What is an Unfair Trade Practice
Unfair trade practice refers to the use of various deceptive, fraudulent or unethical methods to obtain business. Unfair trade practices include misrepresentation, false advertising or representation of a good or service, tied selling, false free prize or gift offers, deceptive pricing and non-compliance with manufacturing standards. Such acts are considered unlawful by statute via Consumer Protection Law, which opens up recourse for consumers by way of compensatory or punitive damages. An unfair trade practice is sometimes referred to as a "deceptive trade practice" or an "unfair business practice."
BREAKING DOWN Unfair Trade Practice
Unfair trade practices are commonly seen in the purchase of goods and services by consumers, tenancy, insurance claims, and settlements and debt collection. Most states' unfair trade practices statutes were originally enacted between the 1960s and 1970s. Since then, many states have adopted these laws to prevent unfair trade practices. Consumers that have been victimized should examine the unfair trade practice statute in their state to determine whether they have a cause of action.
In the United States, unfair trade practices are addressed in Section 5(a) of the Federal Trade Commission Act, which prohibits "unfair or deceptive acts or practices in or affecting commerce." It applies to all individuals engaged in commerce, including banks, and sets the legal standard for unfair trade practices, which may be deemed unfair or deceptive, or both. Below are lists of unfair and deceptive practices as per the rule:
Unfair Practices: An act is unfair where it:
- causes or is likely to cause substantial injury to consumers;
- cannot be reasonably avoided by consumers;
- and is not outweighed by countervailing benefits to consumers or to competition.
Deceptive Practices: An act or practice is deceptive where:
- a representation, omission or practice misleads or is likely to mislead the consumer;
- a consumer’s interpretation of the representation, omission or practice is considered reasonable under the circumstances; and
- the misleading representation, omission or practice is material.
Unfair Trade Practices and Insurance
Unfair trade practices can happen in any industry but are significant enough to prompt the National Association of Insurance Commissioners (NAIC) to issue guidance related to the sale of insurance products. The NAIC defines unfair trade practices as:
- Misrepresents the benefits, advantages, conditions or terms of any policy; or
- Misrepresents the dividends or share of the surplus to be received on any policy; or
- Makes a false or misleading statement as to the dividends or share of surplus previously paid on any policy; or
- Is misleading or is a misrepresentation as to the financial condition of any insurer, or as to the legal reserve system upon which any life insurer operates; or
- Uses any name or title of any policy or class of policies misrepresenting the true nature thereof; or
- Is a misrepresentation, including any intentional misquote of premium rate, for the purpose of inducing or tending to induce the purchase, lapse, forfeiture, exchange, conversion or surrender of any policy; or
- Is a misrepresentation for the purpose of effecting a pledge or assignment of or effecting a loan against any policy; or
- Misrepresents any policy as being shares of stock.
The NAIC considers a deceptive trade practice to be any of the above acts coupled with the conditions below:
- It is committed flagrantly and in conscious disregard of the act or of any rules promulgated hereunder; or
- It has been committed with such frequency to indicate a general business practice to engage in that type of conduct.