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

Did you print your student instructions when you registered? Before you get started, be sure you have your student instructions for this course. The student instructions for each of our programs are always available at our website: www.scic.com/online_courses/general/student_instructions Log On ... It's all about you! Your online Document of Certification and other important National Alliance professional education information is in one convenient place on MyPage, including:

Contact information CE certificates (download online) Course history Exam results When your next update is due Membership dues status (you can pay dues online) New program offerings

View your MyPage on our website, www.TheNationalAlliance.com/MyPage. Legal & Ethical Requirements of Insurance Professionals The goal of this course is to provide a practical guide to the moral, legal, and professional obligations insurance professionals owe to their clients, associates, and insurers. The course focuses on ethics in the insurance industry and is designed to prepare insurance professionals for the unique situations and requirements that may come their way course of performing their daily work. How to Receive Credit This course is designed to fulfill 4 hours of the annual (8 hour) update requirement for persons holding the CISR or CSRM designations. Additionally, you may use this course to earn continuing education credits/hours (CE) towards your state insurance license renewal. Note: The requirements for receiving CISR or CSRM update credit are not the same as the requirements for receiving state CE credit.


If you are updating your CISR or CSRM designation only: Complete each of the self quizzes and the review test with a score of 70% or higher for each.

Multiple attempts are allowed for the review test. A proctor/monitor is not required when completing the review test. An affidavit of exam is not required after passing the review test.

If you also plan to request credit/hours for state insurance license renewal: Complete each of the self quizzes and the review test with a score of 70% or higher. Then, complete the proctored final exam with a score of 70% or higher.

Three attempts are allowed for the final exam. A proctor/monitor is required when completing the final exam. An affidavit of exam is required in order to receive credit for passing the final exam.

Taking the Review Test for Designation Update Credit The review test is a randomized test with 20 questions, designed to let you know how well you have understood the course material. Multiple attempts are allowed for the self quizzes and review test.

You must pass all self quizzes and the review test before taking the final exam. You may navigate to the Review Test and Final Exam area by clicking on the Course

Status link above. The link to the review test will become available when all self quizzes show a score of 70 or above.

When you have passed the review test, your CISR or CSRM record will reflect 4 hours of credit towards your annual designation update.

The review test alone does not earn continuing education credit for state license renewal.

Final Exam For State Continuing Education Credit The final exam for state continuing education credit is a randomized test comprised of 50 multiple choice questions worth 2 points each. It is designed to test your ability to apply what you have learned in the course. Three attempts are allowed for the final exam for this course.


Navigating to the Final Exam

To link to the final exam, click on Course Status link on the top menu bar (above) and continue to the Review Test and Final Exam area.

Click on Final Exam on the top menu bar to go to the last page of the course.

If you have not completed all of your self quizzes, you will not be able to continue on to the Review Test and Final Exam area.

The Final Exam link will become available on this page when the review test score shows 70% or above.

Affidavit of Exam and Continuing Education Request Form The final exam lasts one hour, and must be completed in the presence of a disinterested third-party proctor/monitor. Three attempts at the final exam are allowed, and a passing score is 70% or higher. You and/or your proctor are responsible for submitting the Affidavit of Exam and Continuing Education Request Form to The National Alliance. (In New York, the state approved monitor is required to fax/mail the Affidavit of Exam and Continuing Education Request Form.) Fax the Affidavit of Exam and Continuing Education Request Form to the fax number printed on the cover sheet. Please send the original affidavit by mail (address also printed on the affidavit cover sheet.) We strongly recommend that you keep a copy for your records. Some students will have no need to request Continuing Education credits for an insurance license, and wish only to earn update hours for the designation. Please send the CE Request Form even if you are not requesting CE hours/credits for insurance license renewal. Check off the "No CE" box at the bottom of the form. Note: You will receive an email reminding you to send in the affidavit if you pass your exam with a score of 70 or above. Do not submit an affidavit for an unsuccessful exam.


Curriculum Support Faculty members from The National Alliance for Insurance Education & Research are assigned to take emails from students participating in the online courses. Our faculty are experienced practitioners and teachers in the industry. We ask them to respond to each email within 24 hours, or before the end of the next business day. The course mentor will be happy to clarify any portion of the curriculum for you if you need help. Make sure you have carefully reviewed the course curriculum and clearly note the page or self quiz question number when you contact a course mentor. Help Desk The mentors will refer any computer issues you have to the Online Help desk. National Alliance staff are available by phone or email for technical support issues. [email protected]. To phone the Online Help Desk call: 800-633-2165 and select option 2. Monday through Friday 8:30 am to 5:00 pm Central Time Course Study and Exam Preparation

Have you ever thought about how you learn? The study aids listed below will help you determine your progress and test your understanding of concepts and examples presented in the course.

Learning Objectives: Learning objectives are designed for managing your own

learning. The learning objectives for the course are listed at the beginning of each topic. The learning objectives are indicated throughout the course pages as well. At the end of the course, you will have the opportunity to read the learning objectives again, and see how confident you feel about each one.


Self Quizzes: Self Quizzes are another learning management tool. You are required to pass each self quiz with a score of 70 or above before moving forward in the course, and you can launch a self quiz as many times as needed. To print the score page of your self quiz, click on Assessment Results, then right click on the page. The Assessment Results page makes an excellent study aid.

Glossary terms and definitions: Glossary terms and definitions are critical to insurance professionals, and a key study aid for your online course. To define a term, click on the Glossary link above. Definitions of newly introduced terms will also be included on the course pages.

Knowledge Checks: Knowledge checks are application level questions. By attempting to apply the concepts of the course, you will better prepare yourself for the final exam. Make sure you attempt each knowledge check in the course.

Course Mentor: And don’t forget to email the Course Mentor with your questions about the curriculum. Our faculty members are distinguished producers and risk managers who currently work in the insurance industry. The mentors are happy to explain and clarify the concepts in the course. They will return your email on or before the next business day.

Frequently Asked Questions (FAQs): Please see the following guides for more information.

General Question FAQs: http://magma.magma.scic.com/Elearning/Intro/GeneralQuestionFAQs.html Computer/Technical FAQs: http://magma.magma.scic.com/Elearning/Intro/ComputerFAQs.html Final Exam FAQs: http://magma.magma.scic.com/Elearning/Intro/FinalExamFAQs.html Continuing Education FAQs: http://magma.magma.scic.com/Elearning/Intro/CEFAQs.html


FLORIDA RESIDENTS ONLY An entity that is required to be licensed or registered with the Florida Office of Insurance Regulation but is operating without the proper authorization is identified as an unauthorized insurer. All persons have the responsibility of conducting reasonable research to ensure they are not writing policies or placing business with an unauthorized insurer. Any person who, directly or indirectly, aid or represent an unauthorized insurer can lose their licenses or face other disciplinary sanctions. Please see section 626.901, Florida Statutes, to read the laws. Lack of careful screening can result in significant financial loss to Florida consumers due to unpaid claims and/or theft of premiums. Under Florida law, a person can be charged with a third-degree felony and also held liable for any unpaid claims and refund of premiums when representing an unauthorized insurer. It is the person’s responsibility to give fair and accurate information regarding the companies they represent.


Course Objectives Overview

Section 1 – The Importance of Ethics in Insurance Ethics may be defined as a system of moral principles or values. What is not so easily discerned is the correct ethical approach to a particular situation. The foundation of ethics arose from the traditions of good behavior that people expect themselves and others to practice. Many of these ethical practices have become law. Ethics is a set of instructions for a way of life. Ethics is also good business and in the insurance business it is a matter of utmost good faith. Section 2 – Legal Responsibilities of Agents and Agencies Agents have an obligation to the known the extent of their authority to bind for an insurance company. They must also bridge the gap between the actual services or advice they are able to provide, and whatever it is that the client may be expecting. Clear communication with the insured is very important. Section 3 – Insurance as a Business of Contracts Insurance is a business of contracts. However, the insurance contract is different from common business contracts. One difference is that insurance contracts are not between equals because the insurer has much more control over how the insurance contract is written. Courts routinely award coverage to consumers who believe that they purchased a contract that would cover the loss they suffered. In this lesson, we'll learn more about the "adhesion" principle described above, and other aspects of the insurance contract


Section 4 – The Insurance Agent as a Professional The majority of claims made against agents come from ordinary negligence and simple errors. In this lesson you will review the types of claims that are regularly paid by agents and agent errors and omissions insurance for negligent acts by agents. Sometimes, the courts may apply a higher standard of care for an insurance agent accused of negligence; that is, when a "special relationship" exists between agent and client. You will review a series of court cases that have addressed the issue of the insurance agent as a professional and explore situations where agents have been granted professional status when they engage in “special relationships” with clients. Section 5 – Insurance Agent Obligation to the Consumer, Insurer, and Peers We have seen that the agent owes the consumer both an ethical and legal duty of care to the consumer. However, the agent is also obligated to the insurer and to peers. We will explore these obligations in this section. Section 6 – Unfair Trade Practices, Unfair Claims Settlement Practices, the need for Errors and Omissions Coverage, and the Golden Rule States have implemented unfair trade practices acts. These acts attempt to codify into law a moral code regarding how agents and companies should act towards each other. These unfair trade practices also serve to define those practices that may be harmful or deceptive to consumers. Unfair claims settlement practices acts, as legislated by the states, protect consumers from some of the more egregious claims settlement and delay practices. Course Summary Pages Use the summary section to link back to each learning objective in the course before moving on to the review test and (if applicable) final exam. Use the Course Status link on the top menu bar to keep track of your self quiz scores. When all scores show 70% or above on your course status page, a link to the Review Test and Final Exam area will display.


