Rebating, Twisting and Churning in Insurance

Rebating in insurance means giving a customer something of value that is not in the policy to get them to buy it, most often a share of the producer's commission. It is illegal in most states. California and Florida allow commission rebates under their own rules, and a December 2020 change to the NAIC model law lets states permit value-added services such as loss control tools.

Twisting and churning are replacement abuses, and they are illegal in every state. Twisting is using false or misleading statements to get a client to drop a policy and buy one from another insurer. Churning is replacing a client's existing policy, often with the same insurer, mainly to earn a new commission.

What is rebating in insurance?

A rebate is anything of value, not written into the insurance contract, that is offered to get someone to buy the policy. The classic example is a producer handing back part of the commission on the insurance premium to win the business. The ban reaches beyond cash: paying an inspection fee, covering a client's deductible or offering free tax preparation are rebates too, because they give value outside the policy.

The ban exists to stop unfair discrimination. Rates filed by admitted carriers apply to everyone equally, and a side payment to one insured undercuts the 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 insured or prospective insured per calendar year under Section 626.9541.^[1] A branded coffee mug is fine almost everywhere. A $500 gift card that depends on binding a policy is not.

Which states allow rebating?

California and Florida have allowed commission rebates for many years, under different rules. In California, voter-approved Proposition 103 (1988) repealed the state's anti-rebate law, so producers may rebate commissions on the property and casualty lines it covers.^[2] Florida's Section 626.572 allows rebates only on strict terms: the rebate must follow a schedule the agent files with the insurer, apply equally to everyone who buys the same policy for the same amount of insurance, be posted in the agent's office, and be kept on file for five years.^[3] A one-off rebate for a single favored client is illegal in Florida even though rebating in general is allowed.

The bigger change came in December 2020, when the National Association of Insurance Commissioners (NAIC) amended Section 4(H) of its Unfair Trade Practices Act, Model 880,^[4] to let insurers and producers offer value-added products or services for free or at a discount. To qualify, the product or service must relate to the insurance coverage, help reduce the insured's losses, and cost a reasonable amount compared with the premium. Examples include a water leak sensor with a property policy or telematics on a fleet program. States have adopted versions of this language since then, but no two match exactly, so the same benefit can be legal in one state and a violation in the next.

What is twisting in insurance?

Twisting is getting a policyholder to drop a policy and buy a new one from another company by misrepresenting the old coverage or the new one. The dishonesty is what makes it illegal. A producer who says the client's insurer is failing when it is not, or hides a surrender charge so the new product looks free, is twisting. Replacing a policy is legal, and often good for the client, when the comparison is truthful.

Accuracy is what separates a legitimate remarketing from twisting. States regulate replacements most closely for life insurance, because a replacement restarts the two-year contestability period and can lose some or all of the old contract's cash surrender value. New York's Regulation 60 is the best-known strict rule^[8]: it requires a written comparison disclosure before a life insurance or annuity replacement closes. For property and casualty accounts, a truthful side-by-side comparison of limits, forms and exclusions is the producer's best protection against errors and omissions (E&O) claims.

What is churning in insurance?

Churning is replacing a client's policies with new ones mainly to generate new commissions, not to improve the client's position. What sets churning apart is that the producer works the client's existing business, often with the same insurer. In cash value life insurance, the classic pattern is telling the customer to borrow against or surrender the current policy and use the money to fund a new one. The producer earns a first-year commission on the new policy, and the customer starts a new surrender period and a new contestability period.

The customer rarely sees the harm right away. It often takes years to show up as lost cash value or a lapsed policy. Two protections help. Every state gives the buyer a "free look" period after delivery, typically 10 to 30 days, to cancel for a full refund. And under the NAIC Replacement Model Regulation, Model 613,^[5] the replacing insurer must notify the existing insurer within five business days, which gives the original insurer a chance to keep the policy.

How do rebating, twisting, and churning compare?

The three differ in what the producer does. Moving value outside the policy to get the sale is rebating. Replacing a client's existing policy to earn a fresh commission is churning. Moving a client to another carrier by misrepresenting either policy is twisting:

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

All three are unfair trade practices, and state insurance codes give the commissioner a common set of penalties. In California, Insurance Code Section 790.035 sets a civil penalty of up to $5,000 per act, or up to $10,000 per act if the violation is willful, and lets the commissioner decide what counts as an act.^[6] The commissioner can also suspend or revoke the producer's license, and revocation ends careers.

The industry's biggest churning scandal involved Prudential. In 1997 a federal district court in New Jersey approved a nationwide class settlement over Prudential's life insurance sales practices from 1982 through 1995, calling its value "extraordinary" and uncapped.^[7] Prudential also entered consent orders with all 50 states.

Insurance usually won't pay for the producer's defense either. Agents E&O policies are written on claims-made forms, and nearly all exclude intentional, dishonest or fraudulent acts, so the misconduct that earned the commission also removes the coverage that would have defended it.

This guide is for educational purposes and summarizes state insurance law in general terms. Your state's statutes and regulations, and your own policy's terms, control. Talk to a licensed broker about your situation.

How to protect yourself when a producer suggests a replacement

Ask for a written, side-by-side comparison of the old and new policies before you accept any replacement, and check it against both policies yourself. Rebating is giving value outside the policy to make a sale, and only a few states allow it under strict rules. Twisting, a replacement built on misrepresentation, and churning, a replacement made mainly for a new commission, are illegal everywhere. If a comparison turns out to be false, use the free look period and report the producer to your state's department of insurance.