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Ethics: Delivering on the Promise

A.D.Banker&Company

TABLE OF CONTENTS

Ethics: Delivering on the Promise

Chapter 1: Introduction .........................................................1Ethics in the Insurance Industry; Review Questions

Chapter 2: Ethical Standards and Practices ......................14Responsibility to the Insurer; Responsibility to the Policyholder; Responsibility to the Public; Review Questions

Chapter 3: Ethical Insurance Professionals ......................46Agent versus Broker versus Producer; Advertising and Marketing; Review Questions

Chapter 4: Producer Responsibilities ................................58Selling to the Needs of the Client; Quality Service; Delivering on the Promise; Relationships; Review Questions

Chapter 5: Common Violations and Enforcement ...........72Common Violations; Enforcement; Summary; Review Questions

Review Question Answer Key ..............................................82

Copyright 2015© A.D. Banker & Company®, L.L.C.

This course, seminar, or publication provides general information regarding the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. The publisher hereby expressly excludes all warranties.

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1Introduction

Most insurance professionals believe they conduct themselves ethically and within the boundaries of the law; and, in fact, most do just that. However, jails and prisons across our country are populated by all manner of individuals (including insurance professionals) who believe they were wrongly convicted of violating the law because their actions were justified—even if they strayed a bit from the path spelled out in law books.

Are you one of those people who drives 5 miles an hour over the speed limit because everyone knows you are not going to get a ticket until you are going at least 7 to 10 miles an hour over the posted speed limit?

How many times have you called in sick to work … when you were not really sick?

Can you think of a time when you forgot to ask a client a question on an insurance application and you answered on behalf of the client (without first verifying the information) after taking an educated guess?

Have you ever sold Carrier A’s policy because it offers a higher commission percentage than Carrier B’s policy?

If you answered yes to any of these questions, this is a good time to think about why you answered yes. Why do we feel justified disobeying the law, breaching a contract, or committing an ethical violation under some circumstances and not under others?

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CHAPTER ONE

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At some point in time, most of us have found the speedometer of our car edging over the posted speed limit—even if our foot was pressed heavy on the accelerator unintentionally. Regardless of our rationale, we broke the law. However, because we did not break the law deliberately, we view our actions as less bad than those of someone who drives 30 miles an hour over the speed limit or while under the influence of alcohol or drugs. Essentially, our perception of bad changes with the circumstances.

Our perception of bad, along with our ethical values, also changes based upon our upbringing, environment, degree of self-interest, and a multitude of other criteria. Some of us have no problem waking up in the morning and, for no reason other than we would rather stay home and read a book than show up for work, calling our boss with phony complaints of a 24-hour stomach virus. We rationalize this behavior as an entitlement, the time off as something we are owed, or the practice as something everyone does. What we do not stop to realize is that paid sick time is a provision of our employment contract (written or verbal) and we are breaching that contract if we lie about being sick.

Sometimes, we skew our perception of what our clients’ best interests are. We mistakenly believe trying to read their minds and guessing the answers to underwriting questions is better for them than delaying the submission of an application and, perhaps, delaying issuance of insurance, while we wait to obtain an accurate answer. Or we believe it is better for our clients to remain unaware that we overlooked asking a question (aka made a mistake). Either way, the quick and easy fix is seldom worth the consequences when our best guess turns out to be totally wrong. The most unfortunate consequence of playing guessing games is submitting inaccurate information to an insurer and learning it denies a claim or accuses the client of attempting to perpetrate fraud because of our blunder.

Another issue that often interferes with our ethical judgments is balancing the needs and rights of multiple parties simultaneously. This process often proves challenging—how

INTRODUCTION


do we take care of our insurance companies, our clients, and ourselves … all at the same time? As fiduciaries of our insurers, we are obligated legally and ethically to protect their best interests. However, we are also charged with legal and ethical obligations to help our clients choose the insurance products and solutions that best meet their needs. The needs of the producer are seldom part of the equation that involves an insurance transaction.

Specifically, evaluating and comparing commission percentages should not be a component of a producer’s decision about whether to place coverage with Carrier A or Carrier B. In some states, regulatory authorities are so focused on the ethical conduct of insurance producers; they actually require them to disclose to prospective clients the precise amount of commission they will earn if they sell a particular insurance policy. In short, the needs and best interests of insurance producers can only be served when they attend to the needs and bests interests of insurers, clients, and prospective clients.

Ethics in the Insurance IndustryOne might argue that the philosophy of ethics only applies to a single organization or business industry. However, more often than not, ethics transcends specific entities and segments of commerce. On one hand, our society embraces legislation that spells out what practices and actions are considered bad and wrong (versus good and right), along with the applicable punishment for committing prohibited conduct. On the other hand, many situations are unique and involve people and circumstances not addressed by laws and regulations. What is considered a normal activity for a particular organization or business industry may be regarded as highly unusual at another company or in another setting.

CHAPTER ONE


ExampleIf a man visited a local appliance store and wished to purchase a refrigerator, it would not be unusual for him to negotiate pricing with the store’s owner. If the price tag on the refrigerator were $1,200, the man might ask for a reduced price of $1,000 if he also planned to purchase an oven. The store owner might be happy to sell the fridge at the discounted price $1,000 if earning a second sale; then again, he might prefer to haggle with the customer or remain firm on the advertised price.

When this same customer visits an insurance agency, he will probably attempt to negotiate the premiums for his auto policy in a similar fashion. However, insurance pricing is regulated and an insurance agent/agency owner is prohibited from negotiating the price of an insurance policy—regardless of what other insurance products the client or prospect might be willing to buy. Many consumers do not understand precisely how and why insurance rates and pricing are regulated; therefore, they are often unable to understand all the ramifications of the sales process.

Compensation disclosures are being considered, and required, by an increasing number of insurance regulators due to a number of factors, including the lack of transparency about how insurance agents, brokers, and registered representatives are compensated. Although most consumers understand how a retail store operates when calculating its pricing, they are oblivious to what we in the insurance industry consider “normal” methods of compensation: the payment of commissions, fees, and bonuses.

Unlike the medical and accounting professions, the insurance industry does not promote a single code of ethics that applies to all licensees. Instead, different segments of the insurance industry are represented by various professional organizations that require members to adhere to their own published codes of ethics that pertain to specific lines of insurance or insurance activities, including:

INTRODUCTION


Life/Financial Services Property and CasualtyThe American College of Financial Services (American College)

American Institute for Chartered Property Casualty Underwriters (The Institutes)

National Association of Insurance and Financial Advisors (NAIFA)

National Alliance for Insurance Education & Research (National Alliance)

Financial Industry Regulatory Authority (FINRA)

National Association of Independent Insurance Adjusters

The financial services segment of the insurance industry places special emphasis on ethical practices that involve the advertising, marketing, and sales of insurance. Because life insurance, annuities, mutual funds, and other forms of life insurance and investments are complex products, the average consumer has difficulty understanding how they work. The property and casualty segment of the insurance industry concentrates a great deal of its ethical focus on claim settlement practices for many of the same reasons.

Because of the unscrupulous activities of a few insurance professionals in the past, (i.e., presenting deceitful policy illustrations, engaging in harmful practices such as churning, and representing policies incompletely or inaccurately) all done for their own financial benefit—states enacted laws and associations adopted guidelines to better monitor and regulate agent behavior.

CHAPTER ONE


ExampleIn the state of New York, during the course of the first few months of 1905, extensive media coverage depicted extravagant spending and political payoffs by executives of three large insurance companies. These excesses, it was claimed, were taking place at the expense of the insurance companies’ policyholders. One of the insurers was the major target of several journalists, including Joseph Pulitzer.

The media attention resulted in the insurer’s board of directors appointing a special committee, headed by steel magnate and former partner of Andrew Carnegie, Henry Clay Frick. The committee was charged with examining the insurance company’s business affairs.

After its examination, the Frick committee’s report to the board of directors indicated:

a) corporate officers and favored employees were receiving excessive salaries

b) excessive commissions were only being paid to some agents

c) inadequate accounting procedures existed for expense reimbursements, and

d) insurance company funds were being used to support prices of Wall Street securities in which the insurance officers were involved

When the Frick committee recommended reorganization of the company and removal of two particular members of the board, the board of directors refused to comply with the committee’s recommendations. As a result, Frick and the supporting members of his committee resigned from their positions with the insurance company and leaked the report’s details to the press.

After more intensive media pressure, New York governor Frank Wayland Higgins asked the state legislature to create an investigatory committee to examine the practices of all life insurance companies in that state. The purpose of the committee, headed by Senator William W. Armstrong, was to evaluate insurance company practices and suggest legislation necessary for the protection of policyholders in the state of New York.

INTRODUCTION


Although many of the business customs practiced by life insurance companies were considered usual and acceptable at that time in other business industries, society considered the practices of nepotism, favoritism, lavish spending, and the excessive compensation of corporate officers and agents to be unethical within the insurance industry. A number of other states began their own investigations when the undertakings of the Armstrong Committee were publicized.

In 1907, in response to the Armstrong Committee’s findings after its ethics investigation, the New York state legislature was the first to issue a series of strict insurance regulations and other states soon followed suit. In short, insurance regulation came about precisely because of unethical practices that harmed consumers and has traditionally focused on consumer protection.

The professional organizations listed previously, along with many others, emphasize the ethical treatment of clients and prospective clients as being of paramount importance—even in the absence of a formal code of ethics within a state’s insurance code. You might be wondering why we need to discuss ethics in the framework of insurance continuing education. The answer is simple: ethical obligations are not always clear, even in the presence of established laws and published guidelines.

Most of us understand insurance laws and the ethical principles that form the foundation of our chosen profession. However, change is inevitable and makes its presence known not only with the passing of time but also in society, business, the insurance industry, and from the personal perspective of each and every individual. Our ethical decisions are often challenged when we are faced with a quandary.

The following examples demonstrate the types of dilemmas insurance producers face every day when trying to conduct themselves ethically.

CHAPTER ONE


Example 1Once upon a time, universal life insurance policies credited their cash value accounts with interest as high as 15%. Obviously, the economy has changed since that time and interest rates are currently much, much lower. Despite these facts, a prospective client presents you with a competitor’s universal life insurance policy illustration that projects a return of 10% during the next 25 years. He asks if you can provide him with a quote for comparable coverage at a comparable premium. Since all your universal life insurance carriers are crediting interest at rates hovering around 3%, you are troubled by the prospect’s request.

What do you think? More importantly, what do you say to the prospect and what do you do?

Do you criticize your competitor, sharing a) the stories you have heard that call his reputation into question, b) the fact that life insurers have not credited anywhere near 15% interest in years, and/or c) your belief that the illustration is a sham and cannot have been issued legitimately? Do you point out the disclaimers on the illustration, disclaimers that specify that projected interest rates are not guaranteed? Do you do something else? Do you do nothing?

INTRODUCTION


Example 2Your client is a wealthy man who just became a permanent resident of a skilled nursing facility. He requests a meeting with you and, during the meeting, informs you that he wants to disinherit his children. They are selfish, he tells you, and the people at the nursing facility treat him better than his own children do. The nursing facility was home to his wife before her death and he wants to leave the bulk of his estate to the nursing facility in appreciation of its dedicated care and staff. In addition, your client wants to transfer ownership of all his property to the nursing facility, including that of his car and home.

While you may personally doubt the wisdom of the man’s decision, you are ethically bound to explain that he a) can change the beneficiaries on his life insurance policies and transfer the title of his auto, with your assistance, and b) should seek the assistance of an attorney to amend his will and transfer ownership of his home and other real and personal property. You also explain that you would feel better reviewing his insurance policies and financial statements before you request any changes because you need to be aware of all facts that might affect any transactions you process and you want to make sure all the man’s insurance and financial affairs are in order.

While reviewing the man’s paperwork, you discover that his investment advisor is the son of the nursing facility’s administrator and the advisor claims credit for tripling the value of the client’s holdings during the previous six-month period.

What should you do?

Help the client complete a beneficiary change form and assignment of title for his vehicle and ignore the other issues? Investigate the client’s mental capacity to determine his legal ability to make decisions? Talk to the man’s doctor, lawyer, and/or children? Something else? Ignore the client’s requests and act as if you’d never heard them?

CHAPTER ONE


Each individual producer will respond differently to these scenarios, based on personal ethical values. Considerations you should ponder in such situations include:

■ What obligations do you owe your clients?■ What obligations do you owe to other parties (i.e., the

competition, the nursing facility, and/or the client’s children/heirs)?

■ Legally, what privacy and confidentiality constraints bind you?

■ What would other insurance producers do under the same circumstances?

In many cases, coming up with an answer to these questions is not always easy. And even if it is, deciding how to act may not be quite as straightforward. When faced with ethically challenging choices, your obligations should be the primary factor influencing your actions, along with placing the best interests of your carriers and clients above those of yourself and others.

