Unfair Trade Practices Under Virginia Insurance Law: What Producers Are Prohibited from Doing

Title 38.2, Chapter 5 of the Code of Virginia (§§ 38.2-500 through 38.2-518) defines and prohibits unfair methods of competition and unfair or deceptive acts and practices in the business of insurance. This chapter exists to implement the intent of Congress under the McCarran-Ferguson Act by ensuring that the Commonwealth's insurance market operates with integrity. For producers, Chapter 5 establishes the boundaries of permissible conduct in soliciting, selling, and servicing insurance. Violations can result in license suspension or revocation, civil penalties, and restitution orders — and in the most serious cases, criminal referral. This post covers every material prohibition that applies directly to Virginia insurance producers.

Misrepresentation: § 38.2-503

Virginia's misrepresentation prohibition is broad. No person shall:

Make any statement that misrepresents the benefits, advantages, conditions, or terms of any insurance policy

Make any statement that misrepresents the dividends or share of surplus to be received

Make any misleading representation or misrepresentation of the financial condition of any insurer

Use any name or title of any policy that misrepresents its nature

Make any misrepresentation for the purpose of inducing or attempting to induce any person to lapse, forfeit, change, or surrender any insurance policy

What this means in practice: Telling a prospect that a policy "covers everything" when it has material exclusions, misquoting premium amounts, misrepresenting dividends on participating policies, or understating the surrender charges on a life policy to make switching sound more attractive are all violations of § 38.2-503.

Twisting: § 38.2-503

Twisting — inducing a policyholder to lapse, surrender, or replace existing insurance by misrepresenting the existing policy's terms — is prohibited under the same misrepresentation section. The key element is misrepresentation about the existing coverage. Replacing existing insurance is not inherently a violation; misrepresenting it to induce the replacement is.

Virginia's replacement regulations (applicable to life insurance) require specific disclosure when a new policy replaces existing coverage — a Notice Regarding Replacement must be provided, the replacing insurer must notify the existing insurer, and the client must be given a comparison document.

Rebating: § 38.2-509

No person shall:

Pay, allow, or give (directly or indirectly) as an inducement to any insurance or annuity contract any rebate of premium, any special favor or advantage in dividends or other benefits, or any valuable consideration not specified in the contract

Receive or accept any such rebate as an inducement to purchase insurance

The gift card problem: Many producers inadvertently violate the rebating prohibition by offering gift cards, restaurant certificates, or other items to clients who purchase policies. The violation occurs when receipt of the item is contingent on purchasing insurance. The Bureau's guidance: items may be given away freely to anyone who visits the agency, whether or not they buy a policy — but items provided only to purchasers constitute rebating.

The $25 referral fee limit: A producer may pay a one-time nominal referral fee to an unlicensed person for referring a potential client. The Bureau's position is that "nominal" cannot exceed $25 per referral, and the fee cannot be contingent on whether the referred person buys a policy.

Legitimate exceptions: Rebating does not prohibit payment of renewal commissions to persons who were properly licensed at the time of the original transaction, or payment of commissions to filed trade names, or commission-sharing with licensed agents in the same license class.

Unfair Claim Settlement Practices: § 38.2-510

The unfair claim settlement practices section prohibits engaging in the following with such frequency as to indicate a general business practice:

Misrepresenting pertinent facts or policy provisions relating to coverages at issue

Failing to acknowledge and act reasonably promptly on communications regarding claims

Failing to adopt and implement reasonable standards for prompt claim investigation

Refusing arbitrarily and unreasonably to pay claims

Failing to affirm or deny coverage within a reasonable time after proof of loss

Not attempting in good faith to make prompt, fair, and equitable settlements when liability is reasonably clear

Compelling insureds to institute litigation to recover amounts due under policies

Attempting to settle claims for less than the amount to which a reasonable person would believe they are entitled

The "general business practice" requirement: Note that this section applies to conduct committed with such frequency as to indicate a general business practice. A single claim-handling error is not automatically a violation — the pattern of conduct matters. This standard applies primarily to insurers and adjusters; for individual producers, misrepresentation about claims falls under § 38.2-503.

Additional Prohibitions

Defamation (§ 38.2-505): Making, publishing, or circulating any false or maliciously critical statement about the financial condition of any insurer for the purpose of injuring anyone engaged in the insurance business.

False advertising (§ 38.2-502): Making, issuing, or publishing any advertisement or announcement that contains a misrepresentation or is misleading.

