 500.2055(2)). An officer or agent who intentionally violates the section, or aids or abets a violation, faces a fine of not more than $1,000, imprisonment of not more than 6 months, or both (MCL 500.2055(4)).
Reports required by law may not fraudulently conceal the real facts. An intentional violation is cause for forfeiting a Michigan insurer’s franchise or, after a hearing, revoking a foreign insurer’s authority (MCL 500.2062(1)). An officer or agent faces the same $1,000 and 6-month maximums (MCL 500.2062(2)).
Stock Operations
It is unfair to issue or deliver, or permit agents, officers or employees to issue or deliver, agency company stock or other capital stock, benefit certificates or shares in a common law corporation, securities, or “any special or advisory board contracts or other contracts of any kind promising returns and profits as an inducement to insurance” (MCL 500.2017). Watch for a “local advisory board” contract issued to a buyer with the promise of a cut of the profits. A mere offer of one falls under the rebating sections, MCL 500.2024 and 500.2066.
False Statements on Applications
It is unfair to make false or fraudulent statements or representations “on or relative to an application for an insurance policy” for the purpose of obtaining a fee, commission, money or other benefit from an insurer, agent, broker or individual (MCL 500.2018). A producer who marks a smoker as a nonsmoker so the case will issue and the commission will be paid fits this description.
Lesson summary
- The uniform trade practices act is sections 2001 to 2050 of chapter 20. The chapter runs through section 2093, and many of its later sections carry their own penalties.
- The act binds every “person,” including individual producers, solicitors, counselors and adjusters. The property and casualty guaranty association is excluded.
- MCL 500.2005 reaches misrepresentation by a false statement or by omitting a material fact, on nine subjects, and also reaches causing the statement to be made.
- Michigan’s statutes do not say “twisting,” but MCL 500.2005(f), 500.2005a(a) and 500.2064(2) prohibit it. An incomplete comparison can be enough, and a misleading comparison used to keep a client in a policy is also covered.
- A section 2064 violation means mandatory license revocation after an opportunity for a hearing, a 1-year bar, and a misdemeanor with a fine of up to $2,000 per violation or county jail.
- Marketing may not use force, fright, threat or undue pressure, and it must conspicuously disclose that it is a solicitation and that an agent or insurer will make contact.
- Advertising in any medium may not be untrue, deceptive or misleading, and the name of the insurer carrying the risk must be more conspicuous than a department’s or general agency’s.
- Chapter 20 also bars defamation of anyone in the insurance business, boycotts by agreement or concerted action, false financial statements and entries, stock and advisory board inducements, and false application statements made for a commission.