Lesson 8 Protection Against Creditors; Agents and Brokers Course 324

onto chapter 16

onto chapter 16

PRINCIPAL-AGENT RELATIONSHIP (2)

• The principal is bound by the agent's actions if actual express authority exists. • The law presumes the principal has control over its agents. The principal is liable if the agent's wrongful acts within the scope of the agency injure a third party. The knowledge of the agent is deemed to be the knowledge of the principal.

AGENT'S DUTIES (3)

• To state: Follow the insurance laws of the state. • To insurer: Duty of care Not to exceed scope of authority • Levels of Duty to Clients: Generalist Level — Skill, care, good faith, and diligence Dual-Agency Level — Fiduciary duty to principal-agent of the insurer (application and premium) and insured (delivery of policy) Expert — Expertise and high level of professionalism. Producer representations of expertise may induce client reliance on that expertise. Must make suitable recommendations.

RATIFICATION (4)

• Validation of an unauthorized act. Only relevant to unauthorized acts beyond scope of express or implied authority. • It occurs if the principal fails to repudiate an act within a reasonable time. Ratification must occur within a reasonable time. • Ratification binds the principal and relieves the agent of liability to the principal or a third party. • Ratification occurs if the principal accepts the benefit of the unauthorized activities of an agent or imposter agent (one claiming to be an agent).

BIG IDEAS FROM CHAPTER 16 (8)

• When an agent agrees to an agency relationship, they become a fiduciary for the principal. • Principals and agents may be legal entities or human beings. • A corporation has contractual capacity and can act as a principal. • Brokers have come to be regarded as the agents of the insurer only for certain purposes (such as delivering policies and collecting premiums). • A broker's knowledge is not held or deemed to be the knowledge of the insurance company, while an agent's knowledge is deemed to be the knowledge of the company. • The levels of duty that insurance producers and brokers could owe to a client/insured include generalist, dual agency, and expert. • Actual authority must be intended to be given to an agent, and it is either express or implied authority. • An agent's duties to their principal include a duty of loyalty; a duty to obey the principal's instructions; and a duty to exercise reasonable skill, care, and diligence.

LAW OF AGENCY (4)

*• Agency — A fiduciary relationship where one person agrees to act on another person's behalf and be subject to control of that person that they have the authority to represent • The person granting the agency authority is the principal; the person receiving the agency authority is the agent. • The agent is engaged in the business of the principal and has a duty of loyalty. *• The agent is a fiduciary of the principal and has an obligation to act in the best interest of the principal.

TYPES OF STATE EXEMPTION STATUTES (2)

*• New York Statute — Protects cash value and proceeds from claims of the insured's creditors, but not the beneficiary's creditors. The majority of states have enacted similar legislation. • Comprehensive Statute — All benefits exempt, without limitation, from claims of the creditors of the insured, beneficiary, third-party owner, or any other person or organization. Unlimited protection of all benefits payable to anyone from all creditors.

NONSTATUTORY PROTECTION AGAINST CREDITORS After Maturity of Contract: (2)

After Maturity of Contract: Proceeds paid to the insured's estate are available to estate creditors as any other unrestricted assets. Proceeds paid to a third-party beneficiary (revocable or irrevocable) are vested in (owned by) the beneficiary and are free from claims of the policyowner's creditors.

CAPACITY TO BE A PRINCIPAL (4)

Capacity — Legal qualification, competency, power, and fitness to accept authority or responsibility. The principal must have the capacity to execute a contract. Minors and adults with limited capacity cannot be the principal or appoint agents, but they can be agents if they understand their assignments. Corporations have the capacity to be the principal and to appoint agents.

NONSTATUTORY PROTECTION AGAINST CREDITORS Creditors of the Beneficiary: (3)

Creditors of the Beneficiary: • A beneficiary's (revocable or irrevocable) creditors cannot get the insured's policy cash value. • A beneficiary's creditors can get proceeds after the insured's death since the proceeds are now the beneficiary's property. • If the beneficiary is an irrevocable beneficiary, the policyowner's rights cannot be defeated by the creditor of another person.

