Chapter 8

Agent Ethics

 

 

 

 

In today's lawsuit-prone society, the insurance agent or broker has a difficult line to walk. No matter how careful an agent tries to be, every presentation has the potential of an errors or omissions claim. These claims are often brought against the agent by the families of the client, rather than by the client themselves. This point is not brought out to cause alarm, but rather to stress the need for good judgment on the part of the agent.

 

Defining Ethics

 

Ethics are defined as "formal or professional rules of right and wrong; a system of conduct or behavior." Ethics are standards to which an insurance agent or broker must aspire to, feeling a commitment to each client. Every type of profession generally has an informal "code of ethics," which may be more understood than written.

 

Ethics are a means of creating standards within any given profession to upgrade it and give it honor. It is a means of measuring performance and, in some cases, acknowledging outstanding individuals. Ethics often are a means of providing priorities and building traditions based on integrity.

 

We would not wish to do business with many professions if ethics did not play a part. Can you imagine turning over your financial control to an attorney who had no ethics? The same would be true for an accountant and many other professionals. Ethics add an element of trust.

 

In many industries, the professionals have knowledge that other individuals do not. Individuals who seek out professional help must rely upon their honesty and integrity. As a result, a feeling of ethical standards must exist. It was the potential for abuse of power (which comes from knowledge not possessed by the nonprofessionals) that provided a set of rules or ethical guidelines. Sometimes, ethics are written standards and may even involve laws that must be followed. The premise upon which practical ethics must be based, according to Stephan R. Leimber of the American College where he is a professor of taxation and estate planning, is that power must be exercised in the interest of the clients who seek the professionals out and may not be exercised solely in the best interest of the professional themselves.

 

Most insurance agents or financial planners know if they are being ethical. When an agent picks up a check from a client hoping that the client does not "learn about the omitted facts," then surely that agent was not ethical. When an agent attempts to imply that he or she has more education or knowledge than actually exists for the sake of a sale or other personal gain that is unethical. Even reporting one's earnings fairly to the IRS is a matter of ethics.

 

Competency in the Workplace

 

Competency can also involve ethics. Of course, most people would not view themselves as incompetent. Sometimes the industry itself must remove those within it that are incompetent. Sometimes, competency is merely a matter of obtaining required education within your given industry on a timely basis (and taking responsibility when it is obtained past time requirements). All too often, insurance agents tend to take the easiest route when it comes to education. It is not unusual to take on a new type of insurance product or to begin selling some type of service without the proper schooling. That in itself can promote a lack of competency. To be ethical, you must also be competent.

 

Due Diligence

 

Ethics often involves due diligence; a term familiar to insurance agents. Diligence involves doing what was required in a reasonably prompt manner. It also means knowing enough about the companies represented to feel comfortable about their financial strength.

 

Confidentiality

One area of ethics often overlooked is confidentiality. It is very easy, in the excitement of selling, to tell some bit of information about someone else. While we might assume that one client does not know another that is not always the case. Especially in small communities, people often know each other for miles around. If a client discovers that an agent is sharing information they consider private, that agent is sure to experience trouble.

 

Simultaneous Representation

 

Sometimes estate planners could become involved in what is called simultaneous representation. This means they are representing two different parties who have, or may have at some future date, conflicting interests.

 

 

 

 

 

Simple Honesty

 

Most often, ethics simply means being honest. It is representing each client without regard to personal financial gains, but rather with the client's welfare in mind. It is the act of full disclosure on all products represented.

 

It is not enough to voice an opinion that ethical behavior is desired; such ethical behavior must be exercised on a daily basis in all business functions. It is the insistence that others in your profession do the same. It is often stated that any given professional occupation will not "turn in" their own kind, whether it be a doctor, attorney or an insurance agent. Ethical behavior would actually dictate that a professional MUST turn in another member who is not ethical. This is harder to do than it sounds. Where commissions are involved, turning in another agent could probably be considered a way of "beating out the competition." Therefore, it can be very difficult to police the industry. That is where the state Insurance Commissioner's office comes in. They are charged with removing the unethical agent. Whether or not they are successful may be a topic in itself.

 

Developing a Code of Ethics for Employees

 

Ethics involve not only individuals, but businesses as well. Every business, individual insurance agency and brokerage has a responsibility to develop a code of ethics for their employees or agents. If such a code of ethics is not consistently applied, not only may state regulators be paying them a visit, but also agents within the company may find themselves in a position of fighting each other for commissionable sales. Aside from the in-house problems this would create, honesty for the sake of honesty is reason enough to develop a code of ethics within the workplace.

 

Any industry involved with the public's money (as the insurance industry is) suffers when scandals occur. Public confidence is eroded and business is affected. Therefore, it is in each insurance agent's interests to promote ethical activities within the industry.

 

Some types of unethical actions are commonplace. It is not unusual for signatures to be forged on insurance forms. Commingling funds also happens routinely. While no agent would likely admit to such actions (because they know they are wrong), most businesses are aware of what is occurring. By not addressing the issue, those businesses are not only allowing unethical behavior among its agents, but also condoning it.

