section 2 legal responsibilities of agents and agencies

Legal & Ethical Requirements of Insurance Professionals Rev. 6/11 9

Section 2 – Legal Responsibilities of Agents and Agencies Agents have an obligation to the known the extent of their authority to bind for an insurance company. They must also bridge the gap between the actual services or advice they are able to provide, and whatever it is that the client may be expecting. Clear communication with the insured is very important. Learning Objectives

1. Define agent; define insurance agent and understand what an agent means for a consumer and an insurer.

2. Explain the difference between the express, implied, and apparent authority of agents.

3. Differentiate between the common state insurance licenses granted to agents, brokers, managing general agents and surplus lines agents.

4. Explain how the McCarran-Ferguson and Gramm-Leach Bliley acts affect the states‘ ability to regulate insurance.

5. Give examples of parties that are regulated by various federal privacy regulations.

6. List the important rights of consumers granted by the Fair Credit Reporting Act.

7. Explain the impact of the Sarbanes-Oxley Act on public companies.

8. Provide an example to explain inadequate, excessive, or unfairly discriminatory as it relates to industry rate regulation.

9. Define the following terms as they relate to state regulated insurance practices: replacement, twisting, commingling of funds, conflicts of interest, rebating, unauthorized insurers, large commercial account laws.

Legal & Ethical Requirements of Insurance Professionals Rev. 6/11 0

Section 2 Topic A – What is an Agent; What is an Insurance Agent?

Learning Objective: Define agent; define insurance agent & understand what an agent means for a consumer and an insurer.

Agent means many things. The business school definition is: a person empowered to act on behalf of another. To a consumer, the insurance agent is an advisor; to the company, the agent is a marketing partner. How is the Agent’s Authority Defined? One of the topics in this section is the authority of agents. It‘s also useful to consider who grants that authority.

Agents are granted express authority by their contracts with insurers and have implied authority for some activities that may not be expressed in the contract. Courts may impose the doctrine of apparent authority if a consumer would reasonably believe that the agent has the authority but that the insurer did not otherwise grant authority.

Agents are licensed by the state and there are many forms of licenses. While the states have this authority, Congress has the ultimate authority over insurance as a form of interstate commerce. In fact there are many state insurance laws that agents must deal with and federal laws governing the conduct of the agency as a business that agents must abide by.

State regulations of agent marketing and other activities vary in the 50 states, however there are a number of common regulations that will be discussed including, policy replacement, rebating, and unauthorized insurers.

How is the Agent's Role Defined? In business, an agent is defined as a person empowered to act on behalf of another. Employees are considered agents of their employer. A manufacturer‘s representative is considered an agent of the manufacturer. An insurance agent is an agent for the insurer and the consumer:

To the consumer:

An insurance agent is a person authorized by the consumer to negotiate insurance on his/her behalf.

Legal & Ethical Requirements of Insurance Professionals Rev. 6/11 Page 21

State licensing laws say:

An insurance agent is a person authorized by an insurer to solicit applications, collect premiums, and write policies on behalf of the insurer.

Contractual Duties The insurance agent may or may not have an express written contract with the consumer to perform these services. If not addressed in a contract, the consumer has the authority to terminate the relationship at any time. Insurance agents usually will have written contracts or agreements with insurers that spell out the rights and duties of the agent and the insurer.

You are under a fee income arrangement with your New York based commercial customer. Your customer asks you to rebate him the commission you could earn. Your customer says that another agent is willing to do this and will save him 15% of the premium while doing so. If you don't agree to this scheme, your customer says he will fire you and go to the other agent.

• Do you do what your client asks?

• Do you probe further to find out who the other agent is and then report the agent to the

appropriate authorities?

• Do you say no and explain that you are not permitted by state law to receive both a

commission and a fee and have already taken this into account in the pricing of the

policy?

• Do you tell your customer that rebating is illegal in your state and the consequences are

fines and other penalties?

Advisory Response Rebating is illegal in New York. You may lose the customer if you refuse to accept his offer. Do you really want a customer that wants you to break the law? An agent who rebates may lose his/her insurance license.