Professional Code of EthicsAlthough life and health producers face slightly different legal and ethical obligations than property and casualty producers, many of the ethical requirements of all insurance licensees are the same. The following points illustrate the major universal ethical standards adopted by insurance professional organizations within the insurance industry:

■ Avoid conflicts of interest, including any appearance of a conflict of interest. Under the legal principle of the Law of Agency, agents (i.e., producers) are required to act as the fiduciaries of their Principals (i.e., insurance companies) when transacting business with third parties (i.e., policyholders and prospects). Fiduciaries and agents are required to place best interests of their Principals before all other interests.

■ Comply with all laws, rules, and regulations and refrain from any activity that causes harm to others. Not only should producers avoid breaking laws, they should

INTRODUCTION


also be aware of their responsibilities under those laws. Ignorance of the law does not relieve a producer of legal responsibility for violations of law.

■ Strive to maintain and improve professional knowledge, education, skills, and proficiency. Insurance code requires licensees to be skilled and efficient, which requires producers to complete regular continuing education and insurance training so they can maintain a high level of expertise. Producers should avoid the sales and servicing of lines and types of insurance about which they have little or no knowledge.

■ Exercise due diligence in the performance of all professional duties. Due diligence is the process an individual undertakes by exhibiting the standard of care he or she is expected to demonstrate when performing professional duties. Many states actually regulate the sales and marketing of certain lines of insurance—such as annuities, long-term care, flood, and Medicare supplement—by requiring producers to obtain particular types of information before the sale, prepare specific forms and checklists along with the application for insurance, and complete specialized training and continuing education courses in order to obtain and/or renew their insurance licenses.

■ Protect and safeguard confidential information during the process of collecting that information, as well as when holding and maintaining it. Federal and state laws spell out precisely what type of sensitive personal information must be protected and how producers are required to safeguard it.

■ Refrain from engaging in, or appearing to engage in, the practice of law or accounting unless duly licensed to do so.

■ Conduct business fairly and honestly by avoiding activities that are deceitful, unfair, illegal, unethical, and ambiguous—especially when advertising, marketing, and selling.

1. Balancing the needs and rights of ALL parties involved in an insurance transaction often interferes with ethical judgement. Whose needs are seldom, if ever, part of the equation?

a. The producer’sb. The client’sc. The insurance carrier’sd. The underwriter’s

2. Legally, a producer’s fiduciary obligation is to:

a. The publicb. The insurance adjusterc. The insurance carrierd. The insurance agency

3. Which of the following statements BEST describes the universal code of ethics adopted by the insurance industry?

a. The NAIC created a universal code of ethics that has been adopted by the entire insurance industry

b. The life and property & casualty segments of the insurance industry have adopted their own specific codes of ethics

c. No universal code of ethics has been adopted by all segments of the insurance industry

d. The insurance industry does not recognize any code of ethics

4. States enacted laws to monitor and regulate the activities of insurance agents as a result of:

a. A federal mandateb. The unscrupulous activities of a few insurance

professionalsc. Insurance industry demands for more regulationd. A decrease in insurance claims

CHAPTER ONE QUESTIONS


5. Which of the following is NOT among the most common ethical standards of conduct in the insurance industry?

a. Engaging in the practice of lawb. Avoiding conflicts of interestc. Complying with lawsd. Exercising due diligence

6. Why are insurance producers in most states required to complete ethics courses as part of their continuing education requirement?

a. Because the President requires itb. Because producers naturally behave unethically

without annual remindersc. Because ethical obligations are not always clear—

even in the presence of established laws and published guidelines

d. Because producers forget their “ethics” if not reminded every 2 years

CHAPTER ONE QUESTIONS


2Ethical Standards and Practices

As insurance producers, we promise our clients to act as their advocates in the event of tragedy. When selling any type of insurance product, we promise benefits will be paid in a timely manner if a particular type of loss occurs in the future, whether that loss is a death, disability, illness, property damage, or legal liability. The insurance industry holds insurers and licensees to certain standards and requires them to conduct themselves in a specific manner to ensure that policyholders and prospects are treated fairly.

Responsibility to the InsurerAs an agent, you are charged with many responsibilities to the insurance companies you represent, whether you are employed as a captive agent or independent agent. You are the public face of your carriers and your actions are a direct reflection of the company and its image and reputation. In the eyes of your clients and the public, how you perform is a representation of how the company performs. For example, if you are consistently running late for appointments, how likely is it that your clients will expect the insurance company to shrug off its responsibilities when benefits are due?

The foundation of your job as a producer is to help individuals and businesses purchase insurance contracts that meet their needs. Much of the professional success of your carriers hinges on your professionalism, ethics, and loyalty. When you help an applicant complete an insurance


ETHICAL STANDARDS AND PRACTICES


application, you are charged with doing so as accurately and honestly as possible. This obligation involves numerous responsibilities—all of which are essential to the agent/company relationship.

ExampleIf you return to the office after accepting a client’s signed application for business insurance, what should you do if you discover you overlooked obtaining the applicant’s signature on one of the supporting documents? Should you sign the client’s name yourself? What should you do if you call your client to explain the situation and he says “Oh, just go ahead and sign it for me”?

Should you follow the client’s suggestion? After all, he gave you permission, so signing his name is not forgery, right? In this case, the act of signing a client’s name involves a number of considerations in addition to that of committing forgery. The primary concern involves itself with the legal elements of a contract.

Legally, an insurance application is the applicant’s offer to enter into a legal contract. If that offer contains an invalid signature, any contract issued as a result of the offer is not legally binding. Contracts are regulated by state legislation, common law, and private law; in order for any type of contract to be legal and enforceable, it must contain six elements:

1. The offer2. The acceptance of the offer3. A promise to perform4. The mutual exchange of a valuable consideration5. Terms and conditions of performance6. Actual performance

A party’s application for insurance is the offer; essentially, the applicant is offering to enter into a written contract with the insurer. The insurance company’s acceptance of the offer occurs when it agrees to issue insurance as applied for. If any of the statements made by either party during this

CHAPTER TWO


process of offer and acceptance are false, the basis of the contract is also false and, therefore, the contract is not valid.

ExampleHow many times have you tried to schedule an appointment to sell an insurance policy only to be disappointed by the prospect’s inability to meet with you? How many times has a prospect asked you to send the application in the mail, promising to complete, sign, and return it with a check? How often have you complied with such a request?

This type of situation also raises a number of legal and ethical concerns. First, producers are required to witness the applicant’s signature, which is the reason the agent’s signature is called for on all insurance application. Some states, such as New Jersey, actually contain this requirement in insurance code. Life and health insurance applications actually contain an agent statement, which is part of the application and becomes part of the policy. Some, although not all, property and casualty insurance applications also contain an agent statement.

Agent statements require the producer to provide specific information about the applicant and the completion of the application, such as:

■ Was the application signed after all questions were answered?

■ Did the agent personally see the proposed insured?■ Did anyone sign or assist in the completion of the

application for or on behalf of the proposed insured?■ Is the agent aware of any information that would

adversely affect any proposed insured’s eligibility, acceptability, or insurability?

Even if a producer is not required to witness an insurance applicant’s signature, providing an individual with a blank insurance application gives rise to a host of potential issues—all of which revolve around the applicant’s level of understanding when completing the application. Might an applicant interpret the following two questions differently?



■ “Do you use tobacco in any form?”■ “Have you ever used tobacco or nicotine products in

any form?”

The second question is more explicit because it asks the applicant specifically if he or she uses tobacco or nicotine. However, if an applicant is completing an insurance application without the assistance of an insurance producer, he or she is unable to ask for clarifications about questions that are confusing or vague. Might an applicant who is using nicotine replacement therapy (i.e., gum, inhaler, lozenges, nasal spray, or skin patch) as part of a smoking cessation program believe he or she is a non-smoker? Might an applicant who uses e-cigarettes believe he or she is a non-smoker because “vaping” is not smoking—it is the inhalation of a vapor created in a battery powered aerosol device?

Most applicants have no idea about the precise reason why insurers charge higher premium rates for tobacco and nicotine users than they do for those who do not smoke or use tobacco products. They still believe insurance rates are either “smoker” or “non-smoker” and the only distinguishing factor between the two is whether an individual smokes cigarettes.

As an agent, you understand that insurers are more concerned about an individual’s ingestion of nicotine, which is a chemical known to cause cancer. The Centers for Disease Control and Prevention (CDC) claims the lifespan of a nicotine user is shortened by 10 years. Other facts agents know but that most insurance applicants are unaware of include:

■ Nicotine replacement therapies always contain nicotine and life insurers consider individuals who use them tobacco users

■ The majority of e-cigarettes contain nicotine, despite labelling that claims “no nicotine,” and they produce formaldehyde, which is known to cause cancer; most insurers consider e-cigarette users tobacco users

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■ In blood and urine tests, e-cigarettes generate results that are indistinguishable from real cigarettes

An applicant may unknowingly answer either of the two tobacco underwriting questions incorrectly based on inaccurate assumptions about tobacco and/or nicotine. However, if the applicant were completing the application in the presence of the producer, he or she would be able to ask questions, or for clarification, and avoid the potential for providing incomplete or incorrect information to the insurer.

The ethical conundrums related to completion of the insurance application never go away. Insurers publish their underwriting guidelines based on their preferred classes of business and on which categories of applicants they prefer to insure ... or avoid insuring. Insurance producers have legal and ethical obligations to honor those guidelines for two major reasons.

First, they must honor the contractual terms of the contract between the company and the agency/agent. Breach of contract is the failure to perform, as agreed, under contract; it is a legal cause of action, which means the victim of a contractual breach may file a lawsuit against the party causing the breach. Second, failure to honor underwriting guidelines has tremendous potential to cause harm to existing policyholders by disrupting the rate setting and claim processes.

Historically, underwriting decisions have been made by a combination of statistical analysis, actuarial methodology, and underwriter experience, judgment, and instinct. When underwriters choose to vary from the published underwriting models and guidelines of an insurance carrier, they underwrite by exception. Because this process is entirely opposed to the mathematical and statistical approach insurers use when selecting appropriate risks to insure, it often leaves an insurer vulnerable financially. Insurers become equally vulnerable when a producer submits an application for coverage that contains inaccurate or false underwriting information.



ExampleDuring the application process for homeowners insurance, the applicant indicates to the producer that her home is nine miles from the nearest fire station, which places it in the highest rating category. The application, which the producer had prefilled before meeting with the applicant, contains the default distance from the nearest fire hydrant—less than five miles. Because the producer knows the policy premium will be approximately $400 more if he updates the rating information on the application to reflect the information the applicant provided, and the applicant is likely to change her mind about buying insurance from him due to the increased cost, he does not change the incorrect rating information on the application. When the applicant leaves the office, the producer submits the application containing false information to the insurer.

In reality, the insurance company will detect the incorrect information when the application’s information is input into its computer system. However, what if the insurer did not rely upon automation to calculate the protection class (distance from the nearest fire station) of insured property? Issuing a single policy at an artificially low premium will probably not result in significant, if any, economic consequences—even if the insured property sustains a loss. Yet the same cannot be said if the carrier issued multiple policies at artificially low rates. When insurers wind up paying out more in claims than they anticipate paying, in addition to having to increase premiums, they also run the risk of financial impairment.

Responsibility to the PolicyholderAlthough producers are fiduciaries of their insurers and, as a result owe their primary responsibilities to those insurers (which we will discuss in more detail later in the course), they are also responsible to their policyholders.

CHAPTER TWO


SuitabilityOne of the most important ethical responsibilities a producer owes to an applicant is to conduct a thorough fact-finding interview before recommending the purchase of a particular insurance policy and subsequently completing and submitting the insurance application. Regardless of the type of insurance being written, determining a particular product’s suitability for each individual applicant is essential.

Suitability is a legal standard that requires the producer to have reasonable grounds to believe the recommendation to purchase a particular insurance policy is appropriate for the applicant based upon facts provided to the producer by the applicant. In the life and financial services segment of the insurance industry, the NAIC and each of the states have their own specific suitability requirements for certain insurance products, such as annuities and long-term care insurance. However, ethical insurance producers follow suitability guidelines when selling all lines of insurance, even if suitability standards are not regulated by the state for those lines of insurance.

The process of determining suitability is different for each applicant, even among those who share the same types of policies and similar demographics. Using a “one size fits all” approach for all applicants is neither legally appropriate nor ethical. When it comes to life insurance and financial products, suitability takes into consideration factors such as age, risk tolerance, goals and objectives, financial status, and time horizon. Suitability is judged differently in property and casualty insurance, and considers factors such as the location of property, personal and business activities, and assets at risk in the event of a lawsuit.