Section 1 – The Importance of Ethics in Insurance Ethics may be defined as a system of moral principles or values. What is not so easily discerned is the correct ethical approach to a particular situation. The foundation of ethics arose from the traditions of good behavior that people expect themselves and others to practice. Many of these ethical practices have become law. Ethics is a set of instructions for a way of life. Ethics is also good business and in the insurance business it is a matter of utmost good faith. Learning Objectives

1. Describe, define and explain the importance of ethics.

2. Define moral.

3. Explain how ethics is the law, good business and how insurance involves utmost good faith.

4. Define the concept of Utmost Good Faith.


Section 1 Topic A – The Foundation of Ethics

Learning Objective: Describe, define and explain the importance of ethics. Ethics as a concept has its feet both in law and in acceptable human behavior. Early philosophers explored the bounds of human behavior to distinguish right from wrong. Early bureaucrats and religious scholars borrowed ideas from each other to create laws and religious canon. The word “ethics” was coined in the 14th century. The 1999 Random House Webster's College Dictionary defines “ethics” as:

1. A system or set of moral principles.

2. The rules of conduct governing a particular class of human actions or a particular group, culture etc.

3. The branch of philosophy dealing with values relating to human conduct, with respect to the rightness and wrongness of actions and the goodness and badness of motives and ends.

4. Moral principles, as of an individual. Learning Objective: Define Moral. Definition of Moral “Moral” is defined in the same dictionary as:

1. Of, or pertaining to, or concerned with the principles of right conduct or the distinction between right or wrong.

2. Conforming to accepted or established principles of right conduct.

3. Expressing or conveying truths or counsel as to right conduct.

4. Based on fundamental principles of right conduct rather than on law, custom etc.

Ethics then are guiding principles based upon moral values. These guiding principles usually have foundations in good behavior. We know that not everyone will practice good behavior and this is why laws are created to enforce ethical and moral code.

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


Section 1 Topic B – Why is the Topic of Ethics Important to Me?

In the wake of recent corporate scandals, consumers, investors, and managers have begun to look closely at the decisions being made by businesses. During a period where ever increasing sales meant higher stock prices, some business executives employed exotic schemes or manipulated numbers to make their company's performance appear greater than it was. Many of these manipulations were illegal, but the decisions behind these acts were a matter of ethics. The decisions you make and the actions you take in your daily activities are not that different. Why Do People Act Unethically? People rationalize their actions:

Greed is a factor - So what if the rules are bent just a little for profit

The action doesn't hurt anyone except the person that is acting unethical

Hey, I deserve "it"...

It's ok to do it if I don't profit financially...

The competition does it...

I have competition so I must do it Why is Ethics Important? Management wants to increase revenue 20% this year and encourages everyone to "do what it takes' to get there. What do they mean and how far does this permission to "do what it takes" extend? Click on each example to see some of the rationale that people use to justify their decisions.

Example 1 To get the sale on the Smith account, I need to rate the cars as less than 3 miles to work when l know they drive 20 miles each way. Should I do it? Example 2 To get the sale on the Jones account, I need to ignore the recent at fault accident because I know that the police records won't be updated before the policy is issued. Should I do it? I can always say to the underwriter I didn't know about it.


Example 3 The ABC companies have just increased commissions by 1% which is higher than anyone else in the market. Should I just move as much business to ABC as l can? Example 4 I know my quote on the Wonderful Manufacturing Company contains coverage that my competitor has not included. I have pointed this out to the insured. Mr. Wonderful still believes he is getting a better deal from the other agent. Should I badmouth the other agent in order to make the sale? Example 5 Your only large account insurance carrier has just had its AM Best rating lowered to B+ with negative implications. Management at the insurer gives vague assurances that all is well. Should you convey this message to your clients? You do not have another carrier that will write these large accounts.

Competing Objectives Decisions involving ethical behavior often begin with competing objectives. If I bend the rules, I achieve my objective and I am rewarded. If I play by the rules, I don't meet my objective and in the worst instance, can lose my job. However, bending the rules or taking the ethical low road can lead to adverse consequences including loss of accounts, cancellation of company contracts and regulatory action. Often there are no easy answers. Managers who encourage or ignore unethical behavior do so at the peril of their business.


Section 1 Topic C – Ethics and Insurance

Learning Objective: Explain how ethics is the law, good business and how insurance involves utmost good faith. Why Be Ethical? First, it's the law.

State Laws Each State has a series of laws designed to protect consumers from unscrupulous practices of agents, insurers and adjusters. These laws commonly deal with:

Who is qualified to do business—licensing

Rebating — illegal in most states

Disparagement of a competitor

Other unfair business practices

Advertising practices—accurate and informative

Privacy of customer information

Commingling of funds—agent accounts and customer accounts

Unfair claims practices

Federal Laws In addition there are federal laws that deal with privacy, discrimination, credit practices, and unfair competition. We will discuss a few of these federal laws in lesson 2.

Second, it's good business. Consumers want to do business with an agent and insurer that they can trust. Word of mouth advertising can be the greatest asset to the agent and also the greatest liability. Negative comments are regularly repeated six times more than positive comments. Agents understand that the consumer who will agree to bend the rules in an application for


insurance may also be the individual who overestimates values or otherwise pads a claim. At the time of an uncovered loss, the once-willing co-conspirator may implicate the agent in the unethical or illegal act.

Learning Objective: Define the concept of Utmost Good Faith. Third, insurance is a business of utmost good faith. Insurance is a business of information—a series of questions asked and information provided that requires honest responses from everyone involved. Consumers expect that companies will pay what their contract covers and depend upon the agent for advice and counsel about the amount of coverage they need to buy. Insurers rely upon the agent to obtain accurate and complete underwriting information about the insured and to notify the company if there are changes that may affect the underwriting decision. Utmost good faith is broken by misstatements, incomplete answers and by unfair business practices of insurers, agents and others. Fourth, social responsibility. Simply put, “it’s the right thing to do”. People often do not need any more reasons than that to act ethically. Fifth, to avoid public criticism People avoid public criticism when they do the right thing and act in an ethical manner. Public criticism doesn’t have to mean finding a reporter from 60 Minutes knocking at your door. Public criticism can include the disfavor of peers, co-workers, family and others in the community you value and respect. Sixth, economic success in an industry of utmost good faith. One of the reasons why the insurance industry is so heavily regulated is that it is a business of utmost good faith. As a result, any perception of unethical behavior by or within the insurance industry can cause the public and their legislators to react with more laws. Trust and good faith lead to economic prosperity. The concept of good faith extends to the parties involved in the insurance transaction. Economic prosperity comes from all parties acting in good faith:

The consumer supplies accurate and complete information necessary to underwrite the business and/or pay a claim.

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

To the consumer:

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

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

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

Example You were able to bind coverage for an insured on an older auto and now she believes you to have the apparent authority to bind coverage for her today on an antique auto. If the doctrine of apparent authority is applied by a court in a particular situation, the insurer is obligated to the innocent third party as fully as it would have been had the agent acted according to express or implied authority. Example The agent is in negotiations to contract with the XYZ insurance company. The agent has a starter kit of marketing materials, underwriting manuals, rate manuals and applications to review. The one market they have that the agency doesn’t have is coverage for dwellings in fire protection class 9 and 10. Mr. Jones, a client of the agency, is in the office asking the agent to write a summer home in a class 9 town. XYZ’s pricing is less than what Mr. Jones is paying now, the coverage is broader and Mr. Jones wants coverage today. The agent takes a chance and binds coverage with the XYZ Company. XYZ never appoints the agent and there is a loss. Mr. Jones believed that the agent had the apparent authority to write his summer home. If a court agrees with the apparent authority argument, the XYZ Company may be required to pay the claim. XYZ will undoubtedly subrogate against the agent (who we hope has adequate errors and omissions coverage).

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


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

a. Express authority b. Implied authority c. Apparent authority d. No authority

The answer is “Apparent authority”.


Section 2 Topic C – Agent Licenses

Learning Objective: Differentiate between the common state insurance licenses granted to agents, brokers, managing general agents and surplus lines agents. States grant authority for many different classifications of agents to sell insurance and perform the duties of insurance agents as defined. We will review the more common classifications of licensed agent.

