General Insurance Digest I



Section I

Ethics: A Practical Guide



Section II

Market Conduct and Agent Blunders



Section III

Understanding Errors & Omissions Coverage



Section IV

Flood Insurance Training for Insurance Agents



Section V

Long Term Care: Addressing Senior Needs



Section I

Ethics: A Practical Guide



Introduction.. 2

Ethics vs. Compliance.. 3

Professionalism and Ethics. 4

Ethics is Good Business. 4

Ethics and Compliance: Opposite Sides of the Same Coin. 5

Ethical Duties – To Whom?. 6

Ethical Duties to the Insurer 6

The Concept of Agency. 6

Fiduciary Responsibility to the Insurer 7

Agent vs. Broker: Is the Distinction Important?. 10

Ethical Duties to Clients. 11

Once Again: Agent or Broker?. 11

Legal Duties Owed to Clients. 11

Fiduciary Duties Owed to Clients. 13

Beyond the Basics: Ethical Standards. 14

Ethical Duties to the Public. 15

The Insurance Industry and the Public. 15

Avoiding Problems.. 19

Changing Times, Changing Issues. 19

Suitability. 19

Suitability Standards. 20

Determining Client Needs. 20

Making the Product Recommendation. 21

Making Suitable Recommendations. 23

Replacement 23

The Primary Issue: The Client’s Interest 24

Regulations Governing the Replacement Sale. 25

Standard of Care. 25

Special Relationship. 26

Making the Choice. 28

Negligence. 28

Practical Solutions to Avoiding Problems. 29

Evaluate the Options. 29

Document, Document, Document 29

Provide Follow-Up Service. 30

Developing a Professional Code of Ethics.. 33

First Things First: Take Stock of Yourself 33

Through the Client’s Eyes. 33

“Guidelines for Consumers – How to Select an Insurance Producer” 33

“Insurance Consumers’ Bill of Rights and Expectations” 34

Applying the Principles. 35

Developing a Personal “Standard of Practice” 35

Professional Industry Associations. 36

Sales + Ethics + Professional Service = Personal Professional Practice Standards  36

Producer Rights. 39

Insurer Duties to Producers. 39

Client Duties to Producers. 39

The Force of Ethics. 40



The purpose of this course is to examine the concept of ethics and how it relates to the insurance producer. It attempts to show how embracing a personal code of business ethics will guide the producer’s activities beyond that which are required (or prohibited) by law toward a higher level of service and success. The course looks at:

1)    The difference between compliance and ethics;

2)    The practical and ethical duties a producer owes to his or her insurer, clients and to the public at large;

3)    Practice areas that are common sources for conflicts and problems and how they can be avoided;

4)    Case law that documents the many areas that are ripe for client/producer/insurer disputes and conflicts; and

5)    How to develop a principled and ethics-based approach to one’s practice – and most importantly, how to apply it.



Ethics vs. Compliance



Over the past few years, the insurance industry has been forced to confront numerous charges and concerns related to ethical standards and practices within its ranks. Few would argue that some consumers do not view the insurance industry in a positive light. Certainly one reason for this is that the average consumer does not fully understand or appreciate insurance products, but recognizes they are something that’s needed. Consequently, these consumers rely on the insurance industry and its many and varied representatives to provide them with appropriate information, advice, products and service. In the majority of cases, this reliance has served the insurance buyer well. Unfortunately, when the confluence of events is such that the information or the service or the product later fails to live up to the consumer’s expectation, charges of malfeasance or neglect arise – sometimes valid, sometimes not. When enough of these charges are heard, the regulators step in with new or revised requirements that are intended to reinforce ethical business practices.


Unfortunately, it’s possible that the ever-expanding focus on the issue of ethics may, in the long run, serve to undermine the very essence of this important issue. As more and more requirements in the form of mandated insurer practices, producer education requirements and consumer information and disclosure guidelines become attached to the issue of ethics; they may unintentionally and unwittingly undermine the force of ethical standards.


How can this be? Aren’t rules and requirements that support ethics a good thing? Don’t they encourage better business practices? Don’t they protect the position and rights of the consumer? The answer is yes – and no. When the pursuit of ethics is translated into and defined as a body of regulated practice requirements, it becomes “compliance.” Depending or relying solely on compliance requirements in order to conform to ethical standards will surely fall short of the mark because there is a big difference between compliance and ethics.


Being “in compliance” with the law means adhering to a minimum set of required standards. Compliance requirements simply cannot embrace the whole of ethics or its spirit; statements of policy, laws and regulations cannot cover every issue or question or situation that may arise. Ethics goes beyond compliance; it appeals to a higher standard, a moral code. Ethics is a form of self-regulation, based on principles. Conforming to mandated compliance standards is what one must do; conforming to ethical standards is what one should do. Rarely do the two conflict; the difference is the scope of thought, words and conduct each entails. Compliance rules and requirements are associated with statutes and regulations and they find strength in the threat and reality of legal liability and recourse. In contrast, ethics – though grounded in the law – is associated with social responsibility and public welfare. An activity – or lack thereof – may be legal; it does not necessarily follow that it is also ethical.


Compliance requirements typically come about after the fact. If producer or company business practices have adverse effects on the public welfare, it is necessary to enact laws and regulations to ensure that appropriate standards are met. Compliance is necessary when appropriate or just expectations are not met. In this way, compliance and the law are reactive. On the other hand, ethics is proactive. Ethics precedes thought and action and sets the framework for the manner in which one’s activity and conduct will transpire. An ethical producer or an ethical company does not wait until the law dictates what must be done; they understand and embrace the larger responsibility their role in society plays and live up to those higher standards – again, not because they must, but because they should, because it is right. Very often, it is within the broad landscape that lies between “legal” and “ethical” that consumer or regulator complaints and charges of malpractice arise. Regulations – or that which dictates what is legal – cannot fully govern one’s actions; only individual spirit and intent can do so.


Professionalism and Ethics

The moniker of “professional” has long eluded the insurance producer as it has many who have chosen an occupation devoted primarily to sales and service. This is unfortunate, as so many producers have embraced the attitudes and requirements that characterize professionalism: knowledge, skill, integrity, pride and service. Legions of dedicated individuals have devoted their careers to the insurance business and provide a needed and necessary service to thousands of individual consumers and businesses. Yet they struggle to be perceived as professionals.


Perhaps the problem is such that “selling” is not associated with a consumer’s needs but rather with the producer’s means of livelihood. Perhaps the perception is that sales is a “game” of one-upmanship and that salespeople are considered to have as their primary intent self-enrichment. Perhaps the problem is that the term “sales” implies that the primary focus and ultimate goal is the transaction, not the buyer’s interest. Whatever the reason, insurance producers must confront and overcome certain perceptions and obstacles that those in other occupations do not face. Add to these challenges the reality that the products and services the insurance producer represents are associated not with what is good, but with what is negative; not with what consumers necessarily want but with what they must have. Individuals need insurance, but they don’t want to need it. If or when the reason that prompted the purchase of insurance manifests, it is actually a loss to the individual; it is death or illness or property destruction.


All of these factors place the insurance producer in a difficult role, creating a climate that all too easily permits the public to skeptically question the producer’s intent and assume that their interests and those of insurance producers are not the same. The best way to overcome these challenges and live up to the ideals and mission that the insurance industry and its products serve is to build one’s practice on the principles of professionalism and ethical conduct. Professionalism precludes the notion that the client’s interest is not of primary importance; professionalism negates the concern that the producer does not have requisite knowledge or skills; professionalism implies integrity and dedication. Professionals do not wait for or rely on regulations to define their activity; they create higher levels of self-imposed governance and codes of conduct. Ethical behavior is a cornerstone of the practices of all professionals; it is an integral aspect of their business and is clear in the ways in which they deal with their clients, their companies and their colleagues.


Ethics is Good Business

The insurance business is based on trust. After all, the products the industry provides are ultimately future promises and the public has to trust that those promises will be kept. To earn and keep such trust, insurance producers – as well as their companies and the industry as a whole – must embrace the tenets of professionalism and ethics: integrity, honor, duty, fairness, diligence. In so doing, the trust that clients and the public have in insurance producers will be preserved and enhanced.


For the insurance producer, developing a code of ethics does not mean that the force of its purpose or intent flows only outward to others; it offers tremendous rewards and benefits for the producer personally. The principles of professionalism and ethics and the actions and activity necessary to achieve success as an insurance producer are in no way contradictory; they are complimentary. Assuming that a producer accepts as his or her definition of “success” the apt fulfillment of duty to clients, to his or her insurance company and to the public at large through skilled, competent service and quality products and being rewarded for doing so, there is no conflict. Conforming one’s practice to ethical principles is what transforms prospects into policyowners and policyowners into clients.


Ethics and Compliance: Opposite Sides of the Same Coin

Ethics and compliance are actually opposite faces of the same coin. They both strive to define appropriate behavior and action, but do so in completely different ways. Compliance measures dictate what should and shouldn’t be done in order that people are not harmed; ethics dictate what should and shouldn’t be done in order that people benefit. Compliance requirements rely on sanctions and the imposition of penalties; living up to ethical standards produces its own rewards. Compliance is narrow; ethics is broad. Compliance standards often focus on restricting behavior; ethics encourages innovation, initiative and expansion of service.


Compliance requirements cannot adequately address the full span of insurance producers’ activities or those of the industry at large. But in the end, it is not the responsibility of regulators to manage through laws and mandatory requirements the behavior of the industry. In order for the insurance business to continue to serve its important role, producers, insurance companies and their executives must accept the duty of self-imposed principles of conduct, in the field and in the boardroom.


Compliance requirements can be viewed as the starting point for a code of ethical behavior. Where the requirements end, one’s own principles pick up, extending the spirit of the law into the whole of one’s practice. The more one adheres to a personal and professional standard of ethics, the more likely that the challenges and pitfalls that surround the lower benchmark of merely “being in compliance” will be avoided.


Ethical Duties – To Whom?



For the professional insurance producer, a personal code of ethics forms the foundation for the way he or she conducts business and interacts with all he or she encounters. Given the unique nature of insurance and the producer’s role in its distribution, this will include many people, all of whom have different – and occasionally conflicting – expectations, intentions, goals and objectives. It’s before, during and after those points of conflict that the producer must select a path. One option is the ethical path, paved with good intentions as well as self-imposed standards of principled thought, conduct, responsibility and integrity. Another path, seemingly shorter, is paved with expediency, personal gain and monetary rewards. Which to choose? The right answer, of course, is clear, but all too often; it is not the path chosen. This is unfortunate. Despite what some may think or perhaps even have experienced, the first path, though often more rigorous, is really the straightest and surest to success.


Ethics for the insurance producer extends beyond the line that is drawn by the law or by compliance requirements. It embraces the law but, at the same time, it defines the core of what the producer does and the service he or she provides. It offers a high, consistent and impeccable benchmark against which the producer measures the profession he or she serves, the products he or she represents and the service he or she renders. It reflects the level of conduct, knowledge and commitment to which the producer continually aspires to offer to his or her insurer, clients and to the public at large.


In this chapter, we will look at some of the parties the insurance producer serves and, accordingly, owes a measure of ethical duty and responsibility. These include the producer’s insurer, his or her clients and the industry at large.

Ethical Duties to the Insurer

An insurance producer has a distinct level of responsibility to the company or companies he or she represents. This responsibility stems not only from the principles of good business practice but also from the unique relationship that is established by the principles and law of agency, under which producers operate.


The Concept of Agency

Agency law holds that an agent is a person who is authorized and agrees to act for another person or entity (the principal) with regard to contractual arrangements with third parties. Typically, agents are employed to find, negotiate and conclude contracts on behalf of the principal. The establishment of an agency relationship requires that there must be manifestation by the principal to the agent that the agent may act on its behalf and consent on the agent’s part to do so.


In the insurance arena, agency is established when an insurer authorizes individuals (or businesses) to represent its policies and services to the public. In so doing, the insurer and the agent have formed a relationship that operates in such a way as to create a legal position for the principal with regard to its rights and liabilities with third parties. The actions of an insurer’s agents and the policies they place are legally binding on the insurer.


Authority: Express, Implied or Apparent

The scope of an agent’s role in acting on behalf of a principal is a function of his or her authority. Agency relationships – that is, an agent’s activities on behalf of the principal – operate in such a way as to affect or create a legal position for the principal with regard to its rights, responsibilities and liabilities with third parties. Within most agency relationships, there are three levels of agent authority; all can bind the principal. These levels of authority are express, implied and apparent.


·         Express authority (often referred to as actual authority) is the action and activity that the principal actually defines and extends to the agent; it is usually detailed in the form of a written contract. Insurance agents are typically given the express authority to:

v Solicit and accept applications for insurance;

v Present and describe insurance policies to prospects and clients;

v Explain the process through which applications are reviewed and coverage issued;

v Collect initial premiums;

v Promote the insurer and its products;

v Provide post-sale service and follow-up.

Specific unauthorized acts are also often spelled out. These might include, for example, changing the terms or conditions of the insurer’s policies or incurring any indebtedness on behalf of the company.


·         Implied authority is the natural extension of activity that is expressly granted; in other words, implied authority “fleshes out” the rights and actions expressly given, enabling the agent to perform his or her express authority. For example, if an agent has the express authority to sell auto policies, he or she would have the implied authority to provide standard rate quotes over the phone.


·         Apparent authority is the appearance or assumption of authority stemming from the actions, words or deeds of a principal that would lead a reasonable person to assume that the agent has authority. If the principal, intentionally or through negligence, allows an agent to perform acts for which he or her has no authority, apparent authority has been established and the principal has ratified the act by allowing it to occur. The acts of an agent alone cannot establish apparent authority, but silence upon the part of the principal who knows that an agent is holding himself or herself out as vested with certain authority will bind the principal as fully as under expressed or implied authority. A principal that has created an agency relationship through ratification will be estopped from denying the relationship exists.


In their relationships with insurers, most conflicts arise when agents act with apparent authority and outside the realm of activity for which they have been expressly or inherently authorized to address. With regard to legal issues brought by third parties, courts are prone to rule in the direction that an agency relationship exists which binds the insurer to the acts and actions of its agents. Consequently, even if an agent acts outside the scope of his or her authority, the principal can be legally tied to agreements and terms with third parties. Note that the forces of law and ethics would have very different points of focus here: the law and the courts would be concerned over what subsequently happens as a result of an agent acting outside his authority and the extent to which principal and agent might be liable for any damage caused to a third party; ethics would focus on the appropriate conduct that the agency contract did or did not encourage or support.


The ethical responsibility that an agency relationship entails is of great significance. Agents are empowered to act for and on behalf of their principals; in the public eye, they are often viewed as the company itself.


Fiduciary Responsibility to the Insurer

The relationship formed by a contract of agency creates a unique role for both agent and principal, which requires a level of fiduciary responsibility not assumed in other (arms length) commerce transactions. For one thing, an agency relationship is viewed and serves to operate as a long-term relationship. It is to support this continuing bond that fiduciary standards apply.


By definition, a fiduciary is one who stands in a special position of trust, confidence or responsibility in his or her obligations to others. In an agency relationship, fiduciary duty is required of both parties. For the agent, his or her fiduciary duties to the principal involve a number of responsibilities. These include:


·         The duty of loyalty. The agent is responsible to act for the benefit of the principal, in accordance with the principal’s mission and goals. The fiduciary relationship precludes agents from profiting or deriving gain from any information the principal may have, beyond that which is stipulated in the agency agreement.


·         The duty of care and skill. The agent is responsible for taking care to see to the principal’s interest in the same way a reasonable or prudent person would take care of his or her own interest.


·         The duty of good faith and fair dealing. The agent is responsible for living up to the trust that is inherent in an agency relationship, including making disclosures beyond what would normally be expected in other business relations. Certainly, this would preclude the agent from acting for more than one principal within the same transaction. Certainly, this would preclude the agent from acting for more than one principal within the same transaction.


·         The duty to act only as authorized. The agent should actively identify what obligations and authority he or she has with respect to the insurer’s interest, obtain the insurer’s agreement and act accordingly. Agents should align their conduct to further the insurer’s interest, so long as that interest is legitimate, moral and ethical.

A producer owes his or her company a great deal. The practical application of these fiduciary duties extends into many areas, legal as well as ethical. As usual, the legal requirements are clear-cut; the ethical requirements are less so.


Practical Legal Applications of Fiduciary Duty

The legal applications of the agent’s fiduciary responsibility to his or her insurer are clear-cut. Violations in this area tend to have severe legal implications, for both insurer and agent. Recourse against an agent for violating the law includes license suspension or revocation, fines and even imprisonment. In practice, an agent’s fiduciary responsibility to his or her insurer requires the following.


·         The duty of care. Agents must exercise skill and diligence in order to avoid any negligent act that could open the insurer to liability. For example, incorrect policy dates, erroneous limits of liability or omissions of endorsements have the potential to lead to trouble for both insurer and agent.


·         Proper use of premium monies. Agents owe a fiduciary responsibility to their insurer to promptly and properly remit premium payments they have collected from or may be due to policy owners and to hold them in a segregated account set up for that purpose.


·         Proper and complete disclosure. Insurers rely on their agents to collect and record the information that is used to assess and underwrite policies. If the information provided to the insurer is incorrect or incomplete and it is material in the issue of a policy, the insurer will be liable for covering a risk it might otherwise have rejected. In these situations, it’s possible for the insurer to sue its agent for negligence. (This is illustrated below.)


·         Notification of cancellation of coverage. Normally, agents do not have an obligation or the authority to cancel an insured’s coverage. However, in the event that they have accepted some aspect of this responsibility, they may be liable. For example, in one case (Mitton v. Granite State Fire Insurance Co., 196 F.2d 988, 10 Cir. 1952), an insurer’s agent was instructed by the insurer to obtain a flood and landslide endorsement from an insured. If the insured refused to accept the endorsement, the agent was to notify the company, which would then cancel the policy. The agent did neither and was held liable to the insurer for the insured’s flood damage.


·         Appropriate and fair business practices. Agents owe their insurers the duty to follow appropriate and fair business practices as set forth by the laws of their states. Virtually every state has adopted some version of the NAIC’s Unfair Trade Practices Act which specifies prohibited market and business activities, such as misrepresentation, false advertising, twisting and rebating.

The Agency Relationship: Case in Point

The following case illustrates the legal intricacies and liabilities that can stem from a contract of agency between and insurer and its agent. It points out that the ability of an agent to bind a principal does not necessarily release the agent from any liability the principal may incur.


New Hampshire Insurance Company, through its agent, Fred Sauer of Fred Sauer Insurance Agency, Inc., issued a fire insurance policy to Marvin Engineering, a company engaged in the business of fabricating metal and machine parts. (The policy covered loss of property and business interruption.) Marvin Engineering was owned by three individuals, had several locations and also owned and operated PSI, Inc., a semiconductor company. PSI maintained its warehouse and sales office at one of the same addresses as Marvin. PSI suffered a fire and filed claim.