Suitability requirements were designed to protect consumers and to provide a clear-cut method of obtaining the most essential information necessary to make a suitable recommendation. However, despite complying with the explicit suitability guidelines published by their carriers in specific lines of insurance, some producers are being sued,



losing their insurance licenses, and being convicted of felonies.

ExampleA California insurance agent sold an indexed annuity to the 83-year-old girlfriend of a male client. At the time of the sale, the agent complied with the carrier’s suitability guidelines and submitted all requirements of both the carrier and the state of California. However, after the sale, the issuance of the annuity contract, and the policyholder’s realization of an annuity profit in excess of $40,000, charges were filed against the agent for selling an annuity to a woman with medical issues, including Alzheimer’s disease.

The producer claimed he did not know the applicant suffered from Alzheimer’s disease at the time he made the sale. He also emphasized that he complied with all suitability requirements and never conducted any impropriety related to the marketing or sale of the policy. In addition, neither of the producer’s two assistants noticed any impairment on the part of the applicant, although her boyfriend was present during the interview they observed and did a lot of the talking. Furthermore, the agent never accessed or used any of the client’s money other than to accept the 8% commission he earned for the annuity sale.

The producer was eventually convicted by a county court of felony theft from an elder, sentenced to 300 days in jail (of which he served 90 days and the remainder were stayed pending his appeal), and paid a $5,000 fine. Two years later, an appeals court overturned the conviction and ultimately, the Supreme Court chose not to review the appellate court’s ruling to overturn the county court’s conviction.

The producer cited in the previous example underwent a five-year ordeal even though he conducted the paper suitability review required by both his insurance carrier and the state of California. However, his failure to note the applicant’s lack of mental capacity, and his reliance upon the information provided by the applicant’s boyfriend—an existing client of the producer, raised serious questions

CHAPTER TWO


about the producer’s intentions … and ethics. While the producer never stole (or even accessed) money from the annuitant or her boyfriend, and she actually earned a profit as a result of her purchase, the fact that the sale of the indexed annuity resulted in the annuitant’s lack of access to significant funds was deemed by many parties (including the county court that issued the felony conviction) to be a form of theft.

This case spotlights the sensitivity of sales to the elderly and the suitability of insurance products. More and more laws are being enacted to protect seniors due to their high vulnerability to all types of unfair sales practices. Where did the producer drop the ball when it came to suitability in this particular situation? He certainly filled out all the required paperwork. Should he not have sold the annuity because the woman was 83 years old? Or should he have sold another type of annuity? What other due diligence efforts could the producer have taken?

AffordabilityAnother responsibility producers owe clients pertains to affordability. How much money an individual can reasonably afford to pay for insurance premiums can only be determined by a comprehensive fact-finding endeavor. Most insurance checklist and worksheet documents do not ask affordability questions; instead, they focus more on risks, hazards, exposures, income, assets, liabilities, and existing insurance policies.

Asking open-ended questions elicits more information than asking questions designed to prompt yes/no answers does. Which of the following questions is more likely to produce valuable information about an applicant’s premium paying ability?

a) Can you afford a premium of $1,000 per year?b) How much disposable income do you have in each

paycheck after paying all your weekly financial obligations?



Of course, reviewing an applicant’s budget, or helping prepare one, is the best way to determine affordability. A budget helps take into account fixed expenses like mortgage and car payments, as well as variable expenses such as utilities and credit card payments. Your client’s discretionary spending can also be estimated and itemized.

Needs AnalysisA third responsibility producers owe to policyholders is the formal needs analysis. A needs analysis is used primarily when selling life insurance and financial products; however, it can be adapted to property and casualty sales, as well. Producers can no longer recommend any type of insurance solution based on a cocktail napkin collection of data. Due diligence has always been the responsibility of the producer when determining what type of sale is right and proper.

As mentioned previously, due diligence is the process a producer undertakes by exhibiting the standard of care he or she is expected to demonstrate when performing professional duties. Conducting a fact-finding interview should include a comprehensive “feeling finder” as well as delving into the client’s financial situation, physical risks and exposures, and the completion of any required checklists and worksheets. Examples of “feeling” questions include:

■ Why does the applicant choose to live in his or her current home? Does the applicant want his or her family to continue living in the same home in the event of the applicant’s death or disability? Why or why not?

■ Why does the applicant drive a particular vehicle? Does he or she want to replace it with a similar vehicle if it is destroyed? Why or why not?

Questions that address the applicant’s emotions help producers discover, and explore more deeply, the needs of the applicant. Combined with facts, emotions help the applicant visualize and understand why the producer suggested a particular solution and what the outcomes of that solution might be. Contrary to what many people believe, consumers make their purchases based primarily

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on emotion—not on facts. Specifically, consumers seldom make a purchase unless they trust the individual selling the product or service. In addition, they are far more likely to make a purchase from a salesperson who understands them and their problems and who provides a clear and easily understood solution to those problems. Your responsibility is to master techniques that incorporate fact-finding and the revelation of emotions into one dynamic interview.

A true needs analysis can take many forms and involve the discussion of many topics. It might address income replacement, college planning, retirement planning, or an asset allocation review. For a business client, it might involve the number of employees, a five-year business plan, and annual revenues. Whatever the need, the client’s needs must come first.

When conducting a needs analysis, ask yourself:

■ Will my insurance recommendation improve the client’s situation in all areas—not just in one particular area or financially?

■ Does my solution place the client in a better position than he or she is in currently? If not, why not?

■ If the client’s position is improved, will that improved position continue going forward?

ConfidentialityAlthough you exercise your best efforts to protect the information your clients and prospects provide to you, certain information is far more valuable from the perspective of would-be thieves and hackers. A significant amount of personal, financial, and health information is protected by federal and state law precisely because of that value—to both the owners of the information and the criminals who seek to exploit it.

Legally and ethically, insurance professionals are obligated to protect client confidentiality and, specifically, certain types of sensitive personal information producers obtain from, and keep on behalf of, consumers. Although federal



law only protects certain types of personal information under limited circumstances—and state laws are not always uniform in their regulation of the gathering, use, maintenance, and safeguarding of personal information—you have a solemn responsibility to know and understand what type of information must be protected and how to uphold client confidentiality.

The Gramm-Leach-Bliley Act (GLBA) requires “financial institutions” to explain their information-sharing practices and safeguard certain types of sensitive personal information. The GLBA defines a financial institution as a business that is “significantly engaged” in “financial activities” as described in section 4(k) of the Bank Holding Company Act. Because insurance companies and producers engage in financial activities, it is imperative that insurance agents understand and comply with the requirements of the GLBA’s Privacy Rule and remain aware of ramifications of noncompliance.

The GLBA also contains specific notification requirements in the event of a data breach. Under federal law, “financial institutions” subject to the GLBA must comply with mandates to develop and implement a response program for unauthorized access to customer information and to provide notice to customers whose information was accessed without authorization. Federal law requires all customers to be notified when a financial institution becomes aware of a breach incident. Information that is protected by the GLBA includes personally identifiable information (PII) and nonpublic personal information (NPI).

Personally identifiable information (PII) is information:

■ A consumer provides to obtain a financial product or service (i.e., insurance or securities)

■ About a consumer that results from a transaction that involves a financial product or service

■ Otherwise obtained about a consumer in connection with the provision of a financial product or service

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Examples of personal identifiable financial information include a consumer’s bank account number, insurance policy number, and Social Security number.

Nonpublic personal information (NPI) is any type of nonpublic personally identifiable financial information and any list, description, or other grouping of consumers, derived from using any NPI. This includes publicly available information that pertains to consumers. Examples of NPI (assuming the information is not publicly available) include:

■ The fact that a consumer is a customer of a financial institution

■ The consumer’s name, address, account number, and Social Security number

■ Any information a consumer provides on an application for a financial product or service

■ Information from a “cookie” obtained when using a web site

■ Information contained on a consumer report that was obtained by a financial institution

ExampleAn agent visits with a consumer and takes an auto insurance application and a life insurance application. ALL information the consumer provides on both insurance applications is considered PII and NPI. This means the agent is required to comply with the GLBA concerning the acquisition, use, safeguarding, and data breach notification requirements. In addition, if the agent reveals that the individual is a client, and does so without the express consent of the individual, the agent has breached the legal duties of confidentiality under the GLBA and has also committed an ethical violation.

The Health Insurance Portability and Accountability Act (HIPAA) contains two major sections. The Privacy Rule standards in Title II address the use and disclosure of protected health information (PHI) by organizations subject to the Rule (i.e., covered entities) as well as standards for individuals’ rights to understand and control how their



health information is used. Updates and amendments to original HIPAA legislation further address the use and disclosure of PHI—especially with respect to the electronic transmission of PHI.

In addition, HIPAA contains breach rules. If a data breach involving medical information occurs, federal law under the HITECH Act (an amendment to HIPAA) spells out when and how covered entities and their business associates must provide notice of a data breach related to protected health information (PHI). Similar requirements apply to vendors of personal health records and their third party service providers. Notice must be provided as soon as possible after discovery of the breach and no later than 60 days after discovery.

HIPAA defines various types of health information:

■ Health Information is any information (oral or recorded in any form) “that is created or received by a health care provider, health plan, public health authority, employer, life insurer, school, university, or health care clearinghouse if it relates to the past, present, or future physical or mental health or condition of any individual OR the past, present, or future payment for the provision of health care to an individual.”

■ Individually Identifiable Health Information is a subset of health information, including demographic information collected from the individual that identifies the individual or can be reasonably believed to be used to identify the individual.

■ Protected Health Information (PHI) as “individually identifiable health information, held or maintained by a covered entity or its business associates acting for the covered entity, that is transmitted or maintained in any form or medium.” This includes identifiable demographic information and other information that relates to:□ An individual’s past, present, or future physical or

mental health or condition

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□ The provision or payment of health care to an individual if it is created or received by a health care provider, health plan, employer, or health care clearinghouse

Examples of PHI include genetic information, Social Security Number, medical record number, health plan account number, date of birth, hospital admission or discharge date, date of death, and facial photographs. It is important to note that PHI is only protected when it is held or maintained by a “covered entity” or its “business associates” when acting on behalf of the covered entity.

HIPAA considers the following to be a covered entity:

■ A health care provider, is any person or organization that furnishes, bills, or is paid for health care during the normal course of business

■ A health plan is any individual, group, or combination individual/group plan that provides or pays for the cost of medical care (i.e., health insurance companies, HMOs, Medicare Parts A and B, Medicaid)

■ A health care clearinghouse translates data content or format for another entity from non-standard to standard, or vice versa

HIPAA defines a business associate as a person who performs a function or activity on behalf of a covered entity, or a person that provides services to a covered entity, if “individually identifiable health information” is involved. Health insurance agents are considered business associates.



ExampleAn agent is writing a group health insurance policy for a new small business client and, when the agent is completing the insurance application, the business owner reveals that he was involved in a car accident the previous year and injured his back. Because the insurance company is a covered entity subject to HIPAA, and the agent is a business associate of the insurer, the health insurance information provided to the agent is considered PHI under HIPAA. However, if the agent were completing a homeowners insurance application for the same individual when the consumer disclosed details of his back injury, the medical information would not be protected (i.e., PHI) because the homeowners insurance carrier is not considered a covered entity and neither the carrier nor the agent are collecting or holding the medical information.

In your professional relationship with your insurance clients, you collect nearly every sort of personal and confidential information that CAN be collected during a business transaction, including personal, financial, and medical data. You cannot ignore the potential for harm to your clients should that information be compromised while in your possession—whether it is held on paper, in your laptop, at your office or agency, or on a mobile device. This also applies to your employees and the information they provide in employment applications, employee benefit applications, wage and salary documents (i.e., W4s) and the confidential business information you may possess that belongs to your business associates and other third parties.

It is essential for you to understand that personal information is a commodity. Social Security numbers, dates of birth, account numbers, medical records, financial records, confidential business information, and trade secrets are all examples of products for sale.

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Fiduciary DutyA fiduciary is a person to whom property or power is entrusted on behalf of, and for the benefit of, another. Simply put, if you are acting in a fiduciary capacity for your client, the decisions you make are required to be made based solely on the best interests of your client—not your best interests or those of anyone else. (Legally, producers are the fiduciaries of their insurers; we will discuss this topic later in the course.)

A fiduciary is obliged to be trustworthy and maintain confidentiality. Other duties of a fiduciary include loyalty, obedience, appropriate disclosure, and the exercising of reasonable care and due diligence—especially in a fiscal sense. It is especially important for fiduciaries to avoid all appearance of conflict of interest.

A conflict of interest is a circumstance during which an individual simultaneously owes a duty to more than one party and is unlikely, or unable, to address the best interests of all parties. The classic example of an individual faced with a conflict of interest is an insurance agency customer service representative who begins selling insurance as a self-employed individual.

