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The New Improved Medicare Chapter 6 Agent Ethics
Although Medicare has changed, the required standards of ethical conduct remain the same. Standards of conduct are required regardless of the clients age, but some states may have specific rules related to the treatment of older consumers. All ages deserve honesty, but those who are not ethical often target older Americans. When individuals desire to defraud others they seek out those with the most financial resources, often the retired population. States do their best to prevent unethical behavior in the insurance industry, but it is a difficult task. Usually it means the ethical agent must jump through additional hoops in the effort to keep the unethical from causing financial damage.
The discussion of ethics can become very involved since so many people have opinions on the subject. Even so, it can be summed up simply: Ethics is the conforming to the principles of right and wrong.[1] As it applies to insurance sales, that would certainly involve following all laws of the state and federal governments. Since it is impossible to follow laws we are not aware of, an ethical standard would also require that each agent be aware of the laws that affect them. Certainly that would mean their resident state, but if they have a nonresident license it also means learning the laws of the nonresident state. It involves learning the laws that are presented during insurance pre-licensing classes (to obtain your insurance license) and keeping abreast of new laws as they become effective. This is often not obtainable in continuing education courses that are completed as the agents license comes up for renewal. Most courses, including ours, are designed for use across all states so individual state laws will not be included. Some states, such as Montana and Oregon, have state law requirements. These states are attempting to ensure that their agents do keep abreast of law changes and requirements.
Besides knowing and following all laws pertaining to insurance, what ethical responsibilities does an agent have? Before it is possible to answer that question we must know what is meant by ethical behavior. Ideally, every person given a license to sell insurance would be an ethical person who always has his clients best interest at heart. Realistically, while we believe most people are honest (including insurance agents), we must admit that any industry having the potential or even just the perception of acquiring a fast buck will attract those individuals who are not honest. This is true of any industry where it is assumed quick money can be made.
No career agent would consider the insurance industry capable of providing the quick buck, but unfortunately others sometimes present it that way. It is not unusual to hear recruiters, for example, quote huge sums of potential income to eager faced people looking for the road to riches. Some products do produce a high commission, but the general agent will be involved with middle income America not the wealthy buying unusually large policies.
Hello. My name is Harry Bobs and I am your narrator for this chapter. When I was a young man (and actually had a prime) I was told the chandelier story by my recruiter. I dont know if that story is still being used today, but thirty years ago many industry recruiters told it. It goes like this:
I knew a man who did so well selling insurance that he had to put his money somewhere. He bought a huge house. Then he built a lavish barn and stocked it with prime horseflesh. He still had too much money. Finally he installed a crystal chandelier in the barn.
Obviously this story is unbelievable but apparently the recruiters didnt think so either that or they thought they were hiring a bunch of idiots. Any agent who would buy a chandelier for a barn rather than investing the funds should not be allowed to advise anyone on any insurance, financial, or health product. Of course, we know this story was made up to impress the recruits. Hopefully no one believed it. Still, I remember a lot of bright-appearing people in that room who seemed impressed by the possibilities.
After many years of ups and downs I know there is no easy path to wealth certainly not in the insurance industry. I do know many agents who have done very well financially but they accomplished this the same way every person does in any line of work through hard work and many hours committed to the profession. Just like the doctor, carpenter, or accountant who has done well in his or her line of work, the insurance agent who does well financially accomplishes that over time and as a result of diligent working habits. Like so many professions, we build a client base. As the years pass, we can relax our schedule as we reap the benefits of past years of hard work. Despite what some would have the public believe, insurance agents become successful the same way others do through hard work and perseverance.
In order for perseverance to work in our favor we must build a solid reputation. That is never possible unless ethical conduct is part of our work habits. I hear talk of professionalism or reputation but it seems to me the word ethical is often left out. It doesnt matter what profession I am dealing with, I want the person to be ethical, including my doctor, attorney, accountant, and car repairman. Of course I want them to know their trade but ethical people make a point of knowing their job. We dont directly ask them if they are ethical. Perhaps we think it would be rude to say to our mechanic: Are you ethical? Instead we ask about their past experience or education. I have never asked my attorney if she is ethical. I guess we just assume others are since they have a nice office and look well dressed. Someone must have considered them ethical if they can afford to present themselves so well. Of course, that has be the worst way to judge whether or not a person actually is ethical. Unethical people look just like you and me. Sometimes they are the best salespeople because they dont care about being truthful. An unethical salesperson can say anything necessary to obtain the sale and their commission check.
How do we know when a person is ethically responsible? Since we dont ask them (and an unethical person would lie anyway), what do we look for? Many of us simply go by our gut feeling. We think we can spot the salesperson that is not trustworthy. Many educated, smart people have been fooled. The reason a con man succeeds is because he looks like you and me. Of course, we avoid the obvious: the sweet little thing that will give us $20,000 of found money if we just deposit $5,000 of our own money as good faith. Beyond that, there is no simple answer. Those who routinely lie and cheat become very good at it.
How would someone know if you were selling insurance products ethically? If you copy signatures or do something the state does not allow does anyone at the office point it out or do they just look the other way? Would you even want to be told when others felt you were behaving unethically? Most of us would resent the accusation even if we had just done something we knew to be wrong.
Before any of these questions can be considered we must identify what being ethical involves. Some things, like telling the truth, are obvious but in the insurance field there are many elements of professional ethics that may not be so easy to identify. If we dont know what is ethically required of us, then how will we know if we belong to the ethically responsible group? Everyone thinks they are ethical even if they just told a whopper lie. Who would want to admit otherwise? Ask a coworker to define an ethically responsible insurance agent and you may see some feet shuffling and throat clearing as they try to put it into words. Since no one wants to define something they arent the answer must be thought out.
Ethical behavior is really pretty simple: it is following the rules of right or wrong, as we perceive them. It is the as we perceive them that gets tricky. Obviously, as it relates to insurance, that would include following all state and federal laws. Past that, our ethical code relates entirely to perception. Just because I believe something is ethical doesnt make it so for my neighbor. Neither of us is wrong what we perceive as right and wrong just happens to be different.
Ethics Have a History
The word ethics comes from the Greek word ethos, meaning character. From the time people began living in groups it was necessary to have some type of behavioral code. It was the only way to survive. If the group had no rules only the largest and strongest would survive, which would mean women and children could not survive. Without women and children the human race would not survive. It didnt take a great intellect to know that survival rules were necessary. Early civilizations recorded codes of behavior although they only applied to their immediate group. It was still okay to kill or steal from someone outside of the accepted group since their perception of right and did not extend beyond the group of people that had come together for self-preservation.
Socrates, in the fifth century B.C., was probably the first person to actually study the subject of ethics. This marked the subjects formal beginning. Ethics involved the questioning of why certain things were done or thought making them right or wrong in someones mind. Plato, and later Platos student, Aristotle, further developed Socrates philosophy of ethics. Some of todays philosophy students say these three men were so profound and complete in their studies that nothing new has been added since then.
In the insurance field, ethics is more about the law than personal belief. It is important to note that established law may not be perceived by all as ethical. Our history is full of laws that were unfair to specific groups of people. Other countries display this even today. Women in many countries have no rights at all, subject totally and completely to whatever actions the men in their lives wish to take. Many countries still treat their children as property. Even animals have moral rights, although you wouldnt know that from the human actions we sometimes see. As it relates to the insurance field our ethics are governed by laws and ordinances. Agents must follow these, whether we agree with them or not, since we promised to do so when we accepted our state issued license to sell products.
This chapter will ignore the code of ethics that are associated with beliefs. While that is often tied to how we conduct our business it would become too cumbersome to explore why the same action can be both right and wrong under the definition of ethical. Just bear in mind that personal ethics is not about laws or even social views: it is purely and completely tied to our perceptions of right and wrong. If we are following our beliefs (without regard to financial gain or power) then we are behaving ethically even if it goes against established law and the views of our peers. Business ethics must follow established law; it is part of professional ethics.
Ethical Selling
Agents sell products for a living. If the agent is also a financial planner he or she may be involved in selling their advice rather than products or both advice and products. Agents who sell both products and advice are brave individuals. Doing both flings open the gates to lawsuits (it practically begs sue me!).
There are some fundamental elements to sales, whether it happens to be an insurance product or a magazine subscription. First of all, the seller must find a viable contact or buyer a person willing to purchase their product. Secondly, the seller must convince the contact that their product is better, faster, or prettier than the competitions. Thirdly, the seller must be able to retain the sale (avoid refunds). If the buyer returns the product soon after purchasing it, then the sale is voided. A fourth element could be added referrals.
In the case of insurance and a few other types of products, we are selling a concept since no loss has occurred that will be covered by our product. You cant drive into the tree and then go buy a policy to cover the damages. The policy must first exist prior to the damage or loss. As a result we are selling a nontangible product; it is not something the consumer can touch, see, or listen to. Agents must relay the value of something not yet needed.
Language
The language used by agents tells us a great deal about them. Some words simply sound bad, such as pitch. There is nothing respectful about the term and it is used in much the same way vulgarity is used: with arrogance. Does language expose our attitudes towards our clients and our personal code of ethics? Im sure people could argue both sides of this but it seems to me that an ethical person would dislike language that displays lack of professional ethics or lack of industry respect. If we take pride in our profession and ourselves we do not want it spoken of in negative terms. First of all, it sets the agent up to be negative. Once that happens, it will be easier to fall into unethical patterns. An agent who takes pride in their profession will do all that he or she can to uplift it and give the profession high moral standing.
The term pitch should be banished from the insurance selling industry. A presentation denotes education, organization, and value. Pitch, on the other hand, is something that oozes from trees. It is sticky and darn hard to get off your jeans. It discolors your skin and makes your hands dirty. Why would anyone want to stain his or her profession with such a word?
There are probably many more examples of words that degrade a profession; never should such words be used. Besides degrading the profession they allow the agent a view that can only diminish their level of professionalism. When an agent begins to view his or her profession negatively it allows negative actions to follow. Like profanity, it leads to an inferior attitude. An agent must always strive to uplift the profession; not downgrade it.
While language is only one element of selling insurance it is one of the most important ones. Those who master the art of communication are the most skillful agents. They are able to explain benefits and limitations so that even those who have no experience with insurance can understand what they are buying. A person who understands what they have purchased will keep it. Clients that do not understand the product they bought will be easily swayed by the next agent on their doorstep. Additionally, a consumer who does not understand the product or who did not realize what the limitations meant will feel he or she was deceived even when that is not the case.
Listening: The Lost Art
Some of the best communicators I have ever met listened more than they talked. It is very hard to learn something when your mouth is moving and your ears are filled with your own voice. Before any selling takes place agents need to learn the desires and needs of their clients. That is not possible if the agent is doing all the talking. Insurance is not just about selling a product and earning a commission: it is about fulfilling a void, protecting an asset, or expanding the possibilities of your clients. In the process of fulfilling your clients needs you will earn a commission. Agents who listen to their clients know which products will address their concerns. Agents who do not listen will simply place a product they feel comfortable with but does not necessarily address the clients needs. In both cases the agent may be very ethical; one simply does a better job than the other. Since professionalism demands that we place the best product, it stands to reason that ethical conduct also requires us to place the best product. Therefore, learning how to listen, enabling us to draw on the best products for the clients needs, becomes a basic element of ethical selling.
It is not easy to listen more than we talk. First of all, many agents (especially new agents) are nervous about presenting insurance products. An agent who does not fully believe in their product or their profession will assume the consumer has the same doubts. If that is believed, the agent will hesitate to ask for the clients financial history, health history, or premium, believing the prospect will not accept an insurance product. When we do not have a firm understanding of the benefits we deliver it is possible for such doubts to undermine our performance.
Example #1 Angela Agent became an agent because she could not find another job. Her recruiter told her (and many others at the meeting) that she would make lots of money. When she went through the 8-hour training class, the instructor told those in attendance not to use the word insurance when selling their products unless absolutely necessary because many people were against buying additional insurance. Such negative concepts have made Angela wonder if she is selling inferior or unnecessary products. Being new to the industry she doesnt know whom to ask for help. She finds herself spending more time concentrating on avoiding the word insurance than she intended and her presentation has become halting and tentative.
