Resources for Identifying Standards of Conduct for Insurance Producers

Prelicensing Requirements

State governments license insurance producers after an applicant completes a course of study covering material deemed essential for the license sought. Some states permit a combination of experience and formal classroom instruction to satisfy requirements—persons holding specified academic or industry degrees or "designations" may be exempt. Generally, the study materials are similar irrespective of the location. A typical prelicensing course introduces a student to the following topics:

• Principles of insurance
• How insurance is regulated and why
• Elements of a contract
• Tort law
• Various policy forms and how they are interpreted
• State and federal laws regulating insurance
• The insurance industry
• Underwriting
• How sales practices are regulated
• Features and special nature of the insurance contract

Subject matter content is approved by regulators, and many state departments of insurance post outlines of the curriculum online. Each candidate for licensure must pass an examination before a license is granted. These courses also describe the statutory and administrative rules that govern insurance in each respective state, although the curriculum is mostly uniform and based on National Association of Insurance Commissioners (NAIC) model laws, standards, and regulations. Most prelicensing manuals describe the insurance business as uniquely based on utmost good faith.

Continuing Education

Most states also require completion of continuing education as a condition of maintaining a license. Although the number of hours varies by state, a host of vendors offer hundreds of courses. These courses often delve deeper into the sales process, duties of agents, agent-company relationships, agent-client relations, and ethical considerations. Agents learn marketing, administration, personnel practices, new policy forms, changes in old forms, ethical practices, advertising methods, how to avoid errors and omissions (E&O) claims, and similar matters.

Intentional Misrepresentation of the Insurance Policy/Application

A common way producers can lose their licenses is by intentionally misrepresenting the terms of an actual or proposed insurance contract or application for insurance. Persons familiar with the "vanishing premium" litigation in life insurance sales will note the relevance of this standard as the basis of disciplinary actions and litigation involving most of the major life insurers in America. Additionally, providing erroneous advice about what is covered or not covered in standard homeowners and commercial property coverages are areas where agents may be vulnerable to misrepresentations. Even in the example cited in the introduction, in which a Nationwide agent advised the Leonards that they did not need flood insurance, it is clear that this intentional act misrepresented FEMA standards at the time.

Stating a falsehood is only one way of misrepresenting a policy or application. Nondisclosure, or not telling the whole story, can be equally risky. For example, intentionally failing to recommend a liquor liability endorsement to a bar-restaurant may qualify as misrepresentation by silence when one has been trained to first assess the total risk and determine what coverages are relevant and has failed to at least recommend liquor liability. Similarly, arbitrarily selecting the policy that carries the highest commission (intentionally implying that this is the best choice) is another example that may contravene this standard.

Committing an Unfair Trade Practice or Fraud

Committing any unfair trade practice or fraud may also imperil a license. State insurance codes include statutes and regulations addressing several practices defined as unfair trade practices. Further, the list of prohibited practices is extended in about half of the states where "Little Federal Trade Commission (FTC)" statutes apply to insurance. (Prelicensing courses often cover the former, but not the latter, action.) Unfair trade practices encompass rebating, misrepresentation (again), twisting, false advertising, unfair discrimination, duties to incorporate all known facts in an application, prohibitions against representing an individual policy to be a group policy, and other standards. The Little FTC Act may remove the intent requirement applicable to certain violations and is more sensitive to concepts of deception and unfairness.

"Fraud" is not defined in the Unfair Trade Practices Act, but most states now have insurance fraud statutes. The meaning is largely determined by state law. What is often overlooked in the application of these laws, however, is that courts tend to reintroduce inapplicable rules derived from caveat emptor (let the buyer beware), thereby restricting the scope.

Being Incompetent, Untrustworthy, or Financially Irresponsible

Another way to lose a license is by using fraudulent, coercive, or dishonest practices, or demonstrating incompetence, untrustworthiness, or financial irresponsibility in the conduct of business. These standards, while undefined, open doors to apply community standards of honesty, competence, trustworthiness, and fair dealing to insurance practices.

Violating Insurance Laws or Regulations

The Act prohibits agents from violating any insurance laws, regulations, subpoenas, or orders of the commissioner. If the previous provision opened doors, this provision virtually eliminates any barriers limiting one's ability to tie a practice to a statutory or administrative standard.

Note that the wording does not limit itself to state laws and regulations, thereby permitting the use of federal law. Relevant federal statutes include the following, to mention a few examples:

• Health Insurance Portability and Affordability Act (HIPAA)
• Risk Retention Act
• Various acts and regulations covering retirement plans, securities sales, and taxation
• Terrorism Risk Insurance Act
• Fair Credit Reporting Act
• CAN-SPAM Act
• Gramm-Leach-Bliley Act (Financial Modernization Act of 1999)
• Patient Protection and Affordability Act
• Laws relating to transportation insurance
• Flood insurance
• Crop insurance
• Long-term care
• Medicare and Medicaid

Within the scope of this provision are the following:

• Advertising regulations pertaining to life and health and property and casualty insurance
• Replacement regulations regarding life policies
• Claims practices
• Representation of unauthorized insurers
• Managing general agents

The advertising regulations are especially helpful in cases involving misrepresentations in sales. The "advertising" definition is broad enough to include sales material and presentations. Increasingly, social media, such as agency Web pages, are areas of concern. It is imperative that producers carefully scrutinize how they present themselves to the public and what promises are either stated or implied on agency Web pages. Scrutiny should be extra sharp if a Web page is designed by a vendor who is unfamiliar with the insurance industry.

Insurance Industry Designations

In addition to official codes of conduct, the insurance industry is replete with the equivalent of status badges called designations. Along with the CPCU, various other designation programs are available, such as Accredited Advisor in Insurance, Certified Insurance Counselor, Chartered Life Underwriter, Chartered Financial Planner, Associate in Risk Management, and others. Agents who earned a designation have greater expertise than average producers and, therefore, may be held to a higher standard than average producers are.

One thing is made unmistakably clear in most of the written materials in the designation literature: insurance licensees are more than sales forces. In fact, a reasonable inference is that, if an agent is in the business to sell only, the agent made a wrong career choice. In today's market, sales skills are not enough to avoid E&O problems. Indeed, if selling is all one wishes to do, my suggestion is get a job at a used car lot. They still believe in caveat emptor there, and you are going to need that protection.