On the other hand, you most probably have reduced the premium by the commission you could have earned as permitted by state law. If so, you might want to explain that you have already taken this into account. Disclaimer: The advisory response is not a legal opinion. Different Federal and/or individual state laws may apply to this scenario or others with similar facts. Courts in different jurisdictions may interpret identical facts of the dilemma differently. Minor changes in the facts of the dilemma can produce different, legal or ethical interpretations. Finally, there may be one or more ethically or legally appropriate resolutions to the dilemma that have not been addressed.


Section 2 Topic B – Authority of Agents

Learning Objective: Explain the difference between the express, implied and apparent authority of agents.

The insurance agent can bind the principal (the insurer), but only if the agent acts within the scope of the authority possessed by the agent. There are four types of authority:

Express Authority Express (actual) is authority expressly given by the insurer either orally or in writing.

Example The XYZ Insurance Company manual that is a part of the agent‘s contract expressly prohibits the writing of automobile dealers. However, the agent has received verbal authority from the insurer‘s regional manager to write franchise automobile dealer coverage that represents less than 10% revenue for a large insured. In this instance, the agent has received express oral authority to bind the business, superseding the express written authority not to write automobile dealers.

Implied Authority Implied Authority is not specifically expressed or communicated, but is consistent with the agent fully exercising the express authority granted by the insurer.

Example 1 You put XYZ Insurance Company's name on your website. Your agency's contract with XYZ does not address whether you can put their name on your company information webpage. You do have authority in the contract to put this information in your yellow page advertisement. If you put the company name on your website, you may be acting under implied authority.


Example 2 The underwriting manual that is part of your contract requires that you use company-supplied applications. However, the underwriter routinely accepts ACORD applications from you. In this case, the implied authority of actual business experience may be withdrawn at any time. If the implied authority is withdrawn, you risk contract violation if you continue to submit ACORD applications.

The XYZ Insurance Company regularly permits you to bind drivers with two at fault accidents in the past three years. You are not permitted to bind these drivers without referring the account to an underwriter, but you have never had one of these drivers rejected. A valued client's auto insurance comes up for renewal today. The underwriter's office is closed for business. What do you do?

Advisory Response If you bind the account, you are in violation of the agreement with your company. There is no implied authority here because the underwriting guideline requires you to submit the application to be underwritten before it can be bound. If the prospect has no other option the safest course of action is to recommend that they renew the coverage with the current carrier, it may or may not be advisable for the prospect to consider a midterm cancellation of the policy if the XYZ Company would approve coverage. Disclaimer: The advisory response is not a legal opinion. Different Federal and/or individual state laws may apply to this scenario or others with similar facts. Courts in different jurisdictions may interpret identical facts of the dilemma differently. Minor changes in the facts of the dilemma can produce different, legal or ethical interpretations. Finally, there may be one or more ethically or legally appropriate resolutions to the dilemma that have not been addressed.


Apparent Authority Apparent authority is authority, which the agent appears to have to a reasonable person. Apparent authority is not given by the principal (the insurer), but is based on circumstances that create a reasonable belief to a third party (i.e. the consumer) that the agent had authority. Apparent authority is a concept that protects innocent people where the circumstances create a reasonable appearance of authority in an agent. Consumers do not understand the business of insurance and their assumptions of what the agent can and cannot do may be flawed.

Example You were able to bind coverage for an insured on an older auto and now she believes you to have the apparent authority to bind coverage for her today on an antique auto. If the doctrine of apparent authority is applied by a court in a particular situation, the insurer is obligated to the innocent third party as fully as it would have been had the agent acted according to express or implied authority. Example The agent is in negotiations to contract with the XYZ insurance company. The agent has a starter kit of marketing materials, underwriting manuals, rate manuals and applications to review. The one market they have that the agency doesn‘t have is coverage for dwellings in fire protection class 9 and 10. Mr. Jones, a client of the agency, is in the office asking the agent to write a summer home in a class 9 town. XYZ‘s pricing is less than what Mr. Jones is paying now, the coverage is broader and Mr. Jones wants coverage today. The agent takes a chance and binds coverage with the XYZ Company. XYZ never appoints the agent and there is a loss. Mr. Jones believed that the agent had the apparent authority to write his summer home. If a court agrees with the apparent authority argument, the XYZ Company may be required to pay the claim. XYZ will undoubtedly subrogate against the agent (who we hope has adequate errors and omissions coverage).