Unfair discrimination (§ 38.2-508): Discriminating between individuals of the same class and of essentially the same hazard in rates, terms, or conditions of policies. This prohibition addresses improper risk classification.

Illegal inducements (§ 38.2-513): Making any contract of insurance or agreement as to such contract, other than as plainly expressed in the policy, or paying or offering to pay as inducement to insurance any rebate or bonus.

Commission sharing with unlicensed persons: No producer may directly or indirectly share commissions with anyone not also licensed for the same class of insurance involved in the transaction.

Frequently Asked Questions

What is the legal distinction between twisting and churning under Virginia law?

Twisting (§ 38.2-503) involves inducing a policyholder to replace existing coverage by misrepresenting the terms, benefits, or conditions of the existing policy. The misrepresentation element is what makes it a violation — replacing insurance is not itself prohibited. Churning refers to repeatedly replacing a policyholder's own coverage primarily for commission generation, without necessarily misrepresenting the existing policy. Virginia's statute does not use the term "churning" specifically, but repeated replacement transactions that appear designed primarily to generate new commissions rather than serve client needs raise misrepresentation and suitability concerns that the Bureau investigates under its broader market conduct authority. The distinction matters: twisting requires proving a specific misrepresentation; churning is more about pattern of conduct suggesting the replacements were not in the client's interest.

Can a Virginia producer offer a referral bonus to their existing clients for referring new clients?

Referral payments to existing clients who are not licensed insurance producers raise rebating concerns under § 38.2-509. The referral fee to an unlicensed person — whether a stranger or an existing client — is limited to a one-time nominal fee not exceeding $25 per referral, and the fee cannot be contingent on whether the referred person actually purchases insurance. A producer who offers existing clients a $100 Amazon gift card for each referral that results in a policy sale is violating the rebating prohibition on two levels: the fee exceeds the $25 cap, and the fee is contingent on a purchase. Structured correctly — a $25 non-contingent flat fee for each referral whether or not the referred person buys — the payment may be permissible, but the producer should confirm current Bureau guidance before implementing any referral program.

Does Virginia's unfair claim settlement practices statute create a private right of action for policyholders?

No. Virginia courts have consistently held that violations of Virginia's insurance regulations — including the unfair claim settlement practices provisions of § 38.2-510 — do not create a private cause of action for policyholders. Enforcement of the unfair claim settlement practices prohibition is carried out exclusively by the SCC. A policyholder whose insurer has engaged in unfair claim settlement practices can file a complaint with the Bureau of Insurance and request investigation, but cannot directly sue the insurer under § 38.2-510 for that regulatory violation. Contract claims (breach of the insurance contract itself) and, in limited circumstances, bad faith claims may be available through separate legal theories — but these are distinct from the regulatory violation.

What are the penalties for a producer who violates Virginia's unfair trade practices chapter?

Violations of Title 38.2, Chapter 5 are subject to the enforcement provisions of Chapter 2 (§ 38.2-200 et seq.). The Commission may: (1) issue a cease and desist order after notice and hearing; (2) impose civil penalties for violations of a cease and desist order or for knowing violations of the chapter; (3) order restitution to harmed consumers; (4) suspend or revoke the producer's license under § 38.2-1831; and (5) refer criminal violations to appropriate prosecutorial authorities. The specific penalty amount depends on the nature and severity of the violation. Repeated violations, or violations after a prior warning or order, typically result in more severe action.

What is the rebating rule regarding free insurance seminars and educational events for clients?

The Bureau of Insurance has interpreted the rebating prohibition with practical flexibility for genuinely educational events. A producer who hosts a free seminar on retirement planning or Medicare supplement options — providing educational content open to all attendees regardless of whether they buy anything — is generally not violating the rebating rules by providing the seminar, materials, or modest refreshments. The line is drawn at making attendance or benefits contingent on purchasing insurance. If the "free dinner seminar" involves pressure to buy and benefits that are only available to purchasers, it risks running afoul of the inducement prohibition. If it is genuinely educational and open to all, the educational content exception generally applies.

Virginia's unfair trade practices chapter is not complex in its core prohibitions — do not misrepresent, do not rebate, handle claims fairly, and do not defame competitors or misrepresent their financial condition. The complexity is in application: knowing exactly where the line falls between permissible promotion and prohibited inducement, and between legitimate replacement and unlawful twisting.

Visit JustInsurance to enroll today and study Virginia's unfair trade practices framework with a state-approved course that covers Chapter 5 in the context of the Prometric licensing exam.