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


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

Learning Objective: Explain how the McCarran-Ferguson and Gramm-Leach-Bliley acts affect the states’ ability to regulate insurance. State legislatures have the authority to regulate insurance activities in their states. Congress reserves the right to regulate insurance where states do not and for all matters involving boycott, coercion and intimidation. The McCarran-Ferguson Act In 1944 in the case, U.S. v. S.E.U.A., 322 U.S. 533 (1944), the US Supreme Court said that insurance was interstate commerce. Insurance, then, is subject to congressional legislation. With the McCarran-Ferguson Act of 1945, Congress provided that to the extent that insurance was regulated by the states, antitrust laws should not apply with an exception for coercion, intimidation and boycott. While leaving regulation of insurance to the states, Congress kept the authority to create insurance law in those areas where the states do not regulate one or more activities. Importance to Agents State insurance departments regulate the licensing and market conduct of insurers and agents. In this capacity, the departments have the authority of law to conduct examinations of insurers and promulgate rules to protect consumers and others from unfair business and claims practices. These departments also have the authority to prosecute violators or impose fines and other sanctions where permitted by law. Gramm-Leach-Bliley Act of 1999 In 1999, Congress passed the Gramm-Leach-Bliley Act, otherwise known as the Financial Services Modernization Act. In this act, Congress granted banks and securities firms greater authority to write insurance than was previously permitted. Importance to States Much of this authority had been removed by the 1933 Glass Stegal Act, passed when bank and securities failures, resulting from unsound financial practices, predicated the Great Depression of 1929. The Gramm-Leach-Bliley Act also invalidated those state laws that put greater restrictions on the activities of bank-owned insurance agencies than other agencies.


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

Learning Objective: Give examples of parties that are regulated by various federal privacy regulations. The insurance industry and the agency as a business are subject to many regulations in the following areas:

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

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


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

Health plans Health care clearinghouses Certain other health care providers

Standards that apply include:

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

Importance to Agents

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

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

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

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

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

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

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

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

Copy of your Credit Report

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

Credit Checks

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

Denial of Credit

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

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

Credit Reporting Agencies

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

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

Learning Objective: Explain the impact of the Sarbanes-Oxley Act on public companies. SARBANES-OXLEY ACT of 2002 In response to the accounting scandals of 2000-2002, Congress determined that new accounting oversight and disclosure practices were required for publicly traded companies. These new rules include:

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Disclaimer: The advisory response is not a legal opinion. Different Federal and/or individual state laws may apply to this scenario or others with similar facts. Courts in different jurisdictions may interpret identical facts of the dilemma differently. Minor changes in the facts of the dilemma can produce different, legal or ethical interpretations. Finally, there may be one or more ethically or legally appropriate resolutions to the dilemma that have not been addressed. Learning Objective: Provide an example to explain inadequate, excessive, or unfairly discriminatory as it relates to industry rate regulation. ROBINSON-PATMAN ACT OF 1936 Congress felt that large retailers could dominate the market by extracting price concessions from manufacturers that were unavailable to smaller competitors.

The act makes it illegal for the manufacturer to favor one competitor over another with price differentiation that is not reflected in volume purchase, quantity of goods or services provided by the manufacturer.

The act applies to retail, wholesale and manufacturing insureds, but does not apply to intangibles such as insurance.

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

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

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

Replacement Commingling of funds Conflicts of Interest Rebating Controlled Business

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

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

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

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


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

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

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

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Florida Statutes 2002 Title 18, Chapter 626

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

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

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

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

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

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

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

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

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

No rebate shall be refused or granted based upon the purchase or failure of the insured or applicant to purchase collateral business. State Regulation of Insurers Controlled Business Controlled business is the writing of business that the agent or agency controls. This usually includes family-owned properties or businesses. Regulations exist to prevent a person from being solely licensed to write controlled business. This concept may be best expressed by example. Your business is property management. You own many locations and would like to become licensed as an insurance agent for just your business. You believe this is a good idea because you can reduce the cost of insurance by the commissions you will earn. Your business is considered controlled business. States have passed laws that limit the amount of controlled business licensed agents can write in proportion to all the insurance the agent writes. Consult your state's controlled business statutes.


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

Knowledge Check First click on a term then click on its matching definition. Replacement Customer and agency money in the same account Twisting Giving something of value that is not in the contract Commingling of funds Third party relationship that unduly influences an agent Conflict of interest Insurance on agent or agent’s property Rebating Replacing one policy for another Controlled business Not licensed/permitted to do business in a state Unauthorized insurers Getting customer to change by providing false

information Large commercial account laws Insurers do not have to file rates and forms for certain

large insurers – differs by state Answer: Replacement → Replacing one policy for another Twisting → Getting customer to change by providing false

information Commingling of funds → Customer and agency money in the same account Conflict of interest → Third party relationship that unduly influences an

agent Rebating → Giving something of value that is not in the contract Controlled business → Insurance on agent or agent’s property Unauthorized insurers → Not licensed/permitted to do business in a state Large commercial account laws

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

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


Section 3 – Insurance as a Business of Contracts Insurance is a business of contracts. However, the insurance contract is different from common business contracts. One difference is that insurance contracts are not between equals because the insurer has much more control over how the insurance contract is written. Courts routinely award coverage to consumers who believe that they purchased a contract that would cover the loss they suffered. In this lesson, we'll learn more about the "adhesion" principle described above, and other aspects of the insurance contract. Learning Objectives

1. Define the terms of contract that apply to insurance.


Section 3 Topic A – Terms of Contract That Apply to Insurance Contracts

Insurance is a business of contracts—written policies and oral agreements that represent written policies. Contracts are subject to interpretation and if disagreements occur, a court can be asked to interpret the contract. Within this context, there are many legal terms that apply to insurance contracts that do not always apply to other contracts. These terms include:

1. Adhesion 2. Aleatory Contract 3. Personal Contract 4. Unilateral Contract 5. Conditional Contract 6. Binder 7. Reasonable Expectation 8. Indemnity 9. Utmost Good Faith 10. Representations and Warranties 11. Concealment and Fraud 12. Waiver and Estoppel

Learning Objective: Define the terms of contract that apply to insurance.

Contract of Adhesion The prospective insured has little to say in the insurance contract’s provisions and conditions. Most policies are sold “as is” on pre-printed forms. The buyer’s choice is between not purchasing the insurance or buying and adhering to the insurer’s provisions. Because of this one-sided nature of insurance, when a contract ambiguity exists, courts will usually rule in favor of the insured. Courts reason that only the insurance company had the opportunity to make the contract provisions clear when it wrote the insurance contract, and if it fails to do so, then any ambiguity should be interpreted in favor of the insured.


Aleatory Contract In an aleatory contract there is an unequal exchange between the parties. Insurance is an aleatory contract because the element of chance is involved in the performance of the contract. It is unlikely that the premium in a single insurance contract will be equal to the actual losses paid by the insurance company.

Example The insured may pay $800 for personal auto insurance and during the policy year have no losses. Another insured may pay $800 in premium for the same coverage but be negligent in a serious accident for which the insurer will pay $30,000. In both events there is an unequal exchange.

Personal Contract A personal contract in insurance is between the insurer and insured. The property-casualty insurance contract is not property that can be given away or transferred to someone else. The underwriter is not insuring the building, but the business that owns and manages the property. The underwriter does not insure the product for products liability, but the businesses managers who control the design, manufacture and distribution of the product. If management control changes, the insurance company reserves the right to underwrite the new management. The insured cannot assign the policy to another without first obtaining written permission of the insurer. In life insurance, the policy owner can transfer certain rights. The policy owner may or may not be the insured. The owner may change beneficiaries unless the beneficiary designation has been made irrevocable. What the life insurance policy owner cannot do is transfer the coverage on the life of one person to the life of another.


Unilateral Contract Unilateral means one way. For the consideration of premium, only one of the contracting parties (the insurer) is required to pay covered losses. In a bilateral contract, both parties are expected to perform, for example widgets are produced by A for B who is required to purchase a certain amount. Either party in a bilateral contract may require performance of the contract should the other party renege or not meet performance expectations. In a unilateral contract, performance of the insured is payment of premium and the compliance with certain contract conditions before and after a loss.

Conditional Contract The insurer’s promise to pay is contingent upon certain things occurring:

an event that triggers a covered loss, and

compliance with policy conditions.

An event that triggers a covered loss:

In property and casualty insurance coverage, for example, coverage is activated by an occurrence that causes a covered loss to the insured or a covered loss to a third party that the insured is legally liable to pay. Compliance with contract conditions:

The insured may be required to comply with certain elements of the contract. Non-compliance with these conditions and others may void coverage. Some examples include:

Prompt reporting of the loss Cooperation with the insurer in any claim Participate in and do not jeopardize any defense the insurer has mounted Provide property for inspection

Binders A binder is a temporary insurance contract. Binders can be written or oral and are usually issued for periods of 30 days or less (unless otherwise governed by contract, insurer guidelines or statute). Oral binders are typically converted to writing as quickly as possible.