Initially, New Hampshire Insurance denied the claim, noting that PSI was not a named insured on the insurance policy. A California court awarded the claim and New Hampshire Insurance was compelled to pay over $385,000 to PSI. New Hampshire Insurance filed against its agent, Fred Sauer, claiming that Sauer should be required to reimburse the company the amount it paid to PSI since Sauer had breached his duty as the company’s agent. New Hampshire Insurance stated that Sauer had failed to promptly inform the insurer either of the existence of PSI as a corporate entity or of the exact nature of its business. The insurer claimed that had it known that PSI was engaged in the business of distributing electronic components, it would have declined to issue coverage. Thus, the company’s was that Sauer was obligated to indemnify the company because he breached his duties as its agent. Sauer claimed that it was not necessary to name PSI on the policy since Marvin Engineering owned it and that he had informed the insurer of the nature of the business.


Based on the facts of the case, the court ordered the jury to determine the rights of the insurer and Sauer against each other on the basis of “comparative negligence.” The jury found that there was negligence on both parts, which proximately caused the insurer to be liable under the business interruption coverage: 30 percent of the negligence was Sauer’s; 70 percent was the insurers. Consequently, the agent was ordered to pay the company $52,000 (30 percent of New Hampshire’s liability on the business interruption insurance.)


The reasons for the decision that found the agent partially liable were are follows:

At no time prior to the fire did Sauer specifically or expressly inform the insurance company that an electronic components distributorship was operating on the premises. Sauer told New Hampshire’s branch manager that the basic operation was “in the job-shop / machine-shop business.” The court noted, “It reasonably could be concluded that as an experienced insurance agent, Sauer should have known that for purposes of business interruption coverage, a distributorship of electronic components may be a materially different risk than a manufacturer of metal machine parts and that he should have communicated such facts promptly to New Hampshire.”

New Hampshire Insurance Co. v. Sauer, 83 CA3d 454 (1978)


Practical Ethical Applications of Fiduciary Duty

As is so often the case, the ethical applications of an agent’s fiduciary duty to the insurer extend beyond the legal applications. As has been noted, ethics embraces the law, but strives to embody its spirit and elevate it to a higher ground. The fiduciary duties of loyalty, care, skill and good faith that an agent owes the insurer translate into the following:


·         Proper and professional representa­tion. As an agent for the company, the producer must put his or her best face forward, since this face represents the company to the public. This standard includes – though certainly is not limited to – knowing and abiding fully with the laws and regulations that govern a producer’s activities and market conduct. It includes knowing the company’s products fully and completely and seeking needs for which they are best applied. It includes selling products on their merit. It includes follow-through and follow-up when it is needed and when it’s been promised.


·         Avoiding business associations that could lead to conflicts of interest. Agents have the duty to refrain from entering into any relationship or acquiring any interest adverse to the principal without full disclosure of the facts and without obtaining the insurer’s consent. This might include, for instance, serving as an officer or partner in another organization or accepting consulting assignments that might result in conflicts of interest. It might also include processing applications for commercial insurance coverage on property in which the producer has an interest. Only through informed consent can a principal waive its agents’ conflicts of interest. At the very least, a producer should refrain from exercising any responsibility in a situation that might appear to involve a conflict of interest.


·         Active, fair and proper solicitation. Agents have an ethical obligation to seek business that will be sustaining and profitable for the insurer. Ethics and profit are not incompatible. What is not ethical is to pursue cases that are questionable or that the agent knows will not remain on the books. Agents have a responsibility to pursue quality business and to know and abide by their insurers’ standards for field underwriting.


·         Serving in person. Agents owe the duty to personally provide the services and activity that requires their authority, skill and aptitude. Delegating such activity to others, who do not have the authority, skill or aptitude, though perhaps expedient, is not ethical. In some cases, depending on the activity, it may also be illegal. Individuals who are not licensed, for example, cannot solicit contracts for insurance.


·         Promoting the insurer’s business. The agent owes the insurer the ethical responsibility of promoting the insurer’s business and its interest in all ways, ensuring that needs and objectives of clients and prospects are appropriately matched to the products and capabilities the insurer has to offer.

·         Maintaining proper, current and accurate books and records. An agent owes his or her insurer the duty to scrupulously maintain all books and records. All payments to the agent or on behalf of the company should be made with supporting documentation. Agents must not establish any undisclosed or unrecorded account or fund for any purpose.


·         Keeping confidential all business relating to the insurer. Unless it is generally available to the public (or is mandated by law), any information that the agent receives or has access to should be held in confidence. Producers must respect such confidential information and exercise sound judgment about what disclosures are warranted in pursuing the insurer’s interests.


Agent vs. Broker: Is the Distinction Important?

When discussing the role of an agent or the agency relationship, the issue of “agent” vs. “broker” inevitably arises. In definition and in practice, a distinction exists between insurance agents and insurance brokers. In general terms, an insurance agent is a person or business entity appointed and authorized in writing by an insurer to act as its representative with the authority to solicit, negotiate and place insurance contracts on its behalf. An agent is the agent for the insurer. By contrast, an insurance broker is an individual or business entity who, for a commission, serves to negotiate insurance contracts or to solicit and procure coverage as the agent for a prospective insured.


This distinction would suggest that whereas agents, because they are authorized to place insurance coverage and bind carriers by virtue of their activity, would owe primary duty to the insurance company, brokers do not. In many cases, the courts have determined that this is so and have upheld this position by finding insurers not bound by or liable for the action or inactions of a broker. However, the flip side of the coin is such that the broker owes primary responsibility to the insured and can be liable if the associated duties of the relationship are not carried out. When disputes arise, and an insurer can show that the party who placed the insurance business was a broker rather than an agent, any errors or omissions on the part of broker may exempt the insurer from the wrongdoings, and place them instead on the broker.


Though the distinction between agent and broker may find its significance in the law (and ultimately in the courtrooms), when it comes to the issue of ethics, it is far less important. Ethics demands that those in the business of transacting insurance and soliciting and placing policies adhere to the highest levels of due care and responsibility for and to all parties who are touched or affected by their activity, tending as well as they can to the best interests of both policyowner and insurer. This means acting in all ways to avoid creating any situation that might lead to a conflict between the two. As will be discussed below, the interests of an insurer and its policyowners are actually closely aligned; when all parties act and perform in an ethical, principled and disciplined manner, the opportunity for conflict or disagreement is greatly diminished.


Ethical Duties to Clients

In the insurance industry, the area in which much of the ethical concern lies is that of the relationship between the producer and his or her clients. Producers, after all, are those with whom the public deals; they represent the face of the company and industry in which the client has invested not only money but also trust.


Here the waters can get muddy, as there is much room for interpretation as to a producer’s “responsibilities” and an insurance owner’s “rights.” Unlike the problems that can arise between agent and principal when an agent exceeds his or her authority, those that occur between agents and clients often come about when producers do not extend to the full scope and responsibility their role with the client demands.


Once Again: Agent or Broker?

As noted above, the primary distinction between an agent and a broker is that agents represent the insurance company and are authorized to act on its behalf and in its interests; brokers, working for a commission, act to negotiate, place or effect insurance coverage as an agent of the insured. Agents are agents of the company; brokers are agents of the insured. Thus, it would seem that agents owe their primary duty to the insurer while brokers owe primary duty to the policyowner.


When it comes to the ethical responsibilities owed to one’s clients, the distinction between agent and broker tends to fall apart. For one thing, the difference is a legal one of which few consumers are aware or care. Secondly, the law itself often does not draw a straight line; courts have inconsistently defined the legal duties of agents and brokers but have consistently ruled that both agents and brokers owe their clients a high measure of fiduciary care. The standards of fiduciary care – as well as ethical mandates – require that producers, be they agent or broker, recognize the duty owed to clients and the requirement to put the client’s needs and interest above all else.


As was done in the preceding discussion on a producer’s responsibilities to his or her insurer, here we will attempt to define an agent’s responsibilities to clients in terms of legal and ethical. Again, the two do not conflict; they overlap, as ethics embraces the law but extends further.


Legal Duties Owed to Clients

In their relationships and encounters with clients, as a matter of law, insurance producers are responsible for abiding by the authority of their agency contract as well as the rules and regulations set forth by the states that licensed them. Under the latter, this would include, for example, following the laws that regulate when and how producers can charge and collect fees for their services and complying with the state’s continuing educational requirements for license renewal (since the intent of such laws is to ensure that producers maintain the knowledge and education they need to serve their clients). It also includes adhering to the state’s laws regarding market conduct and the handling of premiums. In most states, producers (as well as insurers) are prohibited from engaging in any of the following activities.


·         Misrepresentation is defined as an inaccurate or misleading statement of fact or an omission of a material fact. Producers cannot make any representation, written or oral, that misrepresents or misleads a client or prospect with regard to:

v The terms, conditions or benefits of a policy

v Dividends or surplus that might be received;

v The financial condition of the insurer;

v The purpose and intent of any policy that is presented.

Misrepresentation may be intentional or unintentional. Unintentional misrepresentation may stem from ignorance or negligence, intentional misrepresentation, where a statement is communicated deliberately and with knowledge that the information is untrue is a form of fraud. As a practical legal matter, unintentional misrepresentation may be covered by a producer’s errors and omission coverage; intentional misrepresentation is a crime and would not be covered. E&O coverage does not extend to any act, error or omission committed by the insured with dishonest, fraudulent or knowingly wrongful purpose or intent.


·         Twisting is the practice of replacing one policy for another or causing the lapse of a policy through misrepresentation of its terms or the terms of another policy. Twisting is a reprehensible practice that usually produces no benefit for the client but does provide a commission for the agent. It is to be avoided at all times.


·         Fraud is a broad area and there are many ways in which producers can run afoul – often without a clear understanding that what they’ve done is wrong. Actions such as altering an application without the insured’s knowledge or consent or signing a client’s signature in his or her absence (a practice known as “windowing”) are illegal as is diverting any premium monies to one’s own use. It should go without saying that such activities can have serious repercussions.


·         False or Misleading Advertising. It is unlawful to advertise or otherwise make public any information or statement that is untrue, deceptive or misleading with regard to the business of insurance, its products or any person who is engaged in the business. Words or descriptions that would only be known to those who are familiar with insurance cannot be used. Any limitation a product might have – coverage exceptions, benefit limitations, exclusions – must be prominently disclosed. Deceptive words or phrases may not be used to describe a policy or its provisions. Advertisements must clearly identify the insurer as well as the name and address of the producer placing the advertisement.


Within the context of false or misleading advertising could fall a producer’s representation of him or herself. In virtually every jurisdiction, it is unlawful to describe oneself as other than an insurance producer unless that is actually the case. Terms such as “financial planner,” “investment advisor,” “financial consultant,” or “financial counseling” cannot be used in such as way as to imply that the producer is generally engaged in an advisory business unless, again, that is truly the case.


·         Defamation. The insurance regulations of virtually every state prohibit those who are engaged in the insurance business from making any statements – written or verbal – that are false or that are maliciously critical of or derogatory to any other person (or entity) also in the business. (Note that while the law uses the terms “false” and “malicious,” ethics would demand that no critical statement at all be made about any business or individual engaged in the insurance business.)


·         Boycott, Coercion or Intimidation. It is illegal to use any method of boycott, force or intimidation that is intended to influence or push business one way or another.

·         Rebating. With few exceptions, producers cannot offer any kind of special consideration to a client in exchange for the purchase of an insurance policy. In this context, “rebating” refers to both giving and accepting and includes:

v Making agreements that are not clearly expressed in the policy

v Offering any kind of consideration with regard to the premium payment

v Providing any special favor or advantage with regard to dividend payments

v Giving anything of valuable consideration


·         Unfair Claims Settlement. Agents are prohibited from any activity that would amount to the practice of unfair claims settlement. Though this activity may be defined slightly differently by the various states, in most jurisdictions, these practices are clearly spelled out and, among others, include:

v Attempting to settle a claim for less than the amount for which the claimant is reasonably entitled

v Attempting to settle a claim on the basis of an application that was altered without the insured’s knowledge or consent

v Informing claimants that the company has a policy of appealing arbitration awards found in favor of insureds for the purpose of compelling them to accept settlements less than the amount awarded in arbitration

v Delaying the investigation or payment of a claim by requiring the submission of multiple documents and information that contain the same information

v Failing to promptly provide a reasonable explanation for denying a claim

As a legal and ethical matter, agents should be wary of any insurer practice that encourages or requires them to “settle” or finalize a specified percentage of client claims in the field.


Fiduciary Duties Owed to Clients

Individuals purchase insurance to secure financial assurance and peace of mind. They place their trust not only in the company that promises them this security but also in the producer who places the coverage. In law and in practice, this positions the producer as a fiduciary of the client – one who holds a position of trust, confidence and responsibility.


There are many areas in which producers are held to fiduciary standards in their relations with their clients, but two stand out: the manner in which they handle client monies and the level and scope of the service they provide.


Handling of Premiums

Agents routinely collect premiums from policyowners and clients. For some, this is limited to the first premium, paid when an application for insurance is taken or a new policy is delivered; for others, it may be more frequent. In either event, the producer must approach this responsibility with the utmost care.


A number of states require their licensed producers to establish separate accounts to house client funds; they specifically forbid any commingling of client monies with the producer’s own monies. In fact, the National Association of Insurance Commissioners (NAIC) has advanced draft legislation that would require producers to direct all insurance monies – premiums, advance premiums, return premiums, claim funds, taxes and fees – into a separate fiduciary account, identified as and for the sole purpose of housing insurance funds.


As a fiduciary of client funds, a producer has the responsibility to maintain them securely, turn them over promptly when and to whom they are due and document them meticulously. Producers should use clear methods to record and account for funds received and paid. States typically have a right to investigate producer books and records.


NAIC Fiduciary Responsibility of Insurance Producers Model Act

With regard to this issue, the National Association of Insurance Commissioners (NAIC) has drafted model legislation to provide stronger guidelines and requirements as to the handling of premium funds by producers. Though the Act is not yet final, the following summarizes its main provisions and intent. Whether or not it becomes law in the state in which a producer is licensed, it provides appropriate and ethical standards to which all would do well to adhere:

v Producers will be responsible in a fiduciary capacity for all fiduciary funds (i.e. insurance premium and claims monies) received or collected.

v Fiduciary funds will be held in an account by the insurance producer separate from other monies and the account shall be identified accordingly.

v Within a specified period of time after receipt, the producer must document the money according to date received, payee and amount. If the producer receives cash, he or she must provide a detailed receipt to the payor.

v The account should be in the form of a checking account, money market account or savings account in a federally insured financial institution.

v The account should be designated as a fiduciary fund account on the records of the financial institution.

v Distribution of monies from the account must be only for the purpose of and related to the producer’s insurance transactions

v The producer is prohibited from using the funds for personal use

NAIC draft, August 2004


The Duty of Service

To his or her clients, an insurance producer typically occupies the position of “expert” in a field about which they know very little. This status undeniably gives the producer credibility and what has been termed “justified believability” among clients and potential clients. Producers have the responsibility to live up to these standards and expectations and to fulfill them in the best way they can.


Assume that the following were set forth as duties and obligations for an independent insurance agent. Would you define them as legal (i.e. minimum) standards or greater, ethical standards?

v Knowledge of the different types of insurance policies available and the terms, conditions and parameters of those policies, including what is included and excluded under the policies

v The obligation to use reasonable diligence in obtaining the insurance requested and notifying the client promptly if unable to do so

v The obligation to obtain the specific coverage desired by the client

v Informing the client as to any specific risk the policy does not cover if the risk were specifically mentioned by the client

v Advising the client with regard to recommended coverage and investigating and ascertaining the financial condition of prospective insurance companies

v Affirmatively notifying the client of any premature termination or cancellation of the policy

v Promptly notifying the client as to possible financial problems with the insurer that issued the policy

v Informing the client as to possible conditions of an insured’s property that could void the client’s coverage under the policy

v Keeping the client informed as to changes in available insurance coverage

Perhaps surprisingly, all of the above were determined by courts of law to be required fiduciary duties and obligations of insurance agents and brokers, through suits brought by policyowners against their insurance agents or insurance companies. Intended or unintended, they represent contributory factors as to why insured clients were not safeguarded in the manner they assumed or expected. Consequently, it could be argued that these duties represent the very basic level of service a producer owes to one’s clients and clearly, the law views the producer’s role as extending far beyond the mere transactional activities of soliciting and placing insurance coverage.

FN * “My Brother’s Keeper – Duties and Liabilities of Agents and Brokers,” by Robert Redfearn, Jr., Insurance Journal, May, 2005


Beyond the Basics: Ethical Standards

Beyond the basics, the insurance client has the right to expect a higher level of conduct from producers. Clients should – and do – expect that the individual representing their insurance policies or providing services of their insurance companies has personally embraced the standards and tenets required of a true professional. “Quality of service” cannot be fully defined or codified, but consumers expect it and it should be rendered. To that end, the ethical insurance producer owes the following to his or her clients:


·         The duty of skill and competence. Producers represent products and services with which clients usually have little understanding. Producers are trusted to know fully their products’ provisions, features, benefits, limitations, advantages and drawbacks and to disclose all. They are expected to understand how and when the products apply and recommend them only when they apply. They are expected to seek the facts and information that would help define client needs and objectives. They are expected to have learned and assimilated the common body of knowledge that comes with training, experience and on-going education.


·         The duty to know one’s limitations and act accordingly. No one can be an expert on everything. The duty to act with competence assumes the ability – and willingness – to know and accept one’s limitations. When a particular case or circumstance presents an opportunity that is outside the producer’s realm of knowledge or experience, he or she needs to bring in assistance or refer the case.


·         The duty to act with honesty and integrity. Integrity involves acting, at all times, with moral soundness, rejecting any association with persons, circumstances or conditions that could corrupt or undermine. Producers should at all times respect and honor the trust that their clients have in them and work diligently to preserve that trust.


·         The duty to be fair and objective. Producers must be reasonable and fair in every aspect of their relationship with their clients. It includes remaining true to one’s judgment and rejecting personal feelings of bias.


·         The duty to be diligent. Producers have the responsibility to work with their clients and render their services in a prompt, thorough manner.


·         The duty to put the client’s interest first. A producer’s primary purpose is to provide a client with products, services, advice or counsel that are needed, warranted and in the client’s interest. This duty is paramount. All other business activity is secondary and must stem from this objective.


Ethical Duties to the Public

It’s clear that a producer has responsibility to his or her insurer and clients as well as the duty to serve each in a professional and ethical manner. Less clear, but no less important, is the responsibility that the producer owes to the public – to society at large and to the industry of which he or she a member.


The insurance industry plays a vital role in the economy: providing necessary and desirable products and services, employing hundreds of thousands of people, promoting economic stability and growth, fostering competition and community. The insurance industry helps individuals, businesses and economies grow and develop by mitigating risk; it is fundamental to the welfare of society. As a representative of this group, the insurance producer has a duty to support and promote the industry’s role and the service it provides to the public at large. In so doing, the producer will serve the public good.