Example #2 Arnold Agent became an agent because he could not find a job that allowed him the freedom he wanted. He knew nothing about insurance and didnt much care how much he learned. When he was recruited he laughed at the recruiters claim he would make lots of money. He had a friend in the industry and knew how hard his friend worked. Even so, his friend also had more freedom than a 9-5 job allows. When Arnold sat through training he wrote down what he thought might be important, then went to his friend for advice. In the end Arnold had a good understanding of the product he was selling. While he knew it wasnt a Cadillac he also knew it had value in the right circumstances. As a result, Arnold became sufficiently successful which was all he cared about.
Example #3 Amy Agent became an agent because she had no idea what to do in life. She simply answered an advertisement. The recruiter told her there was lots of money to be made but all Amy really wanted was to be comfortable in her job. The training session made Amy very uneasy. She wanted to be able to feel she was doing something worthwhile, but based on the trainers advice, it seemed to her to be a job of manipulation not accomplishment. After she left the class Amy headed to the library. She had no friends in the insurance field but she knew the library would have information. She checked out three books on the subject: one on the insurance industry written by a financial planner, one on investing that contained sections about insurance, and one that promised the consumer savings when buying insurance. As Amy read the books she realized that views were often different on the value of insurance. Even so, in all cases she saw where insurance helped those achieve their goals. It seemed evident to Amy that she would have to listen to her prospects if she was going to do a good job. She also realized from the books that there were better products than those offered by the company that hired her. Amy planned on investigating other companies soon.
The three agents all approached their new careers differently. Two of the three will probably succeed in their career. However, between those two, only one is likely to produce the kind of performance that ethics would dictate. While both may do an adequate job, ethics requires an agent to do the best job possible.
Insurance is a necessary and worthwhile product. From annuities to life insurance to fire and casualty the products we present have value. Many types of business could not open their doors without the insurance contract an agent sold them. Insurance protects our homes, our livelihood, and our retirement stability. Our products are worthwhile no matter how we look at it. Insurance is the most regulated of all industries. Regulations dictate the forms we use, the products we offer, and the codes of conduct we must adhere to. Anything given this much attention must be valuable.
Some would argue that the quantity of regulation in the insurance industry comes from agent abuse of the public. Unfortunately, there is truth in that statement. However, it comes not from the career agent who gives their clients a valuable product but rather from the few who thought this industry would provide a fast financial opportunity. Unfortunately, it also came from the many fine people who did not take the time to learn the profession or who were not given the opportunity to learn it. Recruiters often bring in people with no insurance background, toss them a brochure on a product, stating read this, then sell the product to everyone you ever knew in your lifetime. Undereducated agents make as many harmful errors as the dishonest agent. The undereducated agents are often the most harmful because clients trust them. It is obvious that they wish to benefit their clients lives. The clients have no way of knowing that the agent has not the faintest idea of what he is doing. Worse yet he doesnt know he is uneducated!
The states have instituted education in an attempt to solve the problem of the uneducated or undereducated agent. Most states have pre-licensing requirements in order to obtain their insurance selling license. This course does not fulfill pre-licensing requirements. Rather it comes under the classification of continuing education because it is for continuing education after an agent has already obtained their license. Whether or not pre-licensing and continuing education solves the problem, the states are at least attempting to do so. The ethical and professional person would always seek additional education with or without state mandates. In fact, those at the top of the profession almost always have completed additional education. Many of them have specific designations denoting education: Certified Financial Planner (CFP) or Registered Health Underwriter (RHU), for example. There are many designations available with additional education.
In the Field
Field agents do not have an easy time. So much negative insurance press is seen that some consumers eventually believe the worse. Those who are against insurance are for something, of course. They may be for living with their relatives instead of going to a nursing home, they may be for mutual funds and against annuities, they may be for putting money in the bank instead of in premiums, but whatever it is, they have unfairly targeted insurance. Rather than allowing each person to favor their own form of finances they insist that their way be followed. How do they insist? Through negative press. Unfortunately some of those who are against insurance are in a position to be heard even if their views are unfair or incomplete. It is likely that the same people that blast insurance buy it in some form, but that is seldom stated.
Agents have caused many of their own problems. Whether due to insufficient training or bad judgment, agents have often made poor choices with the public. It is not the professional agent who spent days correcting an incomplete retirement plan that we read about but rather the one who bilked money out of the old lady. Agents will likely always fight this battle. That is why it is so important to be professional and get rid of those in the industry who are not.
Agents have many responsibilities: they must know their products but also have someone willing to listen to them. They must dress professionally but also earn enough to be able to do so. They must acquire timely education even if that takes them out of the earning field. They must learn to work alone since few agents have taken the time to establish industry associations that they routinely keep in contact with. They must learn to cast off negativity and maintain a positive working attitude.
Field agents do have more personal time than many other jobs. No one mandates their working hours, although many companies do mandate minimum rates of policy applications in order to maintain their insurer contract. It is very easy to work less rather than more. It is easy to work fewer and fewer days until eventually the agent cannot earn a decent living because not enough time is devoted to the profession. There is no doubt that commissioned jobs like insurance requires discipline. While there is more freedom than traditional 9-5 jobs there is also more responsibility. Telephone calls must be returned. Time must be devoted to servicing existing clients. Paperwork must be completed properly and in a timely manner. Required education must be completed as required by the licensing state. A person who is not prepared to complete all aspects of the agents job should not consider this trade.
At The DoorMost states have regulations regarding consumer contact. Generally, you must identify yourself within the first minute or two of presenting yourself, whether by telephone or in person. Mailed advertisements must also clearly identify the sender. Most insurers require their agents to present any printed advertisements for approval prior to mailing.
The typical door approach would go something like this:
Good morning, Mrs. Jones. My name is Tom Mathews. I represent ABC insurer. I am responding to the inquiry you made regarding your Medigap policy. Is this your writing on the card or your husbands?
This agent has identified himself and the company he represents. If the agent represents multiple companies he would state the name on the mailing piece that has been mailed out. Most mail pieces have only one company represented so even if Tom Mathews represents multiple companies he would identify the one that was on the mailed advertisement the one the prospect would recognize and remember. This would not prohibit him from showing other products, but he must identify himself in a way that lets the consumer connect him to the advertisement piece that was received in the mail. Agents may not, under any circumstance, represent themselves as employees of the government, Medicare or Medicaid (Medi-Cal in California). For example, an agent may not use the following door approach:
Good morning Mrs. Jones. My name is Tom Mathews. I represent Medicare and the policy that you need to go with it.
In this example, the agent is misleading the consumer by suggested he works for the Medicare administration. Even though he did not specifically state this, it is obviously his desire that the consumer believe he has some official government authority.
It is not acceptable to mislead a consumer at any time, but agents are most likely to do so to gain the opportunity to be invited in so he or she can present their insurance products. Tom is using this approach to gain entry to the consumers home, but such tactics will not be tolerated in most states. Since a product cannot be sold if it cannot be presented agents often become overly anxious on the consumers doorstep. As a result they may feel they must be vague about their purpose. This leads to inappropriate or even illegal behavior.
Products cannot be sold while standing on a porch. Agents should not even try to. When the consumer wants more information, the professional agent will be truthful:
Mrs. Jones, I understand that you want to know precisely what I am selling. I do represent insurance products, but I am proud of what I offer and I dont do business standing on a porch. May I come in?
It is better to present no product at all than to try to do so at the door. If the agent is not granted entry into the home there is probably no interest. Even if the agent knows positively that he or she could benefit the consumer, unless the homeowner invites him in, he has no ability to place the product. In such cases, leave your business card and perhaps a short statement about the product and move on.
I would like to tell you that many consumers call you later. Sorry, thats not true. Very few will call you back if they did not allow you into their home at first contact. It is likely that another agent will be successful in selling a product if the need is truly there, but if you are not invited in initially it is unlikely you will receive a second invitation.
I have known many agents who were extremely successful gaining entry to a prospects home. These agents were always skilled communicators. They were concise at the door: name, company and brief statement as to why they were there. Period. Brief information was simply followed up with May I come in?
Of course, these individuals were professional in every way. They had usually called beforehand and made an appointment. Since a previous contact had been made the homeowner did not feel surprised by the appearance of someone at their door and the agent was not interrupting at an inconvenient time. The agents dressed professionally, carried briefcases that were well cared for, and knew their products. Even the most engaging delightful personalities need to present an outer appearance that is suitable to their profession. Women who work with the public, especially the elderly who may have medical conditions, should never wear any scent that is overwhelming. This is also true for men, but it seems to me that perfumes tend to be bolder than the scents men wear. Suffice it to say that any scent that is above a mild fragrance should be avoided. As we age, we tend to have allergies and other conditions that do not mix well with even the best of fragrances. How sad to lose a sale because the consumer cannot tolerate a perfume or aftershave!
Smoking never mixes with professionalism. If the agent is a smoker he or she should never smoke in the consumers home. It is absolutely not professional. Smokers must use breath mints and routinely air out their clothing. If the agent smokes in their car, they are sure to carry the scent of cigarettes on their clothing. Again, since many health conditions do not mix with cigarette smoke, it is likely to cause the agent lost sales.
Representing Products
An agents job is to present products that he or she feels is appropriate and fulfills the clients desires and needs. The specific product selected should never be based on the level of commission that will be earned. For those working in the financial planning field, the focus must be on the advice given never on the products sold.
Most insurance product presentations follow a set pattern. By having a set pattern the agent is less likely to accidentally leave out an important element; it is more likely to be a logical delivery of the facts. Presentations will involve benefits, company stability, price, and perhaps agent services. The focus should not center on price, although the prospect may want to. As a result, price can take up the majority of time, yet an E&O claim is not filed due to the premium quoted (unless it was misstated). Errors and Omission claims usually relate to plan benefits and how those benefits were explained (or not explained). An agent who can clearly communicate the aspects of the policy is far ahead of the one who merely plows through a presentation.
When price ends up being the clients primary focus the presenting agent must be wary since the prospect is probably not absorbing important product information. Although the agent must appropriately explain price, price is never the main issue what risks will be covered, including limitations and exceptions are the main issues. If the prospect cannot afford the product it should not be placed since it will not remain in force and the client will have wasted any premium paid. The underwriting department will have wasted their time, and the insurer will have wasted the resources it took to issue the policy.
When a client insists upon concentrating on policy price and the agent is not able to explain it to their satisfaction it is unlikely that the prospect will buy anything anyway. If he does, the agent will want to document everything covered since the client is unlikely to fully understand what he has purchased (he was too focused on price to have understood policy benefits and limitations).
Agents who cover every policy aspect, but in a way that is difficult for the prospect to comprehend, has done no better job than the agent who only halfway covered the product. The point of the presentation is not just to sell a product; it must provide the consumer with an understanding of the benefits being offered. If the prospect does not understand the product there is no reason to believe he or she will benefit from it, so there is no justification to purchase it. Even if the consumer does buy the product it is likely that he or she will not keep it. Anytime a policy is canceled it becomes a waste of the consumers initial premium, a waste of the insurers time to process the application, and a waste of the agents time presenting it.
Renewal commissions build a reliable agent income. When policies are held only a short time, no one benefits. The buyer loses premium payment, the insurer loses underwriting costs and the agent loses renewal income. If the buyer cancels his or her policy within the allowed time period, the agent will even lose the initial commission that was earned. It simply makes sense from all standpoints to do a good job to begin with.
The insurance contract can be very intimidating. Technical in nature, complex in its subject matter and seldom read in full by either the agent or the policyowner, it is bound to be misunderstood at some point by someone. It has been said that insurance contracts are the number one unread best seller.
Our clients believe the most important part of an insurance contract is the part that begins We promise to pay . . . All other parts are, of course, limitations or conditions to the policy. Not only should the available benefits be covered in the presentation, but also the limitations and exceptions to benefit payment. A person who knows a claim is not covered will not become angry at a denial; it is the client who thought a claim was covered and finds out it is not that will see you in court.
Some policies are easier to understand than others. Medical policies are probably one of the most difficult since there are so many elements to them. Any policy that is difficult to understand will cause the threat of lawsuits. This will not happen when the policy is first purchased; it will happen later on when benefits are denied on a submitted claim. Agents cannot prevent claim denials but he or she can prepare the policyholder for them by full disclosure. Agents can do some additional things to minimize misunderstandings:
Many health policies are very technical but the language used to explain the policy should not be. Some terms need to be explained since they are very important to understanding the contract. If that is the case, the agent must be very diligent in doing so. Watch the body language of the consumer; it will provide clues as to whether or not he or she understands. If the agent feels the prospect does not understand an important element of the policy the agent must word it differently and go over it again.
