Ethics for Producers

Protecting the Interests of the Consumer

Because producers are the fiduciaries of consumers at the time insurance coverage is discussed, reviewed, and purchased, producers must protect the best interests of consumers during this process. The principles of due diligence and competence require producers to recommend the purchase of insurance contracts and coverages that are suitable.

Useful Tools and Resources for the Producer

Ethical Standards An article in the Harvard Business Review suggests the following eight principles should govern the creation of any ethical code of conduct and collectively refer to them as the Global Business Standards Codex (GBS Codex). These eight principles should incorporate most regulations and best practices into the code of conduct: the fiduciary principle (diligence and loyalty) the property principle (protection and theft) the reliability principle (contracts premises and commitments) the transparency principle (truthfulness, deception, disclosure, candor, and objectivity) the dignity principle (respect for the individual, health and safety, privacy and confidentiality, use of force, association and expression, learning and development, employment security) the fairness principle (fair dealing, fair treatment, fair competition, and fair process) the citizenship principle (law and regulation, public goods, cooperation with authorities, political noninvolvement, and civic contribution) the responsiveness principle (addressing concerns and public involvement)

Ethical Dilemmas in Insurance Transactions

Ethical dilemmas involve conflicts: between right and wrong, between how one should behave and how one wants to behave, and between opinions, thoughts, and perceptions. As stated previously, one individual's opinion about what is right and wrong will differ from another's based on their personal perspectives and life experiences. If one removes personal opinion from a situation involving an ethical dilemma, identifying and resolving the dilemma becomes easier because one focuses only on the best interests of all other parties.

Producer Ethics

Ethics is a branch of philosophy concerned with the standards by which human actions are judged right, wrong, good, or bad. A producer who behaves in an ethical fashion conforms to accepted standards of practice in the insurance industry and invites the moral approval of peers and clients. Ethical judgments involve the process used to choose between good and bad or wrong and right. Ethical judgments involve the ultimate choice to do the good (or right) thing. The ethics and laws of a society or business industry represent the collective decision of that society or industry with respect to what are acceptable and unacceptable standards of conduct.

Step 2 of the Resolution

Given the two alternatives, one ethical and one unethical, will the stakeholders be affected differently by each of the two decisions? Too many variables exist for the answer to this question to be clear: How long will the agent hold the check? When the check is deposited, will the funds be available? Will the insured still be alive at the time the check is deposited? Given the lack of a clear answer to this question, a producer should assume the stakeholders will be negatively affected by the unethical option in ways that would not occur if the ethical option were chosen.

Fraud Prevention

Fraud is broadly defined as deceit practiced for the purpose of securing unfair or illegal gain. Fraud is a specific legal offense and each jurisdiction has its own particular definition and methods of punishment. Interstate fraud, and fraud committed against a federal agency or government, is prosecuted at the federal level. Most states share a general criminal statute that addresses the punishment of fraud. Black's Law Dictionary defines fraud as: All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated. It is commonly accepted that a fraudulent act contains three distinct fundamentals: a false statement of material fact by a person intending to deceive; the victim relied upon the fraudulent statement; and the victim suffered damages as a result of the fraudulent statement. It should be kept in mind that a false statement is not necessarily fraudulent. Fraud exists only when the intent of the person making the false statement is to deceive and secure unfair or illegal advantage. Fraud is similar to theft but is not the same thing. Theft is the illegal taking of property without the property owner's consent. An act of fraud contains the additional component of false pretenses. It is also important to note that fraud must relate to an existing fact, not a promise to act in the future—unless the person making the promise planned not to honor it. State law enforcement and regulatory agencies, and insurance companies indicate that the following are ways producers can help prevent insurance fraud: Before becoming appointed with an insurance carrier, a producer should be sure to confirm the is authorized to do business in the states in which he or she is licensed and that it has an acceptable A.M. Best rating (a number of bogus health insurers have perpetrated fraud, nationwide). Be sure to ask each proposed insured all the questions contained on an insurance application. When processing claims, ask for clarification if inconsistencies appear on medical bills or Explanations of Benefits (EOBs). When processing claims, accept only detailed bills for services. Track all insurance claims, from the first report to the final payment. Beware of individuals who continue seemingly unnecessary medical treatment. Beware of the techniques used by "slip and fall" fraud rings. Beware of the claims of seniors who have spoken with competitors "selling" Medicare, Social Security, or other types of government insurance. The government does not sell insurance. Beware of competitors offering policies with unreasonably low premiums. Beware of competitors who sell policies door-to-door or over the phone. In most cases, when anyone reports insurance fraud to the appropriate authorities, he or she may do so anonymously. In some states, fraud bureaus actually reward those who report insurance fraud. Many insurers sponsor toll-free hotlines for the reporting of insurance fraud. Producers are the only insurance professionals who are able to track most insurance transactions from beginning to end. Because producers meet with consumers face-to-face, they are able to collect information firsthand. Producers' offices process paperwork and handle customer service, billing, and claims. Producers also work closely with insurance company underwriting, billing, customer service, and claim departments. Essentially, producers are in the best position of all insurance professionals to detect and prevent fraud. Because fraud harms both consumers and insurers—the parties to whom a producer owes the utmost of legal and ethical duties—it is in a producer's best interests to be familiar with the most common scams and fraudulent insurance activity.

Fair Sales Practices

The Federal Trade Commission (FTC) governs all trade practices, including sales practices. In addition, the insurance department of each state addresses fair, and unfair, sales practices. Producer's Role The principles of a fiduciary also apply to producers when marketing, soliciting, or selling insurance. Producers must exhibit: loyalty—to the consumer while making a sale and to the insurer at all times good faith at all times fairness in all dealings honesty at all times complete disclosure to all parties Sales practices that are considered unfair are both unethical and illegal and include: misrepresentation false or deceptive advertising twisting unfair discrimination unfair referrals bait and switch pyramid sales and marketing Within the insurance industry, a number of unfair and deceptive sales practices have prompted legislation that has been adopted by most states with respect to: sales to seniors, especially annuities and long-term care insurance life insurance sales to members of the armed forces telemarketing and sales calls (do not call registry) suitability in annuity sales accelerated life insurance benefits viatical settlements

Insurance Fraud

The United States does not have a national agency that collects data about insurance fraud. As a result, insurance companies, regulators, and other organizations collect fraud data as it pertains to their activities and well-being. Insurance fraud is a crime in all but three states. Most states have insurance fraud bureaus that investigate allegations of insurance fraud within their own jurisdictions. In 2008, the National Health Care Anti-Fraud Association announced that of all U.S. spending on healthcare, approximately 3% is lost to fraud each year.That 3 percent translates into $68 billion spent on fraud each year.The Association also said that over $17 is returned in court-ordered judgments, recoveries, and unpaid bogus claims for every $2 invested in fighting health-care fraud. In 2008, the U.S. Office of Management and Budget announced that over $23 billion was paid in improper Medicare payments during the previous year. In 2009, the U.S. Department of Health and Human Services announced that the U.S. government saves $1.55 for every dollar in invests in fighting Medicare and Medicaid fraud. A 2008 report of the Inspector General (Department of HHS), indicated that nearly one in three Medicare claims (29%) for durable medical equipment in 2006 was erroneous. The NAIC formed its Antifraud Task Force under the Market Regulation and Consumer Affairs Committee. The mission of the Antifraud Task Force provides for four specific ways to serve and promote the public interest through the detection, monitoring, and appropriate referral for the investigation of insurance crime committed by and against consumers. These four methods are as follows. Maintain and improve electronic databases that track fraudulent activities. Publicize the results of research and analysis about insurance fraud tendencies and provide them to insurance regulators along with case-specific analysis. Provide a contact person to communicate between insurance regulators, law enforcement, and antifraud organizations. Coordinate between state and federal regulators regarding the Patriot Act anti-money laundering amendments to the federal Bank Secrecy Act. Viatical settlement fraud became the impetus for the enactment of legislation in many states. According to the Securities and Exchange Commission (SEC): "A viatical settlement allows you to invest in another person's life insurance policy. With a viatical settlement, you purchase the policy (or part of it) at a price that is less than the death benefit of the policy. When the seller dies, you collect the death benefit." Examples of viatical settlement fraud include a person with a terminal illness applies for life insurance and does not disclose his or her life-threatening medical condition; a healthy person claims to have a terminal illness and provides false information to secure a viatical settlement; viatical insurance companies inform investors that the insured's life expectancy is short when, in fact, it is five years or more; billing investors after the insured (viator) has died; and not informing investors of the insured's (viator's) death.