The Insurance Industry and the Public

Serving the public good also requires the producer to speak out and resist any action on the part of the industry he or she represents that would undermine its position of pubic service. For example, if producer knows that his company is engaging in unfair or unscrupulous claims or underwriting practices, doesn’t he have a responsibility to disassociate from that company or denounce its practices? Or if a producer is encouraged by his company to market and present permanent life insurance policies as “tax-deferred retirement savings plans” – doesn’t he or she have a duty to refuse?


Many of the concerns that regulators and the public have with regard to the insurance industry and many of the issues that have led to regulatory measures stem from the activity of insurance companies and a less than ethical culture that is passed on to or shared with their agencies and field forces. More than any one individual producer, insurance companies have the power to affect – positively or negatively – public perception and the industry’s reputation. An insurer that is truly committed to serving the public good will put consumer and client interest first and, as part of its mission, will insist on delivering value and the best of service. It will encourage – or better, demand – its agents and associates do the same. It will not stand on the legal argument that the agent is an agent of the company and distort the requirement that the agent must act on its behalf to the detriment of the client. The interests of the consuming public and the interests of the insurance industry are closely aligned. The best insurance companies recognize that their success depends on how they view and treat their clients and how they live up to the promises they’ve given. These companies will survive and thrive. Those that do not aspire to the same level of public service are likely to be winnowed out – but perhaps not before prompting regulators to enact more laws and compliance measures.


With this in mind, we can say that the first duty a producer owes to the public is to associate with companies that maintain high ethical standards and align themselves with the ideal that their first concern is the best interest of insurance buyers and owners. From that position, the producer is better situated to strive to support the public – and, accordingly, the industry –in the following ways:

1)    To act in all ways as to reflect credit on his or her profession

2)    To be committed to informing and educating the public about insurance products and risk management

3)    To strive to improve the function of insurance products and their application

4)    To promote the service of insurance in providing financial security

5)    To respect and honor all who work in the industry, competitors as well as colleagues

6)    To adhere to an ethical and principles-based approach to self-regulation and self-compliance.


Insurer Responsibilities

Ethics in the insurance industry is not a one-way street. Carrying the mantle of ethical responsibility does not fall solely on the shoulders of the producer. Insurance companies, large and small, have tremendous responsibilities to all individuals and parties they affect: their policyowners, their producers, their employees and the public at large. These responsibilities go well beyond the minimum mandated by law or by the terms of the policies they put into effect; they extend to the higher mark of defining and embracing principles and practices that support fairness and integrity in all business dealings and encourage competition. Having a framework of such principles then creates the right environment and provides the path toward fair, legitimate and appropriate business practices and market conduct. Insurance companies must lead by example. Only if the company maintains the highest standards for service and commitment can it expect the same of its producers and agents.


IAIS Principles of Conduct for Insurers

In late 1999, the International Association of Insurance Supervisors, a body representing insurance supervisory authorities in some 180 jurisdictions from around the world, set forth its “Principles for the Conduct of Insurance Business.” The purpose of this document is to promote appropriate conduct of the insurance business, thereby enhancing insurer, producer and consumer relationships and strengthening consumer confidence in the industry as a whole. To this end, the Association set forth nine principles, paraphrased below, by which all insurance companies should abide. (The full text of this document can be found on IAIS’s website.)

1)    Integrity: Insurers have an obligation to avoid misleading and deceptive acts or representations. Insurers should not seek to exclude or restrict any duty or liability to a customer, which it has under a legislative framework and/or accepted practices.

2)    Skill, care and diligence: Insurers have a duty to act competently and diligently with regard to all transactions between themselves and the customer. Where appropriate, an assessment of the customer’s individual requirements should be made to determine what coverage is necessary. It also includes arranging adequate protection for a customer’s assets when responsible for them in the context of the insurer’s legal structure and the business it undertakes.

3)    Prudence: Insurers should conduct their business with prudence, including maintaining adequate financial resources and effective risk management systems.

4)    Disclosure: Insurers should pay due regard to the information needs of their customers, including the communication of:

v relevant and meaningful information to enable the customer to make an informed decision;

v All benefits and risks;

v The obligations of both insurer and customer

5)    Information about customers: Because the relationship between insurer and customer should be one of trust, the insurer should obtain sufficient information about the customer to assess his or her insurance needs. Information, which a customer expects to be confidential, should be treated as such.

6)    Conflicts of interest: Insurers should avoid conflicts of interest. When conflicts do arise, the insurer should ensure fair treatment to all its customers through disclosure, internal rules of confidentiality and/or declining to act. An insurer should not unfairly place its interest above those of its customers.

7)    Relationships with regulators: Insurers should deal with their regulator in an open and cooperative manner and keep the regulator promptly informed of significant events.

8)    Complaints: Insurers should deal with customer complaints effectively and fairly, and have a simple, equitable and easily accessible process of dispute resolution. It is also advisable that in addition, a neutral body, independent of the insurer, be set up as an alternative dispute resolution mechanism.

9)     Management and control: An insurer should keep effective control over its own affairs, having directors and managers who are fit and proper for their roles, keeping adequate and orderly records of its business and operations and operating to meet the standards and requirements of the regulatory system.


IMSA Principles of Ethical Conduct

Closer to home is IMSA – the Insurance Marketplace Standards Association, an industry organization with the stated mission to strengthen trust and confidence in the life insurance industry. IMSA-qualified companies commit to maintaining high ethical standards and to being fair, honest and open in the way they advertise, sell and service their products. Acquiring IMSA certification is an indication that a company adheres to high ethical principles and standards with regard to its market conduct practices.


Following are the IMSA principles. (The full text of these principles and related commentary can be found on IMSA’s website.) All IMSA-certified companies subscribe to these principles and commit themselves “in all matters affecting the sale of individually-sold life insurance, long-term care insurance and annuity products.”

1)    To conduct business according to high standards of honesty and fairness and to render that service to its customers which, in the same circumstances, it would apply to or demand for itself.

2)    To provide competent and customer-focused sales and service.

3)    To engage in active and fair competition.

4)    To provide advertising and sales materials that is clear as to purpose and honest and fair as to content.

5)    To provide for fair and expeditious handling of customer complaints and disputes.

6)    To maintain a system of supervision and review that is reasonably designed to achieve compliance with these Principles of Ethical Market Conduct.


Avoiding Problems



Defining the ethical responsibilities a producer has and the various parameters they entail is only a small aspect of a large issue. One of the practical applications of ethics is how it works to prevent and avoid the pitfalls that could lead to problems for one’s clients, which would consequently translate into problems for the producer. The force of embracing a code of ethics to guide one’s professional practice does not ensure that mistakes won’t be made or errors in judgment won’t occur. They will; to err is human. However, basing one’s actions and service on a foundation of ethical principles and ethical decision making will lessen the opportunities for such mistakes and errors and will likely mitigate their impact.


Changing Times, Changing Issues

Over the years, the landscape in which insurance producers work has changed dramatically, bringing with it new challenges and opportunities. It is not always apparent that these changes may also create a climate that could lead to or even encourage unethical practices. For example, the economy of a decade or so ago, when interest rates were high and consumers were turning away from permanent life insurance, prompted the design of new and innovative life insurance products. Whereas this innovation was good and created far better offerings, it also had unintended consequences.


The economic environment and the products that were generated during this time led many insurers and producers to counsel their clients to replace their existing policies. High interest rates and the enhanced features and flexibility of these new products encouraged a different emphasis in their marketing and selling. Instead of focusing on the products’ primary purpose – death protection and risk management – companies and their producers instead emphasized investment options, accumulation, vanishing premiums and (as it turned out) unattainable projected investment returns. Insurance policies were sold by illustration; policy guarantees were ignored in favor of potential results. The true reason why people should purchase life insurance – to obtain financial protection – became secondary to a product’s potential as an “investment.”


When the interest rate environment changed and policies did not perform as consumers expected, the consequences were devastating. The public lost faith in the industry; the life insurance product, having competed as an investment vehicle, began to lose its unique identity for risk management; and the true purpose and function of the role the insurance industry plays – underwriting risk and providing financial protection – was undermined and devalued. Even today, the industry is still feeling the effects of this and, predictably, must now conform to an array of compliance and regulatory measures designed to prevent similar activity and outcomes.


The challenges today are different; ethical issues (as well as regulatory oversight) ebb and flow with the changing times. In this chapter, we will focus on a few that are in the spotlight as well as some that are ever-constant: suitability, replacement, standards of care and negligence.



In the life insurance arena, the issue of suitability is on the front burner. In this context, suitability refers to the relationship between a client’s needs and capabilities and an insurance producer’s product recommendation. From a regulator’s point of view, it is central to the issue of market conduct; to the ethical producer, it forms the core of his or her practice. More and more, suitability is being touted as a condition of required practice standards for various professional designation organizations.


Today’s consumer has many options. That in itself can create challenges. When it comes to life insurance and other financial products, the consumer is not always in the best position to make appropriate choices. Understandably, the average consumer does not have the level of knowledge or expertise that would otherwise form a purchasing decision; consequently, he or she relies on the advice and guidance of the practitioner. Theoretically, if consumers did have the requisite knowledge and skill, they would be able to bypass the producer and purchase the needed product directly. Thus, not only is it the producer’s duty to counsel clients appropriately, it is simply good business practice.


Suitability Standards

Suitability is not a black or white issue. A product that is appropriate for one individual will not be appropriate for another. However, suitability is not complex. It relies on a simple premise, one with which insurance producers are – or should be – very familiar: the age-old standard of need-based selling. The standards of suitability reject product pushing; they focus on the client and his or her unique circumstances. Beyond that, suitability requires that the client understand and accept the product (including any limitations that it might have) and have the means (financially and otherwise) to manage the product.


Adhering to standards of suitability requires that insurance producers reflect on and analyze all of the following:

1)    What are the client’s needs?

2)    What product can best address those needs?

3)    Is this product that I am recommending in the client’s best interest? Will it address the identified needs?

4)    Does the client fully understand the product, its provisions and its applications?

Let’s take a look at how these questions can form the basis of a sound approach to product recommendations.


Determining Client Needs

Seeking and determining a client’s specific needs are the first steps in every insurance transaction. This data “input” and analysis attempt to determine if the needs and objectives a client has can be aptly met with the provisions and applications of an insurance product and the purpose it is designed to serve. Since the primary purpose of insurance is to provide financial protection then it follows that insurance is suitable only if the client has a need for financial protection.



The means by which a client’s needs are determined is through the process of fact-finding. Fact-finding seeks to uncover and address the issues of client goals, attitudes and objectives, problems and concerns, experience and circumstance, risk and protection and his or her comfort zone. It seeks to glean an understanding of the client’s insight and understanding of his or her own situation. Based on that information, a client profile will emerge and needs and problems can be identified and analyzed. From that analysis, a product or service solution can be recommended. Not insignificantly, a thorough fact-find may reveal future opportunities for sales and service. It is the foundation of the producer/client relationship.


Most companies provide their producers with fact-finding forms that are designed to solicit this kind of information. But as experienced producers know, questions and discussions beyond the parameters of a fact-finding form may be called for. Questions that probe for a prospect’s feelings and attitudes will help in the assessment of needs and priorities. This approach also helps build trust and confidence and encourages the client or prospect to become emotionally involved with the discovery process.


For example, a routine sales call on an older client indicates a potential need for long-term care insurance. The following kind of probing questions would be warranted:

v Tell me about your current assets: how are they invested? Who owns them? For what primary purpose do you intend them to serve?

v What about your current income – is it adequate? Is it safe? Would it cover the costs of two or more years of health care services? Is any portion of your retirement savings reserved for long-term care health needs?

v How are your pension benefits arranged? Will they end at the death of the first spouse to die?

v Do you want to leave an estate to your children or your spouse?

v Have you or your family had any experience with a long-term illness? What did you find?

v Tell me what you know about Medicare. Are you familiar with its limits?

To serve its full purpose, fact-finding should not be limited to facts. It should include seeking an understanding of the client’s values, experience, comfort and concerns. The information gathered in the fact-finding process should be documented in detail, and become part of the client’s file. It serves as the basis for a product recommendation and should be able to support that recommendation in all ways.


Making the Product Recommendation

Presenting the appropriate product solution to a client’s needs assumes that the product will specifically address those needs. Recommending a permanent product solution to a 36-year old divorced father who has clearly indicated that his only objective in purchasing life insurance is to ensure that his 12-year old son will have money to attend college in the event the father dies is probably not suitable; for this purpose, a term policy would be more appropriate.


But a suitable recommendation goes beyond advancing a particular product; it requires that the producer makes certain that the client fully understands what the product will – and will not – provide. Suitability demands not only that the product matches the need but also that the client accepts the product’s drawbacks or limitations as well as its benefits. This requires that the producer knows what these limits are and the implications they have as to how the product would serve the buyer. Most importantly, the producer has the duty to fully disclose these drawbacks and their potential effects. Only when the client is fully aware of the product’s features and limitations can a recommendation for purchase be made.


Term: Does the Client Know . . .

For example, if the recommended product is a term life policy, the producer must be confident that the client understands that coverage may expire before death occurs; that there is no cash value accumulation and thus no savings element; and that renewal beyond the original term will require an increase in premium. It is only if these limitations are in step with the client’s objectives and would not undermine his or her goals should the product be placed.


Permanent: Does the Client Know . . .

If the recommended product is a flexible premium universal life policy, the producer must ensure that the client understands that the policy’s primary purpose is long-term death protection, not accumulation; that targeted premium amounts could be affected by adverse market conditions, thereby requiring larger payments to keep the policy in force; that the primary purpose of the cash value account is to fund the cost of the insurance protection – that withdrawals will affect the policy’s death benefit, mortality costs and the cash value available to earn interest; that the policy’s guaranteed minimum rate and its current declared rate are not the same; that early surrender of the policy may be subject to surrender charges.


Variable: Does the Client Know . . .

If the recommended product is a variable life product, the producer must determine that the client understands and accepts the risk of tying a portion of his or her insurance coverage to the performance of non-guaranteed investment accounts; that the primary purpose of the product is long-term protection, not investment or asset accumulation; that the assumption of risk associated with the product’s value lies with the client, not the insurer; that a portion of the premium payment is directed to the cost of insurance and administrative fees; that the growth of the policy’s cash value will not be the same as the growth on non-insurance products invested in similar assets.

By its very nature, variable life insurance products entail risk and volatility – and it is the policyowner who bears the risk, not the insurer. This is something the client must understand. Variable insurance premiums are invested in the insured’s separate accounts, which are valued in units. If $5,000 is deposited into the policy and the aggregate unit value of the separate subaccounts is $20, the client has purchased 250 units. Assume that 30 days later, the unit value drops to $15. Policy fees of $150 are due and 10 units are liquidated to cover these costs. The client now has 240 shares, and the value of the policy is $3,600. How would the client react to this scenario? Does he or she fully understand and accept the risk? This needs to be determined before the policy is purchased.


The risk that variable life insurance products entail places them in the arena of SEC-regulated securities; consequently, their sale must conform not only to state insurance laws and regulations but those imposed by the SEC and the NASD as well. Chief among these is that a prospectus must accompany variable life insurance sales. A prospectus provides full disclosure about the product’s operation: its expenses, fees, surrender charges, separate account investment options, etc. Prospective buyers should be encouraged to read these documents thoroughly, but many do not. Thus, the producer should take the time to disclose this information personally – with the understanding that he or she understands the product enough to do so.


The majority of variable life insurance products purchased today is variable-universal, meaning that the products offer death benefit options, premium flexibility and monthly accounting in addition to the various investment options. This adds an additional layer of complexity to the product, which the producer must be willing – and able – to explain.


NASD Guidelines for Variable Life Insurance Sales

The NASD has set forth strict guidelines for the presentation and sale of variable life products, as explained in its Notice to Members 00-44. Following are the broad parameters of the prescribed market conduct activity that the NASD requires of its producers in this regard. Note that these guidelines represent the minimum level of ethical standards to which a producer should adhere.

1)    Prior to the execution of a recommended transaction, the producer must make reasonable effort to obtain information concerning a customer’s financial and tax status, investment objectives, age, annual income, net worth, number of dependents, investment objectives, sources of investment funds, investment experience, existing investments, existing life insurance, time horizon and risk tolerance.

2)    The producer should document this information in a customer account form and submit it with every application. A registered principal should review the form and verify that the recommendation for both the policy and the sub-account allocation is consistent with the customer’s investment objectives and risk tolerance.

3)    The producer should consider whether the customer desires and needs life insurance and whether he or she can afford the premiums necessary to keep the policy in force.

4)    Producers should be thoroughly familiar with the features and costs associated with each recommended variable life policy, including its surrender charges, premium and cash value charges, separate account charges underlying fund fees, sub-account options, loan provisions, free-look periods and policy premium lapse periods. The producer should clearly convey such information to the customer.

5)    Any communication regarding the tax-deferral benefits of the product should not obscure or diminish the importance of its life insurance protection features. Any communication that overemphasiz­es the investment aspect of the policy or potential performance of the subaccounts may be misleading.


Annuity: Does the Client Know . . .

If the recommended product is a deferred annuity, the producer should make sure the client understands the long-term commitment the product requires and that the need it is designed to address must have a distant horizon; that early surrender or withdrawal would trigger surrender charges and a possible tax penalty; that there is no protection for the product’s values if it is a variable annuity; that upon distribution, income taxes will be due on the product’s return; that a portion of the product’s premium is directed to cover the cost of its death benefit.

Senior Protection in Annuity Transactions Model Act


The subject of the suitability of annuities for seniors has long been a concern to regulators and, in 2003, the NAIC created model legislation that specifically addresses this issue. The purpose of the requirements is to promote appropriate sales practices in the recommendation and placement of both fixed and variable annuities to seniors. Because most annuities are issued with provisions that impose penalties or charges if values are withdrawn from the contract during the first five to 10 years, the concern is that older individuals who are retired may be in need of greater liquidity or ready access to their money than an annuity provides. Similar to the NASD requirements for the sale of variable life, the rules state that insurance agents representing annuities with clients age 65 or older must have reasonable grounds for believing that the annuity is appropriate, and only after the producer obtains the necessary client financial information for determining investor suitability. The rules also say that producers do not have obligations to the client if the senior refuses to provide pertinent information or decides to enter into an insurance transaction that was not recommended by the producer.

Making Suitable Recommendations

As it turns out, many of the problems that insurance producers have encountered are less product-related than suitability-related. Whereas the recommended product will perform as it was designed to do, the issue is such that it will not provide what was needed or anticipated. For this reason, suitability requires that producers fulfill three very important duties.

1)    First, they must commit to having thorough and complete knowledge of the products they represent and their application. Good intentions and the sincere desire to serve the client’s need are no substitutes for being well informed and knowledgeable.

2)    Second, they must explain to their prospects and clients all of the products’ features and disclose their limitations. Producers must understand the implications that might derive from a given product’s design and weigh those against the client’s needs and capabilities.