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Advisory Response First, send the producer to a class or train the producer on the insurance coverage and required endorsements. You do have a complex ethical decision to make. You could simply say—the older version of the form applies. However, if something should happen to the claim and the claim goes to court, you could put the producer in a difficult position —should I perjure myself and lie about the form edition I chose, or tell the truth and deal with an expensive errors and omissions loss. You could also explain the problem to the underwriter and ask for the binder to be reformed to list the older version of the endorsement, if the underwriter refuses, call your errors and omissions carrier. The insurer may need to update its underwriting manual to reflect its stance on when the old and broader version of the endorsement can be used so that there is no confusion. Disclaimer: The advisory response is not a legal opinion. Different Federal and/or individual state laws may apply to this scenario or others with similar facts. Courts in different jurisdictions may interpret identical facts of the dilemma differently. Minor changes in the facts of the dilemma can produce different, legal or ethical interpretations. Finally, there may be one or more ethically or legally appropriate resolutions to the dilemma that have not been addressed. Knowledge Check Mary has a personal auto policy with your agency. Her policy is a standard policy with exclusions. When considering the insurer’s promise to pay is contingent upon Mary’s compliance with all policy conditions, the policy is would be described as what type of contract?

a. Contract of Adhesion

b. Personal Contract

c. Unilateral Contract

d. Conditional Contract

The answer is “Conditional Contract”. Reasonable Expectation People don’t often read their insurance policies and if they do many not understand what they are reading.

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Utmost Good Faith Insurance contracts are said to be a contract of utmost good faith, because each party to the contract (the insurance company and insured) must rely heavily on the integrity and honesty of each other. The insurance company relies upon the accuracy of the applicant's statements. The insured relies upon the company’s promise to pay future claims. The agent is intertwined with both parties in the contract. The agent owes the insurer the utmost good faith that he/she has not withheld pertinent or relevant information. The agent owes the insured the duty to place insurance, priced in the best interest of the insured, with a financially sound insurer. Consumers want the cheapest price. They also want value. It is the responsibility of the agent to match the best value at the best price for the customer. Agents often compare one coverage quotation with another with an insured. It is then the insured’s responsibility to choose whether to take the cheaper policy that covers less, or the more expensive policy that covers more. Representations, Misrepresentations and Warranties

Representations and Misrepresentations Representations are oral or written statements of facts made by an applicant for insurance. A representation is not part of the property casualty insurance contract. Underwriters use this information supplied by the applicant in their decision to write policies. Information that is fundamental to the issuance of the policy if misrepresented by the applicant can void the policy. Many policies have clauses that state that “material misrepresentations” of fact can void coverage.

Joe represents on an application that his home is twenty-seven years old when it actually is twenty-six years old. There is an electrical fire. While this is a misrepresentation, it probably would not be material to the underwriter and the policy would not be voided because of this fact. Joe also represented that the aluminum wiring that was present in the home at the time of construction was replaced with copper wire ten years ago.

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Don’t put it down. The CFO doesn’t know enough to judge the situation at this time. Besides, the account already suffers from claims from this activist shareholder group and the underwriter may decline the account.

Tell the incumbent D&O carrier about the situation, they will cover anyway—give the incumbent carrier every possible situation you can think of. Don’t put it on the new application. Report the situation to the incumbent carrier and list on the application for the new carrier. We don’t have enough information about how the policies are constructed to determine which carrier will be responsible for paying the loss.

Advisory Response It may be prudent to ask the underwriter for a determination and to document that decision so that if there is a claim, the intent of the insurer at the time of the application is in writing, if the insured changes carriers, it may have to report the situation within the policy period to the expiring carrier to be entitled to a defense if the situation turns into a claim. The insurer may need to provide a clearer explanation or definition in the application of which incidents or potential wrongful acts are required to be listed. Disclaimer: The advisory response is not a legal opinion. Different Federal and/or individual state laws may apply to this scenario or others with similar facts. Courts in different jurisdictions may interpret identical facts of the dilemma differently. Minor changes in the facts of the dilemma can produce different, legal or ethical interpretations. Finally, there may be one or more ethically or legally appropriate resolutions to the dilemma that have not been addressed.

Concealment and Fraud A fraudulent insurance act is defined as an act committed by anyone who, knowingly and with intent, defrauds another person for gain. There are three elements required for fraud to exist:

1. There must be a manipulation of the truth 2. There must be intent to get someone to rely upon the manipulation 3. The result of the manipulation is detrimental to someone.

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Waiver and Estoppel A waiver is a voluntary giving up of a known right. Estoppel is the removal of a right or claimed position by acting in a manner that is inconsistent with that right or position. Reservation of Rights In most property and casualty insurance policies, insurers have the right and duty to defend the insured for covered causes of loss even if the allegations may not be true. Casualty insurance policies will not defend claims that are clearly not covered by the contract. However, early in the claims process, it may be difficult for the claims adjuster to determine whether the circumstances surrounding the loss are covered or not. Insurance company adjusters often send the insured a “reservations of rights letter” which says that the company is investigating the facts now but reserves the right to deny the claim at a later date. If the company does not send this letter, it may be estopped from denying the claim in the future, because it gave the insured the impression by its investigatory actions that the claim was being covered. The company could deny a gray area claim entirely; however, if the claim was later found to be a covered claim, the insured could initiate a bad faith lawsuit and claim punitive damages over and above the amount of the covered claim. Bad Faith Bad faith claims against insurers are becoming more common and are often filed when:

1. Insurers deny coverage in a first-party claim and the insured later prevails in court, or:

2. The insurer takes too long to offer any settlement (delaying tactics), or;

3. The insurer otherwise does not treat the insured fairly in the process of settling the claim.

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Complete the Knowledge Check on Section 3 Terms of Contract p24 Be sure to complete Self Quiz 3 at the end of Section 3.


Section 4 – The Insurance Agent as a Professional

The majority of claims made against agents come from ordinary negligence and simple errors. In this lesson you will review the types of claims that are regularly paid by agents and agent errors and omissions insurance for negligent acts by agents. Sometimes, the courts may apply a higher standard of care for an insurance agent accused of negligence; that is, when a "special relationship" exists between agent and client. You will review a series of court cases that have addressed the issue of the insurance agent as a professional and explore situations where agents have been granted professional status when they engage in “special relationships” with clients. Learning Objectives

1. Define tort.

2. Define negligence and the four elements required for negligence to exist.

3. Explain the common law defenses against negligence.

4. Define professional.

5. Describe how Hardt v. Brink and other court cases have applied the concept of “special relationship” in order to elevate an insurance agent to professional status.

6. List the circumstances that have been found to trigger “special relationships.”

7. List the reasons why there has been an increase in lawsuits against insurance agents.

8. Give examples of the types of negligence claims routinely filed against agents by consumers.

9. Give examples of the types of negligence claims routinely filed against agents by insurers.


Section 4 Topic A – Negligence Defined

The courts generally find that the insurance agent is not a professional except when a “special relationship” exists. However, insurance agents are routinely found guilty of ordinary negligence in the performance of duties toward clients and customers. Just what is negligence? To understand negligence, we need to know a bit about the tort liability system. Learning Objective: Define tort. Tort Liability A basic definition of "tort" is a civil legal wrong against another for which the courts often assess monetary damages against the wrongdoer. Tort liability is imposed by common law. Common law evolves through the application of court case decisions over time. In this Ethics course, we are concerned about the tort called negligence. Learning Objective: Define negligence and the four elements required for negligence to exist. Negligence Negligence is the failure to exercise the care that an ordinary prudent person would exercise: either doing that which a prudent person would not do, or failing to do that which a prudent person would do. Four elements are required for an act to be considered negligent. There must be a duty owed by the negligent party to another party.

There must be a breach of that duty. An actual injury or loss must occur. There has to be a close cause and effect (proximate cause) relationship between the

breach of that duty and the injury or loss.

If a driver runs a stop sign, the driver breached a duty owed. But unless they cause injury or property damage, there is no negligent tort.

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Learning Objective: Explain the common law defenses against negligence. Common Law Defenses Against Negligence Causes of Action Assumption of Risk Assumption of risk is the voluntary acceptance of danger or exposure to loss. The agent might use this defense when an insured decides not to carry a recommended coverage. The agent should document this with a written declination. Contributory or Comparative Negligence In the majority of states, a defendant can be found partially at fault (comparative negligence) and still collect a portion of damages. In many contributory negligence states, the defendant cannot be even one percent at fault to collect damages (others may go as high as 10%). The question of partiality of fault may arise in this type of situation: The insured accepts state minimum limits for uninsured motorists coverage, but asks questions about why she should have the coverage to which the agent replies, “Oh, it just pays for uninsured accidents, but you will be insured.” The insured is injured by an uninsured motorist and quickly exhausts the limits of insurance and sues the agent for more money. The insured claims that the agent should have been more specific with the answer and the agent says that the insured signed the application and told him she wanted the cheapest possible insurance available, “Just whatever the state says I have to have”. If the court agrees that the agent should have provided a better answer and that the insured should have continued to ask questions if she didn’t understand the answer, the court may have to decide the proportion of fault for both parties. Fellow Servant Rule In common law, employers are not responsible for injuries suffered because of a fellow worker’s negligence. Such a defense may be used by an agency principal when a producer commits a negligent act outside the scope of employment that injures a client in some way. However, there are many other considerations in this type of claim including vicarious liability related to negligent supervision of the producer by the agency principals or managers. Acts of Nature One cannot be held liable for lighting strikes, hurricanes or earthquakes… However, the agent knew that the customer’s home was in a flood plain and failed to recommend flood insurance to the customer. After a hurricane storm surge floods the home, the agent may be considered


to be negligent in his/her duties as a professional. This leads us to the next topic. What is a professional and when are insurance agents considered professionals? Knowledge Check

Which example illustrates a situation where the agent would have a common law defense of assumption of risk?

a. Nathan tells his insurance agent John that he only wants to insure his car for the minimum required amount. When asked if only the minimum liability coverage will suffice, John tells Nathan that he would be covered in an accident with only collision coverage.

b. Lisa has a homeowners policy. When an earthquake damages her house, she sues her insurance agent Scott for damages, alleging that he did not provide her with accurate coverage.

c. Lynn recommends to all her clients that they carry uninsured motorists insurance on their automobile policies. Her client Phillip decides to forgo purchasing uninsured motorists insurance and signs a declination document.

d. Mark is an agency principal. His producer John backs into a client’s car while leaving for the day. The client sues Mark.