No Authority There is no authority granted, implied or apparently granted by a court. I.e. the agent commits fraud and the court will not extend apparent authority to the act. The company is off the hook, but the agent may be entirely responsible to pay the damages.


Summary Express Authority – given Implied Authority – Not express but is consistent with what has been given Apparent Authority – Not express or implied but appears to customer to have been given No Authority – Not express, implied or apparent Knowledge Check An insurance agent tells a client that their insurance will cover a claim when the adjuster has not yet made a determination. To the client, the insurance agent had:

a. Express authority

b. Implied authority

c. Apparent authority

d. No authority

The answer is “Apparent authority”.


Section 2 Topic C – Agent Licenses

Learning Objective: Differentiate between the common state insurance licenses granted to agents, brokers, managing general agents and surplus lines agents.

States grant authority for many different classifications of agents to sell insurance and perform the duties of insurance agents as defined. We will review the more common classifications of licensed agent.

Agent An agent is a person authorized by the state to solicit applications, collect premiums and write policies on behalf of insurers. Thus an agent represents an insurer. Broker A broker is an individual who acts or aids in the negotiations of insurance contracts, in placing risks, or in soliciting or effecting contracts, as the agent of an insurance company. When serving as a broker, a person does not have the authority to bind the insurer or countersign policies on behalf of the insurer. However, in certain activities, such as receiving premiums or delivering a policy, the broker is regarded as the agent of the insurer by law rather than the agent of the insured. The broker license is not available in all states. Managing General Agent (MGA) An MGA is a person or entity that is an independent business that performs for one or more insurer some or all of the functions typically attributable to a regional or branch office of the insurer. This can include underwriting, marketing, appointing agents and claims function. The MGA does not usually sell directly to an insured, but appoints and manages producers throughout a specific geographical territory. Surplus Lines Agent A surplus lines agent is a person or organization that is licensed to write property and casualty insurance through non-admitted (surplus lines) insurers. In most states, this agent must be appointed by a non-admitted insurer to solicit, write insurance, collect premiums, and collect surplus lines premium taxes assessed on each policy written. Because non-admitted carriers are not subject to certain consumer protections (i.e. insurer insolvency funds) afforded by the state, surplus lines agents are required to follow detailed rules as to when they can offer coverage through a surplus lines company, rules about client disclosure, due diligence and other requirements that go beyond what is required of agents who represent licensed, admitted insurers.


Lesson 2 Topic D – The State’s Authority to Regulate Insurance

Learning Objective: Explain how the McCarran-Ferguson and Gramm-Leach-Bliley acts affect the states’ ability to regulate insurance.

State legislatures have the authority to regulate insurance activities in their states. Congress reserves the right to regulate insurance where states do not and for all matters involving boycott, coercion and intimidation. The McCarran-Ferguson Act In 1944 in the case, U.S. v. S.E.U.A., 322 U.S. 533 (1944), the US Supreme Court said that insurance was interstate commerce. Insurance, then, is subject to congressional legislation. With the McCarran-Ferguson Act of 1945, Congress provided that to the extent that insurance was regulated by the states, antitrust laws should not apply with an exception for coercion, intimidation and boycott. While leaving regulation of insurance to the states, Congress kept the authority to create insurance law in those areas where the states do not regulate one or more activities. Importance to Agents State insurance departments regulate the licensing and market conduct of insurers and agents. In this capacity, the departments have the authority of law to conduct examinations of insurers and promulgate rules to protect consumers and others from unfair business and claims practices. These departments also have the authority to prosecute violators or impose fines and other sanctions where permitted by law. Gramm-Leach-Bliley Act of 1999

In 1999, Congress passed the Gramm-Leach-Bliley Act, otherwise known as the Financial Services Modernization Act. In this act, Congress granted banks and securities firms greater authority to write insurance than was previously permitted.