Sometimes I meet an agent who prides himself on his ability to be very technical. One can only shake their head at such a person. The point is never to prove to the client how smart you are; the point is to inform the client. When an agent becomes overly technical it seldom benefits the consumer. If the agent believes he needs to be technical it is likely that he does not really understand the policy himself and so merely recites what he has read in the contract. Agents must understand the technical language but they must also be able to convert it to everyday language that the layperson understands. Part of being ethical is putting forth the effort to help your clients understand what they are purchasing.
The point of an insurance presentation is to educate the consumer. When it is too technical the consumer wont understand the product. If the customer cant understand the product, there is no need for it.
Policy Replacement
As far as state insurance departments are concerned, we cannot talk about the dangers of policy replacement too often. Having been an agent for three decades I know this is a replacement industry. Agents are trained by their recruiters to replace the policies of others. Some agents even replace their own policies routinely. Some of the policy replacement is necessary for the good of the client, but much of it is done for the good of the agent (to gain a new commission). Some policy replacement harms the client financially, such as when annuities or life insurance contracts are replaced thoughtlessly. In some areas of insurance policy replacement became so rampant and so unethical that state and federal laws were passed in an attempt to curb the practice.
Laws control replacement practices. Specific forms must be used and signed by the insured stating that they realize what they are doing. Of course, we all know that most people do not read forms prior to signing them so it is still necessary to practice ethical standards. Agents are required to inform their clients what is being replaced and how the replacement could impact them. If there are preexisting periods involved, agents must explain this to their clients prior to replacing the product. Some products have had commissions standardized so that replacement is less likely to take place (if an agent receives the same commission on a new product that he or she receives on an existing product replacement for the purpose of a higher commission will not happen).
Agents often sell for one company one year and a different company the next. As a result, agents often replace their own business to take it with them. This would not happen if the company continued to pay the agent commissions even after they leave, but that is not always how it works. Usually it has to do with how the product was sold. If it was sold through a brokerage that retains the rights to the business, departing agents will want to take their clients with them. Even if they have a contract forbidding the practice agents will find a way to move their business when they leave the brokerage. It is not only agents who engage in this unethical practice. It is common for brokerages and insurers to find ways of keeping an agents earned renewal commissions. Obviously it is financially rewarding to retain a departing agents renewal commissions. In an attempt to stop this practice of stealing commissions from departing agents, many states now require insurers to pay someone renewal commissions. Therefore, there is no point in retaining an agents commissions (except for cause, such as illegal activity) since they will be assigning the policyholder to another agent anyway.
It is more difficult to prevent a brokerage from keeping the renewal commissions of departing agents. In many cases, contracts between agents and brokerages actually state that renewals will belong to the brokerage if the agent departs. In that case, the agent has no further rights to them. Like insurance policies that no one reads, agents often sign brokerage contracts without first reading them. After the agent leaves and discovers his commissions will not come with him, he then is likely to attempt to move the business by rewriting it with a currently contracted company. While some lawsuits are probably filed by brokerages, most consider this a hazard of the industry.
Allowing Policyholder Misconceptions
We have discussed using language that prevents misconceptions, but even very good communicators will not always be fully understood. Policies are technical and aspects of them are hard to understand when a person has no background in such matters. It would probably be surprising to learn how many policies are sold on the basis of assumed facts and misconceptions. Sometimes an agent is aware that his or her clients are not understanding some aspect of their policy, but other times the agent may not realize it.
As a guy, I know I am supposed to understand my car, but frankly I dont. Not only do I not understand how the motor operates I dont want to learn! So, when I take my car in to the shop and the car guy begins telling me what is causing the problem, I concentrate on what he is saying, nod my head, and appear (I hope) to fully understand what he has told me. In truth, I only caught a portion of it, but I will never tell him that.
Your clients are no different than me. Some will be honest and tell you they do not understand, but many will not. Rather than appear incompetent or uneducated they will, like me, nod their head and pretend to understand what you have explained. Unfortunately the results are not the same as pretending to understand a car. I know my mechanic is competent. I know this because he fixes whatever is broken. I can tell that as soon as I drive my car and it performs well. When it comes to insurance, there is no way to know if the policy will perform until a claim is submitted. In some cases, such as long-term care policies or annuities, a performance requirement may not come up for years. By then it is too late to fix the problem since ill health or retirement needs probably exist that would adversely affect underwriting or the ability to accumulate wealth.
I cannot provide any absolute remedies to this problem. When a client does not really understand their policy the potential for a lawsuit exists. It is estimated that even a good agent has the potential of being sued at least once during their career. Lawyers now take continuing education classes on how to sue agents and insurers. Agents must make every effort to communicate well, but it is also prudent to document all that was discussed with client signatures or initials. These forms should be filed away indefinitely (even past the death of the client since family members have the right to sue, too).
When an agent is dealing with an individual that may not have the ability to fully understand the benefits and limitations of a policy, agents might want to consider also explaining the policy to a family member. In the case of Medicare plans, that would typically be the adult child of the policyholder. While no one wants to insult or embarrass a client, suggesting a family member be present should not present a problem.
For example: Mrs. Brown, since insurance policies can be very confusing, I would suggest that we set a time when your daughter and son-in-law can be present. That way if they have any questions I can answer them. While you and I will go over all the elements of the policy, they may have questions we didnt think of.
Applicant Signatures
As we know, product sales means reams of paper, many of which require buyer signatures. They also require many agent signatures, but those do not present a problem. Agents often feel uneasy about asking for signature after signature from a new client. The public realizes that everything requires a signature, however, so agents who are reluctant to face this issue are making more out of it than they need to. When an agent feels uneasy about explaining each form and asking for a signature, they might convey this feeling without realizing it. It will make the client wonder why the agent is so nervous and may sway a sale into a rejection.
Why would an agent feel uneasy about asking for signatures on required forms? I would guess it has to do with a lack of confidence in the products being sold. If this is the case, the agent needs to either investigate the product further to determine if it has value or, if he or she has doubts about the product and knows it sufficiently to make that determination, switch to a different company or product. An agent should never market a product they are not completely confident about.
Some agents copy omitted signatures: clearly an illegal act and unethical as well.
Example #1: Janet returns to her agency to turn in the paperwork on contracts she has written. Janet considers herself ethical; she never misrepresents her products and tries her best to appropriately match products to client need. Upon returning to the office she realizes she has forgotten to get a required client signature. Since she considers the form a mere state formality, she places the form over another against a windowpane and copies the clients signature. Janet has no misgivings about doing this since she is confident that she has correctly presented the insurance product.
Example #2 Janet returns to her agency to turn in the paperwork on contracts she has written. Janet considers herself ethical; she never misrepresents her products and tries her best to appropriately match products to client need. Upon returning to the office she realizes she has forgotten to get a required client signature. Even though she is frustrated, she calls her client, informs him that she missed a required signature and makes an appointment to return the next morning.
It is always illegal to copy and present copied signatures on a legal document. Insurance contracts are certainly legal documents. Doing so would void the entire insurance application if the insurer realizes an agent has copied a signature. At that point it is not possible to simply go and get the missing signature. The insurer would not trust any portion of the application, including the valid signatures. While Janet may feel that the form is merely a state required formality, there is a valid reason for every form that is required by either the insurer or the state. If the insurer ever realizes that Janet has copied a signature there will be repercussions for her, too. The insurer may refuse to accept any future business from Janet. If they do accept her business, the insurer will question every insurance application she turns in, scrutinizing each required form, including applicant signatures.
There is a reason for an insurer to be careful. Every year insurers pay the price for unethical agents. Since there is no way for an insurer to be present with each agent as they sell their products, the companies have to be able to trust those who market their products; they must be confident that the agents will follow required procedures. Should a company realize one of their agents is not and allow them to continue submitting business, then the responsibility falls on the insurer to police the agents actions.
Example: Bill has been caught copying client signatures. The insurer knows for a fact that he has done so. If the company allows Bill to continue submitting business they take on the legal responsibility for his actions. The company knew he was not ethical so if they allow him to continue writing business and a lawsuit is filed, the insurer could be legally responsible for his actions. Few companies will take on this responsibility. It is likely they will instead cancel his contract and refuse all future business from him.
Agents should take note of their contracts with insurers. In most agent-insurer contracts an agent who commits an illegal action will lose all future commissions and he or she will be terminated for cause. His or her block of business will be given to another agent in states that require an agent be assigned to each client.
Providing Service
We know that all agents do not provide service to their clients. We know this because we follow them into the home and replace their business. When a client never hears from their agent, not even a card at Christmas, they will move to another agent without much thought.
Providing service can be a thankless job. Some clients call with minor problems that they could have handled themselves. Others never call at all even when they should because a valid claim was not paid or an insurer error caused them a problem. Agents need to keep in touch with their clients because clients are not likely to keep in touch with them. By sending periodic newsletters or personal cards agents will keep their names in front of their clients. When clients know their agents they are less likely to allow their policies to be replaced by a stranger coming to their door.
There is no doubt that an agent can end up doing more than required for their clients. I have known agents who have performed services that were clearly not required of them. I have also known agents who did not even have the courtesy of returning their clients telephone calls. Ethically, agents do owe their clients some basic services and returning telephone calls is clearly one of them. On the other hand, some services must be directed to the insurer since the agent is not able to provide what is needed. Even letting clients know that the question must be directed to the insurer is a service, however. The wise agent will outline at the time of sale what he or she is capable of providing in the way of service. This makes the client-agent relationship stable since there is an understanding of what may reasonably be expected. Some agents have a written explanation of services that may be requested, with a signed copy kept in the agents files.
Commingling Funds
Commingling: to mix together.[2] When an agent collects a premium payment, part of the premium belongs to the insurer and part of it belongs to the agent (eventually) as commission payment. Most insurers require checks to be made out to them not to the agent. Since prospects may not realize this it is not difficult to direct them to make the check out to the selling agent, even though that is against insurer instructions.
Why would an agent request premium checks be made out to them instead of the insurer? Obviously this is an unethical action.
Example: John knows his commission check will arrive next week from his insurer. However, his rent is due tomorrow. If he is late he will be assessed a $50 late penalty. He has just sold Mrs. Murrow a policy. The premium required is $1200 for an annual payment, which she is willing to make. John asks Mrs. Murrow to make the check out to him, explaining: That way I can send a business check to the company and track it. I offer this service since it allows me to make sure your application progresses appropriately. I cant trace your check due to privacy laws.
That evening on the way home he deposits Mrs. Murrows check into his private account and writes a rent check to his landlord. When his commission check arrives a week later he sends a check to the insurer for the policy he sold to Mrs. Murrow, knowing the company quickly issues policies.
There is no doubt that what John did violated the policy of the insurer he wrote the policy through; they definitely do not allow their agents to deposit premium checks into personal accounts. John reasoned that his actions did not hurt anyone. Mrs. Murrow received her policy quickly and he avoided paying a $50 late fee for his rent. Mrs. Murrow even believes that she received an extra service through John the tracking of her premium payment to ensure a quickly issued policy.
Considering this, was what John did unethical? If no person is financially injured, if the insurer receives all the money that was intended for them, and if the purchaser is satisfied with her service, does it matter if he did not follow insurer requirements? The answer is a loud and strong YES! It does matter. John violated his contract with the insurer and he violated the law. We may understand why John did this, but that never makes it acceptable ethically or legally. There are reasons for laws and insurer contract provisions. Suppose Johns commission check was delayed, which can happen for several reasons. He may have experienced a commission charge-back due to a lapsed or cancelled policy. The mail may have been misdirected delaying the arrival of his commission check. Whatever the reason, John may not have been able to send the premium to the insurer. This would have resulted in a lack of coverage for his client, Mrs. Murrow. The point of laws and insurer provisions is the protection of the public. Mrs. Murrow was actually put in financial risk by Johns actions so she was not protected as ethical and legal requirements would dictate.
Legally, insurance has a public interest since consumers are financially affected by the products they buy. When there is a public interest, those involved in the transactions must act in the best interest of the public. Never can the sellers interest be placed above that of their clients.
