The federal district court found no agent misrepresentation, however,
offering the following explanation:
There was no testimony that established the standard of care for
insurance agents in connection with the sale of flood insurance policies,
and there was no testimony that established the standard of care for the
training of insurance agents who are authorized to sell and interpret flood
insurance policies.
The record confirmed that Nationwide authorized its agents to explain
coverage matters to insureds; indeed, the company protocol was to refer all
questions about coverage to its local agents. Aside from a general failure
to introduce evidence of standards that might apply to the transaction, no
one even mentioned that, while Nationwide's agent was discouraging people
from buying flood insurance, the Federal Emergency Management Agency (FEMA)
was taking the opposite position by proclaiming, "Who needs flood insurance?
Everybody."
So, where does one look to ascertain standards applicable to producers?
Caselaw and an insurer's manual of procedures are among the usual sources of
ascertaining what standards apply in a particular case. However, additional
sources may be of value, including occupational standards of entry (how a
person qualifies to become a producer), standards of retention (standards a
producer must satisfy to maintain a license), and relevant ethical codes
pertaining to producer conduct.
Occupational Standards of Entry
Insurance producers are subject to standards prior to being licensed and
afterward, to maintain the license.
Prelicensing Requirements
State governments license insurance producers after an applicant
completes a course of study covering material deemed essential for the
license sought. Some states permit a combination of experience and formal
classroom instruction to satisfy requirements—persons holding specified
academic or industry degrees or "designations" may be exempt. Generally, the
study materials are similar irrespective of the location. A typical
prelicensing course introduces a student to the following topics:
- Principles of insurance
- How insurance is regulated and why
- Elements of a contract
- Tort law
- Various policy forms and how they are interpreted
- State and federal laws regulating insurance
- The insurance industry
- Underwriting
- How sales practices are regulated
- Features and special nature of the insurance contract
Subject matter content is approved by regulators, and many state
departments of insurance post outlines of the curriculum online. Each
candidate for licensure must pass an examination before a license is
granted. These courses also describe the statutory and administrative rules
that govern insurance in each respective state, although the curriculum is
mostly uniform and based on National Association of Insurance Commissioners
(NAIC) model laws, standards, and regulations. Most prelicensing manuals
describe the insurance business as uniquely based on utmost good faith.
Continuing Education
Most states also require completion of continuing education as a
condition of maintaining a license. Although the number of hours varies by
state, a host of vendors offer hundreds of courses. These courses often
delve deeper into the sales process, duties of agents, agent-company
relationships, agent-client relations, and ethical considerations. Agents
learn marketing, administration, personnel practices, new policy forms,
changes in old forms, ethical practices, advertising methods, how to avoid
errors and omissions (E&O) claims, and similar matters.
Standards of Retention
While evaluation of occupations tends to center around what one must
comply with to enter a particular job, how one can lose a license to
practice is also highly instructive. With respect to insurance producers,
the NAIC Producer Licensing Model Act is a rich source of standards,
including the following examples, any of which may result in some form of
regulatory action, including license suspension or revocation.
Intentional Misrepresentation of the Insurance Policy/Application
A common way producers can lose their licenses is by intentionally
misrepresenting the terms of an actual or proposed insurance contract or
application for insurance. Persons familiar with the "vanishing premium"
litigation in life insurance sales will note the relevance of this standard
as the basis of disciplinary actions and litigation involving most of the
major life insurers in America. Additionally, providing erroneous advice
about what is covered or not covered in standard homeowners and commercial
property coverages are areas where agents may be vulnerable to
misrepresentations. Even in the example cited in the introduction, in which
a Nationwide agent advised the Leonards that they did not need flood
insurance, it is clear that this intentional act misrepresented FEMA
standards at the time.
Stating a falsehood is only one way of misrepresenting a policy or
application. Nondisclosure, or not telling the whole story, can be equally
risky. For example, intentionally failing to recommend a liquor liability
endorsement to a bar-restaurant may qualify as misrepresentation by silence
when one has been trained to first assess the total risk and determine what
coverages are relevant and has failed to at least recommend liquor
liability. Similarly, arbitrarily selecting the policy that carries the
highest commission (intentionally implying that this is the best choice) is
another example that may contravene this standard.
Committing an Unfair Trade Practice or Fraud
Committing any unfair trade practice or fraud may also imperil a license.
State insurance codes include statutes and regulations addressing several
practices defined as unfair trade practices. Further, the list of prohibited
practices is extended in about half of the states where "Little Federal
Trade Commission (FTC)" statutes apply to insurance. (Prelicensing courses
often cover the former, but not the latter, action.) Unfair trade practices
encompass rebating, misrepresentation (again), twisting, false advertising,
unfair discrimination, duties to incorporate all known facts in an
application, prohibitions against representing an individual policy to be a
group policy, and other standards. The Little FTC Act may remove the intent
requirement applicable to certain violations and is more sensitive to
concepts of deception and unfairness.
