When Hurricane Katrina damaged their home on the Mississippi coast, the Leonards sued their insurer, Nationwide, and Nationwide's agent who sold them their policy. According to the Leonards, the agent recommended against buying flood insurance, and the Leonards interpreted this advice to mean that they had sufficient flood insurance in their Nationwide policy. This, they claimed, misrepresented the Nationwide policy.
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? Case law 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.
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
Various policy forms and how they are interpreted
State and federal laws regulating insurance
The insurance industry
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.
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
Gramm-Leach-Bliley Act (Financial Modernization Act of 1999)
Patient Protection and Affordability Act
Laws relating to transportation insurance
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
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.
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