Implied authority

involves instructions from the principal to the agent (usually verbal) for the purpose of carrying out the goals of the written contract (expressed authority). In the insurance industry, the implied authority granted to a producer might involve particular field underwriting practices.

Apparent authority

is granted to the agent in the absence of the principal's expressed or implied authority. In the insurance industry, the scope of apparent authority will be defined by the parameters of the expressed and implied authority.

Express authority

outlines what an agent may and may not do on behalf of the principal. In the insurance industry, the expressed authority granted to a producer is usually contained in the agent/company contract and would pertain to responsibilities such as the solicitation of insurance, collecting policy premiums, etc.

Consumer Privacy

All consumers have the right to privacy, especially when it concerns their nonpublic personal information and protected health information. Federal legislation has been enacted to protect consumer privacy and each state has enacted legislation to provide further protection.

Privacy Notice Requirements

The FCRA, GLBA, and HIPAA have clear requirements for the information contained in their notices and when they should be provided to consumers. Producers should be sure to comply with all laws regulating the provision of privacy notices to consumers. FCRA: Requires any person who uses a consumer report about a consumer in connection with any insurance transaction that is not initiated by the consumer to provide in writing with each solicitation a statement that:Information in a consumer report will be used in connection with the transaction.The consumer received the offer of insurance because he or she satisfied eligibility for coverage at the time of the solicitation.Insurance may not be offered after processing of the application if information contained in a consumer report renders the consumer ineligible.The consumer has the right to prohibit information contained in his or her file with any credit reporting agency to be used in any transaction not initiated by the consumer.The consumer may exercise rights contained in the notice. Insurance applications typically include this language near the bottom of the form and above the signature line. Producers are required to bring it to the attention of the applicant. The consumer's signature on the insurance application indicates his receipt of the disclosure. GLBA—Requires "financial institutions" to provide all clients with a printed copy of their privacy policy if nonpublic personal information (NPI) is, or may be, disclosed to any non-affiliated third party. Depending upon the type of NPI disclosed and the terms under which it may be disclosed, the "financial institution" may use a simplified notice or a full notice that includes an Opt-In Disclosure.If NPI is never disclosed, "financial institutions" are not required to provide notice or a copy of their privacy policies.If NPI is never disclosed, "financial institutions" may provide a short form initial notice providing the consumer with instructions how to obtain a copy of the privacy policy. Some insurance carriers require applicants to sign copies of their privacy notices at the time of application and retain them on file. Insurance producers should be sure to comply with all insurer guidelines, especially if the producer is responsible for maintain copies of the signed forms. HIPAA— Requires an authorization disclosure for any use or disclosure of protected health information (PHI) that is not permitted or otherwise required by the Privacy Rule. It must contain:details of the PHI to be used or disclosed;names of parties who will receive, use, or disclose PHI;the purpose for each request;notification that the individuals have the right to refuse to sign the authorization without negative consequences except under specific circumstances;the signature and date of the individual or the individual's personal representative;clear and easily understandable language;an expiration date or event;a notice that the individual may revoked the authorization at any time in writing—and how to exercise that right; andan explanation of the potential for information to be subject to re-disclosure by the recipient once it is no longer protected by the Privacy Rule. HIPAA disclosures are typically provided separately from other documents and must always include the signature and date of the insured. Copies of the disclosure must be obtained and it is in the best interests of the insured, insurer, and producer for the producer to clearly explain the details contained in the notice. Ethical producers always discuss a consumer's right to privacy and the fact that the producer and insurer will do their utmost to protect those rights. Most consumers value a producer's awareness of the laws that protect them and appreciate the attention to detail provided by an insurance professional. Awareness of, and compliance with, consumer privacy and protection not only exhibits a producer's duty as a fiduciary, it strengthens his or her reputation—and that of the insurers he or she represents

Unethical Example #1 - Life Insurance Sale

Using the preceding example involving Mike and Rhonda, if Mike were an unethical producer, he might behave in the following fashion: Instead of explaining to Rhonda that he owes his loyalty to the insurer with respect to the disclosure of all information he receives from her, he tells Rhonda he'll "take care of her," as she suggested, and will omit indicating her occasional nicotine use on the insurance application; and/or He'll refrain from explaining to Rhonda that if she undergoes a paramedic exam, the lab results will likely indicate her nicotine use and may cause the insurance company to believe she provided false information on the application.

Step 1 of the Resolution

Who are the stakeholders and what are their rights? The applicant, who is directly affected: His rights are to be treated fairly and ethically and to have all pertinent information and facts disclosed to him. If the producer breaches the standards of ethical conduct, the applicant will not, in fact, have the life insurance he believes he purchased. The insurance company, which is directly affected: Its rights are to be treated with loyalty by the producer and per the agent/company contract. If the producer breaches the standards of ethical conduct, the insurance company will be legally responsible for the actions of the agent. The bank, which is an innocent bystander: Although the producer is not an employee or agent of the bank, the producer's duty to both the insured and insurer is to be familiar with laws pertaining to the collection and acceptance of premium payments. If the producer breaches the standards of ethical conduct, the bank may be faced with having to refuse payment for the deposited check and the consequences of such an action. The producer, who is directly affected: His rights come after those of the insurer and the insured. If the producer breaches the standards of ethical conduct, he will be ultimately responsible for all consequences of his behavior.

Step 3 of the Resolution

Who is responsible for resolving the dilemma and who is accountable for the outcome of thedecision(s) that affect the resolution? In this example, the producer is obviously the party who is both responsible and accountable. He is the only party with full knowledge of all the pertinent facts, laws, obligations, and consequences—even if he chooses not to observe them. The only ethical resolution to this dilemma is for the producer to refuse to accept the applicant's check; explain coverage can't be bound without payment; explain he is not permitted by law and guidelines of the insurance company to accept a check while knowing funds are not available; and offer to submit the application without payment—and without binding coverage—or to postpone submission of the application until the funds are in the bank.

Defamation of Competitor

If a producer defames his or her competition, not only is the behavior unethical it is also illegal. The NAIC, the Federal Trade Commission, and other entities--including state insurance departments--have enacted much legislation concerning false, deceptive, and misleading advertising. In the insurance industry, it is illegal to make any assertion, representation, or statement with respect to the business of insurance or with respect to any person in the conduct of the person's insurance business that is untrue, deceptive, or misleading. For example, assume Insurance Company A just received a reduction in its A.M. Best rating from A+ to A. If a producer mentioned the rating reduction to a consumer and indicated his belief that Insurance Company A was headed for financial disaster, such an assertion would likely be considered defamation. On the other hand, if Insurance Company A's A.M. Best rating had decreased four years in a row (from A+ to B+) and the producer mentioned the rating reduction to a consumer—along with his concern for the future financial stability of the insurance company, such an assertion would likely not be viewed as defamation. In fact, it would likely be considered assisting the insured in an effort to protect his best interests. Purchasing insurance from a financially unsound insurance carrier is not in the insured's best interests.