Some insurers have trust agreements with their agents. If Johns insurer allowed this, he could have opted to accept the requirements of this agreement. When this is the case, agents are allowed to deposit the premium check, written out to the insurer, into a trust account. Then John would be required to forward only the amount that is due the insurer. The remaining amount, his commission that would have been paid, is already deposited into the trust account. He must always be aware that any cancellations mean he must refund the amount he kept. There are time requirements on such refunds so the money must be available for refund within the time requirements of the state. When trust agreements are used, agents have two separate checking accounts: one for their business account and one for insurer funds. Contractually most insurers allow John to use his portion immediately. Had he had such an agreement, he could have used his portion of the premium for his rent that was due.
Not all insurers allow trust agreements with their agents. The reason has to do with contract cancellations. If the client cancels the policy and the agent has spent the money he may not be able to refund the clients money. In most cases the insurer is still liable for the refund. Although they send their portion to the agent, expecting the agent to issue the full refund to the buyer, if this does not happen it is likely that the insurer must still make a full refund to the buyer. As a result, insurers are very careful when issuing trust agreements.
Education Responsibilities
Im sure no one is surprised to hear that many agents resent having to acquire mandated education each renewal period. While many would acquire education whether it was mandated or not, some simply do not want to bother with it. That does not mean such agents are unethical, but I would guess they have not thought it through.
It is impossible to be a professional without appropriate education. While there is no doubt that field experience is a valuable asset, it is impossible to acquire all that is needed through experience. Additionally, who wants to be the person field experience is acquired through? If a doctor told us he had never performed our operation before, adding dont worry; Im a fast learner would we accept this? Of course not. We want a doctor who is experienced but not at our expense. Why should our clients feel any differently? We are dealing with the consumers financial health and most of us consider that just as important as our physical health.
While much in the insurance industry stays stable, some aspects constantly change (such as consumer laws). As a result, much of the education available is the same since the aspects of the topic are stable and unchanged. In other cases, such as all the recent changes in Medicare, it is necessary to acquire constant education on the topic. For many years Medicare operated the same way with only minor changes or changes in just certain areas. It has only been in recent years that the major changes have taken place. Without education an agent would not be aware of what has changed. Or, knowing the facts of what took place, the agent may not be aware of how to appropriately apply the facts.
Most states now require some type of mandated education. For many years each state had their own idea of how that education should be obtained and how many hours were necessary to keep agents at a professional level of knowledge. Some states allowed only classroom study. These states did not trust agents enough to allow homestudy or internet study courses. They felt agents would not take it seriously enough. Meanwhile, classroom study instructors complained about agents signing in, going to the bathroom and never returning until the class was over (just in time to sign out). Some agents read the newspaper during the class or had a stand-in attend for them (a person who portrayed themselves as the agent). Eventually most states determined that the serious agent will take their education seriously and the unethical agent will remain unethical no matter what the states mandate.
In March 1998 the Insurance Commissioners of the Midwest Zone signed a reciprocity agreement on course approval practices for continuing education courses in the Midwest zone states. The agreement provided that each zone state would accept the credits awarded by another zone state without re-reviewing the course. As of November 25, 2003, 45 states had signed the Addendum to the Midwest Zone Declaration Regarding Continuing Education Course Approval and agreed to participate in what is now referred to as the Continuing Education Reciprocity (CER) process.
In our case, we file the course in the state of Washington our home state. Once Washington has reviewed the course and awarded a set amount of approved continuing education hours, we then submit to other states and those that participate in the CER process accept the amount of hours Washington awarded. It should be noted that states are not required to accept these hours even if they participate in the Midwest Zone Agreement. Each state has the option of adopting only those portions of the Agreement that they concur with. Classroom hours are usually accepted without question since they deal with real time. As for home-study and internet courses, states may participate in the Midwest Zone Agreement, but not accept anything other than classroom as equivalent hours. States are never required to accept that which they do not agree with. In order to be considered classroom equivalent, online courses must meet specific requirements. When classes have met these requirements, they will be called classroom equivalent courses or simply labeled as equivalent courses.
All states have agreed to issue 1 credit for 50 minutes of contact instruction (classroom or classroom equivalent). The minimum number of credits is 1 (no partial credits for less than one); there is no maximum.
Each state will use its own criteria to determine if an instructor or a continuing education company is qualified to offer instruction. States will not review an instructors qualifications but they may disapprove an instructor or company if that person or company has failed to comply with a states laws or regulations. A state is not required to accept any topic, even if the home state does accept it. In all cases each state will still adhere to the states laws and regulations, even if different from the issuing state.
Because of the Midwest Zone Agreement many agents have seen the required hours in their state change; for some it means obtaining additional hours while others require less. The Zone agreement suggests 24 CE hours per two-year license renewal period, with some portion of those hours being in ethics. The amount of ethics is from one to four hours per license renewal period. Check with your state for exact details.
Many states will now be requiring 24 CE hours per license renewal period and include an ethics requirement as part of those hours.
Some states have additional education requirements, usually as part of the total number of hours required. The most common additional requirement, after ethics, is long-term care education. Several states mandate that those who sell such products must obtain state specific education on it. If the agent does not sell long-term care products, then he or she is not required to obtain this specified subject matter. Those who sell annuities may find themselves having to obtain specific education as well. So far, it is not widely required but we expect that to change as more states see the logic in requiring their agents to receive specific education on the topic. Like long-term care products, annuity products require specific knowledge if agents are to benefit the public and not cause undue financial harm in the process of selling (and replacing) policies. It is notable that both long-term care policies and annuity contracts often do not display their flaws until years later when the benefits of the policies are needed by their policyholders. By that time it is too late to fix the perceived policy problem.
Obtaining required education in a timely manner is the agents responsibility. It is not the responsibility of their secretary, their office manager, their insurer, or their spouse it certainly is not the obligation of the education provider. Adhering to state requirements is not only a legal obligation; it is also a moral obligation. Those who provide education are not responsible for any agents time requirements. Agents who have not allowed sufficient time for the education process to unfold have only themselves to blame. States set different time requirements for renewing an insurance license. States may base renewal of the agents license by the date they first became licensed, a specified calendar time (such as the end of the year), or the agents birth date. Whatever the case may be, it is the agents responsibility to keep track of when the education must be completed and when the license must be renewed. States do usually send out notices of renewal, but no system is perfect. Mail does not always arrive or the agent may have listed an address with the state that is no longer current. We recommend that agents always use home addresses rather than business addresses since agents do change whom they work for periodically. Even if a renewal form does not arrive the agent is still legally responsible to renew their license on time. If late renewal takes place, most states impose penalty fees of varying amounts.
In most states agents may not repeat a course within a specified period of time. Some states are more lenient on this than others. Again, check with your state for specific details.
Each course has its own identification number assigned; this number will be specific to the course it is assigned to. There must be hundreds of CE courses titled Life Insurance. Without the course numbers it would be impossible for agents to know if they were repeating a course. Obviously, agents must keep track of the course numbers they have completed to prevent duplication earlier than allowed by the state. We recommend agents use a file folder and write the course numbers, date completed, and the CE provider on the front of the folder for each course completed. The certificates that are received would be kept in the folder.
Caution: there is a continuing education pitfall; a company may get approval for a submitted course, then sell that approval to multiple education companies, although the course number remains the same. In some cases, the name of the course may be slightly different on the advertisement or exactly the same (depending on state law and advertisement design). Again, this is why agents must track the course numbers they have previously completed not the course names. Some agents prefer to stay with the same educational provider to prevent this problem. Agents have the ability to call the company to see what they have previously completed if they have failed to properly document it personally. It is not the responsibility of the provider to notify agents who are repeating a course too soon, although many will do so (including United Insurance Educators, also known as uiece.com).
In many states agents must be careful which courses they select and complete. The course may have to be in their line of license or follow specific course criteria (such as basic or intermediate). Some states require that continuing education be turned in a specified amount of time prior to license renewal, often 90 days beforehand. Education providers are never responsible for the agents time requirements. If he or she failed to complete their CE on time, providers will not backdate completion dates or rush state rosters in before normal reporting times. Agents bear the responsibility of completing correct amounts of CE credit hours and they bear the responsibility of completing them in a timely manner. This information is covered in the prelicensing education that agents complete to acquire their license.
Some agents go beyond what is required by the state. They acquire additional education earning them special designations, such as Certified Financial Planner (CFP) or Registered Health Underwriter (RHU). There are many types of special designations besides the two listed here. While such designations do not guarantee special skills, they do mean that the individual cared enough to spend the time necessary to achieve them. Not all agencies seem to appreciate the time spent acquiring special education because it takes agents out of the selling field; therefore it must be done for ones own pride and professionalism.
Education is not always formal, of course. Agents learn in multiple ways. Often it is a matter of investigating a particular product or a type of product. Even product brochures put out by insurers are a means of gaining education. Agents have an ethical responsibility to understand the products they sell to the public, so anytime an agent does not understand a product it is their ethical and legal responsibility to investigate all aspects prior to selling it.
An agent who lacks the proper product education has the potential of being more dangerous to the public than one who is openly unethical. The openly unethical agent may be easier for the consumer to recognize. One who is uneducated or undereducated may not be easily recognizable especially if the agent does not realize their shortcomings. Such an agent speaks authoritatively and convincingly because they believe they are right.
Due Diligence Requirements
Due diligence is the analysis of a particular companys products, performance, and financial standing for the purpose of placing only strong products that will withstand the test of time. It is done to ensure a reasonable expectation that the values represented can actually be achieved. In short, it is the determination of whether or not the company or product can keep the promises that they make. The term is primarily derived from the securities industry, but it pertains to the insurance industry, too. An insurance company that is concerned with due diligence will treat its sales force and backup staff as well as they treat their policyholders (so being treated poorly would actually be a danger signal). Agents need to practice due diligence to: Prevent lawsuits from unsatisfied clients; Protect the trust agents have built with their clients; and Determine if the people associated with the insurers have the level of integrity desired.
Due diligence relates to many areas, one of which is the investigation of the companies licensed with. There is both a technical and common sense approach to company due diligence. Agents do not have unlimited time so the common sense approach is often used at least initially. If the agent has questions or concerns arising from the common sense investigation, then a further technical investigation would follow.
Some technical analysis of historical company data is important, although the agent will probably use a common sense approach as well. If a potential concern is identified, the agent is likely to rely primarily on a technical investigation of the insurer. This may sound time consuming (and sometimes it ends up being so) but generally insurer investigation does not take a great deal of time. The agent is not trying to put together a financial portfolio on the company, merely identify any potential problems, such as a pending financial failure. It is easier to prove a company stable than it is to prove one unstable. Since the agent is looking for stability, the investigation is not difficult in most cases. Due diligence investigations might be time consuming for the financial planner who is recommending investing for retirement income or any long-term purpose. In these cases, where the future hinges on the companys economic forecast, more time must be invested. However, once the investigation is done for one client, the results can be used for many others. The focus of the company investigation will depend on the purpose. Insurance products will be investigated for different reasons. In this case the agent wants to be sure the product will be appropriately applied to consumer needs, although solvency is still a concern any time an insurance product is sold. Solvency is very important for long-term insurance products (those that will pay benefits years later), such as annuity products or nursing home insurance products. Of course, no agent should ever place a product with any company that is not financially stable, even for short-term use.
I tell agents to go with gut feelings. If a product or insurer does not feel right do not sell it. Gut feelings arise for many reasons. It might be something as simple as a continuing pattern of delayed claim payments. If a company is continuously delaying the payment of client claims, the insurer may be trying to gain quarterly interest earnings by retaining funds as long as possible. Since the insurer owes a standard of care to their clients, this could be a warning that such standards are not a priority with the company. Even if the insurer is financially stable delayed claim payment displays the wrong attitude by management towards their policyholders. Anything that alerts an agent to a continuous problem within the company should not be dismissed.
There are some problems that might come with the technical approach to due diligence, including:
Agents typically start with the three most recent sets of financial statements and study them. Does the company seem to be making minimal, even, or excessive profits? Too little profit could put the company into insolvency; too much profit may mean low regard for the policyholders. Surplus in relation to the amount of business being produced should be compared. Check with the Insurance Department to see if there are any cautions placed on the company. Ask about policyholder complaints over the last three years as well. Look for recent shifts in company management since that could mean a currently acceptable company may cease to be so.