Importance to States Much of this authority had been removed by the 1933 Glass Stegal Act, passed when bank and securities failures, resulting from unsound financial practices, predicated the Great Depression of 1929. The Gramm-Leach-Bliley Act also invalidated those state laws that put greater restrictions on the activities of bank-owned insurance agencies than other agencies.


Section 2 Topic E – Federal Regulation of Business: Basic Issues Relating to Ethical Behavior

Learning Objective: Give examples of parties that are regulated by various federal privacy regulations.

The insurance industry and the agency as a business are subject to many regulations in the following areas:

privacy regulation of the financial industry, credit-scoring (the insurance industry cred-scores personal lines accounts), and accounting practices.

Insurance professionals need to be familiar with these laws and how they apply to themselves and their customers. We‘ll start with privacy. THE PRIVACY ACT OF 1974 5 U.S.C. Electronic databases and the Internet make it very easy for a business to share or sell personal information with other businesses. Insurers and other businesses are required to issue privacy statements to their customers outlining with whom they will or will not share information, and are subject to complex regulations regarding parties with whom they may not share information. The agent must be aware that the information given to the agent is private and confidential and should only be shared with the appropriate parties to the transaction involved. Importance to Agents The act protects consumers from the release of private information by the government, its agencies and non-governmental agencies that are subject to the act —i.e., government contractors.


HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 This act includes standards to protect the privacy of individually identifiable health information. Applicability of Rules The rules apply to:

Health plans Health care clearinghouses Certain other health care providers

Standards that apply include:

The rights of individuals Procedures for the exercise of those rights The authorized and required uses and disclosures of this information

Importance to Agents

Insurance agents are subject to the rule in the following ways:

When the agent is in possession of confidential information on applications that may be subject to the act. Work with life and health insurers to make sure that you are in compliance with procedures that must be followed to safeguard this information.

When insuring medical providers. Medical provider customers need to be aware of what is necessary to comply. These customers can include doctors, hospitals, clinics, labs, nursing homes and medical outreach programs.

GRAMM-LEACH-BLILEY ACT OF 1999 Regulates financial institutions (banks, insurers and investment houses) release and sharing of privacy information:

Requires clear disclosure by all financial institutions of their privacy policy regarding the sharing of non-public personal information with both affiliates and third parties.

Requires a notice to consumers and an opportunity to "opt-out" of sharing of non-public personal information with nonaffiliated third parties subject to certain limited exceptions.

Clarifies that the disclosure of a financial institution's privacy policy is required to take place at the time of establishing a customer relationship with a consumer and not less than annually during the continuation of such relationship.


Importance to Agents Insurers are subject to this act. Agents affiliated with insurers or banks or other financial institutions must be aware of these regulations and their institution‘s policy on the sharing of non-public personal information with nonaffiliated third parties. These third parties could include the non-owned annuity insurer affiliated with the bank. (Excerpts from Federal Trade Commission Facts For Business, ―How To Comply with the Privacy of Consumer Financial Information Rule of the Gramm-Leach-Bliley Act‖, A Guide for Small Business from the Federal Trade Commission, July 2002) USA PATRIOT ACT OF 2001 The Patriot Act requires banks and other institutions (including some life insurers) to implement measures to thwart money laundering and money transfers to known terrorist organizations and those organizations who fund these terrorist organizations. Note: Many more acts and legislation address consumer privacy. This list is intended to address the more recent and relevant legislation.

The CSR on the telephone lets slip to her friend that the Mayor's son has just failed a life insurance exam because he has AIDS. Is this a release of private information?