Producer's Role

In addition to developing model regulation for other insurance issues, the National Association of Insurance Commissioners (NAIC) developed model regulation addressing unfair claims settlement practices. Each state has adopted some or all of the NAIC model regulation with respect to unfair claims settlement practices. Producers should be familiar with all the claims practices that are considered illegal, unfair, and unethical to avoid even the hint of impropriety when assisting insureds with their claims. In virtually all cases, producers are required to act as fiduciaries of the insurance company when handling claims. A list of the claims practices that are considered unfair, and which are addressed by NAIC model regulation, include misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue; failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies; failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies; refusing to pay claims without conducting a reasonable investigation based upon all available information; failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed and received; attempting to settle claims on the basis of an application which was altered without notice to (or knowledge of or consent of) the insured; making claims payments to insureds or beneficiaries not accompanied by statements setting forth the coverage under which the payments are being made; delaying the investigation or payment of claims by requiring an insured, claimant, or physician of either to submit a preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information; failing to promptly settle claims, if liability has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance; and failing to provide promptly a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement. Producers should understand and explain to consumers that they (producers) do not have authority to determine coverage or to settle claims. Only the insurance company and its claims representatives have that authority. In addition, producers should also explain to consumers the following: Producers are required by their contracts with insurers to report all known claims and to report them immediately. Insureds are required by their insurance contracts to report all claims to the insurance company as soon as possible. Failure to report a claim, or undue delay in reporting a claim may, in some cases, jeopardize coverage. Insureds are required to cooperate with insurers during the handling of all claims.

Ethical Dilemmas in Insurance Transactions

In the insurance workplace, ethical dilemmas occur because differences of opinion and perception exist between clients and producers (and among insurance professionals) with respect to matters of significant value (i.e., what's important and what isn't important); the existence, or viability, of available options; and the possible consequences or results of particular actions and behaviors. A potential client may not understand the following factors of determining the pricing of a life insurance policy: Nicotine users have shorter life expectancies than non-nicotine users; Because the premium-paying period of a non-nicotine user is longer than that of a nicotine user, the annual policy premiums are lower for non-nicotine users; and If insurance companies fail to charge the appropriate premiums for existing policies, future claims and premiums will be negatively affected Because a potential client lacks an understanding of the previous points, he may not realize that lying about his nicotine use when applying for insurance is unethical and harmful to others. On the other hand, he may know his behavior is unethical and harmful and simply not care about the negative consequences to others.

General Ethical Responsibilities of the Producer

Insurance producers are legally and contractually responsible for certain actions and behaviors pertaining to each insurance transaction in which they are involved. In addition, producers are responsible for behaving in an ethical fashion at all times. In particular, producers owe their loyalty to two specific parties: the insurance companies they represent their insureds

Compliance with State and Federal Laws and Regulations

Insurance professionals are expected to be familiar with, and comply with, all applicable state and federal laws and regulations. The National Association of Insurance Commissioners (NAIC) has developed numerous model acts upon which much state insurance legislation is based. Topics addressed by the NAIC model acts and regulations include: suitability in annuity transactions health insurance reserves accelerated benefits financial regulation standards and accreditation viatical settlements senior protection in annuity transactions long-term care insurance unfair claims settlement practices unfair trade practices military sales practices

Loyalty to the Insurer

Law of Agency The law of agency is a legal concept that governs a three-party relationship. The three parties to the relationship are: the principal (insurance company); the agent (producer, broker, or agent); and the third Party (insured, policyholder, or prospective policyholder). The principal authorizes one or more agents to act on its behalf for the express purpose of entering into legal relationships with third parties. In the insurance industry, insurance companies are principals. The agent acts on behalf of the principal, is the principal's representative, and is often viewed by the general public as the principal. In the insurance industry, producers, brokers, and agents are agents. The third party enters into the legal relationship with the assistance of the principal's agent. In the insurance industry, insureds (policyholders) are third parties. Because producers represent insurance companies through this legal (agency) relationship, they are held to the highest of legal and ethical standards, and are required to be loyal. The producer's authority to act as the agent of the insurance company is spelled out in one or more contracts: agency/company contract agent/company contract underwriting guidelines and manuals rating and other manuals agency and/or insurance company procedures manuals verbal agreements

Proper versus Improper Behavior

Many people believe that breaking rules is wrong but bending them is acceptable. Such thinking is similar to the justifications or rationalizations unethical persons use when making decisions about how to act—or how not to act. Proper behavior conforms to accepted standards and is characterized by being suitable, right, and appropriate. Improper behavior does not conform to accepted standards and, in fact, is not suitable, right, or appropriate. Example Beth is a health insurance agent and Laurie is a prospective client. While discussing available plans of insurance that meet Laurie's needs, along with the features of each plan, Laurie reveals confusion with the concept of coinsurance. If Beth were to behave properly, she would re-explain the concept, being careful to avoid using insurance terms and phrases so as to help Laurie understand more easily. Beth would also ask Laurie to paraphrase Beth's re-explanation of the concept of coinsurance to confirm Laurie's new understanding. If Beth were to behave improperly, she might tell Laurie the concept of coinsurance is highly technical and she shouldn't worry about not understanding it. Laurie might accept this answer, which will speed up the application process, which allows Beth to end the sales call sooner than expected. It does, however, create the foundation for Laurie to have future misunderstandings. It also sows the seeds of a future E & O claim—it is also unethical.

Resolving Ethical Dilemmas

Once a producer has identified an ethical dilemma, the following process should be utilized to resolve the dilemma: Who are the stakeholders and what are their rights?Who will be directly involved and how will they be affected?Who will be indirectly involved and how will they be affected?Are any innocent bystanders involved and, if so, how will they be affected? Given the two alternatives, one ethical and one unethical, will the stakeholders be affected differently by each of the two decisions? Who is responsible for resolving the dilemma and who is accountable for the outcome of the decision(s) that affect the resolution? To restate the dilemma: A producer accepts a completed and signed life insurance application, along with a premium check for the first modal premium. As the producer prepares the temporary receipt--which places coverage into effect per the terms of the temporary receipt--the applicant asks the producer to hold the check for a week before depositing it because the necessary funds won't be in the account until that time. The producer faces two clear choices: Refuse to accept the check, explain coverage can't be bound without payment, and explain payment really isn't being made if funds aren't in the bank account—and risk losing the sale and/or offending the applicant; or Accept the check without explanation to the applicant, knowing the temporary receipt isn't valid and suspecting the check will be returned by the bank after it's deposited—and place the applicant in the position that he might not have the insurance coverage he believes he has.

Product Suitability

Products must meet the individual and personal needs and wishes of each consumer. In addition to helping consumers select the most appropriate insurance product based on its features, benefits, provisions, limits, and premium, producers must help consumers select the most suitable product based on their particular circumstances.

Honest versus Dishonest Behavior

Saying that honest behavior is good or right and that dishonest behavior is bad or wrong is an oversimplification. The difference between honest and dishonest behavior involves the qualities of fairness, deception, and truth. Honest behavior is free from deception and unfairness and is characterized by being genuine, truthful, and reputable. Dishonest behavior is deceptive and/or fraudulent and is characterized by a lack of truthfulness, trustworthiness, and authenticity. Dishonest behavior is also characterized by placing one's personal preferences and needs over those of others. Example Using the previous situation involving Beth and Laurie, when Laurie reveals her confusion about the concept of coinsurance and Beth re-explains it, Beth exhibits honest behavior. She tells Laurie the truth and she does so in a basic and simple way Laurie understands. Beth's behavior exhibits her professionalism and is commendable. But, when Beth tells Laurie the concept of coinsurance is highly technical and infers Laurie's confusion is normal, Beth exhibits dishonest behavior. Why? Because the concept of coinsurance is not technical. Most clients do understand it when it's explained properly. In addition, Beth's choice not to explain the concept of coinsurance is based purely on her desire to end the interview in a more timely fashion. Beth's behavior exhibits deceit and the placement of her personal wishes over the needs and wishes of the client.

