What Is Rebating in Insurance? Twisting and Churning Explained

Rebating in insurance means providing a customer with some type of "value" which was not included within the original policy terms. The majority of times this can be considered as sharing a portion of the producer's own commission to encourage the sale. In most states it is against the law. A few have permitted the practice of rebating commissions under very rigid guidelines, and a 2020 change to the NAIC model law allows states to allow value-added services such as risk control tools.

Twisting and churning are two closely-related replacement insurance abuses that violate the law in all jurisdictions. A person commits an abuse of twisting when he or she makes false representations to cause a client to purchase a new contract from another insurance company. An individual will be found guilty of committing an abuse of churning by replacing the client's existing policy, which is often issued by the same insurance company as the original policy, to earn a fresh commission. Many individuals believe it is against the law for anyone to share in the commissions on any type of insurance contract. This was generally true until December 2020, after which it stopped being true almost everywhere.

What is rebating in insurance?

A rebate can be anything offered to someone as incentive to purchase a particular type of insurance (the actual insurance contract does NOT contain this) for which there is some financial gain to the agent. This often takes the form of a commission on the insurance premium being paid, and rebates have historically taken the form of returning some portion of the commission back to the client in order to "win" their business. However, the prohibition goes beyond just cash. Covering an inspection fee, paying an insured's deductible or providing free tax preparation are examples of items that fall under the category of a rebate as they represent value given from outside the terms of the insurance contract.

The ban exists to stop unfair discrimination. Rates filed by admitted carriers apply uniformly, so a side payment to one insured defeats the filed rate everyone else pays. Not every courtesy crosses the line. Most states allow small promotional gifts that are not tied to a sale, and Florida caps them at $100 per client per calendar year under Section 626.9541.^[1] A branded coffee mug is fine almost everywhere. A $500 gift card contingent on binding is not.

Which states allow rebating?

The only states that have been exempt from this prohibition for many years are California and Florida, although they work quite different ways. In California, as a result of the voter-approved Proposition 103 (1988),^[2] agents may rebate commissions on most lines of insurance. Under Florida law (Section 626.572,^[3]), statutory permission exists for agents to rebate commission, however, only when the agent adheres to certain specific terms: the agent must file a rebate schedule with the insurer, apply the rebate equally to all clients purchasing the same type of coverage, and keep the schedules on file for at least five (5) years. The mere fact that an agent may rebate on a one-time basis to a particular client does not legally allow the agent to do so and would be considered illegal even if the agent could otherwise legally rebate.

The major change took place in December 2020, when the National Association of Insurance Commissioners (NAIC) changed Section 4(H) of the Unfair Trade Practices Act, Model 880,^[4] to permit Insurers and Producers to offer Value-Added Products/Services for free or at a discounted price. To qualify as permissible under this new model, the product/service offered must relate to the insurance coverage, provide a means of reducing the insured's potential losses (i.e. mitigate), and represent a reasonable cost compared to the premium being charged (i.e., an example would include providing a water leak sensor along with a Property Policy and/or providing Telematics on a Fleet Program). States have adopted versions of this language ever since, but no two of them match exactly, so the same benefit can be lawful in one state and a violation next door.

What is twisting in insurance?

Twisting is making an insurance policyholder buy an entirely new policy (from another company) instead of using their present one by lying about the customer's original coverage, or misrepresenting the new coverage. The dishonesty is what makes this illegal. When a producer says that the client's current insurer is failing when in reality it is not, or when a producer lies about a surrender charge so that the new product appears "free", then the producer is twisting. Replacement policies can be purchased legally and many times customers will benefit if the comparisons made by the agent/producer are truthful.

The difference between remarketing and twisting lies in how accurately you are comparing the two. States have laws regulating replacement of policies, but most notably for life insurance policies, when replacing one policy with another (thereby "restarting" the two-year contestability period) all or some of the accumulated cash surrender value on the original contract may be lost. In addition to being regulated by states regarding replacements, New York has the strictest well-known rules in place as part of its Regulation 60 that requires a written comparative form disclosure document prior to closing a life or annuity replacement transaction. A truthful and accurate comparison of coverage limits, forms, and exclusions in a side-by-side format for property/casualty accounts will provide your best protection from errors & omissions (E&O).

What is churning in insurance?

Churning is when a producer replaces a client's current policies with new ones primarily in order to create new commissions, rather than to improve the client's position. The most important factor of churning is that the producer is working with the client's original business, often with the same insurer. In cash value life insurance, the classic pattern is a producer telling the customer to either borrow against or surrender the current policy and fund a new one with the proceeds. They earn their first year commission on this new policy and now their customer has another surrender period and a new contestability period.

The customer rarely sees the damage from the purchase, since it is usually many years before the buyer finds out about the damages (the loss in cash value, or lapse of insurance). The two protection measures are: In each state there is a "free look" time frame after delivery. Typically, this varies from 10 to 30 days. During this time frame, the buyer can cancel the product and receive a full refund. With respect to the NAIC Replacement Model Regulation Model 613,^[5] the replacing insurer has to inform the original insurer within five business days. And it is during those five business days that accounts get conserved.

How do rebating, twisting, and churning compare?

The one difference in these scenarios is whether or not the agent moved value outside the policy to induce the sale. That is rebating. In this case if the producer replaced an existing policy on their own book with another new policy for the same client to earn a fresh commission, it is called churning. On the other hand, if the client was moved to a different carrier on a misrepresentation of either policy, that is called twisting:

What are the penalties for rebating, twisting, or churning?

All three practices are unfair trade practice violations, and state insurance codes give commissioners a common menu of sanctions. California Insurance Code Section 790.035^[6] lets the commissioner set a civil penalty per act, at the higher figure when the violation is willful, and decide what counts as an act. A commissioner can also suspend or revoke the producer's license, and revocation is the penalty that ends careers.

The most significant scandal of the industry is Churning. In 1997 a U.S. District Court in New Jersey approved a nation-wide class settlement against Prudential Insurance Company related to Prudential's sales practices relating to its issuance of life insurance policies from 1982 through 1995. The U.S. District Court said this was an "extraordinary" settlement in value which had no cap.^[7] Prudential also entered into consent orders with all 50 states.

There is also an opportunity to discuss an aspect of liability coverage since agents E&O policies are written on claims-made forms and nearly all exclude intentional, dishonest or fraudulent acts. Therefore, the misconduct that generated the commission has essentially removed the coverage that would be available to pay for their defense.

This is intended as an educational document and represents a general summary of typical ISO policy language. The policies, provisions, conditions, and endorsements contained within your own policy dictate what is covered and how it will be applied. Consult a licensed insurance broker regarding your individual exposures.

The Bottom Line

Rebating, twisting, and churning are three common violations of producers' duties. These violations include providing consideration outside of the terms of an insurance contract to secure a sale, making misrepresentations that result in the transfer of a policyholder to another insurance carrier, and replacing a policyholder's existing insurance coverage solely for the purpose of earning additional commissions. Rebating is allowed only in a few jurisdictions pursuant to strict filed rule provisions, while twisting and churning are prohibited in all jurisdictions. Compare the terms of both the original and replacement policies side by side prior to accepting the replacement.