3)    Finally, they must insist that clients are fully aware of and understand the products before they are purchased. Only when the producer feels assured in this regard should the recommendation to buy be made.



In addition to suitability, the issue of policy replacement has been a great source of concern. As some pundits have noted, it’s not often that the terms “replacement” and “ethics” walk hand-in-hand. Replacement, defined as the surrender or modification of a client’s existing insurance policy or contract for a new policy or contract, is not illegal, but almost all states have enacted specific requirements that are designed to regulate and monitor its practice because it is ripe for misuse and abuse. It’s no secret that producers earn high first-year commissions on new policies.


The fact that the new generation of life insurance product contains innovative features, benefits and flexibility that their older counterparts do not is not, in and of itself, reason to propose a replacement. There are many consequences of a policy replacement with which the producer should be very familiar and the client be made aware. For example:

v The existing policy’s accumulated values will be lost or diminished;

v The existing policy may have passed the period during which restrictions such as surrender charges, the suicide exclusion or incontestable provisions apply and a new policy would impose those restrictions all over again;

v A new contract will impose new sales charges;

v An existing contract may contain features or options that are no longer available;

v Changes in the client’s health or age which would have no impact on the existing policy would pose problems under a new contract;

v The features or advantages of a new policy that may represent reasons to replace actually may not be available until the policy has been in force for a significant period of time.

v The client could lose tax advantages that are no longer available but were grandfathered under the existing contract.


The Primary Issue: The Client’s Interest

The central issue with regard to insurance policy replacement is the suitability of the intended transaction: is it in the client’s best interest? A good way to assess this is to assume first that it is not. In other words, when a replacement sale is contemplated, the ethical producer must start from the position that replacement is generally not in the client’s interest. From that perspective, the producer then looks at reasons and circumstances that would point to a different conclusion. If the reasons and circumstances to replace a product are compelling, if the client’s needs and objectives have so changed and there is no question that new policy would be in the client’s best interest and advance his or her objectives, then a replacement sale may be appropriate.

Though by no means complete, the following list of points to address will help guide the producer in assessing whether or not a replacement should be recommended.



Points to Consider and Compare: Existing Policy vs. New Policy


Point for Consideration

Existing Policy

New Policy

Cost of coverage and premium differences due to client’s older age



Guaranteed and nonguaranteed death benefits



Guaranteed and nonguaranteed cash values



Surrender charges and the surrender charge period



Company ratings



Historical interest rate crediting



Historical dividend results



Mortality and expense projections



Exclusions and limitations



Client risk tolerance



Client objectives: protections vs. accumulation vs. liquidity



Effect on any outstanding policy loans



Policy riders that might be lost



Grandfathered status of the policy’s provisions (or the client’s status) that might be lost



Client health, insurability and underwriting status





Regulations Governing the Replacement Sale

Most states have enacted strict regulations that govern replacements, applicable to both insurers and producers. Many of these regs are based on the NAIC “Life Insurance and Annuities Replacement Model Regulation,” which sets forth the responsibilities of producers, replacing insurers and existing insurers, all of whom have a duty to the consumer in a replacement situation. The purpose of the regulations is to help ensure that consumers understand the possible implications of replacement sales, thereby enabling them to make informed decisions.


Though the precise rules regarding replacements vary from state to state, the following outlines the procedures most states have adopted:

·         The potential buyer must be asked whether he or she has any existing policies. (This question may be included on the insurance application.) If the buyer answers “yes,” a “Notice Regarding Replacement” must be given to the buyer. (A copy of the NAIC’s model notice is reproduced at the end of this chapter.)

·         On the “Notice Regarding Replacement,” all life insurance and annuity policies that are to be replaced are to be identified and both the buyer and the producer must sign the notice. The buyer is to be given copies of the sales material that was used in connection with the replacement sale.

·         The replacing insurer must notify the buyer that after policy delivery, he or she has a certain period of time during which the replacement policy may be returned for a full refund. The insurer also has the responsibility to review the procedures the producer followed to determine that the replacement conforms to all requirements.

·         Within a certain period of time after receiving the application for a replacement policy, the replacing insurer must notify the existing insurer that its policy is to be replaced and provide a copy of the replacing policy summary.


Standard of Care

Like so many aspects of ethics, standard of care cannot be fully or absolutely defined, but it is without a doubt a responsibility that producers have, especially with respect to their clients. When acting as a professional – which clients expect – a producer is required to apply standards of care and service that are acquired through special knowledge, training, education, skills and experience. Clients have a right to rely on insurance producers to apply that knowledge and skill to the very best of their abilities – and to assume that the producer is acting in their best interest.


Unfortunately, the business of insurance is not fully recognized as a “profession” and accordingly, there are no established standards of professional conduct and activities as there are in “learned” fields such as medicine, law or engineering. This leaves an area wide open for decisions as to what constitutes “standard of care” – decisions which are often left to courts of law. One’s own interests and positions will certainly affect the definition of standard of care. For example, a client who finds that the benefits of his homeowner’s policy will not fully cover his property which was lost to a fire and is considering suing his agent will likely have a different view of standard of care than the agent (and the insurance company that issued the agent’s errors and omissions coverage).


This brings us to the topic of “special relationship.” Broadly speaking, special relationship is a legal term that refers to the extension of service beyond the basic duties that one owes and gives to clients. Accordingly, it entails a higher level of responsibility. That responsibility finds definition not only in good business practice but also in law.


Special Relationship

At the very base level, an agent or broker owes a client the basic duty of exercising good faith and reasonable skill, care and diligence in order to procure quality insurance in accordance with the client’s instructions, from financially secure companies. The parameters of this level of service are based on the rationale that agents and brokers are not financial planners and they have no duty to advise or guide a client to seek different or additional coverage. However, reality is such that this standard is very difficult to limit oneself to; more and more, consumers see their producers as advisors and rely on them for much more than procuring insurance coverage. The demands of a competitive marketplace require more than basic service. And producers themselves – those who see themselves as professionals and aspire to greater levels of service – would have a hard time confining their practice and activity to the basic standard of service.


As the law sees it, any of the following could elevate the producer into a special relationship, which would create a greater duty of care:

v The receipt of compensation beyond the customary commission paid on premiums;

v Providing advise or counsel on insurance or coverage issues;

v Representing oneself as a highly skilled expert;

v Assuming broad discretion in placing coverage;

v A “course of dealing” with a given client over an extended period of time, which can be construed as having put the producer on notice that the client relies on the producer’s advice and knowledge.

Thus, it’s easy to see that as the level of professionalism increases, so does the level of expected service; as the expected level of service increases, so does the required standard of practice and responsibility. It’s in this area that providing the appropriate level of service to a client could pose problems for agents or brokers if they don’t live up to the expectations that they have set. In some situations, the producer may find himself or herself held to a higher standard of service due to passivity on the client’s part, thus leading the producer to assume a more active role in the relationship. In any event, with increased service comes increased responsibility.


Case in Point #1

The insured had been a client of an insurance brokerage business for five years, having purchased commercial insurance coverage for its plant, when in 1999; a fire caused over $1.3 million in damages. The insurance coverage included a coinsurance provision and the insurer paid only $750,000 against the claim. The client sued the broker for the difference, claiming all of the following: that it negligently failed to obtain an agreed value endorsement to cover the coinsurance provision, that it negligently failed to advise the client that an agreed value endorsement should have been obtained and that it failed to properly advise the client of the effect of the coinsurance provision without an agreed value endorsement.


The broker’s argument was that the client’s executives had failed to read the insurance policy and that it should not be held responsible for this. Further, the principal broker on the account testified that he did not advise commercial clients as to whether coverages were adequate or not for their businesses; it was his standard practice to advise clients as to what coverages were available and to let the client determine what amount and what coverage was desired. The insurance policy contained an explanation of the coinsurance provision, providing examples of how it would affect coverage; it also included a statement that an agreed value endorsement could be obtained if the insured completed a business income worksheet. The broker had sent the client a business income worksheet for the renewal coverage; it was never returned. The trial court sided with the broker, agreeing that the uninsured loss was a result of the client’s failure to read and understand the policy.


However, the decision was appealed and on appeal, it was reversed. One of the reasons for the reversal was that the broker handling the account was determined to have created a fiduciary relationship with the client. This was evidenced by the fact that while the broker testified his policy was to simply advise clients as to what coverages were available, he also at one time convinced this particular client not to reduce its then level of business income loss coverage. This, the court held was a “material issue of fact” that a fiduciary relationship existed. As it stated, “[The broker] cannot . . .say that it was appropriate to encourage his client to increase coverage in one circumstance and then state he never became involved in a business decision.”


The appeals court further found evidence of a material fact in that the policy included a coverage summary page stating that the insured had $1.9 million in coverage for the “actual loss sustained.” This confused the client as to the effect of the coinsurance provision, leading them to believe that they had up to $1.9 million in coverage for the full value of the actual loss sustained.

Wanner Metal Worx, Inc. v. Hylant-Maclean, Inc., No. 02CAE10046, 2003


Case in Point #2

The insured contacted his agent to renew his homeowner’s policy, asking for “proper and adequate coverage.” To determine this, the agent used a computerized program, which offered an estimate of the proper level of coverage, as was commonly her practice. Based on this, the homeowner’s policy was issued. It was only after a fire that destroyed his house that the insured found out that he was underinsured. He sued his agent for the amount of underinsurance.


The agent asked for a summary judgment, which was denied. The court ruled that “once the agent, in response to the [insured’s] request for ‘proper and adequate’ coverage, undertook to estimate the replacement value of the property to be insured, she owed [the insured] a duty to perform that estimation with a reasonable degree of care and accuracy. Whether or not the agent did so would be up to a jury to determine.

Stephens v. Hickey-Finn & Co., Inc., 261 A D 2d300, N.Y.S. 2nd 411, 1999


Case in Point #3

The insured purchased two life insurance policies: one for $1 million, the other for $1.5 million, with annual premiums of $10,700 and $16,000 respectively. These premiums, the agent stated, would “disappear” after nine years as the expected policy dividends would be applied to cover the cost of the policies. At delivery of the $1.5 million policy (the other was delivered directly to the beneficiary and the insured never saw it), the contract included an illustration of projected premium payments for 10 years. The illustration was notated with a “supplemental footnote page” which stated, “This illustration is not a contract. It is a projection of values based on a combination of guaranteed values and contingent values such as dividends. Dividends and dividend purchases are neither estimated or guaranteed, but are based on current company experience.”


Six years later, the insured’s agents informed the insured that premiums would have to be paid for a number of years longer than what was originally represented. The insured brought suit against the agents and the insurance company, claiming breach of contract, fraud and negligent misrepresentation. Though the insurer and agents moved for and were granted summary judgment dismissing the claims, this was reversed on appeal.


The appellate court noted that when the policies were first discussed, the original policy illustration did not include the supplemental footnote page and its disclaimers. That fact, as well as the insured’s allegations that the agents had cultivated a relationship of “trust and confidence” through their self-proclaimed expertise and that they had “held themselves as highly skilled agents possessing the special knowledge and expertise to interpret and understand the . . . mechanics of disappearing premium policies” were enough to create an issue of fact as the whether the insured reasonably expected the agents to inform him if the delivered policy was different from the discussed policy.

Cooper v. Berkshire Life Ins. Co., 810 A 2nd 1045 (Ct. of Sp. App. Md 2002)


Making the Choice

Producers have a choice: they can elevate their practices to a higher level of service and care in which case they will owe and will be bound to provide that higher service, or they can choose to conform to the requirements of a lesser service benchmark. The latter is safer but it also reduces one’s opportunities; the first requires greater dedication, skill and knowledge. Much depends then on how one views one’s service: as a limited arena that is predicated on avoiding potential liability exposure or as a path toward increased business and greater opportunity.


Those who choose the path toward greater opportunity are first to be congratulated and second to be advised to follow solid practice standards to ensure that clients are provided with due care and service. To this end, the first step is to be aware of the issues and circumstances that often lead to charges of lack of service; from that awareness one can develop the associated and appropriate standards and procedures that will decrease the likelihood that one’s activities will fall short of the mark. Based on agent errors and omissions coverage claims, the following are common problems and mistakes that lead to disputes with clients:

v Failure to procure insurance, to procure adequate insurance or to procure excess insurance when needed

v Creation of a coverage gap

v Inadequate policy form review, analysis and /or design

v Placing insurance with insolvent carriers

v Delays in processing

v Failure to renew

v Failure to notify an insured of coverage cancellation

Many of these errors arise due to lack of skill, training or education. Some, however, occur simply because of negligence. Though negligence – or more precisely, its avoidance - would be considered a standard of care, it is worth a brief discussion as it represents fertile grounds from which serious problems can stem.



In the insurance arena, negligence has proven to be the source of many problems. The law defines negligence as the failure to exercise the degree of care considered reasonable under the circumstances, resulting in an unintended injury to another party. Many of the issues stemming from negligence are not those associated with malicious or gross intent, but rather with neglect or carelessness, leading ultimately to underperformance. It is this carelessness or underperformance of duty that produces harm.


Consider, for example, the agent who writes a $300,000 life insurance policy and gives the applicant-insured a binding receipt. The agent explains that the receipt provides coverage from the point of application through the underwriting period, but neglects to mention that it limits the insurer’s liability during this period to $100,000. Before the insurer is able to determine the insured’s eligibility for coverage, the insured is killed in a car accident. The insurance company pays the policy’s beneficiary $100,000. The insured’s beneficiary sues the agent for the full $300,000.


Now assume an agent writes a workers comp policy on a house painter who owns and operates a small painting company. After having insured the business for some time, the company decides not to renew the coverage due to the number of claims presented. The notice of nonrenewal is sent to the agent for delivery to the client. The agent sets it aside; it soon becomes buried and forgotten. Three weeks after the policy expires, an employee of the painter falls from a ladder and is seriously injured.


In both of these examples, the wrong done to the client was not intentional; it was simply the result of carelessness or neglect.

In an article published by International Risk Management Institute, Edgar H. Lion, CEO of Alpine Risk Management Corporation, a consulting company specializing in E&O risk management, loss prevention and rehabilitation efforts for insurance agents and brokers, summarized the findings of his company’s research into 20 years of its insureds’ claims.* With regard to claims associated with negligence, Alpine classifies the specific problem-causers into seven “lack of” categories. They are:

1)    lack of action

2)    lack of attention

3)    lack of communication

4)    lack of concern

5)    lack of consistency

6)    lack of control

7)    lack of knowledge

In the article, the author offers this advice: 90 percent of all agent and broker E&O claims could have been avoided through the application of consistent, principled practices and procedures, not only in the field but in the agency. This would require consistent and diligent follow-up and follow-through, all thoroughly documented. Certainly, paying close attention to one’s attitudes, actions and procedures as they relate to the seven areas listed above would go a long way, not only in avoiding liability but also in elevating one’s level of service.

FN * “Insurance Agents and Brokers E&O Claims,” by Edgar H. Lion, JD, Insurance Risk Management Institute, November 2000.


Practical Solutions to Avoiding Problems

As has been noted, adhering to principled, ethical standards will not prevent mistakes from happening, but it will certainly lessen their chances and their impact. The vast majority of a producer’s responsibilities will be appropriately and adequately fulfilled if they conform to ethical – and common sense – levels of service and diligence. Ethics will also provide guidance when conflicts of interest arise or when difficult choices have to be made.


Evaluate the Options

When a producer is faced with an issue that is clear-cut, the resulting activity is usually apparent. When confronting or solving a dilemma whose solution is not so apparent, it is helpful to analyze and evaluate the options and then, guided by one’s values and ethics, to follow the path that consequently emerges.


This is not always an easy process, but it should be followed. The following may help. For any given dilemma, these questions can be used to assess the options and determine the appropriate action:

·         What are the facts of the situation?

·         Who has a stake in the situation and how will they be affected?

·         Does any option lead to an action that is beneficial for all? What is each interested party entitled to?

·         What are my first responsibilities and duties?

·         What benefit will derive from a given action? To whom? Who will be harmed by a given action?

·         Is the action fair? Is it required (either by law or by principle)?

By far, the toughest ethical issues are those that pit one’s own values against each other. For example, how does one choose between truth and loyalty? Or between integrity and fairness? In these cases, Rushmore Kidder, a noted ethics expert and author of the book, Moral Courage, suggests that when the issue is one of “right vs. right” values, one can apply the principles of ethical resolution to help solve the dilemma:

v Do unto others what you would have them do unto you. – The Golden Rule

v Do what’s best for the greatest number of people. - Utilitarianism

v If everyone in the world followed this rule of action I am following, would that create the greatest good? - Kant

Document, Document, Document

In practical terms, one of the best ways to avoid misunderstandings and problems in one’s business activity is to adopt the practice of documenting any data that involves a producer’s actions and recommendations. For example, if a given product recommendation is to be based on a client’s needs and objectives, documentation of those needs and objectives will provide the necessary “proof” that establishes the suitability of producer’s recommendation. Such documentation should not be confined to mere notations; it should be written out in such a way that it can be reviewed and confirmed by the client. This will also give the client an opportunity to expand or clarify any intentions or expectations he or she has.


By the same token, it’s a good idea to document any product recommendation the producer makes which the client declines. This supports the responsibility that producers have when they assume the role of “expert advisor” as opposed to mere intermediary. Ideally, the documentation should include not only that the producer recommended a specific coverage but why, as well as the client’s initials or signature attesting to his or her decision to decline.


If the producer needs to limit the scope of his or her relationship or role with any given client that should also be put into writing. This documentation should be very specific as to what the producer will and will not do. This will serve to set the client’s expectations.


Provide Follow-Up Service

It should come as no surprise that ongoing follow-up and ongoing contact with one’s clients is a recommended activity that can serve to identify and forestall any issues before they turn into problems. Insurance producers are taught the value of follow-up service as part of their sales training. It offers the chance to provide added value to the producer/client relationship as well as seek opportunities for additional sales and service. It also gives clients the chance to express any concerns or questions they have with regard to their existing coverage. Keep clients informed and give them frequent opportunities to tell you when they are – and are not – happy.




NAIC Notice Regarding Replacement of Life Insurance or Annuities


Important Notice

The applicant and the producer must sign this document, if there is one, and a copy left with the applicant.


You are contemplating the purchase of a life insurance policy or annuity contract. In some cases this purchase may involve discontinuing an existing policy or contract. If so, a replacement is occurring. Financial purchases are also considered replacements.


A replacement occurs when a new policy or contract is purchased and, in connection with the sale, you discontinue making premium payments on the existing policy or contract or an existing policy or contract is surrendered, forfeited, assigned to the replacing insurer or otherwise terminated or used in a financed purchase.


A financed purchase occurs when the purchase of a new life insurance policy involves the use of funds obtained by the withdrawal or surrender of or by borrowing some or all of the policy values, including accumulated dividends, of an existing policy to pay all or part of any premium or payment due on the new policy. A financed purchase is a replacement.