After the information is gathered the agent will study it to see if anything raises a red flag. It is not always easy to know if problems exist, especially if the agent is not experienced in due diligence. Most state insurance departments have someone the agent can go to for help in understanding the material. Be sure the state employee actually has the background necessary to provide help. Ask him or her what past experience they have.
While it may not be perfect, technical analysis is still useful as long as it is combined with the agents common sense. A single problem is seldom the cause of company insolvency. Usually it is a combination of problems that bring down an insurance company. All insurers have the potential of making a mistake in their underwriting practices or other areas of business. It is the large mistakes that bring on severe consequences that will affect an insurer. If money goes out faster than it comes in there is little difference between a household and a business either one can fold under these circumstances. More money going out than coming in is called a negative cash flow. Most of us have experienced that at some point in our lives and we know what happens: either we must earn more income or spend less. If we dont do one or both of these, as individuals, we would end up in bankruptcy. It is no different for an insurer: they must have adequate incoming funds to exceed that which goes out.
I saw the following on a reader board: Most money is tainted. It taint yours and it taint mine. Part of the reason we work is to acquire funds. All of us need a positive cash flow to prepare for retirement as well as meet day-to-day obligations. Companies and individuals are the same in this respect. While most money taint mine I want to accumulate enough so that I do not become a financial problem for my children (although on some days, Id like to be). We cannot accomplish that unless we use financially sound companies for our investments and insurance needs.
Just like individuals, companies must experience a positive cash flow to prosper. If the public believes a company is in financial trouble investors and policyholders will move to what they perceive to be a more stable company. This will actually hasten a companys decline or cause one if the publics perception is wrong. That is why states routinely refuse to allow policyholders to move their coverage when the state steps in to prevent an insurer failure. If they allowed the policyholders to move their money to another company the state would not be able to prevent the financial failure. A company that ends up in financial trouble is an embarrassment for the agent who sold the product. It is certainly better to avoid financially weak companies.
When evaluating a company, the common sense approach would dictate that anything that seems too good to be true probably is. Therefore, if an insurer is paying an unusually high commission and paying the policyholder more than other similar products, the agent should consider this a warning. No company can stay solvent if more cash goes out the door than comes in. The company may be trying to buy business by offering too much. They hope to gain back their loss at some point but there is no guarantee that the insurer will be able to do so.
The common sense approach to insurer or product evaluation would dictate that anything that seems too good to be true probably is.
Agents need to keep a circle of friends and acquaintances within the industry. Some commissioned salespeople think they need to be adversaries rather than friends with those who sell similar products or work in the same industry. It has been this attitude that has prevented agents from benefiting from the experience of others. When agents keep in regular contact with their peers they will pick up knowledge of companies, including warning signs of insurers that are either experiencing financial changes, management changes, or attitudes that are destructive.
Agents need not be adversaries. There are enough products and clients for everyone to make a good living. The agents Ive talked to seem to feel that they will be placed in an awkward position if they were friends with the agent whose business they feel the need to replace. It is possible of course that an agent may come upon a friends business and feel the product is inferior. I do not see this as a problem: call the friend and discuss your views rather than replacing his business. Do not do this in front of the policyholder. This must be a private conversation between the two agents. If he agrees he will replace the product himself. If he disagrees he will not. The client will make the final determination. If each agent treats the other with respect the client will be the winner. Friendships can continue even if the client decides to go with the second agents policy as long as the two agents respect each other enough to discuss the matter and are strong enough to know that disagreements on products will happen even among friends.
Insurer Rating ServicesThere are several reliable companies that rate insurance company solvency. One of them is A.M. Best Company. A.M. Best uses a series of letters to determine the financial strength of insurers.
Every rating company will have their own method of determining company strength; some are more stringent than others in their assessments, so it is often best to review all rating companies. A.M. Best uses three critical areas of assessment: profitability, leverage, and liquidity. They use the past 20 years to assess these elements.
Where Does an Agents Ethical Responsibility Lie?
Most of us assume an agents allegiance is to the insured, but that is not necessarily true in a legal sense. Certainly there is a moral responsibility to the insured and most of the time there is also a legal responsibility, but agents may owe their primary legal allegiance to the insurer with whom they have a contract. Policyholders may never realize this until they are involved in a policy dispute and learn that their agent may not come to court in their defense.
At the time of policy sale agents certainly have a moral and legal obligation to the buyer. The agent has the obligation of full disclosure, stating all limitations or policy exceptions, correctly stating the conditions under which the policy will pay benefits and stating any other relevant information, including cost.
The financial planning industry is unique, says Cheryl Toman-Cubbage in her book titled Professional Liability Pitfalls for Financial Planners, in that its members come from a variety of other industries, including insurance. Also in the role of financial planners are accountants, stockbrokers, and sometimes attorneys. Financial planners owe their allegiance to their clients period. Never should products override the standard of care that is owed to their clients. In fact, financial planners must consider selling only their advice and not products. If a product were sold it would be hard to know if it was sold because it was for the client or because it produced a commission for the agent.
Agents who are not financial planners have ethical obligations to:
An agent owes his or her clients: Courtesy in all phases of sales and service. Agents should present themselves professionally, be well groomed, and prompt for appointments. Product honesty. All aspects should be communicated well and questions answered completely. Product knowledge. Whether a car is being sold or a health policy is being sold, the salesman owes it to the client to know their products. Educational awareness. New products are developed or old products offer greater opportunities as laws or situations change. Agents owe it to the consumer to be aware of the industry; and Normal customer service. If a requested service is not available, the agent owes it to the client to recommend, if possible, where to go to request it.
An agent owes the State Insurance Department: Knowledge of state laws and the promise to follow them; Current information. If the agent moves or other pertinent information changes, he or she is required to notify the state. Immediate notification of harmful practices. If an agent is aware of an agent or agency that is dishonest or in some way harming consumers the state must be notified immediately; Professional courtesy at all times, even when he or she does not agree with the state regarding a requirement or legal decision; Acquirement of mandated education in a timely manner. The agent has no right to request or expect special treatment in the issuance or maintenance of his or her insurance license; and Immediate response to any state inquiries regarding a placed policy or consumer complaint.
An agent owes the companies he contracts with: Courtesy at all times, whether dealing with an underwriter, receptionist, or other employee of the insurer; Fair and honest policyholder relations so that insurers are not placed in a position of having to apologize for their agents inept or unprofessional conduct; Compliance with all insurer contract provisions; Knowledge of and compliance with all state and federal laws; Compliance with all mandated education in a timely manner so that the insurer is never faced with having to refuse an application that would have otherwise been accepted; Honesty in policy representation. Insurers are often financially responsible for their agents mistakes or misrepresentations. A valid Errors and Omissions liability policy in an adequate amount to insure any errors that may need to be remedied. Professional company representation. As long as the insurer is fair with the agent, the agent owes it to the insurer to never speak poorly of the companies they represent.
If an agent is not happy with an insurer, there is no reason to continue representing it. Doing so, while simply not logical, also allows a negative attitude to develop that is detrimental to all involved.
Agents owe themselves and their families something too, including: Honest evaluation of the job. Selling insurance is hard work. No one is hanging out the windows waiting to be sold a policy (despite what your recruiter said). Commission work is not suitable for everyone. It can be both stressful and satisfying. If you find the stress is greater than the satisfaction consider change. Maybe you only need to change some element of selling, or maybe you need to change everything. If you find you do not like this line of work, leave it and do something that makes you happy. If you are not happy it is unlikely that your family will be either because your stress will come home with you. A fair income. While I know many agents who do very well financially, not everyone succeeds. The lack of financial success is due to many reasons including sloppy work habits, a feeling of inadequacy, or even a negative view of the industry. When low income (and not over-spending) exists the inability to pay personal bills can cause even a good agent to consider unethical behavior. Struggling agents are the cause of many fraudulent acts as they try to stay afloat personally. Sometimes the cause of insufficient income can be corrected with changes in presentation, a little more personal education, or refocusing on working discipline. If industry negativity has affected the agent, he must reevaluate himself and his professional role. Sometimes the agent needs to work in a different area of insurance or for a different insurer. Sometimes the agent needs a mentor to help them over the rough spots. Ask someone you trust to help you if you feel you need it. If it turns out that this line of work just is not suitable for you, move on to something that is. Just be sure you realize it is not a statement about your ability; it merely means your ability lies elsewhere. Respect for yourself and the work you perform. If you do not value the work you are performing, start reading the history of this industry. Insurance is a needed and valuable service. Many areas of our lives depend upon it. If you are to succeed you MUST value the work you do. You must respect the insurance industry and be able to ignore those that verbally trash it. Their actions reflect not the industry but rather their inability to see the entire forest because they can only focus on a single tree. Time with your family. It is easy in any line of work to forget the importance of family. A commissioned job can be stressful. Time with family will lessen the stress and remind you of why you work as hard as you do. Let your family know they are important to you. Money set aside for federal taxes. No one will be holding out taxes that will be due at each years end. It is important that agents do this for themselves. If you live in a state requiring state taxes, dont forget to include those. While you are at it, also put aside funds for other worthwhile needs, including an occasional vacation and retirement needs. Believe it or not, agents retire at some point just like everyone else.
Agents are legally considered professionals with professional standards of client care. With this title come responsibilities. Agents know they owe their clients professionalism and honesty in the contract representation and in the handling of premium dollars. Stating it here will not change the man or woman who is not honest or ethical. However, it does remove the ability to claim they were not aware of their responsibilities if they should find themselves before the state commissioner.
Insurance departments are hoping that agents who are pressured into behaving ethically will eventually adopt the habit. While there is no evidence that completing ethic courses will have this effect, there is also no proof that it will not benefit agents. We may as well hope for the positive effect.
Agent Liability
Insurers and agents both bear a great deal of legal liability. Every day insurers must deal with the mistakes or unethical behavior of their agents. Usually it costs the insurer money to correct them. When it costs the insurer money, it costs the policyholder money. Just like other types of business, overhead is pulled into the price of the product.
Agents get blamed for lots of things that are beyond their control. Some people view the insurance industry with mistrust and openly attack it in various ways. Agents bear the brunt of this in many ways. It allows the public to overlook what we do for them and focus on what we are not able to accomplish. Those who mistrust the insurance industry are unlikely to change so we must be professional at all times and ignore those who paint an incomplete or simply wrong picture of the industry.
Profits are goal of any business, including ours. I make no apology because I earn a decent living or because the insurers I contract with make a profit. I want them to make a profit so I can be confident that they will be able to complete the financial promises they make. Of course, it is the agents responsibility to fairly represent the products sold, including variable annuities.
Everyone has some type of agenda. Lawyers are spending big bucks advertising for new clients based on insurance losses (primarily variable annuities). The goal of these lawyers is to sue agents and their companies for the losses of their clients. Others are less clear about their goals. In the case of some of the so-called consumer advocacy groups it seems to be the collection of donations. One group advertising on the internet has two pages of negative press regarding annuities followed by three pages asking for monetary donations. They request these donations so they can continue educating the public. Of course, their education consists of incomplete, sometimes totally wrong, information. If agents presented information in a similar fashion we would be charged with fraud or negligence.
One consumer advocacy organization made the statement: Many people do not realize that agents get paid for selling annuities. It is hard to comprehend that anyone would think someone works each day without pay. Except for the few generous people who donate their time to legitimate charity organizations, I can think of no one who works for free. The attorney is paid (usually one third to one half of what he wins for his client), the certified public accountant is paid (somewhere around $60 to $100 per hour), and the politician is paid (more than most are worth). My plumber hands me a bill and even the kid who delivers my paper expects to be paid. Why would anyone believe an insurance agent would not expect payment as well for their services? The truth is we do a lot that we do not get paid for. Yes, our renewal commissions are designed to pay for the service we provide our clients, but in many cases it is not enough to cover our expenses for doing so. I know of many times agents have performed client services without pay or for inadequate pay. My plumber has never performed a free service and neither has my attorney. I do not believe that any of my clients ever thought I worked for free (although mine are well informed). In fact, I have had some ask me if they owed something for service work I performed. Why would this organization practically call consumers stupid? We know the answer, of course. It is an anti-insurance negative campaign against our industry. Im not sure why nor do I care why. Their statement is a sign of ignorance and deserves no further consideration.