The answer is “Lynn recommends that all her clients carry uninsured motorists insurance on their automobile policies. Her client Phillip decides to forgo purchasing uninsured motorists insurance and signs a declination document.” Summary Tort: A civil wrong against another for which courts often assess monetary damages against the wrongdoer. Negligence: Failure to exercise care that an ordinary prudent person would exercise.

Four requirements for Negligent Tort:

Duty owed to another Breach of that duty Actual injury Proximate cause

Negligence defenses:

Assumption of risk Contributory or comparative negligence Fellow servant rule Act of nature


Section 4 Topic B – The Definition of Professional

Learning Objective: Define professional. The 1999 Random House Webster’s College Dictionary defines “profession” as: A vocation requiring extensive education in science or the liberal arts and often specialized training. Most people agree that doctors, lawyers, and accountants are “professionals.” In addition to years of education, doctors, lawyers, and accountants must be licensed by state authorities and must adhere to standards of the profession which go beyond the law. If a doctor is not properly trained, a person could die; if a lawyer is incompetent, a client could lose money or freedom; or if the accountant is careless, the client could suffer heavy fines from the IRS and others. PEOPLE EX REL. TOWER V. STATE TAX COMMISSION 282 N.Y. 407, 26 N.E.2d 955. In 1940, the New York Court of Appeals took on the job of defining what a professional was. In New York, professionals were subject to the state’s unincorporated business tax. The state classified the plaintiff, a customs clerk, as a professional and he sued the state for relief. Because the plaintiff needed to understand customs law, the state reasoned that he was a professional. The court disagreed, saying that knowledge in and of itself did not define a professional but that “knowledge of an advanced type in a given field of science or learning gained by a prolonged course of specialized instruction or study” was the test.

LEE H. KIMMELL, ET AL., RESPONDENTS, v. HERMAN A. SCHAEFER, APPELLANT, ET AL., DEFENDANTS. 89 N.Y.2d 257, 675 N.E.2d 450, 652 N.Y.S.2d 715 (1996) In 1989 in Kimmel v. Schaefer, the New York court further clarified the circumstances in which someone might be classified as a professional: “Since a vast majority of commercial transactions are comprised of such 'casual' statements and contacts, we have recognized that not all representations made by a seller of goods or provider of services will give rise to a duty to speak with care.


Rather, liability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified. Professionals, such as lawyers and engineers, by virtue of their training and expertise, may have special relationships of confidence and trust with their clients, and in certain situations we have imposed liability for negligent misrepresentation when they have failed to speak with care.”

The Agent May Be Subject to the "Special Relationship Test" Even though insurance agents must study and pass tests to become licensed, these tests coined by the New York Court of Appeals require a higher standard, and therefore most courts have agreed that the agent is not normally a professional. However, in the case of Hardt v. Brink, the Western District of Washington Federal Court determined that if a “special relationship” between the agent and the insured exists, the agent is considered a professional and subject to a higher standard of care than ordinary negligence. The essence of the professional relationship is one of degrees. No clear line exists and the courts have made it clear that the existence of a "special relationship" should be judged on a case-by-case basis. We’ll go over Hardt v. Brink in the next section.

Summary: Courts do agree that the agent is subject to ordinary negligence. Unless “special relationships” exist, the courts have generally found the following to be true:

Consumers have a duty to read their insurance policies.

The agent can be held negligent for misrepresentations of the nature, extent or scope of coverage.

The insurance agent is not obligated to offer higher limits of insurance than the consumer asks for, nor does the agent have a duty to advise the consumer as to the adequacy of coverage.

o However, if “special relationships” exist, then the insurance agent is held to a higher standard.


The agent has a duty ask the consumer to clarify statements made by the consumer that the agent does not understand.

The agent has a duty to act in good faith and to do what the consumer asks them to do.

Agents should be held to a duty to perform that is consistent with other knowledgeable insurance agents in the state.


Section 4 Topic C – Court Cases that Define Insurance Agents as Professionals

Learning Objective: Describe how Hardt v. Brink and other court cases have applied the concept of “special relationship” in order to elevate an insurance agent to professional status. HARDT V. BRINK, 192 F. Supp. 879, 881 (W.D. Wash. 1961) Until this case in the Western District of Washington Federal Court, most people assumed that consumers ought to educate themselves about their insurance needs and that the agent didn’t need to explain coverages to the client. Hardt owned a metal products company that leased space in a building. Hardt’s lease with the building owner excluded Hardt from any coverage under the landlord’s building. After a fire, Hardt discovered that he had no coverage. Agent Brink argued that he knew nothing about the lease. The court noted that for eight years agent Brink had selected insurance coverage and settled claims for Hardt. In this case, the court considered the underlying question of whether an agent who assumes additional duties for clients should be considered a professional. Additional duties in this case included the placement of coverage and the negotiation of claims payments. Hardt also argued that agent Brink had held himself to be an expert in insurance and therefore should be considered a professional. In fact, the court found that agent Brink had represented himself as an expert both on stationary and on policy stickers. The court noted, "This is an age of specialists and as more occupations divide into various specialties and strive towards 'professional' status, the law requires an ever higher standard of care in the performance of their duties." Based upon this, the court agreed that Hardt could assume that agent Brink "was a person highly skilled as an insurance advisor" and had assumed the duty to advise Hardt, thus putting himself in the position of being considered a professional, and subject to a higher standard of care. Courts have recognized this expanded duty of care when so-called “special relationships” exist. Hardt left open the door for future cases to determine just what these professional duties are. Generally, a professional is required to act within the degree of care and skill as a reasonable professional in the field. This is a higher duty of care than the reasonable and prudent person for ordinary negligence.


DIMEO V. BURNS, BROOKS & MCNEIL, INC., 6 Conn. App. 241, 504 A.2d 557, (1986), cert. denied, 199 Conn. 805, 508 A.2d 31 The plaintiff insured his home with the agent and then asked the agent to insure his autos. The agent advised the plaintiff to increase liability insurance limits from $100,000 to $300,000. The plaintiff agreed. However, the agent did not recommend that the plaintiff increase uninsured motorists coverage, which remained at $20,000. The plaintiff was in a collision with an uninsured motorist and quickly used up the $20,000 uninsured motorists coverage, and then filed a claim against the agent for failure to advise. The court ruled against the plaintiff in this case because it did not see that the agent had a special relationship with the insured. However, the court expanded upon the Hardt decision by saying, "an agent has the duties to advise the client about the kind and extent of desired coverage and to choose the appropriate insurance for the client." The rationale for this they said was because the consumer, “ordinarily looks to his agent and relies on the agent's expertise in placing his insurance problems in the agent's hands." The court reasoned that the agent was a professional and had a duty to perform to the “knowledge, skill and diligence” of other insurance professionals licensed to do business in the State of Connecticut. One of these duties was to explain uninsured motorists coverage, explain the consequences of inadequate coverage and recommend a reasonable amount of coverage, and make a reasonable effort to find this amount of coverage for the customer. This court decision and others have not provided agents with strong guidance with how to act when performing the duties of an agent. Legally, the agent may not be normally required to advise the consumer to purchase higher limits of coverage, but ethically, the agent as a professional knows the consequences of inadequate liability and underinsured motorists coverage. The agent as a good businessperson knows that a book of business with inadequate limits of insurance is not highly marketable to insurers. Unhappy customers who are not indemnified after a loss spread the word of their unhappiness to their friends and blame the agent and insurer and many will sue the agent and the company to make up the difference in their loss.