You should carefully consider whether a replacement is in your best interests. You will pay acquisition costs and there may be surrender costs deducted from your policy or contract. You may be able to make changes to your existing policy or contract to meet your insurance needs at less cost. A financed purchase will reduce the value of your existing policy and may reduce the amount paid upon the death of the insured.


We want you to understand the effects of replacements before you make your purchase decision and ask that you answer the following questions and consider the questions on the back of this form.

1)    Are you considering discontinuing making premium payments, surrendering, forfeiting, assigning to the insurer or otherwise terminating your existing policy?

         q YES         q NO


2)    Are you considering using funds from your existing policies or contracts to pay premiums due on the new policy or contract?

         q YES         q NO

If you answered “yes” to either of the above questions, list each existing policy or contract you are contemplating replacing (include the name of the insurer, the insured or annuitant, and the policy or contract number if available) and whether each policy or contract will be replaced or used as a source of financing:























Make sure you know the facts. Contact your existing company or its agent for information about the old policy or contract. If you request one, an in-force illustration, policy summary or available disclosure document must be sent to you by the existing insurer. Ask for and retain all sales material used by the agent in the sales presentation. Be sure that you are making an informed decision.


The existing policy or contract is being replaced because ______________________________ .


I certify that the responses herein are, to the best of my knowledge, accurate.


Applicant’s Signature and Printed Name                                                                                                                Date


Producer’s Signature and Printed Name                                                                                                                 Date


I do not want this notice read aloud to me.

_____ (Applicants must initial only if they do not want the notice read aloud.)


Page 2  Life Insurance and Annuities Replacement Model Regulation

A replacement may not be in your best interest or your decision could be a good one. You should make a careful comparison of the costs and benefits of your existing policy or contract and the proposed policy or contract. One way to do this is to ask the company or agent that sold you your existing policy or contract to provide you with information concerning your existing policy or contract. This may include an illustration of how your existing policy or contract is working now and how it would perform in the future based on certain assumptions. Illustrations should not, however, be used as a sole basis to compare policies or contracts. You should discuss the following with your agent to determine whether replacement or financing your purchase makes sense:

v Premiums:

Are they affordable?

Could they change?

You’re older – are premiums higher for the proposed new policy?

How long will you have to pay premiums on the new policy? On the old policy?

v Policy values:

New policies usually take longer to build cash values and to pay dividends.

Acquisition costs for the old policy may have been paid; you will incur costs for the new one.

What surrender charges do the policies have?

Does the new policy provide more insurance coverage?

v If you are keeping the old policy as well as the new policy:

How are premiums for both policies being paid?

How will the premiums on your existing policy be affected?

Will a loan be deducted from the death benefits?

What values from the old policy are being used to pay premiums?

v If you are surrendering an annuity or interest-sensitive life product:

Will you pay surrender charges on your old contract?

What are the interest rate guarantees for the new contract?

Have you compared the contract charges or other policy expenses?

v Other issues to consider for all transactions:

What are the tax consequences of buying a new policy?

Is this a tax-free exchange? (See your tax advisor)

Is there a benefit from favorable “grandfathered” treatment of the old policy under the federal tax code?

Will the existing insurer be willing to modify the old policy?

How does the quality and stability of the new company compare with your existing company?


© 2000 NAIC



Developing a Professional Code of Ethics



A course on ethics is just that – a course. Studying ethics is just that – studying. The true significance comes in adoption and execution. How does one develop a professional code of ethics and, more importantly, how can it be applied in a meaningful way? How can it be woven into the fabric of one’s day-to-day business practices?


In this section, we will attempt to outline a series of steps and suggestions to provide the means by which producers can define and put into effect their own code for principled and ethical conduct.


First Things First: Take Stock of Yourself

Ethics are built on values. Values are at the core of an individual’s being; they transcend all aspects of his or her life. It is not likely that one could create a professional code of ethics that would differ greatly from a personal code. So, the first step in developing a professional code of ethics is to identify and define the values you hold personally. What do you believe in? What principles or values do you hold dear? When you make a personal decision, what evaluations do you make? Try to define yourself in terms of what you believe are your principles, values and standards. Identifying and defining your values will create a foundation for your practice.


At the same time, ask yourself how you want to be viewed by others, such as your colleagues and your clients. Chances are, the values you hold and those that you want others to ascribe to you are not very different. If they are, there is the potential for ethical conflict.


Finally, ask yourself how you would define “professional success.” Self-interest and ethics are not necessarily competing notions. If your definition of personal professional success includes the same or similar terms you used to identify your values, your approach to developing a professional code of ethics will be far less difficult; your values and your view of professional success are in sync. If they’re not – if your core values and your vision of success are not closely aligned – then it will be difficult to pursue both with equal vigor. The one that is deemed more important will likely win out.


Through the Client’s Eyes

One of the best ways to define a code of professional ethics that serves not only your own values but the best interests of your clients is to look at your business, your role and your practice through their eyes. From their perspective, what actions do you, should you and must you take, not necessarily to do your job, but to serve their needs? To help with this assessment, let’s apply some hypotheticals.


Assume there are two documents. The first is titled “Checklist for Consumers – How to Select an Insurance Producer.” The second is called “Insurance Consumers’ Bill of Rights and Expectations.” They read as follows.


Hypothetical Document 1:


“Guidelines for Consumers – How to Select an Insurance Producer”

This document was designed to provide insurance consumers with guidance in selecting the right insurance producer.

1)    First, do you expect the person you select as your insurance producer to serve as an advisor – one who can and will counsel you wisely about insurance coverage, insurance applications, claims and how you can protect yourself? If so, ask the producer how he or she would serve this role.

2)    Ask to see a copy of the producer’s resume. Ask him or her specifically what services he or she provides, what experience he or she has and what his or her qualifications are.

3)    How did you learn about this producer – was he or she referred to your by someone you know and trust?

4)    Ask how long the producer has been in the business.

5)    Does the producer represent a single company? What rating does that company have? Is it licensed to conduct business in your state?

6)    Does the producer represent a number of companies? Which ones? What are the ratings of these companies? Are they licensed to conduct business in your state?

7)    Ask about any professional designations the agent has: CLU, ChFC, CFP, CPCU, CIC, etc. (Having earned a professional designation does not guarantee expertise in every area, but it is an indicator of the individual’s professional level and his or her commitment to professional development.) Ask about any professional or industry affiliations the producer has.

8)    Ask about the kind of clientele the producer has and how the producer’s products and services have helped them.

9)    Ask about the last professional development course the producer took or seminar he or she attended.

10) Ask the producer about the area of insurance coverage with which he or she has the most experience. Ask the producer about the area of insurance coverage with which his knowledge or experience is limited.

11) Ask the producer what role he or she plays in assisting clients with claims or with problems related to their accounts.

12) Ask the producer about any disciplinary actions that have been taken against him or her by the licensing body or professional association with whom the producer may be associated.


Hypothetical Document #2:


“Insurance Consumers’ Bill of Rights and Expectations”

The following sets forth the rights and expectations that consumers can reasonably have with regard to their relationships and dealings with insurance producers and insurance companies. The laws of the state in which your producer and company conduct business and the standards of practice that professional producer associations have set forth support these rights.


Right to Professional Service. You have the right to deal with insurance producers who consider themselves and conduct themselves as professionals. This means you have the right to expect your producer to have thorough knowledge of his or her products – its provisions and limitations – and to be able to competently advise you as to its applications. You have the right to a producer who acts with honesty, integrity and fairness.


Right to Competent and Skilled Service. You have the right to expect that your producer has attained the level of experience and knowledge required to serve you appropriately, adequately and effectively. You have the right to expect the producer to acknowledge openly any situation or service need that is beyond his or her expertise.


Right to Priority Status. You have the right to expect that your producer is acting at all times in your best interest and is serving first and foremost your needs.


Right to Fairness. You have the right to expect that your producer will treat you with fairness and objectivity in all aspects of your relationship.


Right to Information and Full Disclosure. You have the right to ask questions and assume that they will be answered honestly and accurately. You have the right to clear, straightforward information about your policy, your coverage and the claims settlement process. You have a right to ask and be informed as to how your producer is compensated. You have the right to expect that your producer will disclose any instance or circumstance, which may pose or suggest a conflict of interest.


Right to Privacy. You have the right to expect that the information you provide to your producer will be held by him or her in the strictest confidence and will be used only for the purpose issuing and servicing your insurance coverage.


Right to Quality Service. You have a right to expect quality customer service before, during and after your policy is issued. If you have a question or complaint, you have the right to contact your producer and expect his or her assistance in answering your questions or resolving your complaint.


Right to Adequate and Appropriate Insurance Recommendations. You have the right to expect that your insurance needs will be thoroughly reviewed and analyzed and that your producer will recommend appropriate and suitable coverage. To this end, you have a right to expect your producer to inform you of and guide you in fulfilling your role and responsibilities, which include:

v openly and honestly discussing your insurance needs and objectives;

v reassessing your insurance needs and goals in light of the product recommendation the producer makes to ensure that the proposed coverage is appropriate;

v carefully, fully and completely answering all questions on the insurance application and reviewing the document for accuracy before it is submitted;

v thoroughly reading the provisions of your insurance policy when it is delivered to ensure that you understand what it covers; if you don’t understand any aspect of your coverage, you will ask your producer to explain it to you;

v keeping your producer informed of any changes in your circumstances so that any appropriate adjustments to your coverage can be made.


Applying the Principles

With regard to Hypothetical Document #1, “How to Select an Insurance Producer,” take a moment to apply its questions and guidelines to yourself and your practice. If a consumer were to ask these questions of you, how would you respond? Do you feel that your answers reveal any shortcomings or what a client might perceive as inadequacies? Alternatively, do you find that there are specific points that reinforce or highlight your skills or abilities? The purpose of this document is to offer an exercise in self-awareness and self-evaluation with regard to your capabilities, as your clients would see them. It will provide a “starting point” for assessing and refining your own business practice.


The purpose of Hypothetical Document #2, “Insurance Consumers Bill of Rights and Expectations,” is to define the standards to which an insurance producer should strive in his or her business dealings and relationships with clients. By seeing these client “rights” as a measure of the level of professional service that clients can expect, then they set a benchmark for the producer’s conduct and activity. The practical application of these “rights” is in the context of a personal “practice standards” which all insurance producers should have.


Developing a Personal “Standard of Practice”

Generally speaking, one element that defines a “profession” is a common set of standards, principles, values, practices and conduct set forth by a single or dominant regulatory or governing body that oversees the profession. Members of the profession, in addition to meeting a body of formal scholarly and educational training requirements, are required to direct themselves and their professional conduct according to those principles and practices. For the sales profession in general and the insurance producer specifically, there is no one overriding regulatory or governing body that dispenses such guidelines. There is no single, universally accepted approach to the process and service of procuring and placing insurance coverage. Individual states issue the licenses that enable insurance agents and brokers to practice and require that licensees conform to state laws and regulations. However, as we have discussed, these laws and regulations represent what should be considered the lowest benchmark for one’s level of practice and service; indeed, they are typically expressed in terms of what licensed practitioners cannot do. True professions, through their governing or oversight bodies, have created standards that guide their members as to what they should do and how they should do it in order to deliver the level, scope and quality of service and value to which the profession is dedicated. For the insurance business, there is no overarching standard that is considered the approved practice or methodology for creating, implementing and maintaining individual or business plans for insurance.


Professional Industry Associations

Above and beyond the regulatory scheme of state insurance laws, the closest the insurance industry has to approved producer practice standards comes from the many professional associations and the professional organizations that confer specific practice designations (CLU, ChFC, CPCU, CFP, CFA, CIC, CISR, CRM, ARM, etc.) The industry organizations serve to provide a face to the public with regard to the service and values that can be expected of their members and all of them set forth principles of practice and ethical codes of conduct. The designation programs and their sponsoring bodies impose rigorous educational and experience requirements of their members as well as requiring them to commit to the organization’s ethics code. Becoming a member of one of these associations positions the individual in a specialized niche of the industry that is truly focused on high standards of excellence and professionalism; a member of such an association is assumed to have imported its standards into his or her own business practice and will therefore act in accordance with the established codes of conduct.




Sales + Ethics + Professional Service = Personal Professional Practice Standards

However, with the exception of promoting professional industry associations and designation programs – and the laws set forth by the states in which they are licensed – the insurance industry as a whole has established very few guidelines that set a path for professional and ethical producer practice standards. On the other hand, what the industry has and continues to do very well is train producers to sell. After all, insurance producers are salespeople. They serve the industry, the consumer and the public by explaining the value and benefits that insurance provides; they create a recognition of need and desire on the part of consumers to purchase the product and gain financial security; they initiate, develop and finalize the transactions that provide the consumer with the products that meet his or her need. Insurance producers are extremely well schooled in the techniques and mechanics of these processes; they are among the very best of salespeople. What’s needed is to integrate the sales process with principles of professionalism and ethics.


Using the basic steps of the insurance sales process as the foundation and by applying to them the principles set forth in our hypothetical “Consumers’ Bill of Rights and Expectations,” we can create a standards practice that defines the primary tasks the producer performs in a professional and ethical manner while advancing the producer’s own business and his or her role in the profession. Perhaps it would read as follows:


Sales Step

Practice Standard

Related Consumer Rights and Expectations

Solicitation and Prospecting

Through contacts, referrals and other leads, the producer seeks qualified individuals and businesses that may be in need of or can benefit from the products and services he or she has to offer. The producer has a responsibility to pursue quality leads with the purpose of obtaining an appointment or taking the call to the next step in the sales cycle.

Consumers contacted can expect producers to openly and honestly identify themselves and the reason for the call. They can expect that a producer who seeks an appointment has a legitimate reason to believe that the consumer could benefit from the product or service the producer represents.

Establishing the Relationship

The producer seeks to establish a relationship with the customer through dialogue and solidify the assumption that the customer can benefit from the products or services the producer offers. The producer will openly provide information as to his or her background and experience and his or her role in any insurance transactions. Through dialogue and disclosure, the producer seeks to instill confidence in his or her capabilities and services.

The consumer has a right to expect that the producer is honestly representing himself or herself and has attained the experience and knowledge required to provide appropriate, adequate and effective service. The consumer has a right to expect that the producer is pursuing a relationship only because it is warranted by the consumer’s needs and objectives. The consumer has a right to ask and be informed as to how the producer is compensated and to expect that the producer will disclose any instance or circumstance which may pose or suggest a conflict of interest.

Fact-Finding and Needs Analysis

Before making any product recommendation, the producer seeks to determine the consumer’s needs and objectives. This determination involves a mutual “exploration” by both producer and consumer and a mutual agreement as to the consumer’s goals and expectations. The practitioner will endeavor to determine the consumer’s priorities, capabilities and existing resources, seeking both quantitative and qualitative information. The producer is limited to what the client reveals; he or she therefore helps the client explore the fullest range of needs, expectations and capabilities.


The consumer has the right to expect his or her insurance needs will be thoroughly reviewed and analyzed and that the producer will recommend the appropriate coverage. To this end, the consumer has a right to expect the producer to inform and guide the consumer in fulfilling his or her role which includes openly and honestly discussing insurance needs and objectives.


Determining the Product Solution

Based on the data collected during the fact-finding process, the producer will evaluate the consumer’s goals and seek the appropriate product or products that will best meet those goals. The producer will base the recommendation on his or her knowledge and professional judgment, using qualitative as well as quantitative information. If the case is outside the producer’s scope of expertise or competency, additional assistance will be sought or the case will be referred. In all instances, the recommended product solution will be consistent with the consumer’s needs and capabilities.


The consumer has right to expect that the producer has attained the level of experience and knowledge required to recognize and recommend appropriate and suitable coverage. The consumer has the right to expect his or her insurance needs will be thoroughly reviewed and analyzed.


Presenting the Product Solution

The producer will present the product solution to the consumer and will communicate the product recommendation clearly. He or she will explain the purpose, features and benefits of the product as well as its limitations. The producer will explain how the product specifically addresses the agreed-upon needs and objectives the client has. The producer will disclose any risks and/or responsibilities the client assumes if the product is purchased. During the course of the product presentation, the producer will take the opportunity to further evaluate and affirm that the product is suitable for the client’s needs and capabilities. The producer will encourage the consumer to ask questions; the questions will be answered openly and honestly. The producer will seek to gain the consumer’s agreement as to the suitability of the product and its purchase. The producer will provide the consumer with any required disclosure or informational documents, such as a policy summary or notice of replacement or policy prospectus and review its provisions with the client.

The consumer has the right to expect that the producer is acting at all times in the consumer’s best interest and is serving first and foremost the consumer’s needs. The consumer has the right to expect the producer to have thorough knowledge of his or her products – its provisions and limitations – and to be able to competently advise as to its applications. The consumer has a right to expect the producer to inform and guide the consumer as to his or her role and responsibilities, which include reassessing the insurance need and goals in light of the product recommendation to ensure that the proposed coverage is appropriate.


Taking the Application

The producer recognizes the importance of the insurance application to both client and insurer and will ensure that all questions are answered accurately and thoroughly. He or she will not submit any incomplete applications or advise the client to omit any material information. The producer will inform the client as to the policy review and underwriting process and answer any questions the client has. If a policy receipt is given, the producer will advise the client as to its provisions and limitations. Once the consumer signs the application, no changes will be made without the consumer’s knowledge and consent, in writing.


The consumer has a right to expect that the producer will treat the consumer with fairness and objectivity in all aspects of the relationship. The consumer has the right to expect that the information provided to the producer will be held in the strictest confidence and will be used only for the purpose issuing and servicing the insurance coverage. The consumer has a right to expect the producer to inform and guide the consumer in fulfilling the relationship which includes carefully, fully and completely answering all questions on the insurance application and reviewing the document for accuracy before it is submitted.

Delivering the Policy

The producer recognizes the opportunity to advance the client relationship by personally delivering the policy when it is issued. At this time, the producer will review with the client the provisions of the policy, reinforcing the client’s understanding of the product’s features, benefits, limitations and exclusions and how it will address the client’s needs. The producer will seek confirmation that the client is satisfied with the service rendered by asking about others who the producer could call on.

The consumer has a right to expect that the product the producer has delivered will appropriately meet his or her expressed needs and that it is in the consumer’s best interest. The consumer has the right to ask questions and assume that they will be answered honestly and accurately. The consumer has a right to clear, straight-forward information about the policy, its coverage and the claims settlement process. The consumer has a right to expect the producer to inform and guide the consumer in fulfilling the relationship which includes thoroughly reading the provisions of the policy; if the consumer does not understand any aspect of your coverage, he or she will ask the producer to explain it.


The producer recognizes that the client relationship does not end with the sale. He or she will preserve the relationship with continued and on-going follow-up, seeking additional opportunities for needed service and ensuring that the products he or she placed continue to serve the client’s interest.

The consumer has a right to expect quality customer service before, during and after your policy is issued. If the consumer has any questions, concerns or complaints, he or she has right to expect the producer’s assistance in answering questions or resolving complaints.