It is true that we live in a world of liability. We can be sued for just about anything, no matter how unreasonable. The guy who breaks into your house to steal from you can sue if your dog bites him on the way out of your yard. The postman can sue you if he breaks his leg tripping over your childs bicycle. Even the woman you save from a traffic accident might sue you for the inadequate service you performed. Certainly your clients can sue you if the product you sold did not perform to his or her satisfaction. Additionally, their family members can sue you because:
And so on and so on. Make no mistake: agents do cause many of their own problems. What problems we dont cause for ourselves, others will present to us. Clearly agents have more liability than many other occupations. The question is: what can we do about it?
The first step to preventing lawsuits is an honest reputation. When we are perceived as honest we are less likely to be sued. However, even an honest agent may be sued, often initiated by the clients family members. Our client may know we were honest and trust us completely but their family members know nothing about us. When life financially disappoints them they want to place that disappointment onto some third party. While it may not be the agents fault, he or she is in the line of fire since an insurance product was sold. Clients and family members seldom congratulate us when a product performs well and delivers the benefits they expected. They will sue you, however, if the product does not perform well.
I once had a relative of one of my clients stop by my office demanding that I refund years of premium for a nursing home policy. My client died in the hospital. Prior to that she lived in a retirement community. My client never lived in an assisted living complex, but her sister felt the retirement community was close enough and the policy needed to reimburse at least a portion of the costs. Clearly she did not inherit as she thought she would. The retirement community was a very nice one and certainly expensive. My client had the money to pay for it and wanted to live her final years in as much luxury as she could afford. In that pursuit she spent most of what she had saved over a lifetime of hard work. I never was threatened with a lawsuit, but it is likely an attorney would have advised her sister that it was not warranted anyway. Every insurance sale was well documented with proper signatures and disclaimers neatly filed away.
We never know what a clients relatives may decide to do. That is why agents must document all sales, keep all reference material (I even file away the paper I wrote the presentation on it proves what we talked about), and nurture a positive relationship with all involved. While that will certainly help, it cannot totally prevent a lawsuit from being filed. Anyone has the right to sue any other person they wish to even if the suit is unwarranted.
Americans view events and circumstances in whatever manner they wish to. We spend more money than most and the younger generation is likely to buy more and be deeper in debt than previous generations. Americans are quick to tell you they are short of money and long on debt. It is a statement that is made without remorse or apology. Lack of money is the most common reason given for not saving for retirement, buying health insurance, seeking dental work, or making prudent financial choices. The truth is simple: we choose how we spend. If we do not have a retirement account, it is because we chose to spend it elsewhere. That does not stop most Americans from seeking wealth anyplace it can be found, including through a lawsuit. Americans have become accustomed to spending more than they make (remember positive and negative cash flow?). Plastic has allowed us to do so without worry. If we cant pay the bill in full, we dont worry. There is always next month.
This lifestyle attitude has allowed Americans to place the blame on others, including their insurance agents, when the future does not work out the way they thought it would. Todays consumers are quite aware of their legal rights. Certainly there is more information available to consumers but it is more than that. Much of the sue everyone attitude comes from societys acceptance of such suits. Any person or company that we perceive as having more money than us is fair game. Courts are known to award much more today than a suit would normally have dictated in the past.
Our dissatisfaction seemed to blossom in the 1970s when we realized we could sue everyone ever born. It was at this time that professionals were seen as a suitable target for lawsuits. Eugene Kennedy wrote in his article The Looming 80s in the New York Times:
The courts, as perhaps the last institution with authority intact, became the instruments for displacing blame, some real and some imagined, onto third parties.
The scope of professional was broadened to include multiple types of professionals, including real estate agents, management consultants, crop dusters, data processors, printers, employment counselors, translators, telephone answering services and, of course, insurance agents. Of course, there is no point in suing someone who has no assets so attorneys looked at the growing list of professionals and chose those providing the most opportunity for income. Financial planners are especially vulnerable to lawsuits since consumers make financial decisions based on their advice. The planner practices in an area that certainly can result in a financial loss but with the increasing sale of annuities, agents are now finding themselves in the same leaky boat. Even when the financial planner or insurance agent provides full disclosure and acts in good faith, a financial loss can result causing a lawsuit.
The most important step in preventing lawsuits is documentation and awareness. Each decision must be documented with the buyers signature or initials, including notations of what was discussed. Awareness includes looking at the standards of care required of other professionals and following them in this industry. Our duties are closely tied to other professionals, such as accountants and stockbrokers. A financial planner may act in other capacities such as taxation, retirement advisor, or estate planner. Sometimes the same may be said of insurance agents. Financial planners must contend with conflicts of interest especially if he or she is also selling commissioned products in the context of their financial planning activities. Even if the planner is not selling products, he or she must be careful if they recommend another person who will be earning a commission based on the planners recommendations.
The act of negligence is the primary reason insurance agents are sued. Negligence takes on many forms, including selling too little protection, selling too much protection, selling the wrong kind of protection, or selling a product that performs poorly. An agent or financial planner must never place their needs above the clients. This includes any type of benefit, not just monetary. Also the causes of lawsuits are conflicts of interest and poor financial management, although both of these are often placed under the theme of negligence.
Since the 1970s we have also seen the amount of judgments climb dramatically. Courts were often exceeding the limits of the professionals liability policies and adding punitive damages. The point of punitive damage awards is to punish the wrongdoer and it seemed the courts loved this idea. Professionals must read their E&O policies completely since some do not cover punitive damages.
When a lawsuit is filed it seldom matters who won or lost since the real damage is often to ones reputation. People will remember not that the agent was cleared of misconduct; only that he or she was sued. As a result the damage is done to the agent and the agents business regardless of whether or not the agent is guilty of anything.
Agent malpractice policies, known as Errors and Omissions insurance (E&O) contains a unique settlement clause in favor of the insured. In the typical property and casualty liability insurance policy, the insurance company has the right to settle the claim in a manner it deems expedient without regard to agent guilt. With a typical professional liability insurance policy, however, the insurer cannot settle a claim without the insureds consent, primarily because the agents reputation is involved. A settlement could be construed as an admission of guilt. Even so, most claims are settled rather than taken to court because even an innocent agent can lose such a suit. Additionally, it takes time to pursue a court case. Agents work on commission; their time is valuable. If not in the field, their income suffers. Of course, the best avenue is avoidance of lawsuits.
Standard of Care
Professionals have a standard of care that they must adhere to. The standard of care is the basic level of attention and service that a professional must deliver to his or her client. Courts use the term, standard of care, as the level of service owed to clients; standards of care are reasonable expectations.
Courts use the term standard of care as the level of service owed to clients; standards of care are reasonable expectations.
In an ordinary negligence case not involving professionals, the term ordinary reasonable prudent person is used for the standard of expectations. We usually refer to this as the prudent man rule. It means the nonprofessional must act as an ordinary reasonable and prudent person would under the same circumstances. An ordinary nonprofessional would probably not have the training or experience to sell a Medigap policy, for example. However, an agent who sells such a policy is expected to have the necessary education and training to do so. That is what separates the prudent man from the agents applicable standard of care owed to his client.
What an agent prints on his or her business card can establish the expected standard of care. If the agents state has no legislation establishing how the agent may represent himself, he can put whatever he wishes on his business card. If he calls himself a financial planner, he has just elevated his expected expertise and standard of care owed to his clients. When a person offers a professional service to the public, it is presumed that he possesses the necessary degree of skill and knowledge to adequately perform the task required. Unlike the ordinary negligence legal case, where special skill and knowledge is considered only if the accused in fact possesses it, a professional negligence case imposes a certain level of skill and knowledge on the accused whether or not he actually has it. Since he presented himself as a professional it is the agents responsibility to possess the skills necessary to adequately perform the job.
Professional standards are imposed on all individuals whose occupation has been legally recognized as a professional occupation; this includes agents.
Since agents are recognized as professionals, the next question is what is the minimum standard of professionally acceptable conduct? The codes of ethics developed by the various professional financial planning organizations provide some guidelines, although some elements do not necessarily equate well to agents. State laws certainly provide guidelines and agents have not only a legal duty to know their own states laws, but also an ethical duty to know them. There is no excuse for selling insurance while claiming ignorance of state laws.
Insurance agents were the first professionals to expand into the financial planning industry. The goal was to fully insure all needed areas for their clients and do so in the manner that was most advantageous for them financially. This was a natural progression since the first job of a financial planner is to make sure his or her clients have adequate insurance coverage for risk exposures prior to making other investments. Why? Because losses could be catastrophic if the client is inadequately insured. One major loss could wipe out the clients entire financial base, including his or her investment portfolio.
Another reason agents have become financial planners has to do with the types of insurance products now available. In some ways, due to these products, agents have been forced into a financial planner role. Such products as whole life with low rates of return were losing out to more progressive products. If an agent wanted to maintain their current client base and expand into a larger client base, he or she had to learn the new products. In fact, from the 70s on many people were accepting the strategy of buying term insurance and investing the difference into income products. Some of the new products required agents to become licensed securities dealers. Many agencies actually required their agents to become licensed as such since they intended to market products that required such a license. If the agent refused to move into this market, he or she was terminated.
Many agents have moved into financial planning because it just seemed to happen that way. No agency required them to make this move, whole life sales moved into universal life, variable life, and combinations of the two. Annuities have gained and lost popularity based on how the stock market was currently performing, but even during low popularity times agents found annuities to be valuable estate planning tools. Consumers were asking their agents for advise on their retirement planning portfolios. As time went by, many agents simply ended up being financial planners without ever intending to move into that field. Whether an agent intended to or not, with the activity came the liability.
There is no doubt that a legal conflict of interest exists for insurance agents who are also performing financial planning duties. Unlike accountants who become financial planners selling only his or her advice, agents are selling insurance products along with the advice. Accountants can become insurance agents, but most do not sell insurance products so they avoid the conflict. Agents generally began as product sellers, so as they move into financial planning they do not always recognize the conflict that develops. As a result they place themselves in a high-risk position.
Agents are ethically required to place the interests of their clients before their own. If they are also offering financial planning advice this is mandatory from a legal standpoint. Even if it means giving up a large commission, the clients interests must come first.
For example: Jack and Jill have two small preschool age children. They come to a local agent asking for financial planning advice. It is determined that the couple must have no less than $500,000 in life insurance to adequately protect their children and each other. It is further determined that they cannot afford the premiums for a whole life policy (although that would pay the agent the highest commission), so the logical choice would be a term policy. Even if the couple could afford the premiums for a whole life policy, would that have been in their best interest? Probably not. Considering their age, term insurance is probably the best choice with or without the ability to pay the higher premium. There are situations where it is a tax advantage to buy something other than term life, but that is not the case here.
A financial planner must place the interest of the couple above his own, even if it means losing a large commission, so he will recommend the term policy. An agent who is not a financial planner and not offering such advice has more legal room to consider the size of his commission, but ethically that should not be a primary consideration.
In all cases, without exception, the primary function of a financial planner is offering advice not selling products. There is no way to escape this fact.
Agents have other professional liabilities besides conflict of interest. Like accountants, they can be found liable for negligence, violation of a statute, and breach of contract. Negligence is the broadest form of liability that an agent faces because it involves so many possibilities: placing too little insurance, placing too much insurance, failure to process appropriate paperwork, or failure to process a refund. These are just a few examples of negligence. Negligence can involve just about any error or omission in the course of performing an agents normal duties.
Property and casualty agents routinely mention the availability of umbrella insurance when selling other products. This is not done to obtain a higher commission (umbrella policies do not pay high commissions) but to protect themselves legally. If the insured suffers a loss greater than the amount of liability protection provided under the auto or homeowners policy, the agent wants to be able to produce evidence that higher coverage was offered. Usually the agent obtains the clients signature on a refusal document for the umbrella coverage.
When state minimums exist, such as for uninsured or underinsured motorist coverage, agents routinely tell their clients that these are minimums not necessarily amounts that are appropriate for the risk. By specifically documenting such statements, the agent is protecting himself or herself from being sued for negligence for placing inadequate coverage.
