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    Agent Ethics and Responsibilities
    Agent Ethics and Responsibilities
    Agent Ethics and Responsibilities
    Ebook266 pages3 hours

    Agent Ethics and Responsibilities

    By Michael Lustig

    ()

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    About this ebook

    A discussion on the need for ethical codes of conduct in the insurance industry, and on agent responsibilities.

    Several years after the need for a code of ethics became apparent to the U.S. insurance industry, this textbook arrived on the scene and has since proven to be the absolute best source of compiled data anywhere.

    Objectives
    • Learn to think "ethically" and establish personal ethical standards designed to improve your professionalism.
    • Develop ethical skills in selling, underwriting, or replacing insurance coverage.
    • Gain insight into ethical theory and agent responsibilities to the company and to the client.

    Major Subjects Covered
    • Legal Responsibilities of Agents and Brokers.
    • Agent Liability to the Insured.
    • Ethics in the Insurance Industry.
    • The Ethics of Policy Replacement.

    LanguageEnglish
    PublisherMichael Lustig
    Release dateJun 27, 2011
    ISBN9781933891378
    Agent Ethics and Responsibilities
    Author

    Michael Lustig

    Michael Lustig is a graduate of the University of San Diego, California and a former Professor at California State University at Pomona and Immaculate Heart College (Los Angeles). He has been a California Real Estate Broker and the Owner and President of Real Estate License Services, a California real estate and insurance licence school, since 1978, offering state-approved license courses in 47 states and the District of Columbia. He is the author of 35 books on real estate and insurance topics.

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      Book preview

      Agent Ethics and Responsibilities - Michael Lustig

      Smashwords Edition

      AGENT ETHICS AND RESPONSIBILITIES

      CAL-STATE EXAMS

      5059 Newport Avenue, #209

      San Diego, CA 92107

      Telephone: (619) 222-2425

      Copyright © 2010-1991 REAL ESTATE LICENSE SERVICES, INC. Copyright registered. All rights reserved. No part of this material may be reprinted, reproduced, transmitted, stored in a retrieval system, placed in a computer or on the Internet, or otherwise utilized, in any form or by any means electronic or mechanical, including photocopying or recording, now existing or hereinafter invented, nor may any part of this course be used for teaching without permission from the copyright holder. CAL-STATE EXAMS is a division of REAL ESTATE LICENSE SERVICES, INC., holder of the registered copyright.

      Notice

      CAL-STATE Exams has not authorized anyone to copy any part of this textbook, including the distributors, training schools, and insurance companies it has authorized to use or sell this textbook.

      If you become aware of anyone photocopying or otherwise duplicating any part of this textbook, please notify our home office by mail or call collect. All such notifications will be held in strict confidence.

      TABLE OF CONTENTS

      AGENT ETHICS AND RESPONSIBILITIES

      LESSON ONE : LEGAL RESPONSIBILITIES OF AGENTS AND BROKERS

      FOCUS ON AGENTS AND BROKERS

      UNCERTAINTY IN REGULATION AND RESPONSIBILITY

      INSURANCE SALES IN GENERAL

      BUSINESS DEFINITION OF AGENT AND BROKER

      THE AMERICAN AGENCY SYSTEM EXPLAINED

      SOURCE AND NATURE OF AUTHORITY

      PERSPECTIVE ON THE UNAUTHORIZED PRACTICE OF LAW

      WHAT CONSTITUTES PRACTICE OF LAW?