To personalize these practice standards and ensure that they reinforce a producer’s own ideals, it may be worthwhile to further refine this document by adding to each step a related value or ethical principle the producer defined as important to his or her business and success. Doing so will tie together all of the elements that form the basis for an ethical approach to one’s business: standards of competent and skilled client-focused service and personal values.



Producer Rights

Up to this point, the focus of this course has been the responsibilities and duties the producer has with regard to his or her company and his or her clients. But what about the rights that producers have? By aspiring to the high level of service that ethical conduct requires, doesn’t the producer gain the right to expect a certain level of responsibility and duty of these same parties? The answer is “absolutely.”


Insurer Duties to Producers

Insurers owe the duty to establish and follow codes of conduct that encourage only the best of practices by their employees, their managers and their field producers. This should include taking clear and unequivocal positions on ethical conduct which insurers apply first to themselves and their executives, thus enabling them to lead by example. It would include promoting integrity, objectivity, and full disclosure. It would include conducting their business in all ways that serve the best interests of the insurance consumer. Insurers owe their producers the responsibility of defining and illustrating situations that involve ethical decision-making and providing clear guidelines as to the desired and expected action. Insurers have the responsibility to remain vigilant against carelessness or neglect of their ethical duties in the pursuit of profit.


Because they recognize that successful agents and producers exert a strong influence on the behavior of other producers, insurers should define and construct their paradigms for “success” not only in terms of sales production but in terms of ethical and principled business activity.


Insurers have the responsibility to support ethical conduct on the part of their field forces by incorporating its principles and purpose into their sales training programs. Insurers should avoid relying solely on compliance requirements to define the scope and significance of their ethics training.


Finally, insurers have the duty to ensure that the trust they ask from the public and from their clients is not misplaced or squandered so that the path they ask their producers to follow as their representatives is, if not less challenging, at least void of skepticism and distrust. They have the duty to demand of themselves the highest standards of commitment to public service.


Client Duties to Producers

Though they may not be aware of it, clients who expect to be well served by their insurance producers have certain responsibilities to the relationship, thus helping to ensure that their expectations are met. As noted earlier in the hypothetical “Insurance Consumer Bill of Rights,” these include:

1)    openly and honestly discussing one’s insurance needs and objectives;

2)    reevaluating one’s needs and goals in light of the product recommendation the producer makes to ensure that the proposed coverage is appropriate;

3)    carefully, fully and completely answering all questions on the insurance application and reviewing the document for accuracy;

4)    thoroughly reading the provisions of the policy and any prospectus when it is delivered and asking questions about anything that is not clear;

5)    Keeping the producer informed as to changes in one’s situation or circumstances.

Producers need to inform their clients as to these responsibilities and provide corresponding guidance and advice. It would be reasonable to expect clients to assume this level of involvement with their own cases, and embrace the opportunity to “partner” with their producers. If they don’t, producers have the right to disengage from the relationship, and/or limit their own roles. If the latter course were followed, the producer would be advised to inform the client, in writing, as to the role he or she will assume and provide a summary of the limits of the engagement.


The Force of Ethics

It’s been noted that the purpose of ethics is to address not that which is black or white, but that which is gray. This is true, but the effect of adopting an ethical approach to one’s business practice is such that gray issues present themselves less frequently and with less force or implication. In effect, what may have been gray takes on shades that are more clearly black or white. Ethics tends to turn what might be a source of questions – “What do I do?” “How do I do it?” – into clear and resolute action; it defines so distinctly the appropriate course for one to follow that an issue which might otherwise present different options or divergent approaches is immediately and almost without thought settled. An essential element of the producer’s business, ethics informs and guides a producer’s conduct, thereby defining his or her work, its substance and its utility. As a result, all whom the producer engages – clients, insurers, the public – will benefit, as will the producer and his or her practice.






Section II

Market Conduct and Agent Blunders



Liability Based on Agent Duties & Status. 1

Basic Agent Duties. 2

The Law of Agency. 2

Insurance Producer Status. 4

Agent vs. Broker 5

Agent vs. Professional 5

Conflicts Through Contract Disputes. 6

Failure to Act/Procure Coverage. 6

Failure To Notify Lack of Coverage. 6

Failure To Place Coverage At Best Available Terms. 6

Failure To Renew.. 7

Policy Promises & Provisions. 7

Agent Promises. 7

Advertising Promises. 7

What Policies Say vs What They Mean. 7

Client Understanding and Reading of Policies. 8

Minimum Standards. 8

Conflicts Created by Agent Torts. 8

Negligence & Misrepresentation. 8

Bad Faith. 8

Conflicts Created by Client / Agent Relationships. 9

Contributory Liability. 9

Agents as Fiduciaries. 10

Insurer Claims Against Agents. 11

Basic Agency Violations. 11

Misappropriating Premiums. 11

Failure To Disclose Risk Factors. 12

Failure To Cancel or Notify of Cancellation. 12

Authority To Bind. 12

Premium Financing Activities. 12

Unfair Practices. 12

Liability Created by Insurer Failures. 13

Misrepresentation & Insurer Failures. 14

Agent Relationships & Insurer Failures. 15



Sales Conduct In Choosing A Company. 18

Using the Rating Services. 19

On Going Monitoring & Policy Replacement 19

Company Deals. 19

Company Diversification, Business Lines & Parent Affiliation. 19

Conflicts of Interest 20

Reinsurance. 20

Size of Company & Loan Portfolio. 21

State Admission. 21

Risked Based Capital 21

Sales Conduct In Choosing Product 22

Policy Choices & Risk Management 23

Sales Conduct – Life/ Health. 24

Life Insurance Risk Analysis. 24

Disability Insurance. 25

Health Insurance. 26

Annuity Analysis. 28

Business Insurance. 29

Sales Conduct – Property / Casualty. 30

Homeowners Insurance. 32

Auto Insurance. 33

Commercial & Professional Lines. 34



Know Your Agent & License Responsibilities. 37

Agent/Client Duties. 37

Agent/Company Duties. 37

Agent Integrity. 38

License Responsibilities. 39

Agent Business & Marketing Practices. 40

Agent Ethics. 40

Agent Disclosure. 42

Client Disclosure. 42

Insurer Disclosure. 43

Errors & Omissions Insurance. 43

Exclusions. 44

Working With E&O Claims. 44

Office Protocol 45



Insurance Advertising. 48

What is Advertising?. 48

What Isn’t Advertising?. 48

Advertising Compliance. 48

Other Unfair Insurance Practices. 49

Identification. 50

Defamation. 50

Boycott, Coercion & Intimidation. 50

False Financial Statements. 50

Stock Operations. 50

Discrimination. 50

Rebates. 50

Deceptive Name or Symbol 50

Deceptive or Unfair Business Practices. 50

Unlawful Trade Practices. 51

Burden of Proof 51

Legal Remedies. 51

Unfair Competition & Unfair Practices by Insurers. 52

Unauthorized Insurer False Advertising. 52

Unfair Settlement Practices. 52

Discrimination by Handicap. 52

Discrimination by HIV Testing. 52

Discrimination in Rates or Renewal 53

Benefits Protection. 53

Health Policy Benefits. 53

Contract Entirety. 53

Insurer Mergers. 53

Reinsurance Assumptions. 53



What Goes Wrong With Insurance. 54

Coverage Shortfalls. 54

Coverage Disputes. 54

Legal Maneuvers. 54

Attorneys at Work. 54

Agent Records. 55

Agent Cooperation. 55

Insurance Litigation. 55

Defenses of the Insurer 59

Settlement Disputes. 61

Insurer Insolvency. 62

State Guaranty Funds. 62





Life & Health Challenges. 77

Sales Conduct 77

American Disabilities Act 77

AIDs / HIV. 77

Defining Occupation. 77

Psychologically Induced Illness. 78

Experimental Treatment 78

Language Barriers. 78

Defining Accidental 78

Casualty Challenges. 78

Tenants As Implied Beneficiaries. 78

EIL vs CGL. 78

Contamination. 79

“Sick Building” Syndrome. 79

Asbestos. 79

Lead. 79

Business Interruption. 79











The agent of the 21st century deals with stiff competition, fast-paced decisions and some very unpredictable insurance markets.  To aggravate this condition, we live in an era where courts are very sympathetic to consumers.  People seem to feel entitled to seek complete and generous compensation for the smallest problems, even when they are contributors or the discovered source. The consumer of our time has lost all respect for the status of the professional. This includes doctors, lawyers, teachers, clergy, real estate brokers, stockbrokers and insurance agents.  Few would think twice about suing these professionals to receive satisfaction for an honest mistake, let alone one leading to a financial loss or injury.  It is easy to see how selling insurance can lead to conflicts and legal disputes.


Courts have become sympathetic to consumers who have lost respect for the “professions” and feel entitled to compensation for the smallest problems.


When an insurance agent and his client cannot resolve differences, agent liability can result, even when the agent is right.  In fact, about 75 percent of all insurance malpractice claims are frivolous, and while an agent may never pay any damages from these claims, the process of responding is very costly, BOTH in money and lost production.


Claims against you may surface as a result of events that occur before or after a policy is issued, and they may involve you and a client, your insurer or a third party who is an intended beneficiary.  Cases can be built around issues of legal conduct (the subject of this chapter) as well as sales conduct (next chapter). 


Throughout this book you will learn the “triggers” that launch insurance-related lawsuits.  They can be as basic as failure to secure the type or amount of coverage requested by the client to more complex and seemingly "blue sky" claims where clients demand recoupment of losses and damages simply because of a relationship that existed between agent and client.  Other claims span the gamut from client losses due to an insurance company failure to refusal to pay a claim.  Sometimes, an agent’s liability is the result of simply being too busy to witness a signature or too rushed when entering a policy premium payment . . . small “blunders”.  Of course, a single incorrect digit or a blank you forgot to fill can make the difference between a policy “in force” and a cancellation or denial of claim -- a matter that is a guaranteed BIG DEAL to a client when an accident, death or problem occurs.

Agents who have never been sued are sometimes lulled into believing that the way they do business must be working.  Unfortunately, this ignores the real possibility that the same events of the past, that weren’t  problems then are now considered problems.  It is a world of legal rights and little trust.  The long-term client, whom you trusted, can change.  Also, regulations change, industries change, economies change and no one can really keep up or control every aspect of their present business, let alone the future.  Can you imagine, for example, the changes that will occur over the life span of a whole life policy between today and when it endows in fifty or sixty years?  Will a state or federal regulation change the way automobile or health policy benefits are triggered?  Will the IRS retroactively disallow tax benefits for an annuity contract or single premium policy you sold three years ago?


The selling of insurance carries definite risk.  Agents need to accept it and manage it.


No one knows the answers to all these questions, but it should be clear by now that insurance agents can be prone to errors, some beyond your control.  As a business person you need to accept the fact that your business carries risk.  Then, you need to find ways to manage and plan for these risks to minimize the fallout when a claim occurs.  You will notice we said “when” a claim occurs, not “if” a claim occurs.  We said this because statistics prove that anyone who stays in the business long enough WILL suffer the wrath of a client or insurance company claim.


You can try to avoid conflicts, make friends with your clients, buy errors and omissions insurance, or incorporate and practice other means of asset protection, but you will always be at risk for the one problem that seems to “fall through the cracks”.  You have to plan for that day NOW.  In Chapter 3, we suggest several steps to help you reduce and manage this exposure.


Now, let’s look at the deciding issues that establish your legal conduct and create agent liability.


Liability Based on Agent Duties & Status

Overall, the basic duty of an agent is to select a company and coverage.  When a client “requests” coverage, the agent needs to decide whether it is available and if a client qualifies.


The most critical questions in determining agent liability are the extent to which accepted legal

standards, state licensing and agency status obligates the agent.  This process involves the investigation of many areas, including: Basic Agent Duties, The Law of Agency, Producer's Status (relationship to the client/insurer) and the classification of the producer as Agent/Broker or Agent/Professional.


Basic Agent Duties

The agent/broker generally assumes duties normally found in any agency relationship.  The primary obligation here is to select a company and coverage and bind the coverage (if the agent has binding authority, i.e., property/casualty agents).  However, since clients typically request coverage, the basic duty may expand to include the agent deciding whether the requested coverage is available and whether the insured qualifies for it (Harnett, Responsibilities of Insurance Agents - 1990). 


The mere existence of an agency relationship, or the simple selling of insurance, imposes no duty on the agent/broker to advise the insured on specific insurance matters (Jones vs Grewe - 1987).


Agents are not required to obtain “complete” insurance protection for clients but may need to explain widely avail-able options, gaps in coverage and in some cases monitor policies after the sale.


Duty also DOES NOT require the broker/agent to secure complete insurance protection against any conceivable loss the insured might incur, but there may be a duty to explain policy options that are widely available at a reasonable cost  (Southwest Auto Painting vs Binsfield - 1995).  An agent’s duty to provide correct coverage is not triggered by a client’s request for “full coverage” because that request is NOT a specific inquiry about a specific type of coverage (Small vs King - 1996).  In other words, just because a client asks for full coverage an agent may not be liable to provide it.  However, if a client requests a specific type of coverage, the agent is responsible to see if it is available and determine if the client qualifies.


An insured is entitled to rely on an agent/broker’s advice on the meaning of policy provisions.  In Stivers vs National American Insurance - 1957, it is suggested that client reliance may sometimes be unjustified, as when the advice given by the agent “is in patent conflict with the terms of the policy”. 



It is a clear legal responsibility of agents to understand the difference between two products that he is attempting to sell (Benton vs Paul Revere Life - 1994).  Whether an agent has an affirmative duty to inform a client of possible gaps in coverage depends on the relationship of the parties, specific requests of the client and the professional judgment of the agent Born vs Medico Life Insurance Co - 1988). 


Knowing the difference between products an agent is selling is a legal responsibility that can’t be ignored.


Once a policy is issued, traditionally theories of legal conduct provide that an agent does not have the duty to ferret out, at regular intervals, information which brings the policyholder within provisions of a policy (Gabrielson vs Warnemunde - 1988).  In essence, it seems the courts have been more concerned about general agent duties to inform clients of appropriate coverage at the time of sale.  Recent departures from this opinion include a case where an agent was found liable for failing to determine that the insurance policy was no longer needed by the client (Grace vs Interstate Life - 1996).  In another example, an agent assured his client that the limits of the policy continued to meet his needs when they actually fell short (Free vs Republic Insurance - 1992), i.e., agent duties may also include informing clients their coverage is appropriate after the sale.  Although each case stands on its own, the underlying determinant of “after sale” duty may be the “special relationship” that exists between client and agent, e.g., an agent handling the client’s business for an extended period of time may assume a higher standard of care.


These are the basic agent responsibilities.  Agents are not precluded from assuming additional responsibility, which they normally do in most client transactions.  When a lawsuit arises, however, it is the client’s burden to show that greater duty is the result of an express or implied agreement between agent and client (Jones vs Grewe - 1987) where the agent has taken more responsibility.  In most instances, the facts of the particular case determine whether the court finds a greater duty has been assumed.


Another area of legal conduct involves the Law of Agency.


The Law of Agency

The agency status you hold when a problem hits can affect your liability. Are you an agent for the client or an agent for principal (insurer)? The Law of Agency is a universal area of the law that determines producer status and specifically binds the agent/broker for his acts and his omissions or errors.  Simply stated, the law of agency, for most states, establishes many categories of insurance agents and concludes that the authorized acts of the agent automatically create duties and obligations an agent must follow.  These responsibilities occur between agents and principals (insurance companies) and as between agents and

third parties (clients or intended beneficiaries).  An agency relationship begins when agents are granted authority to operate by expressed, implied or apparent agreement.  This can be created by contract or agreement or it can take the form of casual mutual consent.  What is interesting about the business of insurance is that most agents start out as an agent for the client, when coverage is requested, and then become an agent for the company, when business is placed.  As you will see later, the exact status you occupy when a problem occurs affects your liability exposure.


A person who markets insurance is typically referred to as a producer.  The insurance market and many state laws describe different kinds of producers -- general agents, local agents, brokers, surplus or excess-line brokers or agents and solicitors.  Following is a brief description of these categories:


General Agents

General agents assume many responsibilities, greater liability and usually incur higher business expenses.  As a result, they are typically paid the highest commissions.  In the property/casualty field, many sales agents with general agent contracts do not serve all the functions of a general agent but are important enough to their insurers to receive general agent commissions.  In all lines of insurance, general agency contracts, or similar classifications, are frequently awarded as a competitive device to obtain or retain a particularly outstanding agent or firm.


Local Agents

The local agent represents the insurer.  He or she may represent more than one company.  Commission schedules are typically lower for local agents because they do not usually perform technical services  reserved for the general agent or branch/regional office, such as underwriting, policy implementation, claims support, etc., and are subject to a lower level of liability than other agent categories.  The local agent is principally a sales representative of the insurer who acquires business and counsels clients.



Theoretically, brokers are agents of insurance buyers and not of insurers.  Their job is to seek the best possible coverage for clients.  This  can be accomplished in a direct manner with the broker acting as salesperson or through a network of agent contacts.  Premiums paid by clients include the cost of commission paid to the broker by the insurance company, so the client indirectly pays the commissions of both the broker and agent.  In the liability/casualty area, some brokers maintain a loss-control staff to help counsel clients on safety and prevention matters thereby aiding clients to secure a lower premium.  In a sense, these brokerage firms act as insurance and risk managers.


Surplus Brokers / Agents

Sometimes a client will seek a highly specialized coverage not written by an insurer licensed in a home state.  Examples might be an unusually high excess liability plan, auto racing liability, strike insurance, oil-pollution liability, etc.  To handle these limited lines of coverage with “non-admitted’ insurers, states typically license surplus or excess line agents and brokers.



Another type of producer is the solicitor who usually cannot bind the insurer or quote premiums.  The solicitor seeks insurance prospects and then handles the business through a local agent, broker, branch office or service office.


Marketing Organization & Clusters

An offshoot form of producer status occurs when agents join marketing organizations or clusters.  Neither is a legal entity, but both can represent exposure to the agent if operated in a certain way. Most marketing groups and clusters are a simple banding of individual agents operating as sole proprietors for the obvious advantages that come with larger numbers (better contracts, group perks, access to information, etc.  In this instance, member agents have no responsibility for one another or the entity itself.  However, these groups are potentially more dangerous arrangements if the member agents have formed a general partnership to operate as a group.  Here, the acts of one agent can hold ALL others responsible.


Producers can also be classed as actual agents/brokers ‑‑ those given express or implied authority ‑‑ or ostensible agents/brokers ‑‑ those whose actions or conduct induces others to reasonable believe that they are acting in the capacity of an agent/broker.  An agent binds his principal when he acts within the scope of his authority.  The exception is when an agent and an insured are proved to have colluded with intent to defraud an insurance company. In such a case, the principal or insurer is not culpable or bound by the policy.


When an agent acts within the scope of his contract he “binds” the insurer.  If an agent and client are found to work together to defraud the insurer, the company is no longer bound by the policy.