"Fraud" is not defined in the Unfair Trade Practices Act, but most states
now have insurance fraud statutes. The meaning is largely determined by
state law. What is often overlooked in the application of these laws,
however, is that courts tend to reintroduce inapplicable rules derived from
caveat emptor (let the buyer beware),
thereby restricting the scope.
Being Incompetent, Untrustworthy, or Financially Irresponsible
Another way to lose a license is by using fraudulent, coercive, or
dishonest practices, or demonstrating incompetence, untrustworthiness, or
financial irresponsibility in the conduct of business. These standards,
while undefined, open doors to apply community standards of honesty,
competence, trustworthiness, and fair dealing to insurance practices.
Violating Insurance Laws or Regulations
The Act prohibits agents from violating any insurance laws, regulations,
subpoenas, or orders of the commissioner. If the previous provision opened
doors, this provision virtually eliminates any barriers limiting one's
ability to tie a practice to a statutory or administrative standard.
Note
that the wording does not limit itself to state laws and regulations,
thereby permitting the use of federal law. Relevant federal statutes include
the following, to mention a few examples:
- Health Insurance Portability and Affordability Act
(HIPAA)
- Risk Retention Act
- Various acts and regulations covering retirement plans,
securities sales, and taxation
- Terrorism Risk Insurance Act
- Fair Credit Reporting Act
- CAN-SPAM Act
- Gramm-Leach-Bliley Act (Financial Modernization Act of
1999)
- Patient Protection and Affordability Act
- Laws relating to transportation insurance
- Flood insurance
- Crop insurance
- Long-term care
- Medicare and Medicaid
Within the scope of this provision are the following:
- Advertising regulations pertaining to life and health
and property and casualty insurance
- Replacement regulations regarding life policies
- Claims practices
- Representation of unauthorized insurers
- Managing general agents
The advertising regulations are especially helpful in cases involving
misrepresentations in sales. The "advertising" definition is broad enough to
include sales material and presentations. Increasingly, social media, such
as agency Web pages, are areas of concern. It is imperative that producers
carefully scrutinize how they present themselves to the public and what
promises are either stated or implied on agency Web pages. Scrutiny should
be extra sharp if a Web page is designed by a vendor who is unfamiliar with
the insurance industry.
Codes of Ethics
Most agents are required to include a certain number of hours on ethics
among their continuing education courses. Treatments of the subject tend to
portray ethics as rules of conduct that apply when laws are silent or when
more than one course of conduct could theoretically apply. Some courses
suggest that ethical codes are higher standards than laws. The course
material is an excellent source of industry positions on the ethical
obligations of producers and the companies they represent.
Several insurance organizations have codes of ethics of their own. The
American Institute of Chartered Property and Casualty Underwriters is
probably the most recognizable and is applicable to all Chartered Property
Casualty Underwriter (CPCU) designees; indeed, it forms the basis of the
Institutes course in ethics. While the code is detailed and enforceable, a
violation of the code may endanger one's ability to retain the CPCU
designation, but only a regulator has authority to suspend or revoke a
license. Other codes, most of which are available online, include the
National Association of Health Underwriters; Independent Insurance Agents
and Brokers of America, Inc.; and the National Association of Insurance and
Financial Advisors.
Increasingly, insurers and insurance agents are adopting "Codes of
Conduct." Compliance or noncompliance with these codes may be examined when
questions arise about whether a given act or inaction complies with these
standards. (Other insurance licensees also have codes of ethics, such as
public adjusters and independent adjusters. In Florida, all adjusters must
abide by a statutory code of ethics.)
Insurance Industry Designations
In addition to official codes of conduct, the insurance industry is
replete with the equivalent of status badges called designations. Along with
the CPCU, various other designation programs are available, such as
Accredited Advisor in Insurance, Certified Insurance Counselor, Chartered
Life Underwriter, Chartered Financial Planner, Associate in Risk Management,
and others. Agents who earned a designation have greater expertise than
average producers and, therefore, may be held to a higher standard than
average producers are.
One thing is made unmistakably clear in most of the written materials in
the designation literature: insurance licensees are more than sales forces.
In fact, a reasonable inference is that, if an agent is in the business to
sell only, the agent made a wrong career choice. In today's market, sales
skills are not enough to avoid E&O problems. Indeed, if selling is all one
wishes to do, my suggestion is get a job at a used car lot. They still
believe in caveat emptor there, and you
are going to need that protection.