Life Insurance Etc
Penalties
A fine of $10,000 or up to one year in jail is the penalty for any person who obtains information about a client without having a legitimate reason to receive it.
Fair Credit Reporting Act
All insurers and their producers must comply with the federal Fair Credit Reporting Act regarding information obtained from a third party concerning the applicant.
Licensing Regulation
Although much progress has been made in making producer licensing more uniform, it is important to refer to your State Law Supplement for more information on licensing regulations in your state.
consumer
Anyone about whom a company collects information
buyer's guide
a document providing basic information about insurance policies
Temporary Agent Licenses
the surviving spouse or court-appointed personal representative of a licensed producer who dies or becomes disabled in order to maintain the producer's business; a member of a business entity licensed as an insurance producer, upon the death or disability of an individual designated in the business entity application or the license; or the designee of a licensed insurance producer entering active service in the armed forces of the United States.
outline of coverage
(health insurance,a written statement describing the elements of the policy being sold. Generally, it must include the agent's name and address, the name and office address of the insurer, and the generic name of the policy and each rider.
Discrimination
It is illegal to permit discrimination between individuals of the same class or insurance risk in terms of rates, premiums, fees, and policy benefits because of their place of residence, race, creed, or national origin.
Illegal Premiums and Charges
It is unlawful for a person or insurer to collect premiums or make charges that are not specified in the insurance contract.
right to opt out
consumers and customers are given the opportunity to keep the company from sharing the information it has about them
policy summary
life insurance,a written statement describing the elements of the policy being sold. Generally, it must include the agent's name and address, the name and office address of the insurer, and the generic name of the policy and each rider.
Proper market conduct
means conducting insurance business fairly and responsibly. In a market conduct examination, state Department of Insurance investigators examine the business practices and operations of an insurer and its agents to determine their authority to conduct insurance business in the state. During a market conduct examination, state examiners investigate the records and practices of an insurance company and determine whether the company is in compliance with state laws regulating the sales and marketing, underwriting, and issuance of insurance products.
Exemptions from Examination
A person licensed as an insurance producer in one state who moves to another state has 90 days after establishing legal residence to become a resident licensee.
Regulating Insurance Companies
The state Insurance Code prescribes the procedures that must be followed for an insurance company to be formed. It specifies the manner in which the company must be organized, the requirements for incorporation, and the amounts for minimum capital and surplus.
Application for Examination
A resident individual applying for an insurance producer license has to pass a written examination
cease and desist order
Following an investigation and a hearing, if the Department of Insurance finds that any person or insurer is engaged in any unfair trade or unfair claims practice, the Commissioner may issue a cease and desist order prohibiting the individual or company from continuing the practice. Failure to comply with the cease and desist order can result in a substantial fine. In addition, fines and loss of license also may be imposed for a company or person guilty of violating the Unfair Trade Practices Act.
Examination of Insurers
The state Department of Insurance must examine the financial affairs, transactions, and general business records of domestic insurers in accordance with specific state insurance laws. Generally, these laws will state that the Commissioner of Insurance may examine the insurer's records as often as necessary but at least once every three to five years.
License Required
Under the statutes of most states, no person is permitted to act as an insurance producer without being currently licensed as a producer for the class or classes of insurance involved. Acting as a producer includes selling, soliciting, or negotiating insurance.
Investments
All states have regulations that are intended to ensure that insurers invest only in high-quality assets to prevent insolvencies. Life insurance companies may invest funds in concerns that are fairly stable in value. These safe investments include municipal bonds, corporate bonds, real estate mortgages, and even policy loans.
nvestigative Consumer Reports
An investigative consumer report includes information on a consumer's character, general reputation, personal habits, and mode of living that is obtained through investigation—that is, interviews with associates and friends and neighbors of the consumer. Such reports may not be made unless the consumer is clearly and accurately told about the report in writing. The consumer also must be notified that she is allowed to request an accurate disclosure of the report.
Privacy
Because of the abundance of personal information and the numbers of agencies collecting and using personal information, it is vital that controls be established to protect the public from inaccurate or misused information.
License for Controlled Business Prohibited
Coverage written on a producer's own life or health and on the lives or health of such persons as the producer's relatives or business associates is called controlled business. Because of the effect that controlled business could have on the insurance industry if people became licensed solely to sell insurance to family and friends, such activities are limited.