Insurance companies always attempt to tightly define or narrow the authority of agents to limit their
exposure to agent wrongdoing.  In practice, however, the law generally considers the agent and the insurer as one and the same, even though the agent works as an independent contractor.  So, the insurer is most often legally responsible for the acts of the agent and is regularly sued by third parties (clients of the agent) who feel they have been wronged.  Of course, when a policy owner sues his insurance company, agents are often named for various breaches of duty between client and agent.  Agent liability may also exist where insurance companies sue their own agents.  Insurance companies and errors and omission carriers alike exercise their right to sue an agent under various legal theories, typically for indemnity of any judgment losses they may have incurred through a policy owner claim (see Liability From Insurer Claims Against Agents -- later this chapter)


Insurance Producer Status

When marketing insurance, the agent may assume the character of a mere sales representative or the specified agent of the client.  As mentioned earlier, agents generally start out representing the client who requests coverage and then become the agent for the company when business is placed.  Other than brokers, agents rarely retain principal status throughout a transaction. 


When disputes occur, the courts generally lean to the assumption that an “agency relationship” existed to establish links to the “deep pockets” of the insurer.


When a dispute occurs and a producer’s status cannot easily be determined, the courts usually rule in the direction of agency relationship.  This bias is commonplace for two reasons: 1) It is easy to establish that an agent is representing his insurance company since there is typically a preexisting, written agency contract between the parties (the agent and the insurer).  This relationship is distinguished from a principal-agent relationship where the client requests that the agent accomplish a specific result such as "Buy $150,000 of coverage from XYZ Company".  2) Holding a producer to be a true principal could block many claims a client might have against the “deep pockets” of the insurance company (Canal Insurance vs Harrison - 1988).   If the insurance company is not made part of the claim, the client’s only recourse would be the resources of the agent which are likely to be a lot less than the insurer.


In cases where the producer’s status is unknown at the time a problem occurs, the courts have the difficult task of trying to determine who initiated the relationship.  Here again, when in doubt the law leans to the assumption that the majority of insurance transactions are agency relationships even though the client may have called the insurance agent first.  Otherwise, the mere fact that clients request coverage . . . which they do in virtually every instance . . . would establish a principal-agent status every time. The courts feel this is NOT an appropriate conclusion.


Agents who advise clients they are “covered” with knowledge that the intended insurer has not yet agreed to coverage are liable for client losses, i.e., the agents acts as the insurer until coverage is accepted.


A huge problem for agents occurs when they act as principals, when in fact they are not, or when they have neglected to identify the principal, i.e., an undisclosed principal.  An agent who advises a client that he is covered, with knowledge that the intended insurance company has not yet agreed to accept such coverage acts as the insurance company until coverage is accepted, i.e., the client has FULL RECOURSE against the agent for any uncovered loss.  If it can be proven that it was reasonable for the client to assume that the agent actually had real authority to act for the principal, the client can hold the insurer to the contract, even when one did not exist (Stock vs Reliance Insurance Company - 1968).  The client who incurs coverage shortfalls is in a much better position to recover from the agent where a principal (insurance company) is NOT disclosed.


Of course, a written disclosure agreement indicating that the agent is a representative of the insurance company, acting as principal or is not disclosing the principal for a specific reason would go a long way to clarify  the status between the agent and client, or agent and company.  In commercial insurance transactions, agents go to great lengths to “clear the air” concerning agent status by using a broker of record letter.  These letters authorize or terminate agency and stand as proof of evidence that an agent is representing the client/principal or is “out of the loop”.


In a dispute, agents should be prepared to prove their agency status.  A disclosure agreement between agent and client could help establish an “agency relationship” and may remove the higher liability of a  “principal-agency” or “broker” relationship.


In some agent liability cases, status is not the consideration at all. Instead,  claims are filed for a variety of activities outside the scope of an agency contract.  Agents  may create dual agency when representing themselves as agents of the insurance company and as principal to the client in the form of an “expert or consultant”.  As you will see, outside activities such as these create additional liability.  Further, it is doubtful that the court will care whether

an agency status or agent-principal relationship actually existed because wrongdoing will be actionable against any agent acting as a principal.  Additionally, claims of this nature are difficult for agents to defend and are NOT typically covered through errors and omission insurance.


Producer status problems also occur when unlicensed employees of the agent are found to be doing the work of a licensee.  A small mistake here can become a big deal (Williams Insurance Agency vs Dee-Bee Contracting Co -1984).  You can be held responsible for any resulting claim or shortfall and your errors and omission coverage will probably become void.  Insurance department sanctions, fines and the possible revocation of your license could also follow.


Agent vs. Broker

In actions against an insurance agent, the plaintiff’s attorney will first try to determine whether the agent's status is that of an agent or a broker (primarily casualty agents).  The outcome of this initial task will provide the malpractice attorney with legal procedures and strategies to proceed against the agent, his insurer, his errors and omissions insurer or ALL OF THE ABOVE.  For this reason, it is extremely important for agents to know their legal status.


An agent is legally defined as "a person authorized by and on behalf of an insurer, to transact insurance".  Agents must be licensed by the state and typically  a notice of appointment must be executed.  This document appoints the licensed applicant as an agent of that insurer in that state.  Thus, an insurance agent is the agent of the insurer, NOT the insured (client).  Of course, an insurance agent may be the appointed agent of more than one insurer.


An insurance broker is "a person who, for compensation on behalf of another person, transacts insurance, other than life with, but not on behalf of, an insurer".  Brokers must be licensed through most states and are not prohibited from holding an insurance agents license as well.  A broker who is also a licensed agent is deemed to be acting as the insurer's agent in the transaction of insurance placed with any insurer who has a valid notice of appointment on file.  Basically, an insurance broker is an independent business or business person that procures insurance coverage for clients.  Brokers generally receive commissions from the insurer once coverage is actually placed, and except when collecting premiums or delivering the policy, is the agent of the insured for all matters connected with obtaining insurance coverage, including negotiation and placement of the insurance (Maloney vs Rhode Island Insurance Company).  Typically, brokers are insurance professionals who maintain relationships with several insurers but are not appointed agents of any of them.


The purpose of determining whether the insurance producer was acting as a broker or as the insurer's agent when an insurance contract was placed helps establish which theories of liability  the client may plead and what defenses the agent or his insurer may raise.  In many court cases, it is not clear whether the producer was acting as a broker or an agent.  So, attorneys typically plead their case under the banner of each status, thereby plucking the feathers of the agent and the “deep pockets” of the insurance company at the same time.  Agents should be prepared to prove or disprove legal status at any given time.


Under basic liability theory, a client and his attorney may find it quite difficult to seek recovery from a producer acting ONLY as an agent.  Traditional agency law in most states concludes that the insurance agent, acting as agent of the insurer, owes duties primarily to the insurer.  Of course, this assumes that the agent performed as agreed between the agent and insurer,  the terms of the agency contract in the ordinary course of his or her duties.  Where an agent is acting properly, a person wronged by an agent's negligence has a cause of action against the principal or insurance company, although this does NOT preclude clients from naming the producing agent also.  Another general rule of agency law states that if an insurance agent acts as the agent of a disclosed principal, the principal -- NOT THE AGENT -- is liable to the client (Lippert vs Bailey - 1966). 


Broker liability is different.  The insurance broker is normally considered the insured's agent and owes a much higher level of care to the insured.  Brokers can be liable if these duties are not adequately performed.  Additional liability can accrue where the broker is ALSO acting as the agent of the insurer.  Here, the insurance company may pursue the broker for breach of duty.  Where a dispute arises and the insurance company can make out the party who solicited the insurance business to be a broker, rather than an agent, then any errors and omissions on the part of that party will exempt the insurance company for the broker wrongdoings. One very important reason why broker liability is greater than agent liability lies in the fact that the broker, when acting within the scope of authority granted by the client, binds or obligates the client to perform.  Obviously, the broker is in a position of greater trust and, therefore, bears greater liability.


Agent vs. Professional

An agent who professes special expertise, establishes a “dual agency” and assumes additional liability exposure to both his client and insurance company.

Despite rules which seem to offer reasonable protection of the agent producer, it should be made clear that agent wrongdoings outside the agency contract and other torts, WILL subject the agent to additional liability exposure, and it is easier than you think to step outside your agency agreement.   A few pages back, we described a “dual agency” as the  situation where the agent first represents the client as agent, then switches to agent of the company when business is placed.  Now consider that dual agency , and the added liability it creates, also occurs when an agent assumes non-agency duties by agreement or simply by professing to have special expertise .   A slogan on a business card, letterhead or company brochure may have sufficient information to establish you as an agent and an expert in the eyes of the law.  When dual agencies such as these exist, the agent may be held liable for a breach of fiduciary duties owed directly to clients (Sobotor vs Prudential Property & Casualty - 1984)  and, perhaps, contract and statute duties to the insurer. (Kurtz, Richards, Wilson & Co vs Insurance Communicators Marketing Corp - 1993).


It is clear that activities beyond the scope of an agency contract can be dangerous to your financial health.  If you go there you need to proceed cautiously.  This is NOT an indictment of any agent who seeks to improve his practice by becoming a true insurance professional, complete with degrees and designations.  The existence of these honors, by themselves, is not the problem nor a target.   As a matter of fact, some feel that the presence of these awards may inhibit a client’s willingness to file a claim.  Rather, it is the agent who, regardless of his degrees or credentials, professes to be an expert but fails to deliver.  In essence, we are talking about failed promises.   Agent wrongdoings in this area represent the majority of ALL insurance conflicts.


If you are somewhat confused about this agent / professional controversy you are not alone.  There are many agents of professional status, such as CLUs, CPCUs, CICs, AAIs, ARMs and more, who practice due care for all the right reasons.  Most stay clear of conflict by managing it.   There may also be an entire army of extremely qualified agents who stay clear of professional designations for fear that added exposure can’t be managed.  Perhaps there is room toward the middle.  A position we call responsible agent.  These individuals also practice due care, yet operate strictly within the bounds of agency.  They accurately describe policy options that are widely available, but “pass” on outside inquiries, not because they don’t know, rather the request goes beyond the scope of their authority.  They do not profess to be experts but know their product better than anyone.  Their goal is simply to be the most responsible agent possible.


Conflicts Through Contract Disputes

Regardless of producer status, agent or broker, disputes develop where terms of an insurance contract are violated or promises are not kept.  Producers can be liable under two principles: 1) The existence of an insurance contract or principal-agent agreement or an implied agreement, and 2) The breach of contract or nonfulfillment.  A violation of contract terms is fairly clear cut.  Primary breach of contract, however, can surface under any of the following headings:


Failure to Act/Procure Coverage

Agents can be held liable for lack of reasonable “follow through” in obtaining coverage or simply by their silence when coverage is unavailable


This is one of the most important areas of agent/broker liability because an estimated 60 percent of all claims result from agent malpractice in failing to procure coverage.  In a typical transaction, a broker or agent agrees to procure a certain type of coverage for an insured.  It is well established that the broker has a duty to exercise reasonable care in procuring that coverage.  Consider the following cases: (Jones  vs Grewe - 1987); a failure to actually procure coverage (Keller Lorenze Company vs Insurance Associates Corp - 1977); or, a failure to perform some function related to the insurance coverage -- failure to see that policy was actually provided (Port Clyde Foods vs Holiday Syrups - 1982); or, failure to forward premiums to prevent lapse (Spiegal vs Metropolitan Insurance).  In general, when an agent negligently fails to obtain coverage for a client, he steps in the shoes of the insurance company and becomes liable for loss or damage up to the limits of the policy until insurance is found (Robinson vs J. Smith Lanier Co - 1996).  Liability may also be held to result from an agreement to procure a desired coverage at the lowest obtainable premium rate (Hamacher vs Tumy - 1960).


Failure To Notify Lack of Coverage

Agents/brokers can also be liable for silence or inaction, as in an agent’s failure to reasonably notify the applicant that  he is unable to obtain insurance (Bell vs O'Leary - 1984).  The key here is “how long” a delay is normal before informing the client.  The courts have not established any parameter other than

that what is reasonable.  In one case this meant 2 days, in another four weeks.  The best advice is to keep clients fully and continually informed.


Failure To Place Coverage At Best Available Terms

Brokers have a higher duty than agents to place coverage at the best available terms. As part of the duty to exercise good faith, reasonable skill, and ordinary due diligence in procuring insurance, a broker has a higher

duty than agents to be informed about different insurers and their policy  terms and to place coverage at the best available terms.  If other brokers working in the same market knew that better terms were readily available, the broker who failed to obtain these terms for the client could be liable for the client's loss (Colpe Inv. Co vs Seeley & Co - 1933).  This case dealt primarily with the fact that the broker failed to obtain "coinsurance" clauses that were commonly available and carried a lower premium.  This must be distinguished from cases proving that the broker does NOT have an absolute duty to obtain the lowest possible rate (Tunison vs Tillman Ins. Agency - 1987).


Failure To Renew

If an agent has a history with a client of automatically and voluntarily renewing or reminding them to renew a policy, he can assume exposure for the “one and only” time he forgot (Siemorama vs Davis Manufacturing Co - 1988).  With the trend toward “direct billing” of clients by insurers, agents are not as close in contact as before.  However, agents may still have renewal responsibility if the client depended on this service in the past.


Other issues concerning breach of contract include the following:


Policy Promises & Provisions

Agents are legally bound and responsible to accurately describe the provisions of policies they sell.


Agents should ALWAYS review client policies and retain "specimen policies" on file to answer prospect/client questions and to compare with policies received.  In most states, agents are legally bound to accurately describe the provisions of policies they procure for their clients (Westrick vs State Farm Insurance - 1982) and point out the differences between the various products they are selling (Benton vs Paul Revere Life - 1994).


Agents can be held personally responsible for any promise that exceeds the limits of the policy.


Many lawsuits have been pursued due to misunderstandings about policy time limits, which restrict the client’s ability to perform or file a claim.  Agents can easily become a focus of these disputes.  Another misunderstood provision is:  What is the definition of an "accident"?  An insurer may deny a claim for lack of requirements establishing an "accident".  Or, what is "reasonable medical treatment"?  Some agents might be taught NOT to volunteer information on an issue such as this.  But, insurers and agents have a fiduciary duty to their insureds to disclose full and complete information.  Failure to do so may result in a claim of fraud (Ramirez vs USAA Casualty Insurance Co - 1991).


Agent Promises

From time to time, agents make promises that EXCEED what the actual policy promises.  Obvious violations would be intentional or unintentional misquoting of policy limits, specified coverages and exclusions.  Agent liability also existed in a case where a producer promised to arrange "complete insurance protection" for a business and where an agent promised to, but never did, evaluate an appraisal of an individual's property or to determine its "insurable value" in order insure a certain percentage of that value. Additionally, an agent might promise to implement or increase a client's coverage "immediately" yet actual coverage might not be in force for 24 hours or until expiration of the existing policy. 


Less obvious, but equally as serious, are failed promises.  A recent example is the marketing of  "personal pension plans".  Clients, who were promised a "pension plan", received a universal life insurance policy.  Agents involved in this scheme are now subject to huge fines, client actions and possible license revocation.


Advertising Promises

Advertising violations are among the most costly mistakes.  Regulators have been known to levy stiff fines of $1,000 or more per violation.  In other words, distributing 1,000 non-compliant flyers could amount to a fine of $1 million or more ($1,000 X 1,000 flyers).  We have devoted an entire section on advertising in the chapter titled CONSUMER PROTECTION ISSUES YOU CAN’T IGNORE. 


By contract, agents are required to secure company approval of all advertising.  Few agents would think twice about scrutinizing company provided ads.  However, it is suggested that agents carefully review advertising provided by the insurer to make sure it honestly reflects the promises of the policy.  Violations that result in claims would probably not be actionable against the agent, but the claim may name the agent nonetheless, or may establish some form of "alleged" agreement that binds the agent / insurer. 


What Policies Say vs What They Mean

At the minimum, policy holders should expect their policies to be fair and “say what they mean”.  Policy ambiguity is typically decided in favor of the client.


No matter how clear the language, all policies will contain areas of ambiguity.  The universal rule of policy ambiguity, generally upheld by most state courts, goes something like this:  If the policy could imply to a

reasonable or average policy holder that coverage is in force, yet that exact language does not exist in the policy, then coverage DOES extend to the policy holder.  Agents may easily be involved in claims resulting from contract ambiguity.


Client Understanding and Reading of Policies

In days gone by, courts required people to be accountable for their actions.   Clients were required to live up to the terms and conditions of a policy even though they did not read them or fully understand what they read.  Agents have been cleared in many policy conflicts simply by pointing out the applicable clause or meaning.  Consumer groups kicked and screamed and pushed for simplified wording, though.

Today, policies are indeed more user friendly and the courts are still sympathetic to consumer confusion about their policies.  Now, policy conflicts are determined by whether it was reasonable for a certain client to have read his policy and/or understand its meaning.  The decision can be based on how simple or complex is the language of the policy  and the client’s level of sophistication (Karem vs St Paul - 1973 or Greenfield vs Insurance Inc - 1971).  Each case stands on its own.


Minimum Standards

Courts have upheld that even though an insurer does not promise to expressly act in good faith and fair dealings, this is the minimum standard that policy holders can expect.  Agents owe a duty of good faith and fair dealings to their clients and their insurer (American Indemnity vs. Baumgart - 1982).


Conflicts Created by Agent Torts

In an action against an agent or broker, the plaintiff's (client's) attorney rarely distinguishes between contract and tort wrongdoings.  BOTH are routinely pleaded.  In the case of tort action, agents can be pursued on two fronts 1) Applicable professional standards and 2) The broker/agent's acts or omissions that do not meet these standards.  Who decides what these standards are?  In most court cases, the plaintiff's attorney will arrange for "expert testimony" by an agent or broker working in the same field. The fundamental issue is whether the accused broker's professional judgment and methods were appropriately exercised in accordance with acceptable standards.  Following are some important areas of agent wrongdoing (torts) considered to be outside acceptable standards:


Negligence & Misrepresentation

Agents and brokers can be liable for failure to procure the requested coverage (Mayo vs American Fire & Casualty - 1972).  Wrongdoing also occurred where an agent promised to procure "complete" business premises liability coverage and represented that a policy he procured afforded the desired protection when, in fact, it omitted coverage for a freight elevator occasionally used to transport people (Riddle-Duckworth inc vs Sullivan - 1969).  In Hardt vs Brink, the agent was negligent in failing to advise fire insurance coverage on a leasehold made known him by the client in advance.  Another agent negligently obtained non-owner motor vehicle liability coverage for a client knowing it would NOT provide the coverage desired (Rider vs Lynch - 1964).  In Walker vs Pacific Indemnity Co - 1960, the agent negligently obtained a policy with smaller limits of coverage than had been agreed upon.  In yet another case, the agent notified the client that the original insurer was insolvent and that a replacement policy would be needed.  The broker replaced this policy with a new policy having LESS coverage.  The broker was held personally liable for $150,000 because of the gap between the insured's primary and excess coverage (Reserve Ins Co vs Pisciotta - 1982).  Liability was also upheld in the case where a lending institution which was licensed to sell credit life insurance failed to offer it to a client who later died (Keene Investment Corp vs Martin - 1963).  Finally, in Anderson vs. Knox - 1961, an agent represented that $150,000 of life insurance, where premiums were so high that they had to be bank financed, was a suitable plan for an individual earning  less than $10,000 per year,  knowing that it was not suitable.  Another case of misrepresentation involved an application of life insurance with critical blanks (missing information).  The deceased’s widow held that the agent told her husband that the missing information did not need to be disclosed on the application (Ward vs Durham Life Insurance Company - 1989).