Transactions with Senior Clients

Senior clients are more at risk than any other sector of the population in this country. In fact, numerous unethical sales practices targeted at seniors have succeeded because seniors are especially vulnerable to: high-pressure tactics scams fears about their medical condition and longevity fears about their financial security Because of the unique circumstances and susceptibility of seniors, producers must be particularly attentive to their conduct and behavior when transacting insurance business with, and on behalf of, seniors. Some of the particular concerns a producer must address when working with seniors include: Social security benefits—When will they become available and in what amount(s)? retirement plan distributions—When will they be made and how will they be taxed? safety of retirement assets—Does the senior have enough liquidity to risk assets? surrender charges and period—Will the substantial financial benefit of the product outweigh the surrender charges and period? Medicare, Medicaid, and other state programs—How do these programs affect the senior and the senior's purchase of new coverage? buyer competence—Does the senior possess sufficient legal and mental capacity to enter into an insurance transaction? Many states have enacted legislation that requires producers and insurers to adhere to certain practices before, during, and after the sale of insurance to seniors. These practices include longer free-look periods than those offered to other consumers; using designations such as "senior adviser" or "senior specialist" only after being legally granted the right to use such a designation from a qualified organization; and providing additional disclosures to seniors who purchase annuities and long-term care insurance. Other state legislation specifically indicates that certain practices involving the sales of insurance to seniors are prohibited, including pretexting (the practice of using false information, statements, or impersonation to secure an appointment with a senior for the purposes of selling insurance); failing to provide advance written notice to a senior confirming the date, time, and place of a sales interview; and failing to provide a senior with notice that he or she may have a legal, financial, or family adviser present during a sales interview (some states require this notice to be given in advance and in writing).

Preventing Ethical Dilemmas

Studies show that if employees believe management is dedicated to the adoption and advocacy of a professional code of ethics--and is supportive of the employees who report violations--those same employees are more likely to avoid, detect, and prevent ethical violations in the workplace. Likewise, employees are more motivated to adopt and comply with the organization's ethical code of conduct if management communicates its dedication regularly and effectively. In an ethical sense, producers should pay special attention, collectively and individually, to the risks to integrity and reputation. Specifically, producers should be familiar with the answers to the following questions: Legal risks: What are the laws, regulations, rules, and policies that govern legal conduct and behavior? Control risks: How do internal procedures and controls address laws, regulations, rules, and policies? Ethical risks: What are the consequences of not being familiar with the organization's code of ethics? Culture risks: What will happen if employees do not comply with the organizations' code of ethics? When producers can answer these questions fully and accurately, they are far more likely to be able to prevent the occurrence of ethical dilemmas.

Privacy of Consumer Information

The Fair Credit Reporting Act (FCRA) was enacted in 1970 and is governed by the Federal Trade Commission. It governs the collection, sharing, and use of consumer information—including consumer credit information. Prior to enactment of this legislation, the practices of financial institutions, insurance companies, employers, and businesses seeking and providing any type of information about a consumer (but especially credit information) were not regulated. Some sources of information were found to be questionable, as were some of the methods used to obtain information. In addition, some of the information provided was not accurate and the consumer (about whom information was exchanged) had no rights of privacy or protection. The Gramm-Leach-Bliley Act (GLBA) is also called the Financial Modernization Act of 1999. It contains three major sections: Financial Privacy Rule—This regulates the collection and disclosure of personal financial information by financial institutions. Safeguards Rule—This regulates financial institutions that collect information from their own customers and from other financial institutions, requiring them to design, implement, and maintain safeguards to protect customer information. Pretexting—This regulates companies by protecting consumers from the securing of personal financial information under false pretenses. Producers and insurance companies meet the definition of "financial institutions" in the GLBA. As such, producers must comply with all laws, rules, and standards when requesting and possessing the nonpublic personal information (NPI) of consumers. The following are examples of nonpublic personal information (assuming it is not publicly available): the fact that a consumer is the client of a financial institution; the consumer's name, address, social security number, or account number (i.e., policy number); any information provided on an application; information provided by a "cookie" on a website; and information contained on a consumer report obtained by a "financial institution." The Health Insurance Portability and Accountability Act (HIPAA) contains five sections (or titles). Title II addresses Administrative Simplification and contains a Privacy Rule that protects the following types of protected health information. The following types of health information are protected: information about mental and physical health, including the purchase and payment of health care; information that might help identify an individual; information that may be created or secured by a covered institution; and information that is submitted or recorded in any format. The Health Information Technology for Economic and Clinical Health Act (HITECH Act) is part of the American Recovery and Reinvestment Act of 2009 (ARRA). It broadened the required privacy and security provisions of HIPAA because of the increase in the electronic exchange of protected health information. The HITECH Act requires more enforcement and expands the potential legal liability of those who violate both HIPAA and HITECH. Virtually all the information producers receive from consumers in insurance transactions enjoys the benefits of privacy protection. In order to comply with all principles of ethical conduct, as well as complying with laws and regulations, producers must understand, respect, and observe client confidentiality. For example, assume a producer received a call from a lawyer's office indicating that the firm needed a client's life insurance policy number in order to prepare the client's will. If the producer provided the policy number without first securing the client's authorization, the producer violated the client's right to privacy. The GLBA, as previously stated, considers the following to be nonpublic personal information if it is not publicly available: the fact that a consumer is the client of a financial institution; the consumer's name, address, social security number, or account number (i.e., policy number); and any information provided on an application. By providing the client's policy number to the lawyer's office without the prior authorization of the insured, the producer shared nonpublic personal information. In doing so, the producer violated the client's privacy, ethical insurance standards—and the law. The importance of protecting client privacy cannot be overstated. In some circumstances, a consumer may be upset if a non-insurance transaction is delayed because a producer does not provide nonpublic personal information or protected health information to a non-authorized person. When producers explain that protecting their clients' privacy, and best interests, are their primary goals, very few clients will continue to be upset. Not only will they understand the producer behaved ethically and legally during the transaction in question, they'll expect the producer to do so in the future.

Making Ethical Decisions in Insurance Transactions

The first consideration an insurance producer should undertake when making ethical judgments or decisions in the insurance industry is: if an act or behavior is deemed illegal, it is also unethical. On the other hand, unethical decisions are not always illegal. A producer's second consideration should involve asking himself or herself a number of questions, each of which points the direction toward making an ethical decision: Is what I'm doing right for the insurance company and the client? Am I looking out for the best interests of the insurance company and the client? Am I putting the best interests of the insurance company, and the client, before my own personal interests? Am I doing no harm? After doing business with me, is the client in a better position than he was before doing business with me? Unethical people tend to rationalize, or justify, their decisions based on their personal perspectives instead of thinking about what's right, wrong, good, bad, or in anyone else's best interests. For example, an unethical producer might make the following rationalizations or justifications for making an unethical decision: If no one knows I've done this, it's okay. If I don't get caught doing this, it's okay. If I'm not hurting anyone, it's okay. Everyone else in the office does it, so it's okay. Who's going to find out?

Identifying, Preventing, and Resolving Ethical Dilemmas

The first step in identifying, preventing, and resolving ethical dilemmas is to fully understand practices that are considered unethical. General business ethics, or corporate ethics, apply to most industries—including the insurance industry. The following issues often involve ethical dilemmas in all types of business: corporate governance and leadership political contributions accounting practices insider trading executive compensation kickbacks price fixing and discrimination anti-trust laws marketing strategiesbait and switchpyramid schemesplanned obsolescence advertising content patent and copyright infringement Once unethical practices are identified and understood, individuals can either prevent them from occurring or be instrumental in resolving the ethical dilemmas that result. For example, if a producer did not know that price fixing (and discrimination in setting prices) is both illegal and unethical, he may unwittingly become involved in illegal or unethical practices when asked by a client to adjust his policy premium.

Dishonest Practices

The following is a list of practices that the insurance industry considers to be dishonest: misrepresentation of insurance policies false or deceptive advertising twisting (making a written or verbal statement that misrepresents or makes incomplete comparisons about a policy's terms, conditions, or benefits for the express purpose of causing a consumer to lapse, forfeit, surrender, retain, exchange, or convert any insurance policy) permitting, or offering to make—either directly or indirectly--a premium rebate, dividend, or other advantage not stated in a policy extension of credit to a policyholder in violation of the law commission sharing with an unlicensed individual Example A producer is talking with an insured who's considering surrendering his current disability income policy and purchasing a replacement policy with a competitor. Without reviewing the proposed policy, the producer describes the competitor's product so that it sounds unfavorable when compared to the existing contract—in terms of benefit period, waiting, period, and premium. This behavior is dishonest on a number of levels; it also violates the producer's fiduciary duty to both the insured and the insurer.