Annual Statement
Each insurance company must report its financial condition in an annual statement.
Change of Address
Every licensee must promptly give to the head of the Department of Insurance written notice of any change of business address. Most states require this notice be made within 30 days.
Appointment
If a producer is going to function as an agent of an insurer, the producer generally needs to be appointed by that insurer. To appoint a producer as its agent, the appointing insurer needs to file a notice of appointment within 15 days from the date the agency contract is executed or the first insurance application is submitted.
Insurer Solvency
Insurance companies collect premiums before losses are paid. If the insurer later becomes insolvent, customers will have paid for protection the company is no longer in a position to provide. Protection against insurer insolvency is one of the principal concerns of the insurance industry. Insurance insolvency regulations govern such areas as the organization and ownership of a new company, capital and surplus requirements, reserves, accounting, investments, annual statements, and the rehabilitation and liquidation of impaired insurers. The Department of Insurance has the right to compute the reserve liabilities of a company, to value its assets, and to approve or disapprove its investments, dividends, and expenses. The Department of Insurance also has the power to require a company to deposit securities to cover its liabilities in the state. Various state statutes impose capital and surplus requirements and require the preparation of annual financial statements and periodic examinations of insurers by the Department of Insurance. These laws establish initial financial requirements and help in the early detection of financial problems.
False or Deceptive Advertising
It is an unfair trade practice for any person to formulate or use an advertisement or make a statement that is untrue, deceptive, or misleading regarding any insurer or person associated with an insurer.
Issuance of License
Licenses contain the licensee's name, address, personal identification number, date of issuance, lines of authority, expiration date, and any other information the Commissioner deems necessary.
Continuation, Expiration, and Renewal of License
Producer licenses generally remain in effect unless they are revoked or suspended, as long as the appropriate fee is paid and the continuing education requirements are met by the due date.
Regulating Producers
Producers may function as either agents or brokers. Agents represent their companies, and brokers represent their clients.
Other Regulating Agencies
Securities and Exchange Commission (SEC) and the state Insurance Departments regulate variable contracts. Variable annuities and variable life insurance are insurance company products, but these products present a degree of investment risk to the buyer and, accordingly, have also been identified as securities in accordance with SEC regulations.
Rebating
Splitting a commission with a prospect is prohibited in almost every state,Rebates include not only cash but also personal services and items of value.
Termination of Appointment
Subject to a producer's contract rights, if any, an insurer may terminate any of its appointed producers at any time. The insurer must give prompt written notice of the termination and the date to the Department of Insurance (and to the producer when reasonably possible) and must file a statement of facts related to the termination and reasons for it. If the appointment was terminated because the producer was found to have done something that would be grounds for revocation, denial, or suspension of his license, the insurer is obligated to notify the Commissioner, generally within 30 days.
South-Eastern Underwriters Decision
The South-Eastern Underwriters Association Supreme Court decision overturned Paul v. Virginia and stated that insurance transacted across state lines was, in fact, interstate commerce.
Unfair Trade Practices
The Unfair Trade Practices Act is divided into two parts: unfair marketing practices and unfair claims practices. In each state, statutes define and prohibit certain trade and claims practices that are unfair, misleading, and deceptive.
Insurance Code
The body of laws at the state level
Self-Regulation
The last channel of regulation of the business is self-regulation. There are several intercompany organizations and industry associations that impose codes of ethical behavior on their members, including national, state, and local agent associations and associations made up of insurance companies.
Nonresident Producer Licensing
The majority of states allow for reciprocity in nonresident licensing. Reciprocity means a mutual exchange of privileges. In the case of producer licensing, it means the recognition of two states of the validity of licenses or privileges granted by the other.
Penalties
Violators of the Fair Credit Reporting Act may be subject to fines and imprisonment and may be required to pay any actual damages suffered by a consumer, punitive damages awarded by a court, and reasonable attorney's fees. The maximum penalty for obtaining consumer information reports under false pretenses is $5,000, imprisonment for one year, or both.
Statutes
body of law developed by the legislative branch of government. They outline, in general terms, the duties of the Commissioner and the activities of the Department of Insurance.