ExampleThe customer service representative works part-time at an insurance agency in the commercial lines department; her employer sells all lines of insurance. She holds a producer license with only property and casualty lines of authority. The CSR is offered a position to sell life insurance part-time as a self-employed independent contractor for a life insurer. Liking the prospect of being her own boss for this second part-time job, the CSR accepts the offer, obtains a life insurance line of authority on her producer license, and begins her new part-time self-employed business as a life insurance producer.

This scenario involves a conflict of interest for two major reasons. The first reason is her employment agreement with the agency for which she works as a CSR. Whether it is in



writing or verbal, the agreement is unlikely to grant authority for the CSR to work for a competitor while employed by the agency. In fact, if the employment agreement is in writing, it probably contains a non-compete clause that bans the CSR from working for any insurance competitor during the term of employment and within a specified time after employment ends, such as one or two years. The second reason for potential conflict is the CSRs imputed loyalty to her employer. In the insurance industry, it is generally considered improper for an individual to work as a salesperson for two separate organizations … unless the individual is an independent contractor.

In the cited scenario, the CSR is an employee of the insurance agency and an independent contractor for the insurer. Although the insurer has no problem with the CSR working for anyone else, the agency will because it also sells life insurance. If, during the course of doing business with agency clients, it becomes known the CSR sells life insurance for a competitor, the agency’s clients might assume she does not have confidence in her employer with respect to the sales and service of life insurance. Her employer might also fear, with good reason, that the CSR might use the agency client list as a prospecting tool for her “other” job.

Even if the CSR does not intend to act improperly, her employment by these two competitors may give the appearance that she may do so. How can the CSR act in the best interests of her clients when she is unable to act in the best interests of her Principals—namely, her employer and the life insurer she represents?

How does a producer establish what the “best interests” are of the client he or she is representing? These interests will vary from client to client and are subjective; they include the goals and aspirations of each unique individual and business being represented. As a producer, you must remain objective and work toward the attainment of the specific goals of each individual client. Sometimes, a client’s perspective of what is best may differ from your perspective.

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Many agents recommend that clients purchase insurance based on the scope of coverage rather than on price. Is it always in the best interests of the client to purchase the most comprehensive insurance policy available? Is it never in the best interests of the client to purchase at the lowest premium? What about the insurer’s financial stability and level of customer service? Should an agent consider these factors when determining what is best for a client? If you offer products sold by carriers that are financially sound, of good reputation, and that make available comprehensive insurance coverages at competitive pricing, you are looking out for your clients’ best interests.

It is especially important for agents to understand how the price component of the insurance transaction affects fiduciary duty and meeting the needs of the client. Premium is only one consideration when deciding what policy to purchase or what insurer to purchase it from. How the decision is made varies by type of insurance.

ExampleWhen considering the purchase of life insurance, many agents and consumers believe term insurance is the best alternative for those with limited resources to pay premiums. The largest amount of insurance can be purchased for the smallest premium and, if the term life insurance policyholder decides he or she is unable to continue making premium payments, the face amount of the policy can often be reduced to generate a lower premium. Although term life insurance does not provide any cash value (i.e., return on investment), it does provide life insurance protection at a reasonable cost.

On the other hand, long-term care insurance policies do not accrue any cash value and are designed to remain in force for the life of the insured. Significant amounts of money in the form of premium dollars paid can be forfeited if a long-term care insurance policy is cancelled.

Another topic of concern when discussing fiduciary duty arises when determining the appropriate amount of insurance. For example, when considering the purchase of



liability insurance, many consumers and businesses opt to purchase the lowest limit of liability available. Their reasons vary: cost, inability or unwillingness to believe they might be legally liable for causing injury or damage, and a lack of understanding about the financial devastation that can result from an uninsured liability claim.

ExampleThe small business client is purchasing a comprehensive general liability policy and asks for limits of $300,000. The agent explains the annual cost to increase the limit of liability to $1,000,000 is $178. What else can the agent say to illustrate the value of the additional premium?

First, the agent can explain that liability policies include the cost of defense within their limits of liability. This means the insurer must pay the legal costs of any claims or lawsuits, including attorney fees. In addition to the amount of insurance purchased (i.e., $300,000 or $1,000,000). The higher the limit of liability purchased by the insured, the longer the insurer must defend the claim.

(Note: Most liability policies require the insurer to defend a claim or lawsuit until it pays out the limit of liability.)

Depending upon the geographical location of an attorney and the type of law practiced, an attorney might reasonably be expected to charge anywhere between $200 and $500 per hour. What portion of an hour of the attorney’s time does $178 represent? Keeping in mind the insured is required to pay for defense costs once the limit of liability is exhausted, doesn’t it make sense to recommend higher limits—along with an explanation of their value?

Responsibility to the PublicThe subtitle of this course is “Delivering on the Promise” and, in some respects, the word promise could very well be pluralized because as an insurance producer, you make so many promises. When you convince a prospect to purchase one of your products, you are making a promise that a benefit payment will be made when it is needed. Whether the policy is life, health, disability, auto, homeowners, or business insurance, the public places its faith and trust in

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you and the fact that you will see to it the promises you make are fulfilled.

Consumers expect you to explain various policy features, endorsements, and riders—outlining how they work and how much they might add to the premium. By giving prospects the details about all their options, you allow them to make educated decisions and protect their own best interests based on their unique needs and personal circumstances.

When and if that time comes to submit a claim on behalf of a client—or against a client’s policy, it is not enough to refer the insured or claimant to the carrier’s claim department. You must be certain to provide all appropriate disclosures and notices, collect all pertinent information, and submit a thorough and factual accounting of the state of affairs pertaining to the loss.

Other promises are implicit in your conduct and behavior as an insurance professional. Maintaining confidentiality, being fiscally responsible, and complying with all laws and regulations are all examples of agent responsibilities to the public.

State Insurance RegulationRegulation of the insurance industry in the United States has always been riddled with controversy. Aside from the fact that any type of regulation exists to protect the public, insurance regulation is necessary because insurance products are multifaceted and often difficult for consumers and business owners to understand.

Many consumers have little or no ability to conduct the research necessary to gain a proper understanding of the numerous types of insurance available in the marketplace. Instead, they rely upon insurance companies, producers, and advisors to provide the information, knowledge, and answers they require. In addition to the challenges consumers face with respect to insurance contracts—matters such as insurer solvency, market and trade practices, and



claim settlement practices—consumers are often confused and frustrated even further by the concepts, mathematical principles, and legal doctrines that form the foundation of the insurance industry. Because insurance regulations, like all U.S. laws, were developed for the protection of Americans, they were designed to address insurance company licensing, producer licensing, insurance products, financial practices, market practices, and consumer services.

Few federal laws exist with respect to the nationwide regulation of the insurance industry because the majority of insurance regulation takes place at the state level. On the other hand, many federal laws exist for purposes other than insurance; however, because they were designed for the protection of consumers, they also affect insurance companies, producers, and other insurance professionals. Most insurance laws, whether they were created at the federal or state level, pertain to one of two functions: insurer solvency or market regulation.

In the mid-1800s, very few businesses actually conducted transactions across state lines (interstate commerce). Fire and life insurance companies began advertising and selling their products nationwide at that time, which resulted in a number of states charging taxes and fees to insurance companies domiciled elsewhere—and not to local insurers. The unfair taxes and fees were charged for the express purpose of giving resident insurance companies a competitive edge.

The first insurance lawsuit of note occurred in 1869 when the National Board of Fire Underwriters backed litigation to challenge discriminatory taxes and fees charged by a number of states to out-of-state insurance companies when those carriers applied to write coverage within the state. The case revolved around an insurance agent named Samuel Paul, who was a resident of the Commonwealth of Virginia; Paul sold insurance for several insurance companies domiciled in the state of New York. Mr. Paul was convicted of selling insurance in Virginia without an appropriate license because he failed to comply with other provisions of

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Virginia law pertaining to his representation of the New York insurance companies.

On appeal, Mr. Paul’s lawyers contended the New York insurance companies met the definition of “citizen” and that insurance sales transactions by New York insurers in Virginia met the federal definition of “interstate commerce.” At the end of the appeal process, however, the Supreme Court ruled unanimously that state regulation of insurance would continue and insurance was exempt from regulation as interstate commerce.

In 1890, the Sherman Anti-Trust Act became the first federal legislation to restrain the proliferation of monopolies and address trade practices in business that crossed state lines. Before the federal government enacted legislation to ban monopolies and certain other trade practices involving the creation of trusts, it was common for the stockholders of a business to transfer their stock to a trust. After the transaction, the stockholders would receive certificates issued by the trust that allowed them a specified share of the trust’s earnings. These trusts eventually controlled a number of business industries and effectively eliminated all competition. Until enactment of the Sherman Act, the subject of monopolies had only been dealt with at the state level and not between the states.

The contentions concerning the subject of insurance as interstate commerce was re-addressed in 1944 when the South-Eastern Underwriters Association, along with its officers and 198 member insurance companies, was indicted by the U.S. Department of Justice for the price-fixing of fire insurance premiums and monopolizing insurance trade in violation of the Sherman Anti-trust Act. The DOJ accused the Association of controlling 90% of the fire insurance market in a number of states, setting rates at levels that inhibited fair competition, boycotting, intimidation, and other illegal practices—all for the purpose of acquiring and retaining a monopoly.

When the Supreme Court rendered its ruling in the case, it reversed its previous decision in Paul vs. Virginia by holding



that insurance was interstate commerce and, therefore, subject to federal regulation under the Commerce Clause. The insurance industry viewed the decision as interceding with the states’ authority to regulate and tax insurance within their jurisdictions. The NAIC responded immediately, proposing legislation that would respond to, and amend, the Supreme Court’s decision without interfering with states’ insurance regulatory authority.

In early 1945, the McCarran-Ferguson Act was signed into law and allows the states the authority to regulate “the business of insurance” without interference by Congress (i.e., the federal government).The only exception to this edict is that if state law does not apply to the business of insurance, three specific federal laws will apply: the Sherman Act, the Clayton Act, and the Federal Trade Commission Act. By the 1950s, most states had enacted laws that proved they were regulating the insurance industry within their jurisdictions.

The NAIC has been largely responsible for helping the states adopt uniform insurance regulation to deter the federal government from intervening with the states’ authority over the insurance industry. However, the federal government continues to be concerned about state insurance regulation for a number of reasons: the role insurance companies have in the banking and financial industries, how insurance companies influence interstate commerce, how insurance affects certain major issues of concern to consumers (i.e., health care and the environment), and insurer solvency. Congress has also attempted to limit the states’ authority over certain other insurance issues, such as flood, crop, long-term care, and Medicare supplement insurance; risk retention groups and employer-funded health plans; reinsurance; and consumer privacy.

All producers must be familiar with state insurance laws in the jurisdictions in which they are licensed—not only so they can comply with the legal requirements of their profession but also to confirm any state-specific ethics requirements. Although most states have adopted NAIC model laws and regulations, each has adopted them to

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protect their residents; this means that while the insurance laws in the states is similar, it is not identical, and producers must be aware of those differences.

Trade and Claim PracticesThe Code of Laws of the United States of America (United States Code or USC) consists of over 200,000 pages that contain the general and permanent laws of the United States. The USC is divided into 51 titles that address separate and distinct topics; Title 15 (15 USC) addresses regulations that govern commerce and trade, including securities and the securities exchanges, the regulation of insurance, and many different commercial and business industries. In addition to being regulated by 15 USC, the insurance industry is regulated by other federal laws and regulations and by the laws of each of the 50 states, the District of Columbia, and the U.S. Territories.

Because federal law does not apply to interstate commerce if state law addresses it, one of the initial efforts of developing state insurance regulation in response to the McCarran-Ferguson Act in 1945 required the development of uniform legislation among the states to address unfair trade practices in the business of insurance. It is for this reason the NAIC created the Unfair Trade Practices Model Act. Specifically, the NAIC designed the Unfair Trade Practices Model Act to regulate the trade practices in the business of insurance to meet the intention of Congress under the McCarran-Ferguson Act and the Gramm-Leach-Bliley Act (GLBA). The Model Act defines trade practices that either constitute unfair methods of competition or are unfair and deceptive; the Model Act prohibits these practices by law.

The majority of unfair trade practices in the insurance industry fall into the following categories: sales, disclosure, marketing, and advertising. While all the states have adopted some form of the Model Act in their own insurance regulations, the precise detail of such insurance legislation varies by jurisdiction.



When individuals engaging in the business of insurance place a higher value on their own interests than on fulfilling legal, ethical, and fiduciary obligations, consumers and the competition pay the price for those unscrupulous priorities. Ethical, professional insurance producers will be sure to familiarize themselves with the specific laws in each of the states in which they are licensed. It should be noted that the NAIC extracted claims settlement practices from the Unfair Trade Practices Act in 1990 and incorporated in their own model regulation, the Unfair Claims Settlement Practices Act.

