This chapter will primarily discuss ethics but will also spend some time on licensure and appointment. Because insurance agents have ethical responsibilities to everyone they contact and represent, the state has mandated ethical standards that include specific guidelines on what is considered acceptable and unacceptable ethical behavior.
Please pay close attention to the material containing asterisks as they are extremely important.
Most of the material in this chapter will also be covered in the law sections.
Unauthorized Insurers ***
By law, only insurers that have been authorized or licensed by a state may issue policies in that state. Consequently, a producer must make sure that the insurers he or she represents are licensed to do business where solicitation is made. In general, a state's guaranty fund only covers the liabilities of authorized insurers, so anyone purchasing policies from unauthorized or unlicensed companies would be at risk if those insurers could not meet their claims. Some states will hold the producer personally liable on any insurance contract he or she places for an unauthorized insurer. Authorization for an insurer to conduct business in the state is provided with a Certificate of Authority, issued by the Office of Insurance Regulation.
Misrepresentation ***
Producers legally represent the insurer(s), and so misrepresentation is any misleading or inaccurate information regarding the insurer(s) the producer represents. Misrepresentation occurs when a producer is effectively trying to make his or her products, insurer(s), or anything else the producer represents look more favorable to an applicant than what it actually is. Therefore, any written or oral statement that does not accurately describe a policy's features, benefits or coverage is considered a misrepresentation. The states have enacted laws that penalize producers who engage in this practice. Keep in mind that it is also unlawful to make any misleading representations or comparisons of companies or policies to insured persons to induce them to forfeit, change or surrender the insurance they currently have. As we have stressed throughout this course, producers have an ethical duty to present their policies in a truthful and open manner.
Defamation ***
Defamation is the opposite of misrepresentation in the sense that it is any false, misleading or inaccurate information about another. Defamation is any false, maliciously critical or derogatory communication - written or oral - that injures another's reputation, fame or character. Individuals and companies both can be defamed. Unethical producers practice defamation by spreading rumors or falsehoods about the character of competing producers or the financial condition of another insurance company.
Rebating ***
Rebating occurs if the buyer of an insurance policy receives any part of the producer commission or anything else of significant value as an inducement to purchase a policy. State regulations are very strict in this respect and are designed to prohibit discrimination in favor of, or against, policy-owners.
Rebating is allowed only if the agent adheres to the following rules:
- The rebate has to be available to all insureds in the same actuarial class. ( Actuarial class means same age, gender)
- The rebate must be in accordance with a rebating schedule filed by the agent with the insurer issuing the policy to which the rebate applies.
- The rebating schedule must be uniformly applied so that all insureds who purchase the same policy through that producer for the same amount of insurance receive the same rebate percentage.
- Rebates should not be given to an insured who purchases a policy from an insurer that prohibits its producers from rebating commissions.
- The rebate schedule must be prominently displayed in public view at the producer's place of business and a free copy made available to insureds on request.
- The age, sex, place of residence, race, nationality, ethnic origin, marital status, occupation or location of the risk cannot be used in determining the percentage of the rebate or whether a rebate will be available.
Twisting and Churning ***
Before we can discuss twisting and churning, let's first give a brief moment to discuss replacement of policies (we will discuss this in detail shortly; this is simply an overview). Replacements happen when an agent recommends that a client or potential client either reduce or cancel a current policy to better facilitate purchasing the policy the agent is soliciting. There are times when this is entirely appropriate and is the best solution for your client (for example, we will discuss Nonforfeiture Options in Chapter 6). However, there are times when a producer will make a recommendation that is not in the best interest of the consumer, often motivated by the commission of the sale. These inappropriate replacements are called twisting and churning.
Twisting is the unethical act of persuading a policyowner who currently has coverage through another insurer to reduce or drop a policy solely for the purpose of selling another policy without regard to possible disadvantages to the policyowner. By definition, twisting involves some kind of misrepresentation by the producer to convince the policyowner to switch insurance companies or policies. In some states, persuading a policyowner to surrender a whole life policy and use the cash value to make other investments falls under the category of twisting.
Churning - Directly related to twisting is churning - a practice in which the policy values in an insurance policy are used to purchase another policy with the same insurer for the sole purpose of earning additional premiums or commissions. In cases involving churning, there is no demonstrable benefit to the insured with the new policy.
These practices are heavily regulated and carry penalties, and it is important that the producer be aware of these penalties. The penalties specific to your state will be discussed in the law chapters at the end of the course. For now, the most important thing is to know the definitions of twisting and churning.
Coercion ***
Coercion is an unfair trade practice that occurs when someone in the insurance business applies physical or mental force or threat of force to persuade another to transact insurance. For instance, a bank might give a person a loan with a condition that they purchase a policy to cover the loan in the event of death. They can indeed, require the person to buy insurance, but they can not require that the person buy the insurance from them or from a specific company or agentas a conditionto get the loan. If they did, that would be coercion and is illegal.