Insurance Industry Standards

The following list contains accepted ethical standards in the insurance industry. Violations of these practices are considered unethical by the National Associate of Insurance and Financial Advisors (NAIFA), the National Association of Health Underwriters (NAHU), and the Securities and Exchange Commission (SEC) Advisors: Fulfill the needs of the client to the best of one's ability. Maintain client confidentiality. Earn and maintain client trust. Deliver flawless service to all parties. Observe all professional standards of conduct when helping clients to protect their interests and attain their financial goals. Accurately and honestly communicate all facts essential to the client's decision-making process. Conduct business in a way that helps raise the professional standards of the industry. Be aware of, and observe, all applicable laws and regulations. Cooperate with all parties in the process of helping clients obtain their objectives. Do not use unfair, false, or misleading advertising practices. Engage in fair and ethical practices of competition. Be loyal to all clients, associates, fellow producers, and insurance companies. Practice due diligence in all transactions and at all times. Maintain all appropriate, and required, records, books, and trust accounts. Avoid all conflicts of interest.

Ethical Duties Owed to Insurers

The primary duties a producer owes to its insurers will be spelled out in the agent/company contract and may include all, or some, of the following subjects: the terms under which a producer may solicit, sell, and negotiate insurance (i.e., only in the lines licensed); the manner in which the producer may submit business (i.e., according to published underwriting guides and manuals); the location at which the agent conducts business (i.e., must be adequate to handle the business needs of the client with respect to premium collection, accepting loss notices and claims, completing insurance applications and other paperwork, and servicing the needs of clients); the terms under which the insurance company may review the producer's books and records; the terms under which the producer may advertise on behalf of the insurance company; the purchase and maintenance of professional liability insurance (i.e., E & O insurance at certain limits); the securing and renewal of all required insurance licenses (i.e., individual, corporate, and agency); the terms under which the producer must provide copies of required licenses to the insurance company; the producer must, at all times, comply with all applicable laws and regulations; the producer must, at all times, conduct business in a fair and ethical manner and exhibit due diligence; the geographical area in which the producer may conduct business, if applicable; the terms of the authority granted by the insurance company to the producer; the terms of employment between the producer and insurance company (i.e., as an independent contractor or as an employee); the terms of ownership of the producer's book of business; the terms of the contract, including contract period, termination, etc.; the terms of compensation (i.e., salary, per a commission schedule, or both); and the terms under which the insurance company will provide manuals, forms, and records and when and how the producer is responsible for keeping and returning them. In addition, producers owe duties to their insurers per industry accepted concepts and practices. Most of these topics are addressed by model regulation of the National Association of Insurance Commissioners (NAIC): consumer protection fair trade practices fair claims practices fair underwriting practices fair sales practices, including compensation disclosure market conduct fraud awareness acting in a fudiciary coapacity

A producer will see clearly, after reviewing facts pertaining to the stakeholders, their motivation, and the relevant issues, that an ethical dilemma exists because:

The producer experiences conflicting feelings of loyalty to the insurer and the applicant: If the applicant's fund are deposited into his bank account before the insurance company deposits the check, who's going to be hurt by complying with the applicant's request? The producer's personal feelings about what is good for himself conflict with those of the insurance industry: I really need this sale and so long as the insurance company doesn't know I held onto the check for a couple of days, no one will be harmed. The producer doesn't consider what might happen in the long-run because he focuses simply on the issue of depositing the check: So long as the insurance company doesn't receive the check until after the funds are in the bank, nothing can go wrong. The producer focuses more on the applicant's feelings in the present than on his duties and obligations in the long-term: If I don't hold the applicant's check, he'll be upset with me. Not only will I not make this sale, but he might also take his other insurance business to a different agent.

Duty of Loyalty

The quality of loyalty is characterized by faithfulness—to a person, principle, organization, cause, or country. When people are loyal, they: keep their word fulfill their promises avoid conflicts of interest behave in a fiduciary capacity as required; honor their commitments and obligations; and are faithful or devoted to the people, causes, and organizations to whom they owe allegiance.

Commingling of Funds

The term commingle means to mix. When a producer commingles funds, he or she mixes personal funds with those of one or more insureds. Webster's New World Law Dictionary (2010) defines the commingling of funds as: "The mixing by a fiduciary, trustee, or lawyer of the money or property of a customer or client with his own without a detailed and exact accounting of which part of the common funds and property belong to the customer or client." In the insurance industry, placing an insured's funds into any type of bank account other than a trust account is considered commingling. The commingling of funds is prohibited by insurance code in every state and is both unethical and illegal.

Premium Fund Trust Accounts

Trust accounts are bank accounts that are obtained, maintained, and held separate and apart from other funds for a specific purpose. In the insurance industry, producers are required to maintain premium trust accounts for monies collected from insureds for payment to insurance companies. The insurance code in each state includes specifics of the details of premium fund trust accounts. Money from more than one insured may be deposited into the account but no other types of funds may be deposited: including the producer's personal funds and the producer's business funds (i.e., commissions and income earned, money used to pay bills, etc.). For example, if an insured makes a cash payment to a producer for a health insurance policy, the producer may not deposit the insured's payment into his personal checking or savings accounts, his business operating account, or any other account that is not the producer's premium fund trust account

Independent Agents

Unlike captive agents, independent agents sign contracts with multiple insurance companies and own their books of business. Specifically, the contracts between independent agents and the insurers they represent: Do not preclude independent agent from representing other insurance companies or engaging in other business activities; State independent agents own their client lists, expiration dates, renewals, and client contact information; Offer compensation to independent agents strictly on a commission basis; and State that independent agents are independent contractors and not employees. In an ethical sense, independent agents are exposed to greater potentials for conflicts of interest than captive agents are because of the concept of Dual Agency. Ethically, an agent may not simultaneous represent both parties to a transaction, i.e., both the insured and the insurance company. In many states, acting in the capacity of a dual agent is illegal. For this reason, the only time an independent agent represents the insured—and not the insurance company—is during the process of helping the insured choose the plan of insurance, and coverage, that best suits the insured's needs. In all other insurance transactions, the independent agent represents the insurance company. Independent agents represent their insurance companies in all insurance transactions, other than when representing insureds in the selection of the most suitable insurance contract and coverage terms, including during the process of providing customer service; when handling claims; while underwriting or renewing policies; and when accepting premium payments. Independent agents also face potential conflicts of interest when representing multiple insurance companies. Some of the scenarios that breed conflict include varying rates of commission offered by insurance companies; differing policy provisions, exclusions, riders, and coverages between insurance companies; and distinctive underwriting standards and guidelines among insurance companies.

Example #2 - Annuity Sale

Using the preceding example involving Elizabeth and Mrs. Murphy, if Elizabeth were an unethical producer, she might behave in the following fashion: Instead of risking her boss' displeasure, she recommends to Mrs. Murphy that she purchase the annuity product with Company A that her boss suggested; Because she followed her boss' instructions, Elizabeth is unable to provide accurate information on the required reports and disclosure statements required by the insurance company and FINRA; and Because of her unethical behavior, Elizabeth risks serious consequences of exhibiting lack of due diligence and complying with annuity suitability requirements.

Legal and Ethical Behavior

When a producer behaves in a legal and ethical manner, he or she adheres to the legal and professional standards of the insurance industry. Example Marty is a producer licensed only in the lines of life and health insurance. When chatting with his client, George, about the term life insurance policy George purchased the previous year, George brings up the subject of his business auto insurance. He proceeds to ask Marty several questions about his business auto policy. Marty explains to George that he is not licensed in property and casualty lines of insurance and is therefore not permitted by law, and ethical insurance conduct, to discuss George's auto policy. Marty gives George the telephone number of his business associate, who is licensed in property and casualty lines of insurance and qualified to answer George's questions.