WANG ET AL., PLAINTIFFS, RESPONDENTS V. ALLSTATE INSURANCE COMPANY ET AL., DEFENDANTS, APPELLANTS. New Jersey Supreme Court. No. A- 133/134. June 26, 1991 The injured party swerved to avoid two dogs and was injured in the resulting accident. The injured party then sued the two homeowners who owned the dogs for negligence in controlling


their animals. Neither of the two homeowners had adequate insurance limits to pay for the injuries. Both homeowners sued their agent because neither claimed to have ever been given advice by their agent to increase liability coverage. One of the homeowners claimed to have been an insured of the agent for 20 years. Both homeowners claimed no expertise in insurance and said that they relied on the agent for advice. While the court acknowledged that there are times when a “special relationship exists” between agents and customers, no special relationship or pattern of dependency, counseling or recommendation existed in this case. It found that policies were routinely renewed without discussion and concluded that there was "no common law duty of a carrier or its agents to advise an insured concerning the possible need for higher policy limits upon renewal of the policy." THOMAS MURPHY ET AL., APPELLANTS, v. DONALD C. KUHN, ET AL., RESPONDENTS. 90 N.Y.2d 266, 682 N.E.2d 972, 660 N.Y.S.2d 371 (1997) The plaintiff was insured under a commercial automobile policy for $500,000. The plaintiff’s son was found to be at fault after a serious automobile accident. The actual final settlement for the claim was nearly $700,000. The plaintiff sued the defendant agent to recover the additional $200,000 over what the insurer paid. In 1990 the defendant agent notified the plaintiff that his personal automobile policy was in danger of being cancelled because of the bad driving record of his children. The plaintiff then transferred coverage on the vehicle (titled in Murphy’s name) to his business automobile policy. The plaintiff testified that he had titled all of his children’s vehicles in his name. For nearly ten years, the plaintiff had maintained coverage on his business policy at $250,000 per person and $500,000 per accident. The plaintiff never requested higher limits from the defendant/agent. The defendant agent had insured the plaintiff for personal lines since 1977 and for commercial lines since 1979. The plaintiff argued that “insurance agents can assume or acquire legal duties not existing at common law by entering into a special relationship of trust and confidence with their customers. …"that a special relationship developed from a long, continuing course of business between plaintiffs and defendant insurance agent, generating special reliance and an affirmative duty to advise with regard to appropriate or additional coverage.” The State Supreme Court, however, concluded that, “absent a request by the customer, an insurance agent ‘owes no continuing duty to advise, guide or direct the customer to obtain


additional coverage’.” The court concluded that in this instance the so-called “special relationship” doctrine established by Hardt v. Brink did not apply. However the court didn’t stop there. The court advised that while this case didn’t break new ground in the “special relationship” doctrine, “Exceptional and particularized situations may arise in which insurance agents through their conduct or by express or implied contract with customers and clients, may assume or acquire duties in addition to those in addition to those fixed at common law.” The court advised that these situations would need to be decided on a case-by-case basis. Learning Objective: List the circumstances that have been found to trigger “special relationships.” What circumstances have courts found that trigger the “special relationship” test?

The Agent as Expert

When the agent “holds himself out” to be an expert or has expertise in the type of insurance being sought by the consumer. FITZPATRIC V. HAYES, 57 Cal. App. 4th 917 67 Cal. Reptr. 2d 455 at 452 (1997). Also HARDT V. BRINK, 192 F. Supp. 879, 881 (W.D. Wash. 1961).

Relationship of Actual Closeness

When there is a relationship of actual closeness. i.e. there is more than an arms-length business relationship including counseling on insurance coverage the agent doesn’t write or providing services above and beyond what an average insurance agent would otherwise provide in the state. WEISBLATT V. MINNESOTA MUTUAL LIFE INS. CO., F. Supp. 2d 371 (E.D. Pa. 1998). Also HARDT V. BRINK, 192 F. Supp. 879, 881 (W.D. Wash. 1961)

Substantial Disparity

When there is substantial disparity between the agent and the insured. i.e. the agent has significant expertise and the client is semi-literate. The doctor patient relationship is highly disparate because the patient must rely upon the doctor not only for diagnosis, but also for prescriptions and competent care. WEISBLATT V. MINNESOTA MUTUAL LIFE INS. CO., F. Supp. 2d 371 (E.D. Pa. 1998)

Reliance on the Agent

When the insured actually relies upon the agent for advice and counsel. i.e., “recommend the limits you think are best for me and I will follow your advice,” and this pattern extends over a period of time. WEISBLATT V. MINNESOTA MUTUAL LIFE INS. CO., F. Supp. 2d 371 (E.D. Pa. 1998)


Other Special Relationships

The agent can enter into a “special relationship” with a client at any time. It is up to a court to decide when the line is crossed and which activities of the agent contribute to the “special relationship.” THOMAS MURPHY ET AL., APPELLANTS, v. DONALD C. KUHN, ET AL., RESPONDENTS. 90 N.Y.2d 266, 682 N.E.2d 972, 660 N.Y.S.2d 371 (1997).

Summary Professional: Vocation requiring extensive training Hardt v. Brink: First case to make agent professional when “special relationship” exists Circumstances that trigger special relationship:

Agent holds him/herself out to be an expert Relationship of actual closeness Insured relies upon agent for advice Substantial disparity between agent and insured “Special relationship” can occur at any time; court decides


Section 4 Topic D – Beyond Professionalism – Insurance Agents and the Legal System

We have reviewed only a few of the many cases related to agency law and the duties of insurance agents to their clients. There are many more ordinary negligence cases that have been decided against agents who failed to submit applications on time, proclaimed coverage where none existed, or otherwise failed to secure proper insurance coverages for customers in a timely manner. Whether the insurance agent is considered a professional or not in a particular case, we find the following to be true:

Facts of similar cases have different outcomes in different jurisdictions; small factual changes can mean different outcomes in the same jurisdiction.

The legal relationship with the client depends upon the services performed.

The agent’s liability grows with the authority granted by the customer to a point where that “special relationship” exists. However this is not a bright line and courts may need to determine when this relationship begins.

Social, ethical, and legal responsibilities are linked — insurance is a people serving business.

Learning Objective: List the reasons why there has been an increase in lawsuits against insurance agents.

Increase in Lawsuits Against Insurance Agents Insurance agents have not been spared from the increase in negligence lawsuits.

Increase Availability of Legal Services Legal services are available to all consumers today. Many negligence cases are taken by lawyers who only get paid if they win the case, so even the poor can afford to hire an attorney. Attorneys advertise these services. Deep Pocket Theory Juries have come to believe that insurance companies and agencies have deep pockets and can afford to pay any claim. Within this concept is the notion that the person is injured—it wasn't his/her fault—someone should pay.

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Failure to request proper coverage

Client requested coverage, but agent did not ask company to provide.

Failure to receive proper coverage

The agent requested the coverage from the company but did not follow up to see that the coverage was provided.

Failure to place coverage on the best terms available

The agent has a choice between company A and Company B. Company B pays higher commissions but provides lower coverage. The agent recommends and the insured accepts Company B. A subsequent loss is either not covered or is inadequately covered by Company B and the insured finds out that he could have been insured properly with Company A.

Misrepresentations

Of coverages to the insured i.e. “Sure, you have replacement cost collision coverage.”

Failure to maintain or renew coverage

i.e., the agent forgot to send in the renewal questionnaire and the policy was cancelled by the insurer.

Failure to advise of cancellation or non-renewal

Inadequate limits or modified coverage

The insured applies for a policy that includes X coverage, but the agent is unable to obtain X coverage from the underwriter and does not tell the customer.

Placing coverage with an insolvent insurer.

Failure to service the policy.

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HIGGINBOTHAM & ASSOCIATES V. GREER, 738 S.W.2d 45, 46 (Ct. App. Tex. 1987). In this case, the agent placed coverage with an insurer who was insolvent at the time the claim was made, but not at the time the application was taken. While agents normally are not responsible for recommending an otherwise solvent insurer that later becomes insolvent, a certain amount of due diligence is required. In Higginbotham, the judge ruled, "We...conclude that an agent is not liable for an insured's lost claim due to the insurer's insolvency if the insurer is solvent at the time the policy is procured, unless at that time or at a later time when the insured could be protected, the agent knows, or by the exercise of reasonable diligence should know, of facts or circumstances which would put a reasonable agent on notice that the insurance presents unreasonable risk." Learning Objective: Give examples of the types of negligence claims routinely filed against agents by insurers. Negligence Claims The following are common situations where courts have found the agent legally responsible to the insurer:

1. Unauthorized instructions

2. Violation of company binding authority

3. Unauthorized coverage interpretations—the agent produces a brochure that references the insurer, includes some coverage interpretations verbatim supplied by the insurer, but uses a different interpretation not authorized by the insurer for one or more coverages

4. Failure to submit claims

5. Violation of agency agreement—the agency is only permitted to solicit insurance on behalf of the company in specific counties

6. Misrepresentations - misrepresentation of information supplied by the insured on the application, e.g., “No, they discontinued making fireworks years ago, ” and fireworks represents 20% of their profit

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

Summary Agent liable to consumer

• Improper analysis of risk • Failure to provide proper coverage • Failure to request proper coverage • Failure to receive proper coverage • Failure to maintain or renew • Failure to advise of cancellation • Inadequate or modified limits • Fail to place on best terms • Misrepresentations • Place with insolvent insurer • Failure to service policy • Failure to follow instructions • Failure to fully disclose

