1.6 Insurance Agents and Producers

Broker

Broker - A licensed individual who negotiates insurance contracts with insurers on behalf of the applicant. A broker represents the applicant or insured's interests, not the insurer, and does not have legal authority to bind the insurer. Broker licenses are not applicable in all states.

Disclosure upon Request -

■ Disclosure upon Request - Consumer reporting agencies must provide the information on file if requested.

Dishonesty

■ Dishonesty refers to misrepresentation, untruthfulness, falsification.

USA PATRIOT Act and Anti-Money Laundering (AML)

With the increase of drug trafficking and acts of terrorism, the desire and demand for laundered money has also increased. As of May 2006, insurance companies have been required to provide anti-money laundering training to their producers. Brokers as well as agents are required to undergo training as insurance products are now being used to give legitimate appearance to money financed by and for illegal activities. These new requirements and standards were necessitated by the USA PATRIOT Act. This act specified which financial institutions would be required to institute AML training programs including insurance companies. The act specified which insurance products require anti-money laundering training and how to respond to suspected laundering activity. It also helped expand the definition of money laundering to include the money's ultimate purpose as well as its origin. The insurance products being used are mostly single premium permanent life insurance and annuity products, as they generate cash value. There are several "red flags" agents are trained to recognize, one in particular is a client buying a policy simply to hide or move illegal money. Practices that are outside the norm for life insurance transactions include: ■ Paying for an entire policy up front with cash. ■ Early cancellation of the policy, regardless of cancellation fees (surrender charges). ■ The heavy use of third parties for policy transactions. ■ Strong reliance on wire or electronic fund transfers to foreign accounts.

Apparent

■ Apparent - Authority created when the producer exceeds the authority expressed in the agency contract. This occurs when the insurer takes no action to counter the public impression that such authority exists. An example would be the producer's issuance of a binder when, in fact, the producer has not been granted such authority.

Applicant Challenge -

■ Applicant Challenge - Credit reporting agency must reinvestigate within 6 months if applicant challenges accuracy.

Breach of trust

■ Breach of Trust is based on fiduciary relationship of parties and the wrongful acts violating the relationship

Consent withdrawal

■ Consent Withdrawal - If conditions of consent are not continually met, the consent may be withdrawn.

Disallowed information

■ Inaccuracies - Agency must forward to applicant inaccurate information given out within previous 2 years.

Correct or Delete Inaccurate Information -

■ Correct or Delete Inaccurate Information - A consumer reporting agency must correct or, if necessary, delete from a credit file the information that is found to be inaccurate or can no longer be verified. The consumer reporting agency is not required to remove accurate data from a file unless it is outdated. Adverse information that is more than 7 years old (10 years for bankruptcies) must be removed from the file.

Producer's Responsibilities to the Insurer

■ Fiduciary duty to the insurer in all respects. A fiduciary is a legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person especially when handling premiums for insurance policies or applications. ■ Must keep premiums in a trust account separate from other funds and forward to insurer promptly (no commingling). ■ Must report any material facts that may affect underwriting. ■ Responsible for soliciting, negotiating, selling, and cancelling the insurance policies with the insurer ■ Duty to only recommend the purchase of suitable policies.

The privacy notice must explain:

■ The information collected about the consumer - Where that information is shared ■ How that information is used - How that information is protected

Insurer (principal) -

Insurer (principal) - The Insurer is the source of authority from which the producer must abide. The Insurer appoints the producer to act on its behalf in transacting the business of insurance. It is responsible for all acts of its producers when a producer is acting within the scope of his/her authority. A producer may be personally liable when his/her actions exceed the authority of his/her contract.

Law of Agency -

Law of Agency - The relationship of a person (called the agent or producer) who acts on behalf of another person, company, or government, known as the principal. The principal is responsible for the acts of the agent, and the agent's acts bind the principal. An act of an agent is the act of the principal.

Producer (agent) -

Producer (agent) - A person or agency appointed by an insurance company to represent it and to sell policies on its behalf. A producer acts with one or more of the following three types of authority:

1.7 Federal Regulations Fair Credit Reporting Act (15 USC 1681-1681d)

The Fair Credit Reporting Act protects consumer privacy and protects the public from overly intrusive information collection practices. It ensures data collected is confidential, accurate, relevant, and used for a proper and specific purpose. When an application is taken, it must inform the applicant a credit report (from a consumer reporting agency) can be obtained. The purpose of this is to determine the financial and moral status of an applicant (for variety of purposes such as employment screening, insurance underwriting or loan approvals). An applicant has the right to review the report.

Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)

The largest crime bill in U.S. history expands funding to federal agencies such as the FBI, DEA, and INS and includes provisions that address (among other topics) domestic abuse and firearms, gang crimes, immigration, registration of sexually violent offenders, victims of crime, and fraud. The Act made it a felony for a person to engage in the business of insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust. Violations include willfully embezzling money, knowingly making false entries in any book, report or statement of the business, threatening or impeding proper administration of the law in any proceeding involving the business of insurance.

Gramm-Leach-Bliley Act (the Financial Services Modernization Act of 1999)

This repealed parts of the Glass-Steagall Act of 1933 to allow the merger of banks, securities companies, and insurance companies. It also established the Financial Privacy Rule and Safeguards Rule for the protection of consumers' privacy. The Financial Privacy rule requires "financial institutions," which include insurers, to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter. In insurance, the consumer relationship is created when the policy is issued to the client. Application information remains confidential and cannot be used for other purposes without prior notice to the consumer.

Express

■ Express - Authority that is written into the producer's contract. An example would be the producer's binding authority if written in the contract. A producer's contract may also express what the producer may not do, such as creating his/her own advertisements.

Producer's Responsibilities to Insurance Applicant or Insured

■ Forward premiums to insurer on a timely basis. ■ Seek and gain knowledge of the applicant's insurance needs. ■ Review and evaluate the applicant's current insurance coverage, limits, and risks. ■ Serve the best interests of the applicant or insured, although producers represent the insurer. ■ Recommend coverage that best protects the insured from possible loss and NOT the most profitable coverage from the perspective of the producer. ■ Life and health producers do not issue contracts or binders for life or disability insurance, and should not imply that coverage is in effect simply because a person submits an application and payment for the first premium.

IMplied

■ Implied - Authority the public assumes the producer has. An example would be the business activities of providing quotes, completing applications and accepting premiums on behalf of the insurer.

Inaccuracies

■ Inaccuracies - Agency must forward to applicant inaccurate information given out within previous 2 years.

Investigation of Disputed Information -

■ Investigation of Disputed Information - If a consumer's file contains inaccurate information, the agency must promptly investigate the matter with the source that provided the information. If the investigation fails to resolve the dispute, a statement may be added to the credit file explaining the matter.

Limited Access to Information -

■ Limited Access to Information - A consumer reporting agency may not provide a credit report to any party that lacks a permissible purpose, such as the evaluation of an application for a loan, credit, service, or employment. Permissible purposes also include several business and legal uses.

Penalties

■ Penalties - Fines and possible prison time.

Reciprocity

■ Reciprocity - If consent is granted by any state, other states must allow the applicant to work in their states as well.