Legal but Unethical Behavior

When a producer behaves in a legal manner, but flirts with insurance ethical standards by behaving in a questionable manner, he jeopardizes his professional standing and his clients' best interests. Example Using the previous situation involving Marty and George, Marty responds to George's inquiry about his business auto insurance policy with the following statement: "George, I'm not licensed to sell or discuss auto insurance, so I'm not authorized by the state or any insurance company to give you advice about your auto policy. Unofficially, however, this is what I think..." Although Marty follows the letter of the law by explaining to George that he is not licensed or permitted to discuss auto insurance, by offering "unofficial" advice he infers to George that he is both knowledgeable and qualified to discuss it. Such types of behavior confuse clients and often lead to misunderstandings—especially when producers overestimate their degree of knowledge and competence.

Ethical Duties Owed to Insureds

When helping consumers to make their choices about the insurance product and coverage that best suits their needs, producers owe their insureds the following ethical duties: to take reasonable steps to confirm that a specific policy meets the particular needs of each insured; to advise insureds of their duty to disclose to the insurance company all material facts and circumstances pertaining to the risk(s) to be insured; to advise each insured of the consequences of not disclosing all material facts and circumstances pertaining to the risk(s) to be insured; to provide each insured with examples of the types of material facts and circumstances that need to be disclosed; to take reasonable steps to obtain details of all material facts and circumstances by providing explanations and examples to help each insured avoid overlooking information he or she might not otherwise deem pertinent; to make all reasonable attempts to elicit information from each insured with respect to his or her needs, financial position, and future plans; to explain all pertinent policy provisions, terms, conditions, limits, exclusions, and available riders to each insured; to make all required disclosures and explanations in an attempt to be sure each insured understands the contracts being considered for purchase and the consequences of making, or not making, a purchase of a particular type of coverage; to handle each insured's premium payment in a fiduciary capacity; and to be honest and place each insured's interests above all other interests during the process of evaluating and selecting insurance policies, riders, and coverages. It is especially important for producers to remember that if they commit an illegal act, even unintentionally, they are also behaving in an unethical manner. A thorough understanding of existing and revised legislation, both federal and state, is an absolute requirement of conducting oneself--and behaving--in an ethical fashion.

Conflict of Interest

A conflict of interest exists, or has the potential for existing, when a producer's personal interests clash with business interests or those of the general public. In the cases of such conflicts or potential conflicts, the producer's loyalty may come into question. Because of the law of agency, the agent is expected to be loyal to his principal above all other parties and to represent the interests of their insurance companies before all other interests. It is important to distinguish between a potential for conflict of interest and the actual commission of improper behavior: If a producer works full-time for one insurance agency and is hired to work part-time for another insurance agency, working at the part-time job would be deemed a conflict of interest by the full-time employer. If a producer works full-time for one insurance agency and is offered a part-time job working for another insurance agency, the potential for a conflict of interest exists but an actual conflict doesn't, in fact, exist, if the producer does not accept the job offer. Although many believe producers owe their loyalty to insureds in every insurance transaction, this is not always the case. In fact, producers and agents owe their primary loyalties to their insurers. Brokers owe their loyalty to their insureds. The loyalty a producer owes an insured is based on the type of relationship the producer has with clients. Producers may be agents, brokers or both: Agents are the legal representatives of insurance companies and solicit, sell, and negotiate insurance on behalf of those insurance companies. Brokers are licensed individuals who, in exchange for the payment of commission by an insurance company, solicit, sell, and negotiate insurance on behalf of the party buying the insurance

Identifying Ethical Dilemmas

A dilemma occurs when a person finds himself in a situation requiring him to make a choice--and the two or more options he faces are equally unpleasant or undesirable. An ethical dilemma occurs when the available choices involve an ethical conflict. To some, the unethical option may appear more attractive than the ethical option—especially when thinking only of short-term goals and not of consequences and results. In order to identify an ethical dilemma, a producer must determine: who each of the stakeholders are; the motivation of each stakeholder; and the relevant ethical (and legal) issues. For example, a producer accepts a completed and signed life insurance application, along with a premium check for the first modal premium. As the producer prepares the temporary receipt--which places coverage into effect per the terms of the temporary receipt--the applicant asks the producer to hold the check for a week before depositing it because the necessary funds won't be in the bank account until that time. The stakeholders in this example are: the applicant the insurance company the bank the producer The motivations of the stakeholders involve: Truth versus loyalty - Each stakeholder possesses a personal and subjective notion of what is truthful, or factual, and to whom loyalty is owed. Conflict occurs when the truth (facts) interfere with a stakeholder's duty of loyalty. Individual versus community - A stakeholder may become conflicted when the personal, subjective notion of what is good and beneficial does not coincide with what the group (or community) will find good and beneficial. Short-term versus long-term - Stakeholders may overlook the long-term consequences of an action or behavior by focusing only on the short-term results. Justice versus mercy - Stakeholders may have difficulty choosing to do the right thing (the legal, or ethical, thing) when selecting another option seems more compassionate. The relevant ethical (and legal) issues are: laws and regulations underwriting guidelines and rules ethical standards of professional conduct subjective feelings and thoughts

Example #1 - Life Insurance Sale

A life insurance agent, Mike, is meeting with Rhonda to discuss her purchase of a life insurance policy. Mike has collected a great deal of information about Rhonda and her needs, including: personal and contact information employment information, including salary and benefits financial information and circumstances details of other insurance in place Rhonda's thoughts, plans, and expectations for the future Rhonda decides what plan of insurance she wants to purchase and Mike agrees with her choice—based on the information he's collected. Before completing the application for insurance, Mike explains that Rhonda must provide thorough and accurate answers to all questions—meaning her answers must be true to the best of her knowledge and belief. One of the medical questions on the insurance application asks if Rhonda has ever used nicotine. Rhonda replies honestly that she doesn't smoke on a regular basis but will, on occasion, have a cigarette when she is out socializing with her friends. As an ethical agent, Mike will explain to Rhonda that she must disclose her occasional nicotine use on the application and that the premium rate he quoted will likely increase upon the insurance company's completion of the underwriting process because of her nicotine use--a fact she hadn't previously disclosed and a fact he hadn't previously known. When Rhonda reminds Mike that she's his client and he should be "taking care of her" and helping her secure the lowest premium rate (as a non-nicotine user), Mike, as an ethical agent will: Remind Rhonda that he owes his loyalty to the insurance company and must verify that all information provided on the application—both from her and from him—is true to the best of their knowledge and belief; and Explain that although Rhonda is his client, he is the insurance company's agent and his loyalty to the insurance company is required by both his agent/company contract and ethical standards of the insurance industry; and Insist that he is obligated to reveal to the insurer any information Rhonda provides to him.

Ethical Decisions

A society, community, or business industry determines the collective standards of acceptable ethical conduct. An individual, however, approaches ethical decisions from a personal perspective of life experiences along with other factors, including his or her: morals and values concept of good versus bad perception of right versus wrong sociological reasoning degree of self-interest desire for pleasure and happiness facility for considering consequences and results perception of virtue preference for justice or communal values If two individuals are presented with the same scenario, each will make his or her own ethical decision based upon the factors listed above. For example, if a shopper paid a store clerk with a $10 bill and received change for a $20 bill, he might bring the error to the clerk's attention because: His upbringing influenced him to believe that keeping the extra money is theft, which is wrong (or bad); He is wealthy and the $10 doesn't mean much to him but he doesn't want the store clerk to be personally responsible for the shortage; or He believes that if he keeps the extra $10 he'll be contributing to the store's expenses and will, ultimately, be part of the reason the store must increase prices. Another shopper, however, might decide to keep the extra $10 for one or more of the following reasons: He doesn't feel responsible for the clerk's mistake and, therefore, doesn't consider keeping the money a form of theft or dishonestly; He believes he's been overcharged for merchandise in the past and figures this is a way to recoup some of the money he's lost; or He grew up in an environment that never emphasized the difference between right and wrong and focused only on the wants and needs of the individual.