BANKRUPTCY REFORM ACT OF 1978 (4)

Exempts life insurance from claims of creditors when the policyowner is filing for bankruptcy: • Most states (34) have opted out of federal rules, so the policyowner is protected by state statutes. • Some states (16) allow citizens to choose state or federal rules, but not both. • If a policyowner is bankrupt and a trustee is appointed, the policy transfers to the trustee, who can surrender the policy for its cash value.

LIFE INSURANCE AGENT REQUIREMENTS (6)

Life Insurance Agent • Must be licensed by the state and appointed by a company • Must have contractual capacity • Must agree to agency representation • Must satisfy state-imposed minimum age • Is subject to principal's control • Maintains files of business-related materials

AGENT DUTIES AND BREACH OF AGENCY (3 duties plus 1 added point)

The agent has three duties to the principal: 1. Duty of Loyalty — Full disclosure to principal and act in principal's best interest 2. Duty to Obey — Follow principal's directions 3. Duty to Exercise Reasonable Skill, Care, and Diligence • Agent is liable for damages for acts that violate duties to principal

PROTECTION AGAINST CREDITORS (3)

Very complex subject area—there are great variations between state constitutions and statutes of protection provided for life insurance. • Protection may be granted from the owner/insured's creditors. beneficiary's creditors. • Protection may apply to death proceeds at the insured's death. cash values during the lifetime of the insured.

CAPACITY TO BE AN AGENT (3)

• A contract signed by an agent is the contract of the principal, not the agent. • An agent must be licensed (appointed) with each company that they represent as an agent. States require a company to appoint an agent so that the state is informed of which companies producers represent. • An agent is not a party to the contract they negotiate between a third party and the principal.

AGENT DUTIES AND POWERS AND LIMITS (7)

• Agent contract confers and limits powers. Agents denied power to create, alter, or discharge a life insurance policy/contract. extend time limits on premium payments. waive or extend conditions or obligations. accept predated or postdated checks. deliver policies to applicants not in good health. limits expressed in non-waiver clause in application and policy.

LIMITS ON AGENT'S AUTHORITY (2)

• Agent limitations: In policy and application — nonwaiver clause In agent's contract • Termination of agency authority: By agent or company By state when revoking insurance license

AGENTS AND BROKERS (2 pts for each)

• Agents: Represent the insurer and the principal Agent's knowledge is considered knowledge of the insurer • Brokers: May be individuals, corporations, and partnerships Represent the policyholder/insured/beneficiary - Represent insurer for purposes of delivery and collecting first premium

STATUTORY PROTECTION AGAINST CREDITORS (4)

• All states have enacted legislation to provide protection of life insurance from claims of creditors. Not all states protect cash values. • Legislators see a higher value in protecting spouses and children than in protecting creditors. The intent is to protect spouses and children from the claims of the insured's creditors. • Laws vary in protecting all or some proceeds, cash values, or both. • Some laws protect from creditors of the insured, creditors of the beneficiary, or both (except the federal government).

LAW OF AGENCY (4 points)

• An agent has a duty to act solely for the benefit of the principal and under the principal's directions. • The agent occupies a special position of trust that imposes a duty of loyalty to the principal. *• Agents and principals may be "natural persons" (people) or "artificial persons" (corporations as legal entities). • No one can unilaterally make themself the agent of another person

PROTECTION AGAINST CREDITORS (4)

• Bankruptcy Law — Provides protection under Homestead exemptions. May require life insurance to be in-force for required time so it is not considered a shelter. • Homestead Exemptions — The debtor's primary residence and some personal property (life insurance) • State Constitution — May have protections for life insurance and annuities • State Statutes — Some states have no protection, low amounts or protection, or total exemption from creditors for life insurance.