Advisory Response There are two problems in this situation. First, this is a release of private information. The CSR and the agency may be liable by state and federal

regulations for this dissemination. Second, it would be considered a breach of confidentiality if the life insurance underwriter released information to the CSR or agent regarding the medical cause for the declination. Life insurance underwriters do not release even to the insured information regarding medical issues uncovered by medical examinations. Most underwriters recommend that the applicant speak directly with the doctor because the underwriter is not medically qualified to discuss the medical condition with the applicant. Recommendation: Do not share private non-public information with non-affiliated third parties. If this practice is followed, there is no need for any consumer notification to include an "opt out" provision.


Disclaimer: The advisory response is not a legal opinion. Different Federal and/or individual state laws may apply to this scenario or others with similar facts. Courts in different jurisdictions may interpret identical facts of the dilemma differently. Minor changes in the facts of the dilemma can produce different, legal or ethical interpretations. Finally, there may be one or more ethically or legally appropriate resolutions to the dilemma that have not been addressed.

The insurer has printed up wonderful brochures for the agency for which the agency and company shared the cost of producing and mailing. After mailing out 2,000 to prospective and current customers, a CSR points out that some of the important coverages outlined in the policy presented by the brochure are not available in the state.

Advisory Response Should we send out another letter that corrects the information or wait until they call us and explain the problem? If you wait, you may be accused of "bait and switch"—where you offer one thing to a prospective customer and when they come to you offer another of lesser value or greater cost because the original item was never available. You have inadvertently falsely advertised, it may be best to work with the company to send out a corrected piece. Insurers have no less interest in making sure that the information that is released to the public is accurate and available. Disclaimer: The advisory response is not a legal opinion. Different Federal and/or individual state laws may apply to this scenario or others with similar facts. Courts in different jurisdictions may interpret identical facts of the dilemma differently. Minor changes in the facts of the dilemma can produce different, legal or ethical interpretations. Finally, there may be one or more ethically or legally appropriate resolutions to the dilemma that have not been addressed.


The life producer in the agency has produced an annuity solicitation letter she uses that says that the XYZ annuity is less costly because there are no up front fees. She fails to mention in the letter that there are substantial exit fees if the annuity owner cancels the contract during the first ten years.

Advisory Response Discard the letter. It is a form of false advertising. Find out how the producer handles the actual annuity sales presentation. If the life producer does not mention this exit fee, you may need to contact persons who purchased these annuities to make sure that they are aware of and understand the exit fee. Educate the producer. Disclaimer: The advisory response is not a legal opinion. Different Federal and/or individual state laws may apply to this scenario or others with similar facts. Courts in different jurisdictions may interpret identical facts of the dilemma differently. Minor changes in the facts of the dilemma can produce different, legal or ethical interpretations. Finally, there may be one or more ethically or legally appropriate resolutions to the dilemma that have not been addressed.

Fair Credit Reporting Act Consumers have the right to know the status of their credit. The Act was created with the following Congressional Goals in mind:

1. The banking system is dependent upon fair and accurate credit reporting. Inaccurate credit reports directly impair the efficiency of the banking system, and unfair credit reporting methods undermine the public confidence which is essential to the continued functioning of the banking system.

2. An elaborate mechanism has been developed for investigating and evaluating the credit worthiness, credit standing, credit capacity, character, and general reputation of consumers.

3. Consumer reporting agencies have assumed a vital role in assembling and evaluating consumer credit and other information on consumers.


4. There is a need to insure that consumer reporting agencies exercise their grave responsibilities with fairness, impartiality, and a respect for the consumer's right to privacy.

Learning Objective: List the important rights of consumers granted by the Fair Credit Reporting Act.

Consumer Rights under the Fair Credit Reporting Act

Copy of your Credit Report

You have the right to receive a copy of your credit report. The copy of your report must contain all of the information in your file at the time of your request.

Credit Checks

You have the right to know the name of anyone who received your credit report in the last year for most purposes or in the last two years for employment purposes.

Denial of Credit

Any company that denies your application must supply the name and address of the CRA (Credit Reporting Agency) they contacted, provided the denial was based on information given by the CRA.

You have the right to a free copy of your credit report when your application is denied because of information supplied by the CRA. Your request must be made within 60 days of receiving your denial notice.