Fair Trade Practices Producer's Role

Although the sale of insurance is considered interstate commerce, insurance regulation is left largely to the individual states. The first state insurance legislation was passed in New York in 1907 after allegations of unethical conduct on the parts of several life insurance companies were proven true. While many state and federal regulations address the practices of insurance companies, others specifically address conduct, behavior, and practices of insurance producers, brokers, agents, and adjusters. The purpose of insurance regulation is twofold: to prevent consumer abuse; and to promote fair competition among insurers. When insurance producers engage in illegal or unethical conduct or behavior, consumers are harmed and competition is no longer fair. Examples of unfair trade practices include violating anti-trust laws (i.e., Sherman and Clayton Acts)price fixing and discriminationexclusive dealingimproper mergers and acquisitionsboycotting, coercion, and intimidation violating other legislation, including:Fair Credit Reporting Act (FCRA)Health Insurance Portability and Accounting Act (HIPAA)Gramm-Leach-Bliley Act (GLBA) violating other trade practices regulated by the Federal Trade Commission (FTC), including:credit and loansdebt collectiondo not call registryadvertising:bait advertisinguse of the word "free"use of endorsements and testimonials

Misrepresentation of Product

As already mentioned, producers are required to be skilled and efficient. Being skilled and efficient means not only understanding the products represented and sold, it also means being able to explain those very same products so consumers understand them, as well. Some consumers want brief explanations, or overviews, when reviewing policies and coverages prior to purchase. Others want detailed explanations, descriptions, brochures, and other printed materials. When producers explain insurance policies and contracts, they make statements. These statements are representations. Representations are incidental statements of fact upon which a contract is entered into. Just as an insurance company makes a decision to issue or not issue a policy based on the representations made in the application by the applicant, a consumer makes a decision to purchase or not purchase a policy based on the representations made in the sales interview(s) by the producer. Producers must have the knowledge, skills, and competency to perform the following when representing insurance policies and contracts to all consumers, despite a consumer's request for a brief explanation or overview: Understand and explain all the benefits, advantages, conditions, and terms of the contract in question. Understand and explain the dividends, interest, or share of surplus to be received on the contract in question. Understand and explain the financial condition of the insurer of the contract in question. Use the correct name and title of any insurance contract in question, including any class or description of policies pertaining to it. Understand and explain the nature and details of effecting any pledge, assignment, or loan against the contract in question. Understand and explain that the contract in question is not a share of stock or investment vehicle. Failure of a producer to properly and thoroughly represent an insurance contract or product may be construed as misrepresentation. A misrepresentation is a false statement made knowingly by the producer for the express purpose of deceiving or misleading the applicant or insured. Making misrepresentations about an insurance policy or contract—including its features, benefits, provisions, advantages, dividends, riders, etc.—is both illegal and unethical.

Responsibility to the Insured

As discussed earlier in this course, the producer's obligations to the insured are based upon the producer-client relationship. Brokers owe more duties to their insureds than agents and producers do. The insurance codes in each state spell out the precise duties of producers, brokers, and agents with respect to their responsibilities to the insurer and insured. All producers, whether agents or brokers, owe fiduciary responsibilities to their insurance carriers. However, all producers also owe a fiduciary duty to their insureds, specifically when helping them choose the insurance policies and coverages that best meet their needs. The elements of fiduciary duty are the same, regardless of type of party to whom the duty is owed. When the producer acts as a fiduciary of the insured during the process of helping the insured choose the most appropriate insurance policy and coverage, the producer owes the insured the same responsibilities he owes the insurer when acting in a fiduciary capacity. The same holds true when the producer accepts money from the insured in payment of an insurance policy premium.

Producer Behavior in Insurance Transactions

As discussed in the previous section, producer behavior is the way in which a producer acts or operates. The following are examples of a producer's behavior: communication skills manner of processing insurance transactions attitude when providing customer service performance when transacting business professional demeanor display of loyalty to the insurer and the consumer observance (or lack) of rules, regulations, laws, and ethical principles

Authority

Authority is the power granted by the insurance company to a producer, broker, or agent to influence, control, or determine outcomes—specifically how the legal relationship between the insurance company (principal) and policyholders (third parties) comes into being. Producers, brokers, and agents attempt to enter into third party relationships on behalf of insurance companies through the solicitation, sale, and negotiation of insurance. The scope of a producer's authority may be broad or limited and, the more specific (or limited) the authority, the less likely it is a producer will act in an unauthorized fashion. In all cases, when exercising the authority granted by the insurance company, producers are expected to show loyalty to the insurance company: in conversation, communication, and practice. The principal grants authority to its agent in via three types of authority: express authority implied authority apparent authority

Responsibility to the Insurer

Because producers are considered the fiduciaries of the insurance companies they represent, they must adhere to standards that involve the utmost honesty, good faith, and integrity in all insurance transactions. The fiduciary responsibilities of producers to their insurers include placing the best interests of the insurance company above all other interests—especially the producer's own interests; being loyal to the insurance company at all times; exhibiting due diligence in all insurance transactions; complying with all contractual agreements, laws, and regulations; conducting business in a fair and ethical fashion; making all appropriate disclosures to all parties; not allowing oneself to be placed in a situation with a potential for a conflict of interest to arise or exist; not profiting from the relationship unless the insurance company permits it; and with respect to the collections of insurance premiums:upon receipt, treating all premium payments and refunds in a fiduciary capacity, including:depositing the funds into a separate trust account;keeping proper records;not including fiduciary funds as a personal or business asset or income; andnot using fiduciary funds as collateral for a personal or business loan.crediting premium payments only to the insurance company--not to the producer, the producer's agency or employer, or any other party andsubmitting premiums received to the insurance company with the prescribed time frame. In order to avoid the faltering of fiduciary duty, many life and health insurance companies do not allow their agents, brokers, or producers to accept regular premium payments from clients. They permit producers to accept the initial premium with an application for new insurance, or with a request for a policy change; however, once a policy has been issued, they require the insured to make payment directly to the insurance company. For similar reasons, some insurance companies do not permit producers to accept payments in made in cash. When producers receive premium payments from insureds, they should provide a receipt; document the payment; deposit the payment in the appropriate trust account (if applicable); submit the payment within the prescribed time frame; and maintain records as required.

Producer Conduct in Insurance Transactions

Because producers are empowered with authority by their insurance companies, and because the general public places a great degree of trust and confidence in them, it is critical for producers to exhibit the utmost of care in every business transaction or communication. Conduct is a mode or standard of personal behavior based on moral or ethical principles; and Behavior is the manner in which one acts or operates. A producer may conduct himself or herself ethically and professionally while occasionally behaving in an unethical or unprofessional manner, or vice versa. It is essential for producers to conduct themselves, and behave, ethically and professionally at all times. Unethical behavior is the leading reason for loss of producer licensure. Even a single lapse in conducting oneself according to a code of ethical behavior can seriously impair: relationships with clients, associates, and insurance companies reputation continued employment and/or licensure

The Producer as an Insurance Professional Producer Competence

Before producers are licensed by any state's insurance department, they must meet all requirements of licensure. After becoming licensed, producers are required to be skilled and efficient. They must be not only familiar with the lines and types of insurance they solicit, sell, and negotiate, they must also continue to develop their knowledge and skills. It is because producers are required by both law and ethical standards to be skilled and efficient that each state has enacted continuing education laws and requirements. Producers who do not meet the standards of competency are a threat to the well-being of not only the consumer, but the professionals within the insurance industry, as well. Producers are entrusted to transact business with reasonable care--by both insurers and insureds. If a producer cannot fulfill this obligation because he or she is not qualified to perform with the same level of skill and knowledge that other producers possess, he or she should either seek the assistance of a qualified producer or refer the client to one. For example, if a client asks a life insurance producer to secure health insurance coverage and the producer has never written health insurance, the producer should seek the assistance of an associate who is qualified to discuss and sell health insurance or refer the client to one so qualified.