All of the following practices are considered unfair trade practices in the business of insurance:

■ Misrepresentation and False Advertising of Insurance Policies

■ False Information and Advertising Generally■ Defamation■ Boycott, Coercion, and Intimidation■ False Statements and Entries■ Stock Operations and Advisory Board Contracts■ Unfair Discrimination■ Rebates■ Prohibited Group Enrollments■ Failure to Maintain Marketing and Performance

Records■ Failure to Maintain Complaint Handling Procedures■ Misrepresentation in Insurance Applications■ Unfair Financial Planning Practices■ Failure to File or Certify Information Regarding the

Endorsement or Sale of Long-term Care Insurance■ Failure to Provide Claims History■ Violating Any State Insurance Laws as Indicated in

This Section of Insurance Code

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It is important to remember that all insurers are subject to the provisions of these definitions … and that producers ARE “insurers” by definition. It is also important to remember that each state has responded differently in its adoption of The Act. For example, “Burial Insurance Benefits” is contained in Maryland’s list of Unfair Methods of Competition and Unfair and Deceptive Acts or Practices and “Unfair Replacement Transaction Practices” is contained in Tennessee’s Unfair Trade Practices and Unfair Claims Settlement Act of 2009.

Because financial planners are required to complete specific and extensive training before providing financial advice to consumers, and because consumers rely heavily upon the advice provided by financial planners, most states regulate the licensing and practices of these insurance professionals separately and distinctly. In order for individuals to hold themselves out to the public, directly or indirectly, as a “financial planner,” “investment advisor,” “consultant,” “financial counselor,” or any other similar specialist, that individual must be licensed as such and/or hold an approved certification or designation.

Individuals who are only engaged in the sales of insurance policies and who do not hold approved certifications or designations, or appropriate licenses, are not permitted to use the aforementioned titles or hold themselves out as specialists. Individuals must also comply with state law with respect to being compensated. For example, many states preclude licensed consultants and advisors from receiving commissions for the sales of insurance that relate to any work for which the licensee was compensated on a fee basis under a contract.

The NAIC’s Unfair Claims Settlement Practices Model Act has also been adopted, in some form, by the majority of the states. When enacted, this legislation



defines claims activities that have been deemed unfair, dishonest, and/or deceptive. The Act also permits a state’s insurance commissioner to enforce the provisions of the Act.

Unfair claims settlement practices are classified as one of four types:

1. Failing to utilize reasonable standards for the investigation of claims

2. Refusing to pay claims without first conducting an investigation

3. Failing to acknowledge a claim in a reasonably prompt fashion, or to respond to a claim in a reasonably prompt fashion

4. Misrepresenting insurance policy provisions

In addition to the prohibited practices, the majority of states also consider it illegal for an insurance company to delay settlement of a claim when “liability has become reasonably clear under one portion of the insurance policy” in order to influence the settlement of the claim under another section of the policy.

The following fourteen claims settlement practices are prohibited under the NAIC’s Unfair Claims Settlement Practices Act:

■ Knowingly misrepresenting to claimants and insureds relevant facts or policy provisions relating to coverages at issue

■ Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies

■ Failing to adopt and implement reasonable standards for the prompt investigation and settlement of claims arising under its policies

■ Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear

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■ Compelling insureds or beneficiaries to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits brought by them

■ Refusing to pay claims without conducting a reasonable investigation

■ Failing to affirm or deny coverage of claims within a reasonable time after having completed its investigation related to such claim or claims

■ Attempting to settle or settling claims for less than the amount that a reasonable person would believe the insured or beneficiary was entitled by reference to written or printed advertising material accompanying or made part of an application

■ Attempting to settle or settling claims on the basis of an application that was materially altered without notice to, or knowledge or consent of, the insured

■ Making claims payments to an insured or beneficiary without indicating the coverage under which each payment is being made

■ Unreasonably delaying the investigation or payment of claims by requiring both a formal proof of loss form and subsequent verification that would result in duplication of information and verification appearing in the formal proof of loss form

■ Failing in the case of claims denials or offers of compromise settlement to promptly provide a reasonable and accurate explanation of the basis for such actions

■ Failing to provide forms necessary to present claims within fifteen (15) calendar days of a request with reasonable explanations regarding their use

■ Failing to adopt and implement reasonable standards to assure that the repairs of a repairer owned by or required to be used by the insurer are performed in a workmanlike manner

1. When a consumer submits an insurance application, which element of a legal contract has occurred?

a. An offerb. An acceptancec. A promise to performd. A mutual exchange of consideration

2. What legal standard requires a producer to “have reasonable grounds to believe a recommendation to purchase an insurance policy is appropriate for the applicant based upon facts provided to the producer by the applicant.”

a. Common lawb. Suitabilityc. Financial analysisd. Underwriting

3. Which of the following terms includes information a consumer provides to obtain a financial product or service?

a. Personal passwords and PINsb. Protected family datac. Protected health identity codes (PHIC)d. Personally identifiable information (PII)

4. If an insurance application contains an invalid signature, any contract issued as a result of the offer:

a. Is valid only when followed up with a phone authorization

b. Is only valid for 30 daysc. Is not legally bindingd. Must be filed with the insurance commissioner asap

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5. Under the Gramm-Leach-Bliley Act, insurance companies are considered?

a. Financial institutionsb. Covered entitiesc. Business associatesd. Broker dealers

6. If the property or power of another has been entrusted to you, what term describes your responsibilities pertaining to the property/power?

a. Suitabilityb. Fiduciary dutyc. Needs analysisd. Underwriting

7. An agency CSR begins selling insurance for a competitor on weekends. This is an example of:

a. Questionable suitabilityb. Day tradingc. Moonlightingd. A conflict of interest

8. Which statement BEST describes insurance regulation at the state level?

a. The federal government regulates all insurance in each state

b. Federal insurance regulations supersede all state insurance regulations

c. Most insurance regulation is overseen at the state level

d. Most insurance regulation is overseen at the federal level



9. Which of the following is not one of the four major categories of unfair trade practices in the insurance industry?

a. Salesb. Customer servicec. Disclosured. Marketing

10. As insurance producers, we promise our clients to:

a. Always sell them the cheapest insurance possible b. Act as their advocates in the event of tragedy c. Split commissions earned for products with high

premiumsd. Hire their children after college



3Ethical Insurance Professionals

Agent versus Broker versus ProducerWhom do you work for? More specifically, to whom do you owe a fiduciary duty—the client, your insurers … or both?

It is commonly believed that insurance agents and brokers represent their clients, the policyholders who buy insurance from them. However, this belief is not entirely accurate.

In general, a producer is an individual or entity required to be licensed by the state to solicit, negotiate, or sell insurance. Although all three words—producer, agent, and broker—are often used interchangeably, the terms agent and broker describe two different types of producers. Generally speaking, and from the perspective of legal and ethical obligations, an insurance agent represents the insurance carrier and a broker represents the client.

The agent’s role on behalf of the client is solely an administrative role; this means the agent is the fiduciary of the insurer and accepts applications from applicants on behalf of the insurer. Most agents are granted binding authority from the insurers they represent and are obligated to complete forms and paperwork properly, collected premiums from clients, and remit those premiums promptly to their carriers according to certain guidelines. Agents are not required to confirm that clients have purchased insurance according to certain standards. Essentially, agents


ETHICAL INSURANCE PROFESSIONALS


are viewed as order takers; they supply a requested product or service.

Insurance agents can be captive or independent. A captive agent only represents one insurance company (or group of companies) and may be an employee or independent contractor. Most captive agents are prevented by the agent/company contract from representing any other carriers and owning their books of business (the carrier owns them). Independent agents may represent any number of insurance companies, including a single company (or group of companies), and are independent contractors of the carriers they represent. Independent agents own their own books of business.

On the other hand, the broker’s role is to represent the client’s interests. Brokers are charged with the duty of examining the client, the client’s circumstances and needs, and making recommendations for coverage based on the best interests of the client. Unlike agents, brokers “shop” their clients’ coverage at renewal and have a higher duty of care when representing their clients.

Quite often, brokers will secure coverage from carriers with whom they do not have an existing relationship for the express purpose of meeting their clients’ needs. In this type of a circumstance, the broker is not generally granted binding authority. Oftentimes, brokers have a higher degree of education and expertise when dealing with certain types of insurance (i.e., surplus lines or workers’ compensation) and charge administrative and other fees that agents do not charge. In addition, brokers tend to be paid higher commission rates than agents are (and captive agents are usually paid lower rates of commission than independent agents are).

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ExampleThe prospect approaches Miss Agent to purchase a life insurance policy. He asks for a quote for term insurance and Miss Agent complies with that request. After she explains how the product works and verifies that it meets the prospect’s needs, she takes an application and a check for the down payment.

The same prospect approaches Miss Broker to purchase a life insurance policy. He asks for a quote for term insurance and Miss Broker asks him if he understands the difference between term and permanent insurance and he states that he does not. Miss Broker explains the difference between the two types of policies and makes a recommendation for permanent insurance after verifying the prospect’s needs. The prospect chooses to purchase term insurance and Miss Broker takes his application and check for the down payment.

Many consumers and businesses believe independent agents are brokers because they represent multiple insurers; however, this is not always the case. In addition, it is especially important for all producers to understand that even if they are agents, they may elevate the standard of care they owe their clients based on the services they perform and the promises they make. The classic example of this increase in the required standard of care is illustrated by how a property and casualty agent acts after the insurance company mails a policyholder a notice of cancellation for nonpayment of premium.



ExampleThe insurer mails the policyholder a nonpayment cancellation notice on July 19, ten days after the policy premium is due. The notice informs the policyholder the policy will be cancelled on August 18 if the overdue premium is not received by that date.

An agent does not have the legal or administrative duty to follow up on the issuance of the cancellation notice. Premiums are billed by the insurer to the policyholder; although they are due to the insurer from the policyholder, they can be made to the insurance agent only because the agent is the legal “agent” of the insurer—its principal, and receives the premium on behalf of the insurer.

If the agent calls, writes, or emails the policyholder to remind him to pay the premium on time to avoid cancellation, the agent has assumed a duty he or she does not normally have. And if the agent performs this duty of providing notice on a regular basis, he or she will be held to a higher standard of care than would be the case if he or she did not provide notice regularly.

Advertising and MarketingAdvertising and marketing in the insurance industry are highly regulated and scrutinized. This creates issues not only for regulators, but also for insurance and investment companies as well. All insurers, their employees, and their representatives (i.e., producers) are held to truth in advertising laws, which prohibit anyone from making false, misleading, or deceptive statements in advertisements and marketing materials.

What is Advertising?An advertisement takes many forms, from printed and published material used in direct mail, newspapers, magazines, radio and TV scripts, billboards, and on the Internet and elsewhere. Advertisements also include descriptive material and literature used as sales aids for presentation to the public and can include sales brochures, circulars, booklets, and flyers. Based on this definition,

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it is conceivable that anything that can be considered a solicitation is an advertisement.

Within the insurance industry, insurance regulations concerning advertising and marketing tend to be much stricter in the life and health segment than they are in the property and casualty segment. Generally speaking, life and health insurance regulations address three basic types of insurance advertisements: institutional advertisements, invitations to inquire and invitations to contract.

Institutional advertisements have only one purpose: to influence interest in the concept of insurance or to promote an insurer; they are not designed to sell. Because they are intended more as a public relations device than as sales pieces, institutional advertisements are not as highly regulated as other types of advertisements.

Invitations to inquire are designed to create a desire to inquire further about a particular product. They are limited to talking about a loss that would be covered by the policy and are prohibited from mentioning cost.

The final type, an invitation to contract, is any other type of advertisement. Because an invitation to contract is not limited in scope, it is subject to numerous disclosure requirements. Disclosures require the advertisement to list coverage exceptions, reductions, and limitations that affect the basic policy provisions. They must also disclose provisions related to renewability, cancellation, and termination. Finally and most importantly, these disclosures must be conspicuous, prominently placed, and easy to read.

ExampleWe were able to secure coverage for a 35-year-old male, who had diabetes, a $500,000 10-year term life insurance policy with a premium of $22 per month.



One of the most important things for producers to keep in mind is that virtually all state insurance regulations, and the SEC, consider the insurer responsible for all advertisements of its products and services, regardless of who created or displayed them. It is for this reason that most agent/company contracts contain strict provisions pertaining to advertising; specifically, most insurance advertising and company logos must be approved by the insurer before being distributed to the public. It is also important to bear in mind that the Securities and Exchange Commission (SEC) has published advertising rules under the Investment Advisers Act of 1940 and FINRA’s Rule 2210 governs advertising.

