Agent Ethics and Responsibilities

Smashwords Edition

AGENT ETHICS AND RESPONSIBILITIES

CAL-STATE EXAMS

5059 Newport Avenue, #209

San Diego, CA 92107

Telephone: (619) 222-2425

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TABLE OF CONTENTS

AGENT ETHICS AND RESPONSIBILITIES

LESSON ONE : LEGAL RESPONSIBILITIES OF AGENTS AND BROKERS

FOCUS ON AGENTS AND BROKERS

UNCERTAINTY IN REGULATION AND RESPONSIBILITY

INSURANCE SALES IN GENERAL

BUSINESS DEFINITION OF AGENT AND BROKER

THE AMERICAN AGENCY SYSTEM EXPLAINED

SOURCE AND NATURE OF AUTHORITY

PERSPECTIVE ON THE UNAUTHORIZED PRACTICE OF LAW

WHAT CONSTITUTES PRACTICE OF LAW?

CO-OPERATIVE ACTION

PROHIBITIONS AND PERMISSIBILITIES

COMPANY'S CONTRACT LIABILITY FOR ACTS OF THE AGENT

COMPANY'S TORT LIABILITY FOR ACTS OF THE AGENT

AGENT’S TORT LIABILITY FOR HIS OR HER ACTS

FIELD UNDERWRITERS AS PROFESSIONALS

RULES OF THE BUSINESS

PROTECTION FOR THE UNDERWRITER

LICENSING REQUIREMENTS IN GENERAL

PERSONS EXEMPT FROM LICENSING REQUIREMENTS

THE LEGAL CONSEQUENCES — FINAL ANALYSIS

RESPONSIBILITY DETERMINED BY ACTIVITY, NOT TECHNICAL DESIGNATION

LESSON TWO: LEGAL RESPONSIBILITIES OF AGENTS AND BROKERS

BACKGROUND

GENERAL PREMISES OF AGENCY LAW

AGENCY LAW AS APPLIED TO THE BUSINESS OF INSURANCE

PARTIES TO WHOM DUTIES ARE OWED

SPECIAL PROBLEMS OF CARRIER INSOLVENCY

CONCLUSION

LESSON THREE: ETHICS IN THE INSURANCE INDUSTRY

OVERVIEW

ISSUES, HELPS, AND HINDRANCES

A TOUGH ANALYSIS

ENCOURAGING ETHICS

ETHICS QUESTIONS ON INSURANCE EXAMS

THE DIFFICULTIES IN TESTING FOR ETHICS

ETHICS CAN BE TAUGHT

ETHICS MUST TAKE HIGH PRIORITY

DUE DILIGENCE

THOSE WITH ETHICAL DILEMMAS ARE URGED TO DO THE RIGHT THING

UNETHICAL CONDUCT MAY LEAD TO BAD FAITH CLAIMS

RISK MANAGEMENT ETHICS

THE ETHICAL USE OF MEDICAL AND FINANCIAL INFORMATION

ETHICS IN HEALTH CARE

THE INDUSTRY MUST BE CHALLENGED TO FACE ETHICAL ISSUES

SALES ETHICS

COMMISSION DISCLOSURE

DISCLOSURE OF INSURER FINANCIAL STRENGTH

LESSON FOUR: THE ETHICS OF POLICY REPLACEMENT

OVERVIEW

ARGUMENTS FOR REPLACEMENT

A CASE STUDY IN POLICY REPLACEMENT

ARGUMENTS AGAINST REPLACEMENT

REPLACEMENT MYTHS

THE ETHICAL CONSIDERATIONS OF REPLACEMENT

MEASURING THE FINANCIAL EFFECTS OF REPLACEMENT

COMPANY ETHICS ON REPLACEMENT

CONCLUSION

CHAPTER QUIZZES

LESSON ONE: LEGAL RESPONSIBILITIES OF AGENTS AND BROKERS

FOCUS ON AGENTS AND BROKERS

No one has endurance like the person who sells insurance. So goes the old saying. But what about this person who sells insurance? Surely his or her persistency is a part of American folklore, whether it is a foot in the door, a calendar in the mail, or a voice on the telephone. Professional person or salesperson? Which is it? A person on his own or under another’s employment? A huckster in the marketplace or an expert on whom one can rely? Where is this person’s accountability?

These are not idle speculations, but important questions which involve not only the many men and women in insurance agencies and brokerages across the country, but also their insurance companies, as well as the general public. The interests of the segments may vary, and potential harms may differ, but all of the associated concerns are legitimate and persisting.

The agents, brokers, and adjusters who are central to this lesson may be individuals, partnerships, or corporations. In any form, it is significant to know the legal responsibilities of their conduct. These concerns relate to how they conduct themselves and their financial exposure to civil damages (which can be the full amount of the loss otherwise sought to be insured) if sued for doing wrong. The agent's or broker's continuance in business is also involved since government regulation is a condition of life in the insurance business.

Legal infractions can result in license suspension or even constitute a crime. The litigious era in which we live is no small part of the whole. Now more than ever professionals and experts can expect court and consumer challenges to their activities. Increasing public awareness forces all modern institutions to conform to tests of reality and responsiveness, and this forum gives an increasing sympathy to complaints.

Just as medical, legal, and other professional malpractice litigation has soared, a renewed willingness to hold participants in other specialized pursuits – including insurance agents and brokers – accountable to certain standards has increased the hazard of liability suits for not doing right.