The Producer as a Fiduciary

Black's Law Dictionary defines a fiduciary relationship as "one founded on trust or confidence reposed by one person in the integrity and fidelity of another." A fiduciary responsibility requires the utmost in care and the highest standards of conduct with respect to the law or ethics. A fiduciary has a duty to act on behalf of his principal to the point that he cannot act on his own personal interests. The following qualities are required in a fiduciary: loyalty good faith fairness in all dealings honesty complete disclosure The courts in the United States universally accept that the relationships between the following are regarded as fiduciary: attorney and client broker and principal principal and agent trustee and beneficiary executors/administrators and heirs of the deceased Fiduciary relationships are usually generated only when the confidence offered by one person is accepted by another. For example, once an agent or company contract is signed, it is accepted that the fiduciary relationship between insurance company and producer has been established. Under certain circumstances, a producer, broker, or agent is also the fiduciary of the insured. It is especially important for a fiduciary to avoid even a hint of exerting undue influence—which is defined as any form of persuasion that overcomes the free will and judgment of another. Examples of undue influence include any form of insinuation, flattery, trickery, or deception.

Brokers

Brokers are hired by insureds for the specific purpose of assisting them find the most competitive insurance product(s) for their needs. "Most competitive" does not necessarily mean the least expensive. All aspects of the insured's needs must be considered when brokers discuss the variety of products offered by their insurers and ultimately make a recommendation ... or sale. It is also important to note that not all independent agents are brokers. Although brokers owe their primary loyalty to their insureds, they also owe loyalty to their insurance companies per: the agent/company contracts they sign their fiduciary duty to their insurers (which will be discussed in detail later in this material) accepted insurance industry ethical practices

Captive Agents

Captive agents typically represent only one insurance company or group of insurance companies. The following are typical elements of the relationship between a captive agent and his principal (the insurance company or insurance group): The contract between the insurance company and captive agent precludes the agent from soliciting, selling, or negotiating insurance with any other insurer. The contract between the insurance company and captive agent requires the agent to disclose all details of any other business activities in which the agent engages; the insurance company makes the final determination about the existence of, or potential for, a conflict of interest. The insurance company may require the captive agent to cease outside business activities if it deems a conflict of interest exists or potential conflict of interest may arise. The insurance company owns the book of business—which includes the client list, expiration dates, renewals, and client contact information; in exchange for the services of the agent, the insurance company pays a salary, commissions, or combination of salary plus commissions. In an ethical sense, captive agents experience fewer potentials for conflicts of interest than independent agents do because of the nature of the contracts they sign with the insurance companies they represent. Captive agents always represent their principal, the insurance company. The insurance codes of many states require producers to represent the interests of their insureds, or prospective insureds, during the process of choosing which plan of insurance (or coverage) best suits the individual insured's needs. It is always in the best interests of the insurance company to provide insurance coverage that best suits the needs of the insured.

Commonly Required Disclosures

Consumer protection is essential in any fair and ethical business dealings. Because the sale and service of insurance involves numerous types of policies and contracts, each of which is technical and requires detailed explanation, insurance companies and regulators alike require producers to disclose certain information to consumers before, and at, the time of purchasing life and health insurance products. In addition to providing the disclosures required by federal legislation--(i.e., the Fair Credit Reporting Act (FCRA) and the Health Insurance Portability and Accountability Act (HIPAA)—producers must also provide certain types of disclosures to consumers based on the product being considered or sold. These disclosures include: insurance company and policy information contract and benefits examples, including descriptions replacement forms, if applicable compensation disclosure, if required by state law or the insurance company Buyers guides and policy summaries that contain cost and benefits information, including:information about the appropriate amount of insurance to purchasea cost comparison to those of other, similar policiesinformation about various types of policies that might suite the applicant's needsdetails of premium payments for specified future yearscash values, if applicable for specified future yearsdividends, if applicable for specified future yearsdeath benefits for specified future years Product details:life insurance: type and term of policy; premium guarantees; interest rate guarantees (if applicable)annuities: type of annuity (fixed, indexed, variable); annuity suitability; contract provisions and features, including limitations; charges and fees; current guaranteed interest rate; and qualified or non-qualifiedhealth insurance: type of policy (short-term, group, individual); contract provisions and features (i.e., deductible, coinsurance percentage, out-of-pocket limit, etc.); premiums and any premium guarantees, etc.)disability income: type and class of policy; contract provision and features (i.e., benefit period, waiting period, definition of disability, etc.); riders (i.e., cost of living adjustment, social security, partial disability benefits, etc.); and premiumslong-term care: outline of coverage (i.e., benefits provided, exclusions, limits, reductions in coverage, renewal or continuation options, and cancellation or termination provision); qualification for purposes state and federal income individual taxes

Fair Claims Practices

Consumers purchase insurance policies for the express purpose of avoiding financial loss after suffering a tragedy such as an accident, illness, disability, or death. In addition to exhibiting ethical conduct and behavior prior to and during the sales of insurance policies, producers (along with adjusters, insureds, and insurers) are required to exhibit ethical and legal conduct and behavior during the process of handling claims. Although producers do not settle claims, they are often the parties who receive the first notice of a claim. Their opinion, advice, and assistance is also often sought by the insured, beneficiaries, adjusters, insurance company representatives, and others involved in the claims settlement process.

Loyalty to the Insured

Consumers view insurance producers as experts. They also view producers, brokers, and agents as professionals who work on their behalf to not only help them make insurance buying decisions but also to explain the intricacies of the insurance products they purchase. It is unethical for insurance producers to overlook or deliberately avoid disclosing to their insureds the nature of the loyalties they owe to both insurance companies and consumers. Regardless of the producer's relationship with an insured or prospective insured (i.e., as an agent or broker), the producer always owes his loyalty to the insured during the process of evaluating needs and selecting an insurance product to meet those needs. Part of the loyalty a producer owes to insureds is to be competent, diligent, knowledgeable, and honest. In many states, insurance code requires producers to be skilled and efficient. In all cases, both ethics and the law require producers to exhibit due diligence, which requires the carrying out of tasks and duties with the utmost of care. Producers who exhibit appropriate loyalty to their insureds will be honest in all dealings with their insureds; fulfill their promises to their insureds; and behave in a fiduciary capacity when handling the insured's premium payments.

Producer Honesty

Earlier in this material, we discussed different types of producer behavior, specifically honest versus dishonest behavior. Honest behavior is free from deception and unfairness and is characterized by being genuine, truthful, and reputable. Dishonest behavior is deceptive and/or fraudulent and is characterized by a lack of truthfulness, trustworthiness, and authenticity. Dishonest behavior is also characterized by placing one's personal preferences and needs over those of others. Honesty is at the core of all legal and ethical principles and standards. Honest behavior is fair and genuine. It is real, truthful, and open. Honest behavior does not involve—in any way—deceit, trickery, sham, pretense, cheating, or fraud. The Law of Agency is based upon the honesty between principal and agent. The trust placed in the insurance industry by consumers is based upon the honesty of producers in their explanations of insurance products, the recommendations they make, and in their carrying out of their duties.

Example #2 - Annuity Sale

Elizabeth is a relatively inexperienced life insurance agent and registered representative who would like to specialize in the sale of annuities. She is meeting with Mrs. Murphy, who is 65 years old, to help her determine if the purchase of an annuity product will be a beneficial financial decision. When she discusses Mrs. Murphy's situation with her boss after the initial fact-finding interview with the prospective client, Elizabeth's boss favors one of the insurance companies the brokerage firm represents, Company A, because of a particular type of product it offers and the rate of compensation it pays for sales of that product. He advises Elizabeth to recommend the sale of a specific annuity product with Company A based on those factors. Elizabeth, being an ethical producer, understands she cannot place her loyalty to her boss, to Company A, or to herself, above the loyalty she owes to Mrs. Murphy when helping her choose the annuity product that best suits her needs—if, indeed, an annuity product actually serves Mrs. Murphy's needs better than any other type of product. Although she risks the displeasure of her boss, Elizabeth recommends a different annuity product based on the detailed information Mrs. Murphy has provided. Elizabeth believes the purchase of a different annuity contract will serve Mrs. Murphy better—irrespective of the other insurance companies' products available and the rate of compensation she will be paid for the sale.