Credit Reporting Agencies

If you contest the completeness or accuracy of information in your report, you should file a dispute with the CRA and with the company that furnished the information to the CRA. Both the CRA and the furnisher of information are legally obligated to reinvestigate your dispute.

You have a right to add a summary explanation to your credit report if your dispute is not resolved to your satisfaction.

Learning Objective: Explain the impact of the Sarbanes-Oxley Act on public companies.

SARBANES-OXLEY ACT of 2002 In response to the accounting scandals of 2000-2002, Congress determined that new accounting oversight and disclosure practices were required for publicly traded companies. These new rules include:


Limits on the number of inside directors (i.e. employees)

Removal of some of the conflicts of interests when the firm‘s public accounting firm also provide consulting services

Established a new federal oversight board

Requires rotation of accounting partner who audits the firm

Requires a public company to establish an audit committee made up of outside directors

Requires the CEO and CFO to certify the "appropriateness of the financial statements and disclosures contained in the periodic report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer (the firm)"

The agency has insured the medical device company since Dr. Smith founded it with a new idea for a blood vessel shunt that is used to open blocked coronary arteries. Once the company obtained a patent on the device, it went public and now is a very large and profitable firm. You have a copy of the company's annual 10k report filed with the SEC (a report of financial information required of public companies by the Securities and Exchange Commission). You also have the most recent audit

report that the CFO mailed to the insurer. The annual company 10k shows 200 million more in sales than the CFO signed for on the insurance general liability audit report. What will you do with this information?

Advisory Response Not all such discrepancies are ethical lapses or fraud. The general liability rating manual is specific regarding what is considered to be sales or receipts. The information supplied by the CFO may be correct. However, the agent should investigate this discrepancy and if the numbers are incorrect, attempt to resolve the problem. This is a public company. If the agent discovers that these numbers were fraudulently calculated, the agent would be wise to consult his/her counsel to determine by law what he/she is required to do with that information.


Disclaimer: The advisory response is not a legal opinion. Different Federal and/or individual state laws may apply to this scenario or others with similar facts. Courts in different jurisdictions may interpret identical facts of the dilemma differently. Minor changes in the facts of the dilemma can produce different, legal or ethical interpretations. Finally, there may be one or more ethically or legally appropriate resolutions to the dilemma that have not been addressed.

Learning Objective: Provide an example to explain inadequate, excessive, or unfairly discriminatory as it relates to industry rate regulation.

ROBINSON-PATMAN ACT OF 1936 Congress felt that large retailers could dominate the market by extracting price concessions from manufacturers that were unavailable to smaller competitors.

The act makes it illegal for the manufacturer to favor one competitor over another with

price differentiation that is not reflected in volume purchase, quantity of goods or

services provided by the manufacturer.

The act applies to retail, wholesale and manufacturing insureds, but does not apply to

intangibles such as insurance.

Importance to Agents While the act does not apply to most insurance transactions, the states have developed a similar approach to unfair price competition. States require that insurers file rates that are not inadequate, excessive, or unfairly discriminatory. In this context, insurers are prohibited from charging different premiums to two insureds with identical exposures to loss. We see this most commonly in personal auto and homeowners where persons of the same age and driving record who live across the street from each other etc. pay the same rates with the same insurer. Flexible rating plans and the inherent complexities of businesses make these comparisons more difficult in commercial lines insurance.


Producer Bob simply copied the renewal application of a prospective commercial lines customer and mailed it into the XYZ insurance Company. XYZ is not the current insurer. The incumbent agency marketed the same application to XYZ, but they deal with a different office and somehow the company did not catch the duplication. Producer Bob got his quote, which was $3,000 higher than the identical quotation that the other agent got from the underwriter in a different office. Is this a possible

violation of the Robinson-Patman act or State Insurance Law?