Marketing IssuesThe marketing of insurance products is much different today than it was years ago. Social Media sites such as LinkedIn, Facebook, and Twitter have introduced innovating marketing (and advertising) methods to the business world.

Before the public began using the Internet, television, radio, and print advertising were the norm. The competition has never been greater in light of our ability to email brochures and other sales materials without having to meet with consumers face to face. “Going green” not only means being able to avoid printing cumbersome prospectuses in the securities sector of the industry, but also emailing them. The ability to reach far more prospects, at a much lower cost, is an amazing option.

Agents can post sales and marketing ideas to LinkedIn and Facebook accounts, thereby reaching an ever-growing audience for their products and services. However, these opportunities are not without drawbacks … and, of course, applicable regulations.

FINRA, through its Rule 2210(b) and Rule 3010, has provided guidance about how firms can supervise interactive electronic communications being sent and received by representatives using social media websites. These guidelines include the preapproval of any communication considered sales material or advertising. Because these

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are only guidelines, some companies have stricter rules governing the use of social media web sites, thereby making it harder for their representatives to compete for business.

Sales Presentations and IllustrationsSales presentations and illustrations offer agents many opportunities to fall into the “ethics trap.” Sales aids are plentiful and, when used properly, are legal and ethical guides for use by consumers and businesses. Insurers advertise and market the majority of products on their own web sites and colorful brochures. Illustration software and sales tools help bring insurance presentations to life. Most insurance advertising and marketing material is thorough and compliant with regulation.

The “ethics trap” seldom lies in what you show and tell your prospect or client, but in what you fail to show or make known. Mutual fund illustrations, for instance, generally show returns from fund inception and over the past one, five, and ten years. Although they state that past performance is no guarantee of future performance, the temptation to project future results based on the past must be resisted. Of course, everyone knows the future cannot be predicted accurately; however, the potential problem lies in the client’s perception. It is your responsibility to prevent the client from building unrealistic expectations. A typical mutual fund illustration contains a litany of disclosures, including disclaimers, taxes, and fees. Realistically, you cannot expect your client to read them all; ethically, it is your responsibility to make sure the client understands them.



ExampleA whole life insurance illustration might list one column that shows results based only on guaranteed cash values and another column that shows guaranteed cash values with projected dividends. To which column will you direct your client’s attention?

The obvious answer: point out both and explain that dividends, while credited in the past, are not guaranteed. Note: marking up illustrations with a highlighter, or writing anything on them, is generally considered a compliance violation.

Many producers believe the buyer also bears some responsibility to read advertising materials and illustrations. However, in the insurance industry, the doctrine of caveat emptor (“let the buyer beware”) no longer applies. This ancient adage embraced the philosophy of allowing sellers to say whatever they wanted to say when advertising their product or service, and placing the onus of the transaction on the buyer. In today’s society, even in business sectors other than the insurance industry, omitting or distorting salient information to make a sale is not only unethical, it is probably also illegal.

Although some states require policyholders to read their policies in order to prevail in lawsuits against agents alleging the agent did not explain coverage, others do not.

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Example 1A recent Ohio court decision found for the defendant agent in a lawsuit brought by a client. The client was the owner of an apartment complex who specifically asked for coverage for third party liability in the event he was sued. After the apartment complex suffered property damage from snow and ice, and the owner was sued for property damage by one of the complex’ tenants, its owner learned he did not have coverage for the loss.

When the apartment complex owner learned of the claim denial, he sued the agent for improperly procuring coverage and for failing to give proper coverage advice. The court’s ruling found a) the agent had obtained the coverage the policyholder requested (i.e., third party liability), b) the agent had no fiduciary duty to the client to advise what other types of coverage were available (i.e., liability for property damage of tenants), and c) if the policyholder had read the policy, he would have learned the agent had only secured coverage as requested.

Example 2A recent New York court decision found for the plaintiff client in a lawsuit brought against an agent. The client had requested and believed he purchased general liability coverage that included coverage for bodily injury sustained by its employees. The agent renewed the existing policy, not realizing it contained an exclusion that prohibited coverage for injuries sustained by employees.

After the policy renewal was sent to the client, he did not review it. Unfortunately, an employee was injured on the client’s premises and when the claim for injury was submitted, the insurer denied it based on the cross liability exclusion contained in the policy. The client then sued the agent for failing to secure coverage as requested.

After an appeal of the initial trial court’s decision, the appellate court found that a policyholder’s failure to read a policy does not bar the policyholder from suing the agent if the client had made a specific request for a particular type of coverage.



The process of soliciting and selling insurance is rife with the potential for confusion and misunderstanding. Because all insurance products are complex and involve many provisions about which the public is not familiar, agents must be clear and concise, utilizing every available opportunity to express themselves properly with their use of advertising and marketing materials.

1. Legally speaking, who among the following represents the insurance client?

a. The agentb. The brokerc. The Insurerd. The adjuster

2. Which insurance professional listed represents the insurance company?

a. The agentb. The brokerc. The clientd. The adjuster

3. Which statement BEST describes independent insurance agents?

a. They only represent one insurerb. They are always brokersc. They may represent multiple insurersd. They do not own their own books of business

4. All of the following are forms of insurance advertisements, EXCEPT:

a. Institutional adsb. Invitations to inquirec. Invitations to contractd. Insurance policies

5. Regardless of who creates or displays an insurance advertisement, which party is held responsible?

a. The policyholderb. The producerc. The insurerd. The state insurance department

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6. Which of the following types of advertisement is subject to the most disclosure requirements?

a. Invitations to inquireb. Invitations to contractc. P&C insurance adsd. Institutional ads

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4Producer Responsibilities

Selling to the Needs of the ClientAs mentioned several times throughout this course, selling based on the client’s needs should be the primary focus of all producers during the sales process. When making a recommendation, you should make sure it is suitable. Furthermore, the client’s purchase should be affordable. Ethically, an insurance sale must be made for more than just the sake of the sale (i.e., earning a commission). Just because an insurer will accept an application for an annuity or life insurance up to an applicant’s age 90 does not mean your 87-year-old client needs to buy an annuity or life insurance … or that either product is in the client’s best interests.

The days of calculating human life value on a cocktail napkin before submitting a life insurance are long gone. Today, industry regulators demand comprehensive suitability documentation. Using a yellow legal pad to collect information may work in some cases but, from an ethical standpoint, you owe it to each client to do the most thorough job possible. Your analysis can only be completed based on the information you have gathered from the applicant. If the information is incomplete or inaccurate, you get the old “garbage in, garbage out” analysis.

Most insurers use their own fact finders, checklists, and worksheets that range from one to two pages in length to a 20-page booklet. Once you have collected all necessary information and decided on your recommendation, it is up to you to educate your client about why you feel a path is the best one for him or her to follow.


PRODUCER RESPONSIBILITIES


This information-gathering portion of the sales process is the ideal time to arrange with your client to schedule the annual review. Any number of circumstances can change during the course of the year, many of which may affect your client’s insurance policies—something many clients do not realize.

Likewise, the insurance industry is constantly changing and producers owe it to the public, their clients, and their insurers to stay abreast of the ever-evolving marketplace. Federal and state laws often have a significant impact on the insurance industry when they are enacted or amended; the Affordable Care Act is a notable example. New insurance products are constantly being introduced (i.e., cyber liability) and old insurance products are overhauled periodically (i.e., commercial general liability).

ExampleA client calls his agent and says his CPA recommends the purchase of another $1 million of life insurance. During the conversation, the client asks to have the policy issued immediately, before he is admitted to the hospital for the heart bypass surgery scheduled for later in the month.

If you are the agent, what are you thinking? #1, When was the last time I reviewed the client’s account? #2, Why is the CPA making the recommendation now? Is there something I do not know about, aside from the client’s health, an issue?

This is the kind of case that proves the need for a comprehensive fact finder and annual reviews. Had the agent met with the client on an annual basis, and if the CPA had made the recommendation previously, additional insurance might have been purchased before his heart condition was known. Due to his heart condition, it is highly unlikely the client will be eligible for life insurance at any time in the future. Did the agent “drop the ball” by not conducting annual reviews? Had he agreed to do so when he sold the policy?

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Quality ServiceRegular meetings with, and education of, your clients are essential if you want to retain them as clients. Perhaps the most vital thing you can do to retain their business is to heighten the level of service you offer. Yes, product and price are important features, but staying in touch, being available to answer questions, sending a card to send a sincere holiday message are all ways of making your client feel important and special.

The feeling of importance and specialness begins and ends with confidentiality. In the process of working with you, your clients have trusted you with sensitive and private information regarding their financial and medical status. On occasion, clients balk at providing information—and they have every right to be concerned about their privacy in light of the many incidents of confidential trust being shattered. In order to earn and maintain your clients’ trust, you must show them they matter. Your compliance with law and ethical standards prove you are trustworthy:

■ You focus all your sales efforts around the suitability of the products you sell

■ You provide full and honest disclosure ■ You honor all legal and ethical standards when

obtaining consumer reports, motor vehicle records, and information from the Medical Information Bureau, etc.

■ You comply with transparency requirements concerning your compensation

■ You avoid the appearance of all conflicts of interest■ You deliver on the promises you make because you

never promise what you cannot deliver

Delivering on the PromiseEach and every insurance product, idea, and solution is viewed by your clients as promises:

■ The life insurance policy promises to provide a lump sum of money when the insured person dies



■ The disability insurance policy promises to replace income during a long-term sickness or injury

■ The annuity promises to provide a lifetime stream of income

■ The auto policy promises to compensate the injured party when you rear-end his or her car

■ The homeowners policy promises to rebuild your house after a fire

■ The workers’ compensation policy promises to replace lost wages when an employee is injured on the job

Ensuring that these promises come true is of the utmost importance. When a claim is filed, it is submitted with the expectation that benefits will be forthcoming. Unfortunately, certain circumstances arise that might delay the claim payment process. For example, a life insurance death claim is usually straightforward—but what if it occurs within the 2-year contestable clause? Auto insurance policies generally pay for repairs soon after an accident occurs—but what if the client’s deductible exceeds the amount of damage?

You need to be available to your clients to help them understand the claims process and why the process is sometimes delayed. Acting in an ethical manner is very much like adherence to the Golden Rule: if the tables were turned, would you want the same attention and assistance?

Every recommendation, every application, every service call is delivered with the client’s expectation of integrity and honesty. Phone calls, paperwork, and meetings with beneficiaries or family members may seem tedious and not very fruitful, but they are an essential part of the process of building and earning trust—and performing due diligence. Each producer has a personal code of ethics he or she lives by, and each company has one, as well. Adherence to these codes should not be on a case-by-case basis but as a way of life and doing business. How an agent delivers on the promise is a graphic illustration of reputation.

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RelationshipsLaw of AgencyInsurance producers are involved in many professional relationships: with clients, insurers, co-workers, competitors, vendors, adjusters, regulators, consumers, and businesses. The primary relationship that governs how a producer must act is the legal concept of the Law of Agency, which concerns a three-party relationship.

The Principal authorizes an Agent to act on its behalf to create a legal relationship with a Third Party. Within the insurance industry, insurance producers (Agents) collect premiums, obtain signed insurance applications, and initiate legal contracts of insurance with clients (Third Parties) on behalf of insurance companies (Principals). Because the producer is representing the insurance company through this agency relationship, the insurance company holds its producers to legal and ethical standards.

Agency can be created in one of three ways: by appointment, estoppel, or ratification. Agency by appointment is created by a legal document that outlines the obligations and duties of each party. An example is the actual insurance company contract executed by and between the insurance company and the insurance agency/agent that spells out the terms of the relationship.

Agency by estoppel is created by implication: the insurance company allows the producer to act in such a way that a third party construes the agent’s or producer’s behavior to be that of the insurance company. Three elements must exist:

1. Principal acts as if a relationship between itself and the Agent exists

2. Third party is misled by the actions of the Principal3. Third party is harmed by the Principal’s actions



ExampleA producer renews her insurance producer license in the lines of property and casualty but not in the lines of life and health. When she receives the renewal license, she forwards a copy of it to the insurance company. The insurance company continues to advertise the producer on its web site as a life insurance agent although she is no longer licensed as one. The insurance company would be liable for the illegal acts of the agent if she holds herself out as a life insurance agent.

Agency by ratification is created when an Agent represents himself to be authorized by a Principal, but is not, and that Principal authorizes the actions of the Agent despite the lack of an agency relationship.

ExampleA producer has binding authority to $500,000 when writing insurance on residential dwellings. However, when binding homeowner insurance coverage for a client, the producer accepts an application for $600,000 of coverage, informs the client he has binding authority from his company, and issues a binder. The insurance company accepts the application and issues the policy, thus ratifying the agent’s authority. The insurance company is liable for the acts of the agent in this situation.