Agents can be liable to both the insured and the insurer they are contracted with. In this respect it is important to note a distinction between agents and brokers. Agents are considered to be representatives of the insurance company, while brokers are considered representatives of the insured.[3] The brokers primary allegiance is to the client. Knowledge of the broker is not considered to be knowledge of the insurance company. On the other hand, it is assumed that agents and insurers have the same knowledge.
This distinction can be critical when a client sues both the agent or broker and the insurance company that issued the policy. If a broker is involved, the insurer may be able to escape liability since the insurer is not deemed to have had the same knowledge (so could not have known liability existed). If the agent is being sued rather than a broker, the insurer is assumed to have had the same knowledge so the insurer will probably also be liable. This would be true even if the agent did not follow the policies of the insurer. Even if the agent violated his agent contract with the insurer, the insurer is still likely to be considered liable.
Express Authority refers to the powers given to agents by the insurer in the agents contract. Agents also have other implied powers, which may include powers not actually given the agent by the insurer. Courts have used the doctrine of ostensible authority to give agents powers the public would reasonably expect them to have. It does not mean the insurer actually gave such powers to the agent.
Example: Bob purchased a nursing home insurance policy, paying the agent a premium. The agent, Dorothy, accepted the premium even though no underwriting had been performed. Dorothy was supposed to present a form stating that accepting premium did not bind the policy and only underwriting could determine if the policy would be issued, but she failed to do so. Had Dorothy told Bob that the premium did not have the power to bind the policy and acquired Bobs signature to that statement, Bob could not have assumed the effectiveness of the policy.
Bob did provide complete health statements to the best of his ability. What he did not realize was that the insurer would not accept him due to specific existing health conditions. When he was admitted to the nursing home one week later, prior to receiving a policy denial letter, he expected to receive benefits under the terms of the policy he believed he had purchased. Because Dorothy failed to obtain his signature relating to policy issue requirements, the insurer was liable for benefit payment even though Dorothy failed to follow their required agent procedures. Bob has reasonable expectations of coverage.
Such cases have actually gone to court. Often it is the family members who sue on the basis of ostensible authority. Insurers have required forms for a legal reason to protect themselves from misunderstandings with clients and their family members who were not present at the time the policy was purchased. When agents do not cover each required form with their client and obtain the clients signature as required by the insured, they place not only themselves, but also the insurers at legal risk.
Suppose Bob had purchased a life insurance policy and then suddenly died. If his heirs were not present at the time the policy was purchased they would think the policy was active. Even if Dorothy verbally informed Bob that coverage was not effective until underwriting had been performed, without the proper signature on the proper form his heirs would have a basis for their lawsuit. There is a reason that insurance companies have so many forms requiring so many policyholder signatures (as well as agent signatures); they offer legal protection against lawsuits.
In some cases the insurer has recourse against agents who act outside of the authority they were given in their agency contract. Whether or not the agent has any financial means of repaying the insurer, the insurer can sue the agent for failing to follow their procedures. Agents risk losing whatever financial assets they have accumulated (another good reason to have E&O insurance).
The courts will always consider the situation based on the agents and insurers implied duty of good faith and fair dealing that is imposed upon them for the benefit of the consumer. If the insurer is sued for bad faith, it is likely that the selling agent will also be named as a defendant.
Agents may be found liable for both civil and criminal statutory violations. This can be a serious area of liability since criminal violations can result in a fine, imprisonment, or both, depending upon the severity of the crime. Some states give the agent the option of having a hearing before the state insurance commissioner rather than appearing in court. In some cases, if the agent voluntarily surrenders his or her insurance license, no further action is taken. An agent must be aware that he or she is liable for illegal actions, even if they do not harm a buyer.
Fraud is one of the most common crimes committed by insurance agents. For example, in Colorado a man was involved in a car accident that caused nearly $7,500 in damages to his car and the other vehicle. Although his agent assured him the accident was covered, as it turned out the agent had never submitted the premium to the insurer because he was not licensed to sell insurance in Colorado, so no policy existed. The policyholder had no recourse against the insurer that was represented without authority so he sued the agent and was awarded $5,000, but the man filed bankruptcy, so the plaintiff was unable to even collect the amount he was awarded. Of course, Colorado also became involved. The man surrendered his license to prevent state prosecution. While this protected future consumers it did nothing to help the victim in this case.
In another case of fraud, an agent convinced an elderly couple to drop their current Medigap coverage and buy a policy from him. When their policy failed to arrive, the couple contacted the agency he said he sold insurance for. They were told the agent no longer worked there and had no authority to sell products under their name. As a result of this incident and several others that were similar, the agents license was revoked and he was convicted of premium theft and sentenced to five years imprisonment.
There are many other circumstances of fraud that are less severe than these two examples. Some states react to fraud more severely than others, but in all cases an agent who commits fraud has the potential of both fines and jail time.
An accountant is more likely than an agent to be sued for breach of contract. An agency or insurer would be more likely to be involved in breach of contract since agents merely sell the products that are available to them. However, it should be noted that it is possible for an agent to be named in this type of lawsuit, however rare.
Agents may be sued for failing to act promptly on an application for insurance, but they would most likely be named along with the insurer. It is likely this would be presented as a negligence case rather than a breach of contract, although historically such cases have been filed both ways. Under the breach of contract theory, the application is the offer and silence on the part of the insurer or silence coupled with retention of premium forms a contract. This makes the insurer liable for any unreasonable delays in acting on the application.
When is the Policy Legally Binding?
An important aspect of any policy is the point it becomes legally binding. The point of binding is the point in time when the insurer is legally bound to deliver that which the contract promises. The application is considered the offer. The acceptance occurs when either the agent binds the coverage or the insurer issues the policy. An insurance contract usually does not have to be in writing, although it typically is in written form. Binding is important because it legally signifies the point at which a loss is covered under the policy. The writing agent may bind some types of policies; others are bound by policy issuance. When an agent accepts an offer for a Personal Auto Policy on a car, he usually has the ability to bind the contract whereas an agent accepting a health policy usually cannot bind the contract underwriting has that responsibility. When an agent has the legal power to bind a contract, such as with automobile policies, the insured is covered for damages before he has actually received the written contract. When underwriting must determine whether or not an applicant is acceptable, the consumer must actually be issued a written policy before risks are covered.
The relevance of determining when a contract comes into existence relates to some types of liability, such as breach of contract. There can be no breach of contract unless binding exists. Historically, life insurance agents could not bind the insurance company. Case law over the last thirty years has changed how that is viewed, however. The courts have ruled an ordinary person who pays the premium at the time he applies for insurance is justified in assuming that payment will bring immediate protection, regardless of whether or not the insurer ultimately decides to accept the risk. As a result of such rulings it is becoming increasingly common for companies not to accept premium until the policy has been issued or use a disclaimer form that clearly states the policy is not binding until a written policy is issued.
There can be no breach of contract unless binding exists.
When premium determines acceptance of risk, this is usually called a contract of adhesion, which simply means the insured has no option to change or negotiate policy terms. The policy is presented to the insured on a take-it-or-leave-it basis. In most cases, the courts view any ambiguities in an insurance contract in favor of the insured and against the insurer and agent. Since agents are thought to have more knowledge than the insured, it is automatically assumed the agent or insurer is at fault, unless proven otherwise.
Liability can be set up as seen in the following table:
Protecting Oneself Against Liability Claims
Of course, it is always best to avoid being sued. No matter how innocent an individual is a lawsuit brings about harm to their reputation, their bank account, and their sense of fair play. If a lawsuit is filed, the wise agent will have liability insurance (E&O) in place to protect him or herself from financial harm (there is no way to insure against the loss of reputation and time that will be involved).
In order for a risk to be insurable certain criteria must be present. This is true whether we are insuring a house fire or professional liability. The first requirement is a sufficiently large number of exposure units to make the loss reasonably predictable. If only a handful of people are requesting a specific type of insurance it either will not be available or the cost will be so great that it would be unaffordable. Many insurance companies now require proof that their agents have Errors and Omissions insurance in order to represent their products. The potential loss produced must also be definite and measurable. This means the insurer must be able to tell when a loss has occurred and be able to determine the dollar amount of the loss. Certainly the loss must also be accidental. Insurers are not going to insure loss that has purposely been initiated. The loss must be one that may or may not happen. If every agent were sure to be sued, for example, no company would want to take on the risk. Finally, in order to offer coverage, the loss cannot be catastrophic meaning it cannot occur to a large number of insureds at the same time. If a company found large amounts of accountants being sued it might reconsider continuing the policy, for example. Some industries have had a difficult time finding liability insurance, either because not enough people were requesting it (making premiums unaffordable) or because the industry was experiencing too many liability problems.
Two Types: Claims-Made and Occurrence PoliciesThere are two types of liability policies for insurance agents although it is not always possible to find both types available for purchase. Claims-made policies are more rigid than occurrence policies. Claims-made are the type agents are mostly likely to find available because the insurers risk is lower. With a claims-made policy the insured is covered only for claims made during the time the policy is in force. Under an occurrence policy the insured is covered for any damage that occurs while the policy was in force even if the claim is filed after it has lapsed.
Example: Jane has a claims-made policy; Jordan has an occurrence policy. Both Jane and Jordan are sued for separate errors made independently of each other, but both are filed on errors that occurred two years ago.
In Janes case she made an interest rate error that cost her client financially. It is clearly Janes error so there is no dispute regarding the cause of it. Jane had a policy at the time she made the error but she did not renew it so it is no longer effective. Because she did not renew the liability E&O policy the claim was filed after the policy had lapsed. As a result, she is not covered for her error.
Jordan made a similar error during the same time period. Like Jane, her policy has since lapsed. However, Jordan had purchased an occurrence E&O policy that promises to pay if the claim happened while the policy was in force, even if it has since lapsed. As a result, Jordans error will be covered by her policy.
When agents select a claims-made policy it is important to select a company the agent plans to stay with, renewing the policy year after year even after they have left the industry in many cases. This protects the agent from insurance errors and omissions they made during their career. It is not surprising that occurrence policies cost more since they are more likely to cover the liability. Perhaps that is one of the reasons occurrence policies are harder to find and purchase. Fewer insurers want to take on the additional risk imposed by occurrence policies. Even those written for medical professionals are most often claims-made policies. As some industries are more likely to be sued, those purchasing liability (malpractice) policies tend to buy claims-made policies because they are more affordable. As fewer people purchased occurrence policies that became another reason for fewer insurers offering them.
It is important to realize the risk insurers take on when they issue occurrence policies. Their liability could conceivably go on forever even though the policy has lapsed. With some types of insurance, such as long-term care policies and annuities or policies purchased for retirement, claims could occur decades after the contract was sold and issued. This was certainly illustrated with the latent injuries filed by asbestosis victims. These claims were filed years after occurrence policies had expired yet the insurers who issued them were still liable for the claims. Considering the quantity of claims we have seen filed decades later it is not surprising that insurers issuing E&O policies are most likely to offer claims-made rather than occurrence policies.
Since agents may also be financial planners it is important to address E&O insurance for both. A financial planner may perform many types of duties, including providing financial advice, providing insurance policies, accounting recommendations, and maybe even stockbroker services. Because the financial planner performs so many duties, his or her liability is very broad. Liability policies for agents will not cover claims that are outside of the distinctive label of what their title is. The policy will not cover damages that are considered outside of the policys intent. In other words, financial planners will only be covered for duties directly relating to that and agents will only be covered for duties related to selling policies. If the agent also sells living trusts, their E&O policy will not cover any errors or omissions related to the sales of living trusts; it is not insurance related so it falls outside of the specific duties of an insurance agent. Since agents and financial planners seem to be branching out in so many directions this is a very important point.
The errors and omissions insurance that is purchased by agents would be called malpractice insurance in the medical industry. Errors and omissions insurance pays on behalf of the insured all sums which the insured becomes legally obligated for as a result of a claim made against the insured and caused by his or her negligent act, error or omission of the insured or their employees in the conduct of their business as general agents, insurance agents, or insurance brokers. E&O policies typically exclude dishonest, fraudulent, criminal, or malicious acts and libel and slander. Insurance under E&O policies do not apply to bodily injury, sickness, disease, or the death of any person, or to injury to or destruction of any tangible property, including the loss of its use. Policies usually cover liability to clients, to third parties, and to the insurance companies for which the agent works. Policies may be as small as $25,000 per claim/$75,000 single limit or as high as $5 million or more.
