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    Rhode Island Proposes to Amend its Life Insurance and Annuities Replacement Rule

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    Rhode Island proposes to amend Insurance Regulation 29 (the “Regulation”) governing the activities of insurers and insurance producers with respect to the replacement of existing life insurance and annuity products by adding a new section to the Regulation on “twisting” and “churning” practices (the “Proposed Rule”).  The purpose of the amendment is to expand upon and clarify, with respect to replacements, the prohibition against “twisting” and “churning” set forth in Section 27-29-4.7 of the Rhode Island Insurance Law governing unfair methods of competition.

    Section 27-29-4.7 of the Rhode Island Insurance Law defines “twisting” as the practice of “[k]nowingly making any misleading representations or incomplete or fraudulent comparisons or fraudulent material omissions of or with respect to any insurance policies or insurers for the purpose of inducing, or tending to induce, any person to lapse, forfeit, surrender, terminate, retain, pledge, assign, borrow on, or convert any insurance policy or to take out a policy of insurance in another insurer.”  “Churning” is defined as “[t]he practice whereby policy values in an existing life insurance policy or annuity contract . . . are directly or indirectly used to purchase another insurance policy or annuity contract with that same insurer for the purpose of earning additional premiums, fees, commissions, or other compensation” without a reasonable basis for believing the replacement is in the interest of the policyholder, where the transaction is fraudulent or misleading, where the applicant was not informed of the cost of replacing the exiting policy (e.g., reduction in the policy’s cash value), or about key differences between the existing and replacing policy, and the impact of such differences (e.g., that the policy will not be paid-up, or that additional premiums will be due or that a new contestable period will apply). With respect to “churning,” Section 27-29-4.7 requires that insurers disclose to applicants at the time of the offer the manner in which the policy or contract values of a previously issued policy or contract will be used to purchase a replacing or additional policy or contract with the same insurer.  Additionally, it requires that insurers adopt written procedures sufficient to reasonably avoid “twisting” and “churning.”

    The Proposed Rule expands upon and clarifies, with respect to replacements, the concepts of “twisting” and “churning” set forth in Section 27-29-4.7 by specifically prohibiting “[a]ny sale or replacement of a life insurance policy that involves fraud, deception or misrepresentation” regardless of whether it falls within Section 27-29-4.7 of the Rhode Island Insurance Law.  The Proposed Rule further provides that: (i) the replacements of policies that constitute “twisting” or “churning” are in violation of Section 27-29-4.7; (ii) insurers to which the replacement regulation applies must adopt written procedures as required by Section 27-29-4.7 no later than July 1, 2013; and (iii) the fact that written procedures have not been finalized does not alter the requirement that sales must not constitute “twisting” or “churning.”  The Proposed Rule also sets forth various clarifications of the terms used in Section 27-29-4.7, including defining “paid-up policy”, and specifying disclosure timing.

    Click here for a copy of the Proposed Rule.

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