AuthorityA producer’s authority is created by contract. Once a contract is duly signed, dated, and approved, the insurance company (Principal) grants the insurance producer (the Agent under the law of agency) the legal right to act on its behalf and enter into insurance contracts (Third Party agreements) with clients.

The specific details of the power of authority are spelled out in the contract and may range from broad to limited. The more limited or specific the power of authority, the less likely the producer is to act in an unauthorized fashion. Both the legal and ethical consequences of an agent not acting

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in authorized fashion can be considerable. The authority granted to an Agent by a Principal can be expressed, implied, or apparent.

Expressed authority is specifically, or expressly, stated either verbally or in writing. It generally outlines what the agent can and cannot do.

ExampleThe producer’s ability to solicit, obtain signed applications, and collect premiums is spelled out in the agent/company contract.

Implied authority is the result of expressed actions that are generally communicated verbally in order to carry out the goals of a written contract.

ExampleThe insurance company issues written and verbal underwriting guidelines.

Apparent authority involves the principal allowing the agent to act on its behalf in the absence of expressed or implied authority.

ExampleThe insurance company accepts an application from a producer that was solicited outside the producer’s territory as stated in the agent/company contract.

If a producer acts in a manner inconsistent with the authority granted by an insurer, significant legal and ethical issues may arise. Because producers are required to be licensed by the state to conduct business within the jurisdictions of that state, and are also contracted with one or more insurance companies, they are held responsible to the state, the insurance carriers with whom they are contracted, and to the public. Producers are also held to legal and ethical standards of conduct by all parties involved in the insurance



transactions in which they are involved. As a result, producers have significant fiduciary responsibilities.

Fiduciary DutyA fiduciary is, according to the Encyclopedia Britannica:

In law, a person who occupies a position of such power and confidence with regard to the property of another that the law requires him to act solely in the interest of the person whom he represents. Examples of fiduciaries are agents, executors and administrators, trustees, guardians, and officers of corporations.

A fiduciary responsibility is the highest standard of conduct and care imposed by ethics or law. As stated previously, a fiduciary owes his loyalty to his Principal, cannot put his or anyone else’s personal interests before those of the Principal, and cannot profit from the relationship unless the Principal permits it.

ExampleThe administrator of a deceased person’s estate is required to act on behalf of the deceased person, and to protect the best interests of the deceased person and his or her estate—without regard to personal feelings, opinions, and beliefs. If an administrator conducts business in such a manner that the deceased person’s estate suffers harm, the administrator is considered to have breached his or her fiduciary duty.

This fiduciary responsibility extends far beyond financial matters. Because the public has a perception that producers work for them, and not the insurance carriers they represent, it is especially important for producers to not only carry out their fiduciary duties meticulously but also to inform consumers about them.

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ExampleIf a consumer is unhappy with an insurance carrier, or voices displeasure with the insurance industry in general, the producer is required to exhibit loyalty to the insurance company while responding to the consumer’s complaint. This involves protecting the carrier’s best interests by complying with all provisions of the agent/company contract, all laws and regulations, and exhibiting due diligence in both behavior and during insurance transactions. It also involves verbally explaining these obligations and duties.

This fiduciary duty is often magnified because producers have fiduciary duties to both the insurance company and the client. Sometimes, these fiduciary duties to both parties are required simultaneously: they must act in a fiduciary capacity when handling the money of the client and must also act in a fiduciary capacity when handling the money and other matters of the insurance company.

Should a producer “change” the description of a loss “just a little bit” so the claim is paid instead of being denied ... thereby making the client happy? Should a producer “forget” to tell the carrier something the client said? The answer to both these questions is a resounding no! Despite their personal feelings, fiduciaries (producers) are ALWAYS required to act in the best interests of their principals (insurance companies).

ExampleThe client decided to purchase auto insurance and the agent secured his signature on the insurance application. When the agent tells the client a $200 deposit is required with the auto insurance application, the client explains that she only has $100 in her bank account. She asks the agent if he can hold her $200 post-dated check for three days—until she will have additional funds in the account to cover the check.



Aside from the fact that national banks in the United States may cash a check upon receipt, regardless of its date, the agent is in some ethical hot water if he agrees to hold the woman’s post-dated check. Why? Because the insurance company/agency contract probably states that the producer may not bind auto insurance coverage without a signed application, verifying that all underwriting requirements have been met, and collecting the required down payment. At the time the producer accepts the woman’s post-dated check, he knows he does not have the required funds. He has breached his fiduciary duty to the insurance company.

Would the producer still be breaching his fiduciary duty by asking the woman to provide him with a $100 check with the current date—knowing those funds are available? It all depends upon the insurance company/agency contract. If a down payment of a specific amount, such as $100 or 10% of the policy premium, is required to bind coverage, then yes, the producer has breached his fiduciary duty.

Remember, the producer owes his loyalty to the insurance company before all other parties—including himself and his clients. He is supposed to put the insurance company’s interests before all others. If the insurance company requires a $200 down payment, then the producer is breaching his fiduciary duty if he does not secure the $200 down payment. In an ethical sense, the producer’s sympathies with the woman do not matter, his desire to “make a sale” does not matter, and his opinions about post-dated checks do not matter, either.

The producer’s fiduciary duties to the woman require him to accept her down payment, provide her with a receipt, document how he handles her money (i.e., deposits into a client trust account or mails it to the insurance company), and process her payment promptly and in accordance with all banking laws and insurance company guidelines. If the producer fails to follow accepted accounting procedures when handling the woman’s premium payment, he will breach his fiduciary duties to her … and also to the insurance company.

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It is always in the best interests of the insurance company to behave in a fair, ethical, and legal manner when transacting insurance business with policyholders and prospects. If a producer breaches a fiduciary duty to a client, especially with respect to premium collection, he or she also breaches the fiduciary duty to the insurance company.

Captive and Independent AgentsThe basic difference between captive and independent agents is that captive agents usually only represent one insurance company (or group of insurance companies) and independent agents typically represent several insurance companies.

Are some captive agents permitted to sell insurance with other insurance companies? Yes, depending upon the intricacies of their agent/company contracts. Do some independent agents represent only one insurance company or group of companies? Again, the answer is yes. In general, however, certain characteristics are typical of both captive and independent insurance agents.

Captive AgentsThe contract between a captive agent and his or her company often spells out that the agent may not sell insurance with any company or organization without the express approval of the contracted party. For example, if the insurance company sells only property and casualty insurance and does not sell lines of life or health insurance, it may allow the captive agent to contract with life and health companies and to sell those lines of insurance elsewhere. On the other hand, it may stipulate that the agent may not sell any insurance sold by, or on behalf of, any carrier other than the contracted insurance company.

The contract between a captive agent and his or her insurance company also spells out that the insurance company owns the book of business, the client list, the renewals, and the expirations. The agent has no



ownership interest in the book of business and is paid a salary, a salary plus commission, or commissions. For example, if the contract between a captive agent and the insurer is terminated, the insurance company owns all rights to the book of business, the client list, the renewals, and the expirations.

The third provision usually found in a contract between a captive agent and his or her insurance company requires the agent to disclose to the insurance company the details of any other business in which the agent is engaged—even if the business activity is not insurance-related. The insurance company then makes the final determination about the existence of, or potential for, a conflict of interest. If the insurer deems the agent’s other business activity presents (or may present) a conflict of interest, it may require the agent to cease engaging in that other business.

Captive agents may receive a salary, commission, or a combination of salary and commission for the insurance business placed with the insurance company. They may be employees or independent contractors of the insurance companies with which they contract. Captive agents face fewer conflicts—in an ethical sense—than independent agents do because their contracts state explicitly that the captive agent owes all his or her loyalty to the contracted insurance company.

Independent AgentsIndependent agents are permitted to sign contracts with multiple insurance companies, all of whom know the agent is placing business with competitors. Although some insurance companies do require independent agents to commit to production requirements and other contract provisions, all parties know that either party may terminate the agreement at will—subject to certain contract provisions.

Independent agents own their books of business—the client list, the renewal list, and the expiration list.

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Independent agents may place their clients’ business with any carrier they represent; however, it is important for independent agents to communicate that they are not brokers, unless such is the case. In exchange for placing business with a particular insurance company, an independent agent receives commissions.

Independent agents are not employees of the insurance companies they represent. The contracts between independent agents and the insurance companies they represent specifically state that an employer/employee relationship does not exist and that the agent is an independent contractor. Insurance companies usually require their independent agents to provide copies of all insurance licenses, errors and omissions declarations pages, and other business documents to confirm that the independent contractor (contracted independent agent) is complying with all federal and state laws—and insurance regulations in the states in which insurance is being sold and serviced.

Because independent agents are not employees of the insurance companies they represent, they face a number of ethical challenges, potential conflicts of interest, and choices that captive agents do not face:

■ They must obtain the best coverage, terms, conditions, and pricing for their clients from among the insurance companies they represent

■ They must comply with all of their insurance company contracts, including any production requirements or sales quotas contained in each contract

■ They seek the highest rate of commissions paid by insurance companies for the lines of business they sell and service

On the surface, this list does not seem like it contains unrealistic requirements. However, meeting all three requirements simultaneously is, at the least, very difficult. At most, it is impossible.

1. What should a producer’s primary focus be during the sales process?

a. Selling to the needs of the clientb. Commission dollars earnedc. The producer’s reputationd. The highest policy premium

2. All of the following are elements of providing quality service, EXCEPT:

a. Focusing on suitabilityb. Commission dollars earnedc. Full disclosured. Avoiding conflicts of interest

3. The Law of Agency involves a three-party relationship between all of the following, EXCEPT:

a. The third party (client)b. The agentc. The principal (insurer)d. The adjuster

4. If a producer is granted authority in a written contract, what type of authority does he/she have?

a. Expressedb. Impliedc. Apparentd. Personal

5. What is known as the highest standard of conduct and care imposed by ethics or law?

a. Expressed authorityb. Individual integrityc. Fiduciary responsibilityd. Implied authority

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5Common Violations and Enforcement

The focus of the course, thus far, has been on the ethical role of the insurance producer. However, laws and rules exist to act as guidelines for acceptable behavior but they are only as strong as the consequences for failure to follow them. In this chapter, we will look at how certain laws and rules are enforced, as well as some of the more common violations.

Federal anti-trust laws have been in place for many years, and were designed to regulate corporations from getting too big and fixing prices and to encourage competition. They prevent monopolies and encourage fair and balanced trade practices.

Throughout the first half of the 20th century, insurance transactions were not considered transactions in commerce, which prevented them from being subject to the federal Commerce Clause and anti-trust regulations. As discussed previously, in 1944, the Supreme Court ruled that insurers conducted substantial business across state lines were engaged in interstate commerce and, therefore, subject to federal anti-trust regulations.

The McCarran-Ferguson Act of 1945 was enacted by Congress in response to states’ concerns that they could no longer regulate the insurance business in their boundaries. It provides that state law shall govern the regulation of insurance, and no congressional law will invalidate state law unless the federal law relates specifically to insurance.


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A state law has the purpose of regulating the insurance industry if it has the “end, intention or aim of adjusting, managing, or controlling the business of insurance.”

McCarran-Ferguson does not prevent the federal government from regulating the insurance industry but it does allow the states broad powers of regulation in the absence of any federal law. In addition, McCarran-Ferguson does not define the key phrase business of insurance. However, three factors are considered by the courts when determining whether a particular commercial practice constitutes the business of insurance:

1. Does the practice have the effect of transferring or spreading a policyholder’s risk?

2. Is the practice an integral part of the policy relationship between the insured and insurer?

3. Is the practice limited to entities within the insurance industry?

Because of McCarran-Ferguson, the states maintain control over most of the regulation, enforcement, and resolution of issues within the insurance industry. Each state establishes rules of conduct for producers; the following are commonly found in state insurance code.

Common ViolationsDefamationDefamation is a statement that harms another’s reputation and encompasses both slander and libel. Slander is spoken and libel can be seen, such is in writing, printing, a movie, or a gesture. What makes allegations of defamation contentious is the fact that although the First Amendment grants the right of free speech, that right allows individuals to say whatever they want—including statements that are not true and/or that hurt others. When harmful statements are untrue and made with the deliberate intent to cause harm, defamation laws protect the injured party.

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For a statement to be defamatory, it must be published, untrue, cause harm, and not be privileged. The laws of each state will contain other requirements.

Defamatory statements are published when someone other than the people making them, and the people alleging defamation, saw or heard the statement. Essentially, a statement has not been published if it is not witnessed or it cannot be visually documented.

Defamation has become a consumer rights issue, because defamatory comments are usually made in the context of convincing someone to purchase one company’s policy or product rather than one sold by a competitor. Ethically speaking, it is never a good practice to criticize or demean a competitor. Legally speaking, it is a violation of insurance code.