An analysis done by Shand, Morahan, administrators of the National PIA Errors and Omissions Insurance showed that three quarters of all liability claims fell into three categories:
Dishonesty and fraud comprised only 1 percent of all lawsuits. Two percent of the lawsuits involved claims by insurance companies against agents.
Stockbrokers and securities dealers also buy liability policies, but theirs are called blanket bonds or Employee Dishonesty Coverage forms. This type of bond provides the broadest form of fidelity coverage. The main distinction between blanket bonds and a professional liability insurance policy is the number of parties involved. Insurance involves only two parties: the policyholder and the insurer; a bond involves three parties: a principal who promises performance, a surety who guarantees that performance, and the obligee to whom the promise of performance is made.
When a lawsuit is filed against an agent or financial planner, the agent or planner should immediately call their policy representative, if a liability policy exists. If the suit falls within the terms of the policy, the insurance company will handle the defense of the lawsuit. Companies often have outside counsel on retainer to handle these cases. These attorneys specialize in these types of claims.
When an insurer handles the defense of the insured, the insured will usually lose some control over the lawsuit, but that loss may be worth having their expertise. The loss of control is especially true if the policy is a personal catastrophe or general liability policy rather than a professional liability policy. A typical clause of a personal catastrophe or general liability policy is a statement that the company may make whatever investigation, negotiation, or settlement of a claim or suit as the insurer deems prudent or expedient. There is no regard given to guilt or innocence of the agent or financial planner. With this type of policy clause it is not necessary to have the consent of the insured in order to settle the claim. A professional liability policy recognizes the gravity of a professional malpractice suit and gives great regard to proving innocence. A professional liability policy may not settle a suit without the approval of the insured since it is the insureds reputation that is at stake. Most insurance companies believe the professional should be aware of this possibility and should have the right to decline or consent to any settlement prior to settlement agreement.
It is important to realize that simply have a lawsuit filed against an agent or financial planner can damage their business, which is why it is so important to try to avoid such a situation if at all possible. When a suit is filed, several questions must be asked to determine a course of action that is appropriate:
Although the agent or financial planner may feel he or she has done nothing wrong it might still be in his or her best interest to settle outside of court. Of course many people realize this and make a habit of filing lawsuits. It is never easy to settle a suit with someone who filed it merely to gain financially without regard to the ethics involved. However, in some cases that may be wisest course for the agent.
Even when settling outside of court may be prudent in some way, each agent or planner must assess what ramifications settling a case might have on their reputation. Although it may be financially wise to settle a case outside of court the resulting effect on the agents reputation must be considered. This would especially be true if the lawsuit is public knowledge. Of course, even if the agent wins in court, the public may not be aware of it so in that case the damage is done no matter what the outcome of the trial is.
When the lawsuit is frivolous, the agent or planner must consider whether settling rather than fighting the suit will encourage others to file more lawsuits. Most people are not dishonest, but the smell of money can draw out those who lack ethics. Some professionals feel agents and financial planners have an ethical duty to others in their industry to fight frivolous suits to discourage others from filing them.
Even when the agent or planner considers a suit frivolous that does not mean the individual filing the suit feels that way. Suppose a client purchased a policy that the agent advised against. Even though the agent did not support the purchase the client may still feel the agent is somehow at fault. If the agent settles the suit, paying the client the amount he lost, it may encourage others who lost money to also sue their agents and planners. Other clients may even consider the settlement an admission of guilt, which will further harm the agents business.
In some cases, even though the agent or planner is innocent, they have no way to prove it. This is certainly reason enough to obtain and keep disclaimers that relate to everything from how the product was presented to the products the client chose not to buy. Many who market long-term care policies to existing clients require their clients who decide not to purchase this type of coverage to sign away all rights to sue if they end up in a nursing home. This protects the agent from his clients family members suing on behalf of their institutionalized relation. It is not unusual for family members, who are witnessing their inheritance going to medical bills, to look for someone to blame.
Unfortunately many innocent agents have had no proof to back up their side of the story. Even those agents who may have obtained documentation may not have done so in a manner that proves their innocence. A signature on a vaguely written statement will not protect an agent in a court of law. Since the agent or financial planner is considered a professional possessing special skills and knowledge, he or she will not be viewed sympathetically by the courts. The agent or planner will be able to produce past performance as an indication of innocence, but the courts usually side with the consumer if no proof to the contrary exists. If the client is elderly, it is especially hard for the professional to prove innocence. People tend to believe older people are easy targets for those selling something even when the seller had the consumers best interests at heart. Additionally, the public looks at insurance companies as large, heartless entities and the agent is merely an extension of that perception.
In court the plaintiff (your client) has the option of suing the defendant (you) for either a breach of contract or for the tort of negligence, which involves the standard of care that was provided, or both. If a contract is involved the case may be easier to resolve. If the contract spells out the rights and duties of each party, it would seem a logical settlement could be made. Either the agent did or did not perform as required by the contract. In reality it doesnt always work that way since the plaintiff can claim he or she was not made aware of the contract elements. While there is the responsibility of those involved in contracts to read what they have signed, courts do not necessarily follow this philosophy (especially where professionals are involved). Additionally, many contracts are difficult to read so even if the plaintiff did read the contract he or she may not have correctly understood the legalese in it. If the professional is not able to prove that he or she explained the contract terms in language the buyer could understand, the outcome may go against the agent or planner.
The courts do recognize degrees of performance. In other words the agent may have performed his duties, but to what degree? Did he or she do a satisfactory or complete performance of his or her duties, a substantial performance, or a material breach (an inadequate performance)?
A satisfactory or complete performance is determined by the test of a reasonable expectation of a professional. This may be a very straightforward matter if performance can easily be determined. That is not always possible.
A substantial performance means the agent did most, but not all, that was expected of him in the role of a professional. His performance fell short of being complete when a substantial performance exists. This can be a very gray area since the agent or planner insists they did a complete job, but the client insists the job was not completely performed. If the agent or planner made all reasonable efforts to perform, but has been unable to complete performance in some minor way, the court may hold that he filled his or her contractual duties to the best of his or her ability. Such might be the case if the agent tried repeatedly to deliver an issued policy, but the policyholders were continually unavailable, despite the agents best efforts (all of which could be documented by the agent). In such a case, the courts would probably say the agent did complete his performance to the best of his abilities.
Negligence The history of our courts demonstrates a move from strict adherence to contract law into the concept of fiduciary duties owed to clients. Because agents and financial planners are legal professionals they owe their clients a fiduciary duty based on a professional standard of care. If the professional breaches a fiduciary duty, he or she may be sued (and found guilty) of negligence. There is no doubt that this concept allows for many more lawsuits than would be possible under strict adherence to contract law. Additionally, since the courts may interpret the professionals duties differently than the agent or financial planner had, the professional may find themselves at a disadvantage in the lawsuit. A particular court may assign duties that the agent or planner had not anticipated. In his book, The Litigious Society, Jethro Lieberman wrote:
The fiduciary rule does not circumscribe the range of choices open to either party to a transaction except to say that which you undertake to do, do well.
While agents do work with contracts, those contracts describe the insurers duties regarding the risk involved. The contract does not outline the duties of the agent or financial planner. Perhaps agents and planners should have such a contract; in fact, many financial planners are doing exactly that. By outlining precisely what duties are involved and requiring signatures to that effect, the financial planner has created a contract, making adherence to contract law applicable. Of course, the contract may still be attacked on the basis of vagueness or language but it does at least allow a starting point of defense. Perhaps the best argument for such a form is the ability to prevent client misunderstandings. When clients know what may be expected there is less chance of dissatisfaction.
No contract will avoid some types of dissatisfaction. When we go to the doctor he does not have us sign a contract. There is the expectation that the doctor will perform his duties appropriately without a written contract. If he does not do so, the patients only recourse is to sue for negligence. The patient has the reasonable expectation of adequate health care. As it applies to insurance, agents do not request a contract signature when they show up for an appointment to sell insurance. Frankly, it would look a little strange to produce a contract when no policy has yet been sold. The consumer has a reasonable expectation of courtesy, honest product presentation, and delivery of product if a policy is sold. This legal expectation exists without initiating a contract (except for the policy that was sold). Since the agent or planner is legally defined as a professional, there is the fiduciary responsibility for honesty and delivery of the service that is requested by the client. If the agent or planner fails to perform to the expected standard of care, he or she may be sued for negligence.
Of course, filing a negligence suit does not mean that it actually occurred. The courts would decide if the clients expectations were reasonable. Did the agent have a duty to perform the standard of care the client expected? Is there any connection between the clients perceived loss and the actions of the agent or planner? Was there actual loss (clients do not always understand the product purchased and may mistakenly believe a loss was suffered)? In order for a claim to exist an actual loss must exist. The negligent act must cause some type of actual harm to the client. Actual harm can be financial, physical or emotional harm. As it relates to insurance contracts, physical or emotional harm would be attributed to stress over financial harm.
When financial planners and agents are sued for negligence it typically has to do with a financial loss, even if the agent or planner could not have foreseen that loss. Some types of insurance products carry risk of loss; it is a characteristic of the product that either financial gain or loss is possible. In such a case the client would be suing because the agent or planner was negligent in explaining this possibility adequately or in a manner that could be comprehended by the investor. The agent or planner is perceived to have superior knowledge so they bear a legal responsibility to fully inform the investor of possible financial harm. When the agent or planner has done so (and can document that) then the investor can only sue because the explanation was not understandable by a person not possessing professional knowledge. That is why companies provide a printed disclaimer that must be signed by the investor.
There is currently a move among many attorneys to sue agents who sold variable annuities when a financial loss occurred. Obviously, if a financial gain occurred no one is interested in suing even if the client was not adequately informed of the potential risk. As previously stated, an agent or planner need only look under annuities on the internet to realize how many lawyers are actively seeking annuity clients. One lawyer claims he might be able to recover annuity losses no matter how long ago they occurred.
When agents and financial planners are sued expert witnesses are often used since lay people are not expected to own knowledge on the insurance industry (including juries and judges). This presents a specific problem: two experts with the same training and experience may not hold the same opinion on the validity of an insurance product. In many areas, it is personal opinion that determines which product is best suited to a client.
Often court cases revolve around statute or ordinance and whether or not the agent or planner violated them. Obviously the person suing feels the agent did. If the agent or planner did, in fact, violate a statute or ordinance then he or she has automatically committed negligence (which is why agents and planners must know and follow the laws). In some states, violation of statute proves negligence; in others the violation gives rise to a rebuttable presumption of negligence. In other words, the agent or planner is allowed the opportunity to prove he was not actually negligent. Even if there was a statute or ordinance violation, the client must prove the violation is the reason for their loss. Violation of state requirements does not necessarily mean it caused a clients loss. If there is no clear evidence of related loss the client must prove cause and result.
Industry Codes of Conduct
Many industries have codes of conduct that are not formal laws. They are guidelines that groups wish their members to follow. They cannot be used in lieu of official statutes or ordinances. They can be used to demonstrate that the member had knowledge of what was expected of them as a professional. Because such codes of conduct demonstrate the professional had access to rules of professional conduct, they are often effectively used against the member in a lawsuit.
From an ethical standpoint, members of professional organizations must follow any printed or advertised codes that are distributed to the membership. Agents do not have a professional organization. Agents are required to follow all laws and ordinances relating to their profession, of course. Many people feel agents would benefit from a professional organization but to date there has been little interest in organizing some type of professional agent group. Part of the problem is the tremendous turnover in licensed agents. Many people enter the insurance profession because of unrealistic promises made by a recruiter. Once the individual realizes that the promises made are not likely to materialize, they let their license lapse. Even when recruiters give fair expectations of income or personal benefits to the agent, the individual may find that the industry is not suitable to their personality or abilities. There are also many individuals who become an agent merely to earn a little extra money. They sell few policies and have little interest in devoting valued time to an organization.
We cannot be sure that requiring ethics be part of an agents continuing education requirements will solve some of the dilemmas states and insurers have faced. Even so it will do one thing: take away the agent or planners excuses for failing to act appropriately. When individuals have completed continuing education specifically relating to their required duties and professional ethics, any misconduct can only be attributed to their personal failure to follow the law or contract requirements. Blame may not be placed on their manager, their secretary, or the insurance companies they contract with. Part of being a professional is accepting the responsibility that comes with it.
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