Rules and regulations
developed by the Department of Insurance to expand upon statutory requirements and legislative intent.
Paul v. Virginia
established that the transaction of insurance across state lines was not interstate commerce and therefore should be regulated by local law. This decision held for 75 years.
False Financial Statements
is a violation of unfair marketing practices for any person to deliberately make a false financial statement regarding the solvency of an insurer with the intent to deceive others.
McCarran-Ferguson Act
1945. This act stated that the federal government had the right to regulate the business of insurance, but only to the extent that such business is not regulated by state law. The main intent of the law was to exempt the insurance industry from most of the provisions of the federal antitrust laws.
consent order
which is a disciplinary action in which the party at fault (the insurance company or agent) agrees to discontinue a particular practice (usually an unfair trade or claims practice) through a written agreement with the Department of Insurance.
Churning
which is the practice of using misrepresentation to induce replacement of a policy issued by the insurer the producer is representing, rather than the policy of a competitor. The impetus behind churning is to allow the producer to collect a large first-year commission on a new policy. Churning is the result of a producer putting his interests above those of the client.
National Association of Insurance Commissioners (NAIC),
Although without legal authority as a group, an association of state Commissioners, also imposes a strong influence in the area of the industry's self-regulation. The NAIC is the organization that has done the most to standardize law between the states. The model laws passed by the NAIC include the Individual Accident and Sickness Policy Provisions Law, Standard Nonforfeiture and Valuation Laws, Fair Trade Practices Act, Unauthorized Insurers Service of Process Act, Insurance Holding Company System Regulatory Act, Variable Contract Law, Group Life Definition and Standard Provisions Bill, and Credit Life and Credit Health Insurance Regulation Bill.
Consumer Reporting Agencies
Consumer reporting agencies collect information on individuals, prepare reports, and make the reports available to persons or organizations with a legitimate reason to receive such information. These agencies may operate for profit (e.g., Experian or Equifax) or agencies may be nonprofit (e.g., the Medical Information Bureau or a credit union). A consumer may choose to have her name and address excluded from any list provided by a consumer reporting agency in connection with a credit or insurance transaction that is not initiated by the consumer. The consumer simply needs to notify the agency that she does not consent to any use of a consumer report in connection with any credit or insurance transaction that is not initiated by the consumer. Credit agencies are required to provide a notification system, including a toll-free telephone number, to allow consumers to request exclusion of their information. This notification is valid for two years. If notification is made in writing on a signed notice of election form issued by the agency, it is valid until the consumer revokes the request. The consumer may revoke the request at any time.
Consumer Reports
Consumer reports include written, oral, and other forms of communication that a consumer reporting agency has regarding a consumer's credit, character, reputation, or habits and are used or collected to determine whether a consumer is eligible for credit, insurance, employment, or other purposes. Consumer reports may be issued only to persons who have a legitimate business need for the information.
Consumer Rights
Consumers who feel that information in their files is inaccurate or incomplete may dispute the information, and reporting agencies may be required to reinvestigate and correct or delete information. Insurance companies may use consumer reports, or investigative consumer reports, to compile additional information regarding the applicant. If applicants feel that the information compiled by the consumer inspection ser vice is inaccurate, they may send a brief statement to the reporting agency with the correct information.
Exceptions to License Requirements
Each state identifies exemptions from the licensing requirements. Generally speaking, people who are not paid commissions for selling insurance do not need a license.
Office and Records
Every resident producer must have and maintain in the state issuing the license a place of business accessible to the public. The designated place of business must be where the licensee principally conducts transactions under the license. Licenses must be conspicuously displayed in a part of the place of business that is customarily open to the public. The producer must keep at the place of business the usual and customary records pertaining to insurance transactions.
Disclosure Requirements
GLBA requires that a company make two primary disclosures to customers: one at the time of the establishment of the customer relationship and the second before the company discloses protected information. The first disclosure is to be made at the time a consumer becomes a customer, usually by purchasing a policy. At this point, the company is required to give a clear and conspicuous disclosure to the new customer regarding its policies and procedures for customer privacy. The customer must, at least on an annual basis, receive an updated notice containing the same information. The second disclosure required by GLBA explains the customer's right to opt out of information sharing. Each customer must be given the right to opt out and must be told explicitly how that right may be exercised.