Advisory Response The action of the insurer probably does not violate the act because the Robinson-Patman act applies to goods, not intangibles like insurance. When a transaction involves both the sale of goods and the sale of services, the Act applies "only if the 'dominant nature' of the transaction is a sale of goods." However, the company may have unfairly discriminated in its pricing which is contrary to state insurance law. insurance companies do try to avoid these situations by reviewing applications as they are received to make sure that the same account is not underwritten twice. Most agency-company contracts require the company to accept the first "complete" submission time stamped by the office unless another agent can produce a later dated agent of record letter appointing the other agent as the incumbent agent. Disclaimer: The advisory response is not a legal opinion. Different Federal and/or individual state laws may apply to this scenario or others with similar facts. Courts in different jurisdictions may interpret identical facts of the dilemma differently. Minor changes in the facts of the dilemma can produce different, legal or ethical interpretations. Finally, there may be one or more ethically or legally appropriate resolutions to the dilemma that have not been addressed.


Section 2 Topic F – Common State Regulations Dealing with the Marketing of Insurance Products & Other Practices

Learning Objective: Define the following terms as they relate to state regulated insurance practices: replacement, twisting, commingling of funds, conflicts of interest, and rebating, unauthorized insurers, large commercial account laws.

The following practices are governed by state regulations:

Replacement Commingling of funds Conflicts of Interest Rebating Controlled Business

In governing insurance company activities within a state, laws are written to restrict the placement of business with unauthorized insurers. Also, depending on the state, insurers may not have to file rates for certain large commercial insureds. Replacement Replacement refers to selling the insured a new policy to ―replace‖ a current policy from another insurer.

Replacement regulations apply both to property casualty and life insurance contracts.

Note: By replacement we are not referring to ―twisting.‖ Twisting is the practice of inducing customers to change insurance carriers by providing false information about either company or policy form. Twisting is illegal.

Most replacement legislation deals with life insurance policies. These contracts are carefully underwritten and many accrue benefits based on the length of time that the policy is in force. Life insurance contract provisions that may affect policy replacement regulations include two year discovery provisions, two year suicide clauses and non-forfeiture provisions in cash value policies. Because of the long-term benefits of life insurance policies, and because people can become uninsurable overnight, states have implemented strict life insurance replacement policies. Requirements include notifying the replaced carrier of the impending replacement to permit the carrier and agent a second chance with the insured to keep the contract in force.


The agent may also be required to complete specific forms that include policy comparisons and the signature of the insured or policy owner. Commingling of Funds Not all states prohibit the commingling of insurance agent business accounts with premiums collected from insureds. However, the practice of commingling funds, even where not prohibited by law, is not good business practice. Insurance agents should maintain separate accounts for commissions, business operations, customer premiums, and personal interests. Some states specify the form and structure of premium trust accounts and even in what financial instruments trust moneys can be invested. Conflicts of Interest Conflicts of interest can take many forms.

Conflicts of interest exist where the agent has relationship with a third party that may unduly influence the agent‘s ability to be objective in providing service to clients and insurers. Similar conflicts of interest exist between insurance adjusters and third party vendors like body shops, medical clinics and even attorneys.

Example 1: The agent‘s brother is a physician specializing in workers compensation claims. The agent recommends clients to his brother and to the prosthetic device company that he and his brother jointly own. Clients accept the advice of the agent, but may be unaware that there are more qualified physicians or less costly prosthetic devices in the marketplace. Similar conflicts of interest exist in other areas—agent interest in body shops, contracting firms and other claims remediation businesses. Example 2: The agency is an equal but silent partner in a public adjusting company. The agency gives the names of clients that have claims to the public adjusting partnership.


The agent's spouse who is not a licensed insurance agent has decided to obtain a real estate license and open her own realty firm. She wants to open the firm in a spare office in the insurance agency in Nebraska. She tells her spouse that she is planning on reducing her commission by1/2 of 1% if her customers purchase home and auto insurance from the agency when they purchase a home. What should the agent do?