NONSTATUTORY PROTECTION AGAINST CREDITORS • Creditors of the Insured: (4)

• Creditors of the Insured: Creditors of the insured may seek to satisfy claims from the cash value while the insured is alive or from proceeds after death. Courts and insurers do NOT support forcing surrender. Insurers are under no obligation to pay creditors. Proceeds payable to the owner/insured or the insured's estate are not exempt in most states. Protection is mostly for 3rd party beneficiaries/dependents.

TYPES OF STATE EXEMPTION STATUTES (2)

• Distributive Statute — Proceeds (generally not cash values) payable to the insured's estate will pass to their spouse and children free of the claims against the estate. Seldom protects against the claims of the beneficiary's creditors. • Procedural Statute — Provides protection from the insured's and the beneficiary's creditors. The amount of insurance is limited, and typically protection for cash values is not provided.

EXPRESS, ACTUAL, AND APPARENT AUTHORITY (3)

• Express Authority (Contract): Powers specifically given to the agent by the principal orally or in writing, most often in a contract and/or manual • Implied Authority (Incidental) Powers not specifically given by the principal to the agent but that are necessary to exercise powers expressly given. It is implied that the agent has authority to perform incidental acts to those expressly given. Example: The agent accepts the check for the first premium. • Apparent Authority (Reasonable Belief) The public reasonably believes the agent possesses authority based on the actions of the principal. Example: The agent repeatedly grants permission for the policyowner to pay the premium late.

STATUTORY PROTECTION AGAINST CREDITORS (5)

• Generally, proceeds are exempt from claims of the insured's creditors as long as they are identifiable as proceeds. • Some statutes apply to all types of life insurance, and some to only particular forms of insurance. • Proceeds often are NOT protected once they are in the hands of the beneficiary. • State exemption statutes vary significantly and are difficult to summarize. • Cash values and death proceeds are not exempted from federal tax liens

PRINCIPAL'S DUTIES (6)

• Give the agent opportunity to work. • Provide goods for the agent to sell. • Pay the agent for services rendered. • Reimburse the agent for authorized expenses incurred. • Indemnify the agent for liabilities incurred. • Keep accurate accounts of finances

BIG IDEAS FROM CHAPTER 15 (3)

• If proceeds are paid to the deceased insured's estate, they will become available to the deceased insured's creditors. • The New York type of statute protects cash values. • Spendthrift statutes are found in most states, and they state that a spendthrift clause will be enforced if it is contained in the life insurance policy or in the settlement agreement

GENERAL RULES OF AGENCY LAW (3)

• Presumption of Agency: There can be no presumption that one person acts for another. There must be tangible evidence of the agency relationship. • Apparent Authority of Agents The agent acts for the principal and is subject to the principal's control. Apparent authority must be created by principal. • Responsibility for Acts of Agents The agent must consent to the agency relationship.

LAW OF AGENCY (4 pts)

• Principal — A person who employs another to act for them. Can be a person or a corporation. The insurer must meet state requirements to be the principal (admitted insurer). • Agent — A person who acts for another. Fiduciary of principal. Must act in principal's best interest. Agent must be licensed. • Fiduciary — A person who acts in the best interest of another. Must exercise good faith, a high degree of trust, and a duty of loyalty. • Broker — A person who acts or aids in negotiating insurance on behalf of a client or a beneficiary. An agent of the insurer for purposes of delivery and collecting first premium.

TYPES OF STATE EXEMPTION STATUTES (1 with 2 pts)

• Spendthrift Statute — Only protects the proceeds held under a settlement agreement (installment payout) from claims of the beneficiary's creditors Insurer and insured can agree that proceeds will not be subject to assignment or attachment by the beneficiary's creditors. This agreement must be a part of a policy or settlement agreement, and the beneficiary cannot be a party to it.

FEDERAL TAX LIEN ACT OF 1966 (2)

• The federal government can override state exemption laws to get taxes owed from the policy's cash value. • The federal government can attach proceeds to the extent of debt if a lien was attached before the insured's death. (United States v. Bess, 1958)