Commissioner, Superintendent, or Director of Insurance
In each state, a public official will head the department, and the title of the official,This person has broad powers to supervise and regulate the insurance affairs within the state. Note that the Commissioner does not make the insurance laws. He is simply in charge of making certain all insurance operations within the state are in compliance with the laws made by the state legislature.
Boycott, Coercion, and Intimidation
It is a violation of the act for a person or organization to commit or be involved in an act of boycott, coercion, or intimidation that is intended to create a monopoly or restrict fair trade in the transaction of insurance.
Defamation
It is an unfair trade practice for any person or company to make oral or written statements or to circulate literature that is false, maliciously critical, or derogatory to the financial condition of any insurer or that is calculated to injure anyone engaged in the insurance business.
Unfair Claims Practices
Misrepresenting pertinent facts or insurance policy provisions relating to coverage 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 on all available information Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds Attempting to settle a claim for less than the amount to which a reasonable person would have believed he was entitled by reference to written or principal advertising material accompanying or made part of an application Attempting to settle claims on the basis of an application that was altered without notice, knowledge, 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 Making known to insureds or claimants a policy of appealing arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration Delaying the investigation or payment of a claim by requiring an insured, claimant, or the 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 where liability has become reasonably clear under one portion of the insurance policy coverage to influence settlement under other portions of the insurance policy coverage Failing to promptly provide a reasonable explanation of the basis relied on 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
State Regulation of the Insurance Industry
Most insurance regulation takes place at the state level.
Marketing and Advertising Life and Health Insurance
States often regulate the marketing and advertising of life and health insurance policies to ensure truthful and full disclosure of pertinent information when selling these policies. As a rule, the insurer is held responsible for the content of advertisements of its policies. Advertisements cannot be misleading or obscure or use deceptive illustrations and must clearly outline all policy coverages as well as exclusions or limitations on coverage (such as preexisting condition limitations). Most states require insurers to keep a permanent advertising file of all advertisements used in the state until the next regular examination of the insurer by the Department of Insurance or for a specified minimum number of years, usually two or three.
Company Financial Ratings
There are several organizations that rate the financial strength of insurance carriers on the basis of an analysis of a company's claims experience, investment performance, management, and other factors. These organizations include AM Best, Inc., Standard & Poor's Insurance Rating Services, Moody's Investors Service, Duff & Phelps Credit Rating Company, and Weiss Ratings. These ratings are one of the most widely used indicators of financial health (or the lack of it) in the insurance industry.There are at least four different rating scales in use among the five firms.
Disclosure Authorization
Written disclosure authorization forms must be furnished stating who is authorized to disclose personal information, the kind of information that may be disclosed, the reason information is being collected, and how it will be used. The applicant's signature on the disclosure form authorizes the insurer to collect and disseminate information in the manner described in the notice. The authorization is good only for a certain period. At the end of this period, another authorization must be obtained.
customer
a consumer who has an ongoing relationship with the financial institution.
misrepresentation
a lie. It is a violation of unfair marketing practices for any person to make, issue, or circulate any illustration, sales material, or statement that is false, misleading, or deceptive. Misrepresentations include (but are not limited to): misrepresenting the benefits, advantages, or terms of a policy; misrepresenting policy dividends by implying or stating that they are guaranteed; misrepresenting the financial condition of an insurer by means of an inaccurate or incomplete financial comparison; and misrepresenting an insurance policy by using a name or title that is untrue or misleading or by indicating that an insurance policy represents shares of stock.
Twisting
a producer convinces a policyowner to lapse or surrender a present policy in order to sell him another one, usually from a different company. Any attempt by the producer to misrepresent another insurer by falsely making statements about the financial condition of the company or by giving an incomplete comparison of policies is an unfair trade practice.
pretext interview
an interview whereby a person, in an attempt to obtain information about another person, pretends to be someone else, misrepresents the true purpose of the interview, or refuses to properly identify himself. Generally, pretext interviews are prohibited. However, such an interview may be conducted when there is evidence of criminal activity, fraud, or misrepresentation.