Advisory Response This is not a fiscally responsible decision. On a $300,000 home, for example, the forgiven real estate fee would be $1,500, probably greater than the agency would earn in commission. The agent should also consult with counsel or review the state insurance law to see whether it is permissible for an insurance agency to house other businesses within the office. If yes, it is always better to conduct transactions between businesses at arms-length. Ask the spouse to mention the agency as a possible source of insurance but don't tie in anything or offer a rebate if the homebuyer purchases insurance from the agency. Disclaimer: The advisory response is not a legal opinion. Different Federal and/or individual state laws may apply to this scenario or others with similar facts. Courts in different jurisdictions may interpret identical facts of the dilemma differently. Minor changes in the facts of the dilemma can produce different, legal or ethical interpretations. Finally, there may be one or more ethically or legally appropriate resolutions to the dilemma that have not been addressed. Rebating Rebating is prohibited in most states. Rebating is the practice of giving something of value (usually money) to an unlicensed party to induce that party into purchasing insurance. Rebating can include giving all or part of the commission the agent earns to the consumer or other unlicensed person. Rebating is legal in Florida and California. (In California, anti-rebating laws were repealed with Proposition 103 of 1988.) The Florida regulation regarding agent‘s rebating is shown below.


Florida Statutes 2002 Title 18, Chapter 626

1. No agent shall rebate any portion of his or her commission except as follows: a. The rebate shall be available to all insureds in the same actuarial class. b. The rebate shall be in accordance with a rebating schedule filed by the agent

with the insurer issuing the policy to which the rebate applies. c. The rebating schedule shall be uniformly applied in that all insureds who

purchase the same policy through the agent for the same amount of insurance receive the same percentage rebate.

d. Rebates shall not be given to an insured with respect to a policy purchased from an insurer that prohibits its agents from rebating commissions.

e. The rebate schedule is prominently displayed in public view in the agent's place of doing business and a copy is available to insureds on request at no charge.

f. The age, sex, place of residence, race, nationality, ethnic origin, marital status, or occupation of the insured or location of the risk is not utilized in determining the percentage of the rebate or whether a rebate is available.

2. The agent shall maintain a copy of all rebate schedules for the most recent 5 years and their effective dates.

3. No rebate shall be withheld or limited in amount based on factors which are unfairly discriminatory.

4. No rebate shall be given which is not reflected on the rebate schedule.

No rebate shall be refused or granted based upon the purchase or failure of the insured or applicant to purchase collateral business.

State Regulation of Insurers Controlled Business Controlled business is the writing of business that the agent or agency controls. This usually includes family-owned properties or businesses. Regulations exist to prevent a person from being solely licensed to write controlled business. This concept may be best expressed by example. Your business is property management. You own many locations and would like to become licensed as an insurance agent for just your business. You believe this is a good idea because you can reduce the cost of insurance by the commissions you will earn. Your business is considered controlled business. States have passed laws that limit the amount of controlled business licensed agents can write in proportion to all the insurance the agent writes. Consult your state's controlled business statutes.


Unauthorized Insurers Unauthorized insurers are insurers that are not licensed to do business in the state or are non-admitted insurers that do not comply with the regulations that apply to non-admitted carriers in that state. Agents are not permitted to write insurance for unauthorized insurers in the state. Large Commercial Account Laws Insurers do not have to file rates and forms for certain large insureds - differs by state.

Knowledge Check First click on a term then click on its matching definition.

Replacement Customer and agency money in the same account

Twisting Giving something of value that is not in the contract

Commingling of funds Third party relationship that unduly influences an agent

Conflict of interest Insurance on agent or agent‘s property

Rebating Replacing one policy for another

Controlled business Not licensed/permitted to do business in a state

Unauthorized insurers Getting customer to change by providing false information

Large commercial account laws Insurers do not have to file rates and forms for certain large insurers – differs by state

Answer:

Replacement → Replacing one policy for another

Twisting → Getting customer to change by providing false information

Commingling of funds → Customer and agency money in the same account

Conflict of interest → Third party relationship that unduly influences an agent

Rebating → Giving something of value that is not in the contract

Controlled business → Insurance on agent or agent’s property

Unauthorized insurers → Not licensed/permitted to do business in a state

Large commercial account laws

→ Insurers do not have to file rates and forms for certain large insurers – differs by state

Be sure to complete Self Quiz 2 at the end of Section 2.

section 2 legal responsibilities of agents and agencies

Documents