      CO-OPERATIVE ACTION

      PROHIBITIONS AND PERMISSIBILITIES

      COMPANY'S CONTRACT LIABILITY FOR ACTS OF THE AGENT

      COMPANY'S TORT LIABILITY FOR ACTS OF THE AGENT

      AGENT’S TORT LIABILITY FOR HIS OR HER ACTS

      FIELD UNDERWRITERS AS PROFESSIONALS

      RULES OF THE BUSINESS

      PROTECTION FOR THE UNDERWRITER

      LICENSING REQUIREMENTS IN GENERAL

      PERSONS EXEMPT FROM LICENSING REQUIREMENTS

      THE LEGAL CONSEQUENCES — FINAL ANALYSIS

      RESPONSIBILITY DETERMINED BY ACTIVITY, NOT TECHNICAL DESIGNATION

      LESSON TWO: LEGAL RESPONSIBILITIES OF AGENTS AND BROKERS

      BACKGROUND

      GENERAL PREMISES OF AGENCY LAW

      AGENCY LAW AS APPLIED TO THE BUSINESS OF INSURANCE

      PARTIES TO WHOM DUTIES ARE OWED

      SPECIAL PROBLEMS OF CARRIER INSOLVENCY

      CONCLUSION

      LESSON THREE: ETHICS IN THE INSURANCE INDUSTRY

      OVERVIEW

      ISSUES, HELPS, AND HINDRANCES

      A TOUGH ANALYSIS

      ENCOURAGING ETHICS

      ETHICS QUESTIONS ON INSURANCE EXAMS

      THE DIFFICULTIES IN TESTING FOR ETHICS

      ETHICS CAN BE TAUGHT

      ETHICS MUST TAKE HIGH PRIORITY

      DUE DILIGENCE

      THOSE WITH ETHICAL DILEMMAS ARE URGED TO DO THE RIGHT THING

      UNETHICAL CONDUCT MAY LEAD TO BAD FAITH CLAIMS

      RISK MANAGEMENT ETHICS

      THE ETHICAL USE OF MEDICAL AND FINANCIAL INFORMATION

      ETHICS IN HEALTH CARE

      THE INDUSTRY MUST BE CHALLENGED TO FACE ETHICAL ISSUES

      SALES ETHICS

      COMMISSION DISCLOSURE

      DISCLOSURE OF INSURER FINANCIAL STRENGTH

      LESSON FOUR: THE ETHICS OF POLICY REPLACEMENT

      OVERVIEW

      ARGUMENTS FOR REPLACEMENT

      A CASE STUDY IN POLICY REPLACEMENT

      ARGUMENTS AGAINST REPLACEMENT

      REPLACEMENT MYTHS

      THE ETHICAL CONSIDERATIONS OF REPLACEMENT

      MEASURING THE FINANCIAL EFFECTS OF REPLACEMENT

      COMPANY ETHICS ON REPLACEMENT

      CONCLUSION

      CHAPTER QUIZZES

      LESSON ONE: LEGAL RESPONSIBILITIES OF AGENTS AND BROKERS

      FOCUS ON AGENTS AND BROKERS

      No one has endurance like the person who sells insurance. So goes the old saying. But what about this person who sells insurance? Surely his or her persistency is a part of American folklore, whether it is a foot in the door, a calendar in the mail, or a voice on the telephone. Professional person or salesperson? Which is it? A person on his own or under another’s employment? A huckster in the marketplace or an expert on whom one can rely? Where is this person’s accountability?

      These are not idle speculations, but important questions which involve not only the many men and women in insurance agencies and brokerages across the country, but also their insurance companies, as well as the general public. The interests of the segments may vary, and potential harms may differ, but all of the associated concerns are legitimate and persisting.

      The agents, brokers, and adjusters who are central to this lesson may be individuals, partnerships, or corporations. In any form, it is significant to know the legal responsibilities of their conduct. These concerns relate to how they conduct themselves and their financial exposure to civil damages (which can be the full amount of the loss otherwise sought to be insured) if sued for doing wrong. The agent's or broker's continuance in business is also involved since government regulation is a condition of life in the insurance business.

      Legal infractions can result in license suspension or even constitute a crime. The litigious era in which we live is no small part of the whole. Now more than ever professionals and experts can expect court and consumer challenges to their activities. Increasing public awareness forces all modern institutions to conform to tests of reality and responsiveness, and this forum gives an increasing sympathy to complaints.

      Just as medical, legal, and other professional malpractice litigation has soared, a renewed willingness to hold participants in other specialized pursuits – including insurance agents and brokers – accountable to certain standards has increased the hazard of liability suits for not doing right.

      The issue of responsibility in insurance counseling, sales, and service is not limited to notions of legality or economics. There is a dimension of professionalism that exceeds minimum legal prescription. To many insurance agents and brokers, there are major elements of pride, craftsmanship, and personal responsibility implicit in their activities. Considerable time and effort can be devoted to the obtaining professional designations such as Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC), Chartered Property and Casualty Underwriter (CPCU), and others. The esteem in which the agent holds his or her pursuit is important beyond legal or economic measure.

      The buyer who deals with the insurance seller has more than a theoretical interest in the agent's professionalism. How much reliance can the buyer safely place on the given word?

      Insurance can be fiercely technical, sometimes beyond the understanding of most lay people. Yet the essence of the insurance obligation is its sense of assurance. The agent or broker is the sole contact most insurance buyers have with their insurers, and buyers rarely read their policies. In many cases they do not even see their policies.

      Insurance companies have tremendous stakes in the conduct and status of the agents and brokers who produce their business. The fact that agents and brokers can legally bind insurers is a prime concern. But the matter does not rest there. Insurers typically invest large sums of money to develop sales and promote their good names and reliability. Their reputation is critical, particularly in view of the nature of the insurance institution. Yet much of this reputation rests in the hands of agents and brokers, many not readily susceptible to control or thorough supervision, who make the public contact.