Financial Services Modernization/Gramm-Leach-Bliley Act (GLBA)
legislation was passed in 1999 to remove Depression-era barriers between commercial banking, investment banking, and insurance. This law allows financial holding companies to engage in any activities that are financial in nature. Regulation of these holding companies is managed on a functional basis. This means that regulatory authority is based on what activity is occurring, rather than on what type of company is engaging in the activity. For example, the sale of insurance is regulated by state insurance regulators even if the company making the sale is a bank or securities brokerage. Financial holding companies have the potential to capture unprecedented amounts of information about their customers. This law also establishes a minimum federal standard for financial privacy. The law requires that technical, administrative, and physical safeguards be established: to ensure the security and confidentiality of customer records and information; to protect against any anticipated threats or hazards to the security or integrity of such records; and to protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.
Fraud and False Statements
making any false material statement or report that willfully and materially overvalues any land, property, or security in connection with any financial reports or documents presented to an insurance regulatory official or agency, or an agent or examiner acting for an insurance regulatory official for the purpose of influencing the actions of such individual; making any false entry of material fact in any book, report, or statement of such person engaged in the business of insurance with intent to deceive any person, including any officer, employee, or agent of such person, engaged in the business of insurance regarding the financial condition or solvency of such business; willfully embezzling, abstracting, purloining, or misappropriating any of the monies, funds, premiums, credits, or other property of any person engaged in the business of insurance; or corruptly influencing, obstructing, or impeding the due and proper administration of the law under which any proceeding is pending before any insurance regulatory official or agency or any producer or examiner appointed by such official or agency to examine the affairs of a person engaged in the business of insurance.
Notice to Applicant
must be issued to all applicants for life or health insurance coverage. This notice informs the applicant that a report will be ordered concerning their past credit history and any other life or health insurance for which they have previously applied. The agent must leave this notice with the applicant along with the receipt.
Assumed Names
n insurance producer doing business under any other than the producer's legal name is required to notify the Commissioner before using the assumed name.
Guaranty Associations
organized to protect claimants, policyholders, annuitants, and creditors of financially impaired or insolvent insurers by providing funds for the payment of claims and other related policy benefits. Associations are composed of insurers authorized to transact insurance business within the state. Association membership exceptions include fraternal organizations and nonprofit companies. Member insurers are assessed certain sums of money to cover the association's operating expenses. If insurer insolvency occurs, each member insurer will be assessed additional fees to cover the insolvency.
License Denial, Nonrenewal, or Revocation
providing incorrect, misleading, incomplete, or materially untrue information in the license application; violating insurance laws or violating any regulation, subpoena, or order of the Commissioner or of another state's Commissioner; obtaining or attempting to obtain a license through misrepresentation or fraud; improperly withholding, misappropriating, or converting money or property received in the course of doing insurance business; intentionally misrepresenting the terms of an actual or proposed insurance contract or application for insurance; having been convicted of a felony; having admitted or been found to have committed insurance unfair trade practices or fraud; using fraudulent, coercive, or dishonest practices or demonstrating incompetence, untrustworthiness, or financial irresponsibility in the conduct of business in this state or elsewhere; having an insurance producer license or its equivalent denied, suspended, or revoked in any other state, province, district, or territory; forging another's name to an application for insurance or to any document related to an insurance transaction; improperly using notes or any other reference material to complete an examination for an insurance license; knowingly accepting insurance business from an individual who is not licensed; failing to comply with an administrative or court order imposing child support obligations; and failing to pay state income tax or comply with an administrative or court order directing payment of state income tax. If the Commissioner nonrenews or denies an application for a license, the applicant or licensee must be notified and advised, in writing, of the reason for the denial or nonrenewal of the license.
Rehabilitation and Liquidation
some insurers become insolvent or find themselves in financial difficulty. In this event, the Department has the authority to assume control over company funds and management. If an insurer becomes impaired (in financial difficulty), the Department will attempt to put the insurer back in sound financial standing. If an insurer becomes insolvent (unable to meet financial obligations), the Department will attempt to make the insurer solvent again. Rehabilitation efforts are undertaken if the Department believes that an impaired insurer has a chance of restoring solvency. Liquidation proceedings are instituted when the insurer is insolvent and cannot be restored to solvency.