Agent liable to insurer • Unauthorized instructions • Violate binding authority • Violate agency agreement • Unauthorized coverage interpretations • Failure to submit claims

Reasons for increase in lawsuits against agents • More legal services • Deep Pockets • Agents buy E&O • Specialization • Complex policies



Section 5 – Insurance Agent Obligation to the Consumer, Insurer, and Peers

We have seen that the agent owes the consumer both an ethical and legal duty of care to the consumer. However, the agent is also obligated to the insurer and to peers. We will explore these obligations in this section. Learning Objectives

1. List the six major categories of agent obligation to the consumer.

2. Give four reasons why fraud is prevalent in the insurance industry.

3. List the four major categories of agent obligation to the insurance company.

4. Describe the application of state laws dealing with advertising, fair dealing and disparagement of peers.


Section 5 Topic A – Insurance Agent’s Obligation to the Consumer

Learning Objective: List the six major categories of agent obligation to the consumer. There are six major categories of agent obligation to the consumer:

1. The agent should understand that the insured looks to the agent for advice about insurance.

Consumers are expected to read their policies, but many do not. The responsible agent double-checks the policy to make sure that what was ordered is what is received. The consumer expects to be asked questions by the agent to determine needs, but the consumer reserves the right to reject that advice. The responsible agent will respect the consumer’s right to choose, but will also make sure that this rejection is properly communicated so there is no confusion at the time of a claim.

2. The agent owes a fiduciary duty to the consumer.

A fiduciary is a person who occupies a position of trust, especially one who manages the affairs of others. Consumers expect the agent to be a fiduciary. This includes the premium they entrust with the agent and the risk of loss they have asked the agent to measure.

3. The consumer expects the agent to obtain coverage from a solvent company that will promptly pay claims when due.

Consumers don’t understand the business of insurance. They rely upon the agent to recommend a company that will be around to pay claims and be reasonable in the adjustment of claims. Commercial customers want to know whether a company will be available to pay liability claims that may take decades to fully develop.

4. The consumer expects to receive insurance at a reasonable cost.

The consumer expects that all other things being equal (coverage, service, claims paying ability etc.), that the agent will recommend the carrier with the lowest cost.

5. The consumer expects to be kept informed by the agent.

Consumers want to rebuild their homes after a fire or remain in business after a devastating automobile accident. The consumer relies upon the agent’s advice in suggesting appropriate coverages and limits. We have seen that not all courts will find an agent responsible for not suggesting higher limits of coverage than the customer

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If admitted insurers in the agent's shop will not write the coverage, the agent may have to seek coverage in the excess and surplus lines markets—even if it means earning lower commissions than the admitted companies will pay. It may be necessary for the insurer to better define when it will write the endorsement and when it will not so that the agent is not put in the position of guessing when to ask for the coverage and exposing the agency to errors and omissions claims. For example, the customer has a loss and finds out that it would have been covered by the endorsement. The agent was able to obtain the endorsement for that insured's same size competitor. The customer could have a cause of action against both the agency and company. Disclaimer: The advisory response is not a legal opinion. Different Federal and/or individual state laws may apply to this scenario or others with similar facts. Courts in different jurisdictions may interpret identical facts of the dilemma differently. Minor changes in the facts of the dilemma can produce different, legal or ethical interpretations. Finally, there may be one or more ethically or legally appropriate resolutions to the dilemma that have not been addressed.


Section 5 Topic B – Consumer Attitude Towards Fraud

The National Insurance Crime Bureau of Palos Hills, Illinois estimates that property-casualty insurance fraud costs American consumers $30 billion per year and adds between $200 and $300 to each household’s premium bill each year. Learning Objective: Give four reasons why fraud is prevalent in the insurance industry. Insurance fraud has always been a problem for a number of reasons.

Customer attitudes

People don’t understand actual cash value and think they are entitled to new for old.

Rising costs

Deductibles and premiums are rising. Some people believe they are entitled to get at least their money back from all the premiums that they pay.

Unscrupulous providers

Unscrupulous service providers in the automobile repair, medical professions, and other services provide opportunities for consumers to pad claims.

Workers comp

Others misuse the workers compensation system, remaining out of work longer than the injury requires. Third party claimants may overstate pain and injury to get higher awards.

However, consumers are beginning to realize that the cost of fraud is included in the rising premiums that they pay. A recent opinion poll entitled Insurance Fraud: A Public View, June 2003 by the Insurance Research Council found that one in three consumers feel it is all right to exaggerate claims under certain circumstances. However, the study also noted that since 1997, the public’s support for claims exaggeration continues to decline. Three out of four respondents to this survey expressed concern over the amount of automobile insurance fraud in their states.

Mike: Are you sure the rear bumper was damaged in this accident?

Darelle: Yes. It was damaged in this accident.


Mike: Based on the accident information, that isn’t possible.

Darelle: So what? It was damaged in another accident. I pay a lot of premiums. The insurance company can afford this repair, I can’t! They owe me!

Mike: Well, I really shouldn’t do this, but business is low. We’ll just see if the adjuster catches it.

Darelle: It’s not really lying; it was damaged in another accident, just not this one.

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Section 5 Topic D – The Insurance Agent’s Obligation to Peers

Learning Objective: Describe the application of state laws dealing with advertising, fair dealing & disparagement of peers. Fair Dealing and Disparagement of Peers The codes of Ethics of CPCU, CLU and ChFC and the IIABA all contain wording that suggests that disparagement of peers is not ethical:

From CPCU: Cannon 6, G6.2

“A CPCU should strive to establish and maintain dignified and honorable relationships with competitors, as well as with other fellow practitioners.”*

From the IIABA:

“I pledge myself to maintain friendly relationships with other agencies in my community. I will compete with them on an honest and fair basis, make no false statements, nor any misrepresentation by omission or facts, inference or subterfuge.” *

From CLU and CHFC, Guide 2.2 B (2)

Activities that could present a violation to this guide include “A member impairing the reputation of another member.” *

*(Code as of 8/02 from Responsibilities of Insurance Agents and Brokers, Volume 4, Mathew Bender, Newark, NJ.)

These codes of ethics also require that the member or designee fairly compete with peers and other members or designees. Many state laws have rules against disparagement of peers. For example, Texas says that an agent “May not unfairly disparage competitors, policies services or business methods.”

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Summary Agent obligations to consumer

• Consumer look to agent for advice • Fiduciary duty • Solvent insurer • All things being equal - choose lowest-priced company • Keep insured informed • Due diligence in selecting third parties

Fraud is prevalent because

• Consumers don't understand actual cash value • People believe they are entitled to money back • Unscrupulous service providers • Consumers take advantage of WC or otherwise overemphasize pain and injury

Agent obligation to insurer

• Fiduciary duty • Compliance with guidelines, policies and procedures • Loyalty, good faith and integrity • Don't conceal matters that may prejudice company decisions

Agent obligation to peers

• No disparagement • Fair dealing • Accurate advertising



Section 6 – Unfair Trade Practices, Unfair Claims Settlement Practices, the Need for Errors and Omissions Coverage, and the Golden Rule

States have implemented unfair trade practices acts. These acts attempt to codify into law a moral code regarding how agents and companies should act towards each other. These unfair trade practices also serve to define those practices that may be harmful or deceptive to consumers. Unfair claims settlement practices acts, as legislated by the states, protect consumers from some of the more egregious claims settlement and delay practices. Even ethical agents make mistakes. Most agents purchase errors and omissions coverage to provide defense and indemnity against the negligent errors that an agent can make in the ordinary course of business. Some of these errors can be attributed to sloppy paperwork or other practices, yet others have their foundation in ethics where decisions were made or actions taken that were not right, and when uncovered or discovered, actual harm resulted.

The course closes with a brief discussion of the Golden Rule, probably the simplest statement of the application of ethics that has been written down. Learning Objectives

1. Name the unfair trade practices listed in the NAIC Unfair Trade Practices Model Act.

2. List the common provisions of state unfair settlement claims practices laws.

3. Give examples of the types of claims made against agents that errors and omissions policies cover.

4. Explain the common features found in most agent errors and omissions policies.

5. Explain the meaning of the Golden Rule.


Section 6 Topic A – Unfair Trade Practices Act

The NAIC (National Association of Insurance Commissioners) developed a model regulation for unfair trade practices in 1991 (with later amendments). Many states have adopted this act in total or in part. The purpose of the act is to regulate trade practices in the business of insurance in accordance with the intent of Congress as expressed in the Unfair Trade Practices Act of 1945. We won’t review the entire act; only summarize the unfair trade practices outlined in the act. Learning Objective: Name the unfair trade practices that are listed in the NAIC Unfair Trade Practices Model Act. Unfair Trade Practices Act of 1945

A. Misrepresentation & False Advertising of Policies including:

Misrepresentation of benefits

Misrepresentation of dividends

Misrepresentation of the financial condition of an insurer

Intentional misrepresentation of the premium to induce purchase

Misrepresentation of the policy as shares of stock

B. False Information and Advertising Generally—In the papers, on the radio, television, on the Internet etc.

C. Defamation—Making, publishing, circulating etc. oral or written statements which are false or maliciously critical or derogatory to the financial condition of any insurer, and which is calculated to injure such insurer.