 

Sometimes deciding if an action is actually unethical is not an easy determination. Sometimes it is merely a matter of opinion. Replacement business is one area where a variety of opinions exist. The senior market, for example, has seen much news coverage in recent years concerning policy replacement. If a new Medicare Supplement policy appears to be better to an agent, is it always wrong to replace an existing contract? Legally, a Medicare Supplement policy may be replaced if the new policy would:

 

(1) Lower premium rates

and/or

(2) Increase coverage (benefits).

 

Policy Replacement

 

Where replacement is clearly a matter of opinion, it is probably best to simply outline the features of both policies to the consumer and then let that consumer make the choice.

 

Sometimes a simpler method of determining replacement may be asked in this form: if it were my personal policy, and I would not receive any commission at all, would I still replace the policy?

 

Most presentations involve a few "set" items, which includes premium rates, benefits, agent services, and company stability. Of these, premium rates should be the least important. However, our clients often do not allow that to be so. As a result, rates often take up the majority of the presentation; yet an errors and omissions claim has never occurred due to the premiums quoted. Probably 98 percent of the E&O claims filed relate to the benefits of the program and how those benefits were discussed. Obviously, more time needs to be devoted to that aspect. Then, as an agent, you must hope that the client remembers what was said! That is why documentation is so important. As each segment of the contract is presented and covered upon delivery, it would be a wise idea to have the client initial it.

 

The Insurance contract

 

The insurance contract is intimidating to many consumers. Technical in nature, containing complex subject matter, it is seldom read in full by either the policyowner or the agent. It is bound to be misunderstood at some point.

 

We Promise to Pay

 

To our clients, the most important part of a policy is the part that begins "We promise to pay In reality, all other parts are, in fact, limitations or conditions on the policy.

 

A life insurance policy is one of the more easily understood products. If the insured dies while the policy is in force, the promise of a payment is kept. There are no gray areas (such as Usual, Customary or Reasonable). The insured is either dead or alive. Long-term care policies are not nearly as simple. There are benefit triggers, activities of daily living, qualified plans and non-qualified plans, plus any number of other confusing and easily misunderstood provisions. All of the provisions can create dissatisfaction, which can cause questions regarding an agent's diligence in presenting the policy and providing services. This is not to say that a life policy should not also be clearly explained to a potential client. Any policy can cause a misunderstanding if not fully covered.

 

Minimizing Misunderstandings

 

There are steps that an agent can follow to minimize any possible misunderstandings.

 

  1. Full disclosure is always necessary in any type of policy being recommended to a client. Where different interpretations are possible between a brochure and the actual policy, the policy always wins. The policy is the final word! A brochure is simply a selling feature; never the final authority. The statement the agent received over the telephone from the home office always takes second place to the contract. The policy (which is the contract) is the final word every time. An agent who has not read the contracts he or she is selling is an agent waiting for a lawsuit to happen.

 

  1. An agent should always be slow to replace an existing contract. That is not to say that an existing contract should never be replaced. However, to do so without fully examining what is currently in place would be foolish. The agent should first be fully informed of pre-existing conditions, take-over provisions and limitations that may exist in the new plan. Health problems of dependents should also be reviewed.

 

  1. Whether you are dealing with a health program or a disability program or a life program, be sure that health questions are clearly understood and correctly answered. A term that has come into use in recent years is "Clean Sheeting." It means that an agent fails to correctly record an existing health condition of an applicant. The agent is presenting a "clean" application. Obviously, this is illegal and will not be tolerated by any insurance company. Sometimes, an agent simply is not aware of existing health conditions. If the applicant does not fully understand a health question, it may be incorrectly answered. This will not alter the insurance company's view of it. A policy may be rescinded (taken back) by the insurance company for incorrect or undisclosed information. This may occur, for instance, on a question asking if the applicant has high blood pressure. Since the applicant is taking a medication that keeps his or her blood pressure under control they may answer that question "no". In fact, they DO have high blood pressure; it is simply controlled. The question should have been answered "yes". Since these types of misunderstandings can easily happen, an alert agent will want to closely monitor the questions and how they are answered by the applicant.

 

  1. Eligibility of applicants is always a concern when replacing an existing coverage. Do not overlook the eligibility of dependents as well. Employees or persons nearing retirement are especially vulnerable.

 

  1. Any time one insurance contract is replaced with another, continuity must be considered. One plan should NEVER be dropped until the new plan is firmly in place.

 

If it Looks Too Good to be True . . .

 

Perhaps the best common sense approach is simply looking at the products being offered. If any given product seems to give much, much more (commissions plus high interest rates for the policyholder, for example) than other similar products, then it is possible that trouble is waiting down the road. Product design may also reflect the company's outlook and philosophy. If gimmicks rather than sound design seem to hold the product together, that could well be the philosophy of the company. Is the product set up to "catch and hold" a policy-owner rather than benefit them? Could you find yourself in an embarrassing situation down the road when your client requires service or benefits?

 

It Bears Your Signature

 

It is never an easy task to be both a successful agent in the field and an ethical person as well. Over the long run it will pay off, however. Think of each contract (policy) as a personally signed document. You place your name on each policy you write. Do you want your name on anything less than the very best?

 

 

 

 

 

 

 

 

 

 

 

 

United Insurance Educators, Inc.

PO Box 1030

Eatonville, Washington 98328-8638

Telephone: (253) 846-1155

FAX: (253) 846-7536

Email: mail@uiece.com