Boycott, Coercion, and IntimidationThe federal government considers certain acts of boycotting, coercion, and intimidation to be harmful regardless of the industry in which they are committed; they are addressed by federal antitrust laws. Prohibited acts are those that result in, or tend to result in, the unreasonable restraint of insurance business or the creation of a monopoly in the insurance business.

Boycotting is defined as the act of voluntarily refusing to have business dealings with a person or organization to express disapproval or to force acceptance of certain conditions. Coercion is an act of force or an act that nets results by means of a threat. Intimidation is the act of instilling fear to achieve certain results—such as to compel someone to do something, or to restrain them from doing something.

For example, it is legal for a property and casualty insurer that issues umbrella liability coverage to require policyholders to maintain underlying coverage (i.e., personal and auto liability). However, coercing or intimidating the client to purchase underlying coverage from a specific



company (such as itself or a member of the parent group of companies) is illegal.

TwistingThe practice of twisting is outlawed in all states. It is defined as the deliberate use of deceptive practices to induce an individual to lapse, surrender, cancel, or retain one insurance policy for the purpose of issuing another with a different insurer. In most cases, when a producer commits this prohibited practice, he or she either makes false or misleading statements about the existing or proposed policy or makes incomplete or unfair comparisons of the policies or insurers. Obviously, the reason a producer engages in twisting is to sell a new policy and earn a new commission.

ChurningThe practice of churning occurs more often in the life segment of the insurance industry than in any other segment; however, it does occur industry-wide. In the life segment, churning refers to excessive trading within a client’s account or the unnecessary replacement of financial product with the primary goal of generating a commission. In addition to being a violation of insurance code, churning violates SEC rules and securities laws. In other segments of the insurance industry, churning is a form of twisting that effects an unethical replacement of policies issued by the same insurer; for example, replacing a whole life policy issued by Carrier A ten years ago with a brand new whole life policy.

Improper ReplacementReplacement of insurance policies, if carried out with a client’s best interests in mind, may be acceptable. However, for life and health insurance policy replacements to comply with the law and insurance code, they must meet all suitability and replacement laws in effect in the jurisdiction, as well as those imposed by the carrier, the SEC, and FINRA.

For any life insurance product, including annuities, required disclosures include accurate comparisons of the values, provisions, interest rates, settlement options, death benefits,

CHAPTER FIVE


etc. between the existing product and the recommended product. Suitability factors to consider include:

■ The client’s risk tolerance■ Comparisons of the guaranteed rates of return■ The degree of the client’s liquidity before and after the

sale of the new product■ Whether the accumulation value will increase for the

same, or a similar, premium■ The potential tax treatment of the proposed surrender or

exchange

These factors also apply if the producer is conducting a replacement under an IRS Section 1035 Exchange.

NoteA 1035 Exchange is a tax-favored transaction that results in a non-taxable event if certain requirements are met.

Those requirements include:

■ The policyholder cannot realize a loss or gain from the exchange/replacement

■ The policyholder cannot take constructive receipt of the cash value—meaning the cash value must be transferred directly from the existing insurer to the replacing insurer

RebatingRebating is returning a portion of a policy’s premium or commission as an inducement to buy insurance. In the insurance industry, rebating takes place in a variety of sizes and shapes—all of which are illegal. Rebating is prohibited because insurance premium rates must be established in accordance with state law and approved by state law. If a rebate is offered in connection with the sale of an insurance policy, the policy’s premium and/or rate is modified. Such modification is both arbitrary and discriminatory.

Illegal rebates contain the following characteristics:

■ They are not mentioned in the policy



■ They are paid, allowed, given, offered, or received—either directly or indirectly

■ They include money, special favors, advantages in dividends or policy benefits, and other valuable considerations—including stocks, bonds, and other securities

■ Their purpose is to induce a person to buy, sell, or give an insurance policy

The states may include other provisions in their insurance statutes with respect to rebating. For example, some states include reference to a dollar amount—meaning rebates are only illegal if they are valued in excess of a certain amount, such as $100.

MisrepresentationKnowingly providing false information on an insurance application or claim document is both unethical and, in most states, illegal when it is done for the purpose of obtaining a fee, commission, money, or other benefit. Generally, when false information is provided on an insurance application, it is given for the purpose of acquiring insurance that is not available if factual information were provided or withheld OR to obtain a lower premium.

Over-InsuranceSome producers find that issuing insurance at amounts higher than those generated by a needs analysis, or the client’s circumstances require, is tempting. The higher the policy’s amount of insurance, the higher the premium, and … the higher the commission. From an ethical perspective, the answer to the client’s question, “How much insurance should I buy?” should be “As much as you need and can pay for comfortably,” and not “As much as I can sell you.”

The producer’s primary objective when selling insurance should be to provide one or more products that meet the client’s needs and objectives and protect the client’s assets. Insurance is a risk management tool, not a lottery.

CHAPTER FIVE


EnforcementAs already mentioned, the insurance codes in most states have incorporated language from the NAIC’s model regulation, Unfair Trade Practices Act, which was designed to act in accordance with the wishes of Congress as stated in McCarran-Ferguson and the GLBA. When a state insurance commissioner has reason to believe any person (i.e., an individual or an entity) is engaging in (or has engaged in) an unfair practice defined in legislation, he or she is authorized to investigate and press charges. The commissioner may request one or more hearings, issue cease and desist orders, and impose penalties if any person is found guilty after a hearing.

In general, when an insurance producer is found guilty of violating insurance code, he or she is subject to fines and, in some cases, suspension, or revocation of all insurance licenses. In addition, if a producer is found guilty of committing a felony and certain other violations of non-insurance law, he or she is also subject to the loss of license.

Common grounds for license suspension, revocation, or nonrenewal include:

■ Any violation of an order, rule, or subpoena issued by the insurance commissioner

■ Commingling client or insurer funds with the producer’s own business or personal funds

■ Being convicted of a felony■ Using fraudulent, coercive, or dishonest practices■ Being incompetent, untrustworthy, or financially

irresponsible■ Being found guilty of committing an unfair trade practice

found in insurance code■ Forging a signature on any insurance document■ Failing to comply with a child support order or to pay

state income tax



SummaryEthical dilemmas exist because people do not share the same morals, degree of self-interest, level of social responsibility, perception of right and wrong (or good and bad), etc. In the insurance workplace, ethical dilemmas can be multifaceted and create serious conflicts. The presence of differing interests concerning a matter of significant value, various options that are all viable, and a variety of consequences to each party present quandaries that are not easily solved.

The adoption of a Code of Ethics—within an organization or within a business industry—provides many benefits:

■ Offers improvements to society, i.e., child labor laws, discrimination laws, anti-trust laws all contributed to the growth and development of society in the United States

■ Offers a moral compass to those individuals who grew up without one

■ Provides uniform moral guidelines within an organization, industry, or society

■ Endorses teamwork and productivity■ Promotes individual growth and development■ Helps ensure compliance with state and federal laws

and regulations and avoiding the commission of criminal acts

■ Encourages a strong and affirmative reputation and public image

An ethical individual, organization, or industry has the following qualities:

■ A feeling of comfort in relating to diverse groups of people

■ Concern with fairness and abiding by rules and standards of behavior

■ Assumption of responsibility for its actions■ Possession of a purpose, or goal, that is tied to a values

system based on integrity

CHAPTER FIVE


■ Understanding that every action and every decision generates consequences

Most of the insurance laws on the books in each state are a direct result of practices that were originally accepted within the insurance industry. The practices evolved into acts that became abusive or harmful to consumers and society decided they were unacceptable. The practices were not good; they were wrong, harmful, and unethical.

These Unfair Trade Practices may be used as a guideline when evaluating situations involving insurance clients or prospective clients when the agent is not sure how to behave. Sometimes, it may appear that a single act or behavior is acceptable because it benefits the client and it “doesn’t hurt anyone else.”

Many people operate under the mistaken assumption that if a person does not know about something it cannot hurt him or her—which is why fraud abounds in the insurance industry in today’s society. Policyholders, agents, auto body repair shops, and insurance companies sometimes commit acts that benefit one party. Because another party to the act or transaction is not aware of all the details, people convince themselves they are not “hurting” anyone.

Ethical people and businesses have the best interests of their business partners, associates, and clients at the forefronts of their minds. In a given situation, an ethical insurance producer will follow procedure, guidelines, accepted practices, and the law. The producer will place his or her own interests last when making decisions.

1. What do federal anti-trust laws prevent?

a. Competitionb. Monopoliesc. Crimed. Fair competition

2. What kind of statement harms another’s reputation and encompasses both slander and libel?

a. Twistingb. Churningc. Misrepresentationd. Defamation

3. What prohibited practice uses deceit to induce a client to cancel a policy and purchase a new policy with another insurer?

a. Twistingb. Churningc. Rebatingd. Overinsurance

4. Churning is a form of which prohibited trade practice?

a. Misrepresentationb. Improper replacementc. Twistingd. Rebating

5. When a producer commits misrepresentation on an insurance application, what has he/she done?

a. Deliberately provided false informationb. Unintentionally made a false statementc. Forged the applicant’s signatured. Submitted a blank application

CHAPTER FIVE QUESTIONS


REVIEW QUESTIONS ANSWER KEY

Chapter 1

1. A Insurance producers are charged with legal and ethical obligations to help their clients choose the insurance products and solutions that best meet the client’s needs...not the producer’s.

2. C As fiduciaries of their insurers, producers are obligated legally and ethically to protect their best interests.

3. C The insurance industry does not promote a single code of ethics that applies to all licensees.

4. B States enacted laws to monitor and regulate the activities of agents as a result of the unscrupulous activities of a few insurance professionals.

5. A Insurance agents should, at all times, refrain from engaging in the practice of law unless duly licensed to do so.

6. B You might be wondering why we need to discuss ethics in the framework of insurance continuing education. The answer is simple: ethical obligations are not always clear, even in the presence of established laws and published guidelines.

Chapter 2

1. A Legally, an insurance application is the applicant’s offer to enter into a legal contract.

2. B Suitability is the legal standard that requires the producer to have reasonable grounds to believe the recommendation to purchase a particular insurance policy is appropriate for the applicant based upon facts provided to the producer by the applicant.

3. D PII is information a consumer provides to obtain a financial product or service (i.e., insurance or securities).



4. C Legally, an insurance application is the applicant’s offer to enter into a legal contract. If that offer contains an invalid signature, any contract issued as a result of the offer is not legally binding.

5. A Insurance companies meet the GLBA’s definition of “financial institution” because they are significantly engaged in “financial activities.”

6. B A fiduciary is a person to whom property or power is entrusted on behalf of, and for the benefit of, another.

7. D A conflict of interest is a circumstance during which an individual simultaneously owes a duty to more than one party and is unlikely, or unable, to address the best interests of all parties.

8. C Few federal laws exist with respect to the nationwide regulation of the insurance industry because the majority of insurance regulation takes place at the state level.

9. B The majority of unfair trade practices in the insurance industry fall into the following categories: sales, disclosure, marketing, and advertising.

10. B As insurance producers, we promise our clients to act as their advocate in the event of tragedy.

Chapter 3

1. B From the perspective of legal and ethical obligations, an insurance broker represents the client.

2. A From the perspective of legal and ethical obligations, an insurance agent represents the insurance carrier.

3. C Independent agents may represent any number of insurance companies, including a single company (or group of companies).

4. D The three basic types of insurance advertisements are institutional advertisements, invitations to inquire, and invitations to contract.



5. C Virtually all state insurance regulations consider the insurer responsible for all advertisements of its products and services, regardless of who created or displayed them.

6. B An invitation to contract is not limited in scope, and is subject to disclosing a list of coverage exceptions, reductions, and limitations that affect the basic policy provisions, as well as disclosing provisions related to renewability, cancellation, and termination.

Chapter 4

1. A Selling based on the client’s needs should be the primary focus of all producers during the sales process.

2. B Elements of providing quality service include a focus on suitability, full disclosure, and avoiding all appearances of conflict of interest.

3. D The Law of Agency involves a three-party relationship whereby a Principal authorizes an Agent to act on its behalf to create a legal relationship with a Third Party.

4. A Expressed authority is specifically stated, either verbally or in writing.

5. C A fiduciary responsibility is the highest standard of conduct and care imposed by ethics or law.

Chapter 5

1. B Federal anti-trust laws prevent monopolies and encourage fair and balanced trade practices.

2. D Defamation is a statement that harms another’s reputation and encompasses both slander and libel.

3. A Twisting is the deliberate use of deceptive practices to induce an individual to lapse, surrender, cancel, or retain one insurance policy for the purpose of issuing another with a different insurer.



4. C Churning is a form of twisting that affects an unethical replacement of policies issued by the same insurer.

5. A. Misrepresentation is knowingly providing false information on an insurance application for the purpose of obtaining a fee or commission.


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