The issue of responsibility in insurance counseling, sales, and service is not limited to notions of legality or economics. There is a dimension of professionalism that exceeds minimum legal prescription. To many insurance agents and brokers, there are major elements of pride, craftsmanship, and personal responsibility implicit in their activities. Considerable time and effort can be devoted to the obtaining professional designations such as Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC), Chartered Property and Casualty Underwriter (CPCU), and others. The esteem in which the agent holds his or her pursuit is important beyond legal or economic measure.

The buyer who deals with the insurance seller has more than a theoretical interest in the agent's professionalism. How much reliance can the buyer safely place on the given word?

Insurance can be fiercely technical, sometimes beyond the understanding of most lay people. Yet the essence of the insurance obligation is its sense of assurance. The agent or broker is the sole contact most insurance buyers have with their insurers, and buyers rarely read their policies. In many cases they do not even see their policies.

Insurance companies have tremendous stakes in the conduct and status of the agents and brokers who produce their business. The fact that agents and brokers can legally bind insurers is a prime concern. But the matter does not rest there. Insurers typically invest large sums of money to develop sales and promote their good names and reliability. Their reputation is critical, particularly in view of the nature of the insurance institution. Yet much of this reputation rests in the hands of agents and brokers, many not readily susceptible to control or thorough supervision, who make the public contact.

Finally, government should be intimately concerned with the doings of agents and brokers. Protection of the public interest demands regulation of insurance sales, as well as regulation of the insurance industry in general. Regulations regarding disclosures, unfair and deceptive trade practices, and advertising have proliferated.

Licensing requirements vary among the states. Some issue permanent licenses kept up to date by the payment of periodic renewal fees with little or no activity or training requirement. Others issue new licenses annually. In some states, a broker's license is a strong credential; in others, a broker is a very limited operative. Many states do not issue broker licenses as such, and thus, people in counterpart positions are called agents.

In some states, there are solicitors who are really limited selling agents. The calculations of numbers of operatives are confused by multiple licenses in many states, not only by regional and national firms, but by individuals who handle more than one separately licensable line of insurance business. There are also temporary and special sales licenses for limited lines or insurance placement allied to another type of business.

UNCERTAINTY IN REGULATION AND RESPONSIBILITY

The regulation of insurance in this country is performed by the various states. There is little regulation by the federal government of the private business of insurance as such. Historically, state statutes on the subject of agency or brokerage fitness have been in the areas of licenses to sell with minimal educational, experiential, or character requirements, if any. However, the National Association of Insurance Commissioners (NAIC), an association of state insurance commissioners and one of the nation's prime forces in regulation and regulatory attitude, promulgated in 1973 the model Uniform Agents and Brokers Licensing Act.

Qualification is a corollary of responsibility, for even if there is a willingness to respond, there must be an ability to do so. Agents and brokers groups have tended to advocate the upgrading of standards when entering the insurance profession. However, while many insurance carriers manifest some interest in the maintenance of standards, their most visible concern in this area is frequently attracting people to make sales.

An observable fact of the life insurance business in particular has been the recruitment and training of short-term personnel who sell in relatively small quantities to their family and friends and then, having exhausted contacts, fade from the business. With no real education, training, or experience requirement, except for a simple course or two, and with character and aptitude being typically limited to lack of a criminal record, this is not surprising. There is counterpart performance in the brokerage business, although usually without particular insurance company sponsorship.

Traditionally, the law has clothed the legal aspects of insurance agents and brokers in semantics which can confuse cause and effect. The very different working concepts in various states of functions denominated as insurance broker or agent make it difficult to apply a national jurisprudence based on these words. In many jurisdictions, there are only agents, and they fulfill functions otherwise classified as broker.

The use of the common word agent has a specific substantive meaning in the law in general, and this will be discussed further in Lesson 2. In the insurance industry, the concept of agent has been perhaps the single most confusing factor. There are business differences between an insurance broker and an insurance agent, but legally an insurance broker may be an agent, as these words are used in the law.

Any uncertainty over fundamental responsibility in insurance sales lies in the nature of the insurance institution. The public interest in collection of proceeds by insurers, as well as a willingness to favor the reasonable expectations of an insured over strict and perhaps obscure policy language, is evident in many courts, as is sympathy for insureds and apparent hostility toward insurers.

INSURANCE SALES IN GENERAL

In insurance sales, the end seller is the insurance company, often called the insurer or carrier. This is a corporation licensed by a state or other jurisdiction to offer policies of insurance. Basically, the insurer does not sell a product or a service so much as it vends its promise to pay money on the happening of a contingency. It really markets, then, its own conditional obligations.

While this might be characterized as the sale of a security, insurance offerings have not been thought to be public offerings under the laws regulating the sales of securities, with the exception of certain hybrid offerings of insurance elements and equity shares, such as variable annuity and life insurance policies or contractual plans combining mutual funds and insurance.

As a result, personnel actually conducting the sales of insurance historically have not been required to procure securities sales licenses as a condition of performing their insurance selling services. Their licensing requirements have been classically restricted to state licenses for agents and brokers of insurance. This view, excluding duplicate securities sales licensing for the sale of insurance alone, seems to be correct since regulation of the insurance business by the states serves as the supervisory element in the protection of the public interest.

In addition, the requirement of maintaining a current registered public offering under the securities laws for every insurance sale would, as a practical matter, sharply escalate the present expense levels for insurance sales. It is, of course, understood that an insurance seller also selling stocks, bonds or mutual fund shares must be separately licensed for this distinct activity.

BUSINESS DEFINITION OF AGENT AND BROKER