      Finally, government should be intimately concerned with the doings of agents and brokers. Protection of the public interest demands regulation of insurance sales, as well as regulation of the insurance industry in general. Regulations regarding disclosures, unfair and deceptive trade practices, and advertising have proliferated.

      Licensing requirements vary among the states. Some issue permanent licenses kept up to date by the payment of periodic renewal fees with little or no activity or training requirement. Others issue new licenses annually. In some states, a broker's license is a strong credential; in others, a broker is a very limited operative. Many states do not issue broker licenses as such, and thus, people in counterpart positions are called agents.

      In some states, there are solicitors who are really limited selling agents. The calculations of numbers of operatives are confused by multiple licenses in many states, not only by regional and national firms, but by individuals who handle more than one separately licensable line of insurance business. There are also temporary and special sales licenses for limited lines or insurance placement allied to another type of business.

      UNCERTAINTY IN REGULATION AND RESPONSIBILITY

      The regulation of insurance in this country is performed by the various states. There is little regulation by the federal government of the private business of insurance as such. Historically, state statutes on the subject of agency or brokerage fitness have been in the areas of licenses to sell with minimal educational, experiential, or character requirements, if any. However, the National Association of Insurance Commissioners (NAIC), an association of state insurance commissioners and one of the nation's prime forces in regulation and regulatory attitude, promulgated in 1973 the model Uniform Agents and Brokers Licensing Act.

      Qualification is a corollary of responsibility, for even if there is a willingness to respond, there must be an ability to do so. Agents and brokers groups have tended to advocate the upgrading of standards when entering the insurance profession. However, while many insurance carriers manifest some interest in the maintenance of standards, their most visible concern in this area is frequently attracting people to make sales.

      An observable fact of the life insurance business in particular has been the recruitment and training of short-term personnel who sell in relatively small quantities to their family and friends and then, having exhausted contacts, fade from the business. With no real education, training, or experience requirement, except for a simple course or two, and with character and aptitude being typically limited to lack of a criminal record, this is not surprising. There is counterpart performance in the brokerage business, although usually without particular insurance company sponsorship.

      Traditionally, the law has clothed the legal aspects of insurance agents and brokers in semantics which can confuse cause and effect. The very different working concepts in various states of functions denominated as insurance broker or agent make it difficult to apply a national jurisprudence based on these words. In many jurisdictions, there are only agents, and they fulfill functions otherwise classified as broker.

      The use of the common word agent has a specific substantive meaning in the law in general, and this will be discussed further in Lesson 2. In the insurance industry, the concept of agent has been perhaps the single most confusing factor. There are business differences between an insurance broker and an insurance agent, but legally an insurance broker may be an agent, as these words are used in the law.

      Any uncertainty over fundamental responsibility in insurance sales lies in the nature of the insurance institution. The public interest in collection of proceeds by insurers, as well as a willingness to favor the reasonable expectations of an insured over strict and perhaps obscure policy language, is evident in many courts, as is sympathy for insureds and apparent hostility toward insurers.

      INSURANCE SALES IN GENERAL

      In insurance sales, the end seller is the insurance company, often called the insurer or carrier. This is a corporation licensed by a state or other jurisdiction to offer policies of insurance. Basically, the insurer does not sell a product or a service so much as it vends its promise to pay money on the happening of a contingency. It really markets, then, its own conditional obligations.

      While this might be characterized as the sale of a security, insurance offerings have not been thought to be public offerings under the laws regulating the sales of securities, with the exception of certain hybrid offerings of insurance elements and equity shares, such as variable annuity and life insurance policies or contractual plans combining mutual funds and insurance.

      As a result, personnel actually conducting the sales of insurance historically have not been required to procure securities sales licenses as a condition of performing their insurance selling services. Their licensing requirements have been classically restricted to state licenses for agents and brokers of insurance. This view, excluding duplicate securities sales licensing for the sale of insurance alone, seems to be correct since regulation of the insurance business by the states serves as the supervisory element in the protection of the public interest.

      In addition, the requirement of maintaining a current registered public offering under the securities laws for every insurance sale would, as a practical matter, sharply escalate the present expense levels for insurance sales. It is, of course, understood that an insurance seller also selling stocks, bonds or mutual fund shares must be separately licensed for this distinct activity.

      BUSINESS DEFINITION OF AGENT AND BROKER

      Insurers use the terms agent and broker to describe the personnel in the field selling or placing their products. Terms such as sales or special representative or distributor, while in occasional insurance industry usage in special situations, are not in general application, although the word solicitor as a limited salesperson working for an agent does enjoy some amount of

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