D. Boycott, Coercion and Intimidation—Boycott: A local agent association refuses to do business with an insurer until it increases its commission schedule.

E. False Statements and Entries—Knowingly making false statements to the insurance department or other regulatory authorities (including, for example, the SEC).

F. Stock Operations and Advisory Board Contracts—Offering stock as an inducement to purchase insurance. Unfair Discrimination—unfair discrimination between persons or businesses in the same class. This includes underwriting and pricing considerations.

G. Rebates—Except where provided by law i.e. Florida


H. Prohibited Group Enrollments—e.g. An insurer cannot appoint a trade association manager to write insurance for the association unless that person is licensed. (Controlled business statutes in the states generally prohibit the association manager from being the agent for the association.)

I. Failure to Maintain Complaint Handling Procedures—For insurers, the process to handle complaints by consumers to the insurance department.

J. Misrepresentation in Insurance Applications—Making false statements on a policy to obtain a fee, commission, money or other benefit from any insurer, agent, broker or individual.

K. Unfair Financial Planning Practices—Deals with a life insurance agent holding himself/herself out to be a financial planner when in fact the agent only sells life insurance. Collecting both a fee and a commission on a life insurance policy is not permitted. Also, included are client disclosure requirements as to compensation, expertise and the like.


Section 6 Topic B – Unfair Claims Settlement Practices Acts

Learning Objective: List the common provisions of state unfair settlement claims practices laws. Each state has legislated a different unfair claims settlement practices act. Many unique state provisions have to do with time limits for certain filings or settlements, or for unethical claims practices that were prosecuted in the state.

Policy Misrepresentation

The company cannot knowingly misrepresent policy provisions at the time of claim, nor can the company alter policy conditions, exclusions or add endorsements that were not part of the original policy without your consent.

Good Faith Negotiation

The company cannot hold up the settlement for the collision coverage until it has settled with you for uninsured motorists coverage.

Claims Acknowledgement

The company must promptly acknowledge that it has received your claim. What is prompt varies by state. For example, states often specify that the insurer must contact the insured on first party auto claims within so many days after the claim has been reported by the insured.

The company must also establish guidelines for investigating and processing claims so that claims are not dragged out unnecessarily. These requirements vary by state. The company cannot also require excessive or duplicitous paperwork.

Forcing Claimant to Sue

Require the insured to sue for larger settlement — the company cannot say, “the only way you can get more money than I am offering is to sue us.”

Abuse of Legal System

Can’t abuse the legal system — the company cannot file endless appeals and extensions to drag out cases.

Explanation of Claim Denial

Claims denial must be related to the facts of the claim — the insurer must provide a factual explanation of why the claim is not covered


Summary NAIC Unfair Trade Practices Model Act

• Misrepresentation and false advertising • False information • Defamation • Boycott, coercion, and intimidation • False statements and entries • Stock operations and advisory board contracts • Unfair discrimination • Rebates • Prohibited group enrollments • Failure to maintain complaint handling procedures • Misrepresentation in insurance application • Unfair financial planning practices

Unfair Claims Settlement Practices Act

• Policy misrepresentation • Negotiate in good faith all policy coverages • Claims acknowledgement and processing • Require insured to sue for larger settlement • Abuse of legal system

• Claim denial must be related to facts of the claim


Section 6 Topic C – The Need for Errors and Omissions Coverage

Learning Objective: Give examples of the types of claims made against agents that errors and omissions policies cover. Agents and agencies make mistakes:

Applications are not properly completed.

Phone messages get lost.

The customer says she told the agent she wanted coverage for auto; the agent doesn’t remember.

The customer believes the agent should have offered higher limits of insurance.

The company believes the agent has given confidential information to its competitor.

Through apparent authority the company must pay the claim, but subrogates against the agent because the agent did not have authority to bind the coverage.

The agent lost the customer’s check. These and many other scenarios can lead to claims against the insurance agent that are not covered in the general liability contract or other standard business liability coverage forms. Whether or not the agent is ultimately found to be responsible for the loss, the agent will need to defend against the accusation. Some errors and omissions cases cost hundreds of thousands of dollars to defend. Learning Objective: Explain the common features found in most agent errors and omissions policies.

Features of Errors & Omissions Policies – Premium and Limits The following features are commonly found in agent errors and omissions policies:

Policies are generally claims made.

Offer limits of one million or higher.

Deductibles are usually in the thousands or higher.

Premiums have increased substantially as claims have increased in number and size.


Features of Errors & Omissions Policies – What is Covered

Defense may be within the limit of insurance. Some policies provide a certain amount of additional defense outside the limit of insurance.

Wrongful acts arising out of the performance of professional services are covered, as defined by the policy.

May or may not cover related activities i.e. financial planning, brokering, acting as a Managing General Agent.

Negligence, not fraud is covered. The contract excludes employee dishonest that would be covered under an employee dishonesty ins. policy. Does not pay fines. Most do not cover punitive damages.

Features of Errors & Omissions Policies – Other Common Characteristics

The policy may include a duty to defend; some policies do not

Will not pay for intracompany suits—i.e. one producer sues another

Employment related practices claims are excluded

Employee benefits liability claims are excluded

Claims for monetary relief are paid; equitable relief claims are not i.e. the agreed upon remedy is to apologize on the radio or fulfill contract terms.

In some E&O contracts the company must gain consent to settle from the insured; in other contracts the company can settle without the insured’s consent

Summary Need for Agent’s E&O

• Application error • Lost messages • Agent forget to add coverage • Should have offered higher limits • Agent gives confidential information to competitor • Apparent authority • Agent lost check


Agent E&O Policy Features • Claims made • 1 Million+ limits • Deductibles • High premium

• Defense – in or outside limit • Professional services defined • May not cover related activities • No fraud • Duty to defend • No intracompany suits • No EPLI • No employee benefits liability • Monetary relief no equitable relief • Permission to settle


Section 6 Topic D – The Golden Rule

Learning Objective: Explain the meaning of the Golden Rule. There are many ways of saying it: Christian Version: “Therefore all things whatsoever ye would that men should do to you, do ye even so to the; for this is the law and the prophets.” (I.e. do unto others as you would have them do unto you.) Hebrew Version: “What is hateful to you; do not to your fellow men. This is the entire law; all the rest is commentary.” Islamic Version: “No one of you is a believer unless he desires for his brother that which he desires for himself.” The Practical Results of Ethical Behavior

Customers Customer reputation for honesty and fairness and for concern for the client Peers Peer reputation for fairness and honesty in competition and recognition that the person enhances the reputation of the industry Company Company reputation for fair dealing and honesty; someone who seeks the correct balance between loyalty to the insurer and service to the customer Community Community reputation for being an honest and ethical business person

Employees Employee peace of mind—they won’t be asked to or be required to act unethically Your Family Ethical family values You Personal peace of mind



Course Summary Review the learning objectives for each section. Section 1 – The Importance of Ethics in Insurance Learning Objectives

1. Describe, define and explain the importance of ethics.

2. Define moral.

3. Explain how ethics is the law, good business and how insurance involves utmost good faith.

4. Define the concept of Utmost Good Faith.

Section 2 – Legal Responsibilities of Agents and Agencies Learning Objectives

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

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

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

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

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

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

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

Section 3 – Insurance as a Business of Contracts Learning Objectives

1. Define the terms of contract that apply to insurance.


Section 4 – The Insurance Agent as a Professional Learning Objectives

1. Define tort.

2. Define negligence and the four elements required for negligence to exist.

3. Explain the common law defenses against negligence.

4. Define professional.

5. Describe how Hardt v. Brink and other court cases have applied the concept of “special relationship” in order to elevate an insurance agent to professional status.

6. List the circumstances that have been found to trigger “special relationships.”

7. List the reasons why there has been an increase in lawsuits against insurance agents.

8. Give examples of the types of negligence claims routinely filed against agents by consumers.

9. Give examples of the types of negligence claims routinely filed against agents by insurers.

Section 5 – Insurance Agent Obligation to the Consumer, Insurer, and Peers Learning Objectives

1. List the six major categories of agent obligation to the consumer.

2. Give four reasons why fraud is prevalent in the insurance industry.

3. List the four major categories of agent obligation to the insurance company.

4. Describe the application of state laws dealing with advertising, fair dealing and disparagement of peers.

Section 6 – Unfair Trade Practices, Unfair Claims Settlement Practices, the Need for Errors and Omissions Coverage, and the Golden Rule Learning Objectives

1. Name the unfair trade practices listed in the NAIC Unfair Trade Practices Model Act.

2. List the common provisions of state unfair settlement claims practices laws.

3. Give examples of the types of claims made against agents that errors and omissions policies cover.

4. Explain the common features found in most agent errors and omissions policies.

5. Explain the meaning of the Golden Rule.

legal & ethical requirements of insurancee professi onals

Documents