Agent negligence, bad faith and misrepresentation are proven in court using “expert witnesses” who testify that the accused agent acted outside the standards of other agents working in the same field.


Bad Faith

The insurance agent runs a great risk of personal liability in the event that he is less than fair or reasonable when dealing with either a client or claimant.  Bad faith actions and violations of various

statutes, such as the Unfair Claims Practice Act, are considered a breach of the implied duty agents have to deal with clients in complete good faith. Agent liability may accrue due to unfair conduct by agents or allegations of fraud, deceit, misrepresentation or the statutes dealing with unfair settlement practices (where the agent is acting as a claims representative for the insurance company or in his individual capacity, independent of the agency).  Licenses have been revoked for misrepresenting benefits of policies

and entering false medical information on an application (Hihreiter  vs Garrison - 1947) or in the making of false and fraudulent representations about the total cash that would be available from a policy (Steadman vs McConnnell - 1957).


Agents must remember that the number one reason that people purchase insurance policies through agents is for service.  When an insured makes a request to procure coverage or turns in a claim, he is not bargaining for promises, but rather action.  Additionally, the insured is under the assumption that, due to his prudence in securing insurance in the first place, he will have a peace of mind in knowing that the insurance company is protecting him.  Any breaches of this reasonable expectation will usually subject the insurance company and the agent to the exposure of insurance bad faith practices and a breach of the fiduciary duties owed to the insured.


In the property/casualty arena, many bad faith issues surface under the title of "claim avoidance".  Some agents play judge and jury with client claims by advising them to NOT submit a claim since it would be cheaper to repair the vehicle or property or pay his own medical bills rather than incur potential insurance rate increases or even cancellation.  Such conduct  exposes agents to a breach of their fiduciary duty to  insureds as well as to a breach of the implied-in-law covenant of good faith and fair dealings.  In some states, it may also be a breach of the unfair claims practices statutes .  This kind of agent deception  may even lead to  punitive damages (Independent Life & Accident Ins Co vs Peavy - 1988).


Conflicts Created by Client / Agent Relationships

The insurance agent/broker is increasingly regarded as a professional to whom clients turn  for advice and guidance in insurance matters.  In some states, the insured's pattern of reliance on the broker's advice has been the basis for a higher standard of duty (Hardt vs Brink - 1961) and (United Farm Bureau Mutual Insurance vs Cook - 1984).  Relationship liability generally occurs on two fronts:  1) Contributory Liability and 2) Agents as Fiduciary.


Contributory Liability

When an agent holds himself out to be an "expert", a "specialist" or a "professional", he is creating contributory liability and may be held to higher than normal standards, or standards beyond the disciplines of insurance.  The earning of credentials or designations further compounds the agent's exposure, since he is considered, in the eyes of the law, to be subject to a higher standard of knowledge and responsibility.  Yet, faced with stiffer competition, agents are somewhat compelled to upgrade their image by creating marketing "niche" expertise with titles, credentials and job descriptions like financial planner, estate planner, retirement planner, "one-stop" insurance agency, loss control consultant, etc. Contributory liability relationships have also been cast simply because an agent has “ALWAYS” handled a clients business over the years, so much so, that clients have blindly depended on their advice.  The result of these "titles" and "agent trust" is a higher level of culpability.  In fact, plaintiff attorneys have and continue to develop legal strategies that establish contributory liability of agents through multiple approaches, including:


Lack of Client Knowledge

The insurance purchaser usually is not versed in the intricacies of the insurance business.  Prospective insureds seek the assistance of the insurance "specialist" and come to rely on his knowledge.  In some cases, the reliance on the agent is total and complete.  When the agent procures coverage that turns out to be defective in some way or fails to make appropriate arrangements, the applicant should have a cause of action against the agent.  This takes on more meaning today as agents and brokers have increasingly promoted their “professional expertise” in serving the public's insurance needs (Sobotor vs Prudential Property & Casualty - 1984).


Improper Advertising

Advertising has clearly affected the importance and desirability of acquiring insurance, especially where the agent claims to have substantial or special expertise that can be used to guide the consumer.  Advertising has influenced clients to develop reasonable expectations, true or not, that these agents are independent business entrepreneurs and, in some instances, are capable of expertise in a wide variety of business areas, e.g., financial planners, health specialists, catastrophe experts, business continuation consultants, etc.


A higher standard of care is assumed by agents who profess to have special knowledge, particularly when their clients blindly and substantially depend on them for their insurance needs.


Dual Agency

In many insurance transactions, the agent can generally be shown to have acted as a "dual agent" -- representing BOTH the insurer and client.   As such, he owes a duty to exercise due care and reasonable diligence in the pursuit of the client's insurance business regardless of the insurer chosen or represented by the agent.

Errors & Omissions Insurance

The availability and wide subscription of errors and omissions insurance for agents creates an argument that agents can be liability targets in any insurance disputes.  In some cases, the absence of errors and omissions coverage has practically absolved the agent of liability because attorneys assume there is nothing to go after.  But, who wants to risk going without coverage in this legal environment?


Client / Agent Interaction

There is a lot of discussion about building solid relationships with clients.   Considerable study has been done on customer satisfaction and the close association that develops with agents who are responsive to customer questions, explain policies well and are able to  “get it right” the first time.  Some feel that the close ties often stop a lawsuit in its tracks . . . after all, they say, who wants to sue a friend?


Agents as Fiduciaries

New legal theories are continually attempting to establish an agent selling an insurance contract as a principal fiduciary and therefore a probable "deep pocket".  A fiduciary is defined as someone who is held in trust or complete confidence.  Compared to an agent’s contractual duty, which requires negligence or tort action, fiduciary duty is intrinsic to his business.  In other words, an agent’s liability as a fiduciary simply comes with the territory . . . it’s part of selling insurance.  In recent years, cases of fiduciary duty are more prevalent.  The most obvious fiduciary responsibility of agents is to protect and safeguard client monies (Glenn vs Leaman - 1983). 


Other fiduciary related liabilities relate to an agent’s duty of care.  These cases even rear-up in a one-time business transaction; you don’t have to be a longstanding advisor to be liable.  More often than not, the issue of fiduciary exposure surfaces where an agent proposes a “full coverage” policy but failed to describe a certain provision or exclusion that existed in the written policy (Eddy vs Sharp - 1988).  In addition, fiduciary problems are launched by special agent relationships where the insurance contract is established as a collateral issue of some greater purpose, such as an insurance agent claim to have special “expertise” where the client is unsophisticated  (Sobotor vs Prudential Insurance -1984) /  Kurtz vs Insurance Communicators -1993), or when an agent promises  to provide "complete coverage" (Magnavox Co of Tennessee vs Boles & Hite - 1979).  The exposure also seems  exist where the agent is the "exclusive" insurance provider for clients or in cases where the client, over time, has come to be totally dependent on insurance decisions made by the agent  (Glenn vs Leaman & Reynolds - 1983).

Another area of fiduciary responsibility concerns disputes dealing with Employment Retirement Income Security Act (ERISA) qualified funds.  Many life agents help clients establish and fund retirement plans using insurance products.    Under ERISA, a plan must designate a fiduciary to administer its operation.  An ERISA fiduciary has been interpreted to be any person exercising managerial control over the plan or its assets, regardless of their formal titles.  In recent years, the U.S. Labor Department, the federal agency that administers ERISA, has become more aggressive in reviewing insurance funded plans and the link to agents as fiduciaries.  It is even proposed that agents and brokers be labeled ERISA fiduciaries simply based upon how t their retirement plan services are advertised and marketed. 


In the past, it was typically the owner of the business, the board of directors or a specifically assigned fund manager that was considered the principal fiduciary.  ERISA imposes a variety of duties on fiduciaries of life, health and retirement benefit plans, including a duty to act for the exclusive benefit of plan participants and beneficiaries.  The act also establishes prohibited transaction rules governing plan fiduciaries that would disallow, for example, a fiduciary receiving personal benefit from a third party dealing with the plan.  Does this mean that a commissioned agent who helps establish a retirement plan and recommends products to fund the plan violates these rules?  The answer lies in whether the agent is actually deemed a fiduciary.  If the agent arranges to receive a fee for consulting on the pension plan, he is clearly a fiduciary.  If the agent has an ongoing relationship with trustees of a plan who regularly accept the agent's proposals without advice from other consultants, he can be classed as a fiduciary of the plan.  On the other hand, where the agent is only acting in the capacity of an agent, offering a choice of products from which to choose, and as a member of a team of plan consultants, he is less likely to be classed as a fiduciary.


To summarize, ERISA fiduciary status may be established where the trustees of a retirement plan "relied" heavily on the agent's advice in the purchase of insurance contracts.  In Brink vs Dalesio - 1981, the

agent was found liable for unsound insurance purchases because the plan trustees relied on his advice. In Reich vs Lancaster - 1993, the agent was again found liable as a fiduciary when insurance transactions absorbed the majority of the fund's assets.  In addition, the agent failed to disclose his compensation or relationship with the insurer.  Since the fund trustees were inexperienced in insurance matters and accepted every recommendation offered by the agent, he was considered a fiduciary.   In Kerns

vs Benefit Trust Life, an agent, as a courtesy, notified employees that their group term life coverage had lapsed shortly before their employer's death.  But, he failed to forward the insurance company's routine offer to reinstate coverage and was found responsible.  In yet another case, a Louisiana district court held that an insurance agent was a fiduciary of a profit sharing plan, even though he only sold a whole life policy in the plan's name. The policies later proved unsatisfactory from an investment and tax perspective.  In support of their decision, the court stated that the primary purpose of a qualified retirement plan is to provide retirement benefits.  The plan can provide life insurance death benefits only if those benefits are incidental to the retirement benefits.  "Incidental", under IRS guidelines, would allow for premium payments LESS THAN 50% of the aggregate employer contributions to the plan.  In the Louisiana Case (Schoegal vs Boswell), the plan had purchased life insurance on a plan participant IN EXCESS of 50%.  Since the ERISA rule on incidental benefits had been violated and the life insurance agent had violated the rule, he was declared a fiduciary and seemingly responsible for the taxes, penalties and possible disqualification of the plan.  In further implicating the agent, the court pointed to Boswell’s (the agent’s) strong relationship with the custodian bank, management of the company, its employees and the plan administrator, deciding that he was "...clearly more than a mere salesman".  In the court's view, he had sufficient discretionary authority and control to be a plan fiduciary.  Fortunately, the court's ruling has recently been appealed and reversed on the basis that agent Boswell lacked the necessary authority and control over the plan investments and because there was no underlying agreement that his advice would serve as the primary basis for investment decisions for the pension plan.  While this is a favorable decision for agents, it demonstrates the extremes and aggressive legal action to which agents are vulnerable, particularly if the insurance transaction does NOT produce the anticipated or desired results for plan participants.


New fiduciary conflicts may also develop in the area of Medicaid planning.  Agents who routinely counsel clients on methods of transferring assets so as qualify for Medicaid benefits may be subject to fines and penalties under H.R. 3101 The Health Insurance Portability & Accountability Act of 1996 (Kassenbaum-Kennedy).  Under this bill, if the transfer of assets results in a “period of ineligibility” BOTH clients and agents could be subject to misdemeanor fines of between $10,000 and $25,000 per violation and/or one five years in prison.  Many agents recommend that clients purchase annuities, previously “exempt” in calculating assets qualify for Medicaid.  Under these new rules, if the payout of the annuity contract does not match the payout schedules established by the Department of Health (most don’t) a disqualification of asset transfer and ineligibility period can be established.  Look for future court cases here.


Insurer Claims Against Agents

An agent is a fiduciary of the insurer and has a duty to exercise reasonable care, skill and diligence.

When most agents ponder professional liability, they think client lawsuits.  But agents and brokers also face exposure from the insurers they represent.  When agents are sued by their insurer it is most likely for a violation of the law of agency.   Most agents are familiar with the term fiduciary duty.  Between agent and principal, (the insurer), fiduciary duty of the agent prevents him from competing with the principal concerning the subject matter of the agency or from making a "secret profit" other than what is stipulated or agreed as commissions.  Fiduciary responsibility is especially pronounced when the agent writes insurance for himself (Southland Lloyd’s Insurance vs Tomberlain - 1996).  Beyond fiduciary matters, agents are bound to the insurer by other statutory duties. They include Duty of Care and Skill, using standard care and skill;  Duty of Good Conduct or acting so as not to bring disrepute to the principal;  Duty To Give Information by communicating with the principle and clients;  Duty To Keep Accounts by keeping track of money;  Duty To Act as Authorized;  Duty To Be Practical, or not to attempt the impossible;  and Duty To Obey or comply with the principal's directions.  A violation of these duties can be considered grounds for termination and represents legal exposure for the agent.

Following are some examples: 


Basic Agency Violations

When an agency agreement exists between agent and insurer, the agent/broker has a duty to exercise reasonable care. The agent is considered a fiduciary of the insurer.  He or she must exercise skill and diligence and is liable for negligence that induces the insurer to assume coverage on which it suffers a loss.  Brokers who have agency agreements with insurers have been found liable to the insurer for clerical mistakes -- incorrect policy dates, erroneous limits of liability and omissions of endorsements.


Misappropriating Premiums

As representatives of the insurer, agents and brokers owe a fiduciary responsibility to the insurer to remit premiums collected from clients promptly or hold them in a trust account.  In Maloney vs Rhode Island Insurance Company - 1953, the agent converted premiums for his own use, facing liability to the insurer and possible criminal charges for embezzlement.

Failure To Disclose Risk Factors

An agent has a duty of good faith and loyalty to his insurer and may be liable for negligently inducing the insurer to issue coverage on which it suffers a loss (Clausen vs Industrial Indemnity – 1966).  In this case, it was successfully argued that an insurer may obtain indemnity from a broker, if the broker knows or should know that the insurer is relying on the broker to supply information about the client; the information furnished is incomplete or incorrect; the incomplete or incorrect information is material to the decision to accept or decline the risk; and the insurer is forced to pay a loss under a policy that the insurer would NOT have issued if complete and accurate information had been provided by the broker.  In a similar case (New Hampshire Insurance Co vs Sauer - 1978), the insurer sued its agent, alleging negligence for failing to notify the insurer of the exact nature of the insured's business when applying for business interruption coverage.  The jury attributed 70 percent of the loss to the insurer and 30 percent to the agent's negligence.


Failure To Cancel or Notify of Cancellation

Agents do not normally have an obligation to the insurer with respect to canceling an insured's coverage.  For example, if the policy is billed directly, the insurer usually notifies the insured directly of the insurer's intent to cancel and, thereafter, of the actual cancellation.  The broker/agent is typically "out of the loop".


However, a broker who has undertaken responsibilities in canceling coverage (Gulf Insurance vs The Kolob Corporation - 1968) through agreement with the insured, owes the insurer a duty to follow the insurer's instructions promptly and correctly.

Agents are liable to their company for violations such as clerical mistakes, mishandling premiums, withholding information, twisting information, failure to perform, exceeding authority, fraudulent schemes and unfair trade practices.


In Mitton vs. Granite State Fire Insurance Company - 1952, an agent was accepted as the insurer's general agent for purposes of signing policies, issuing endorsements, etc.  As the insurer's agent, the broker was instructed by the insurer to obtain a flood and landslide endorsement from an insured. If the insured refused to accept such an endorsement, the agent was to notify the insurer who would cancel the policy.  The broker failed to do either and was held liable to the insurer for the insured's flood damage.


Authority To Bind

An agent may be a general agent with general powers, or his powers may be limited by the insurer.  Some agents are authorized to issue insurance contracts that bind the insurer; they have binding authority (typically casualty agents).  Some agents may have binding authority only as to certain classes or lines of coverage. 


Legally, the agent possesses the powers that have been conferred by the company or those powers that a third party has a right to assume he possesses under the circumstances of the case.  In Troost vs Estate of DeBoer - 1984 the agent exceeded his binding authority yet his acts and representations were relied upon by the insured.  The agent was held liable for the insurers' losses.


Premium Financing Activities

Frequently, brokers play a role in helping clients finance their insurance premiums by bringing the insured and the financing entity together.  There have been cases where the financing company has been the victim of fraudulent schemes, misleading them into issuing loans to nonexistent insureds.  In an effort to recover its losses, the financing entity may look to the insurer on grounds that the broker was acting on the insurer's behalf in arranging the financing, even though the insurer may not have given the agent explicit authority to engage in premium financing activities.  In New England Acceptance vs American Manufacturers Mutual Insurance Company - 1976, an insurer was held liable for its agents actions in such a financing scheme because it was "implied" that the agent had been authorized to conduct premium financing.   In a similar case, Cupac vs Mid-West Insurance Agency - 1985, the court held that the insurer had not authorized its agent to engage in premium financing activities because nothing in the agency agreement referred to such activity.  The agent was held liable.  Various states have split on the decision that the business of premium financing is an integral part of the business of insurance.


Unfair Practices

Insurers may also lash out against agents under the National Association of Insurance Commissioners "Unfair Trade Practices Law" which many states have enacted. 


The thrust of this code is contained below:


"Persons (defined to include insurance companies and insurance agents) are prohibited in engaging in "unfair methods" of competition and deceptive acts and practices." Including, "making, publishing, disseminating, or circulating, directly or indirectly, or aiding, abetting, or encouraging the making, publishing, disseminating, or circulating of any oral or written statement or any pamphlet, circular, article, or

literature which is false, or maliciously critical of or derogatory to the financial condition of an insurer, and which is calculated to injure any person engaged in the business of insurance."


Under this act, it is conceivable that an insurer could commence litigation naming an agent where the company's insolvency was related to the agent’s "derogatory" actions.  Consider a case similar to Mutual Benefit Life, where agents were actively involved in the disintermediation or withdrawal of "blocks" of client policies after rating drops occurred.  Ultimately, this "run on the bank" was deemed the single greatest issue contributing to the companies liquidation.  Were agents exercising "due care" for clients or breaching their legal and "unfair practice" duties to their contracting company?


Liability Created by Insurer Failures

To date, few courts have held that insurance brokers or agents are liable for the losses that policy owners might suffer from an insurer insolvency.  Be assured, however, agents continue to be sued and pursued for malpractice in this area, and there are countless legal theories being proposed to force accountability. 


The basis for most tort actions where an insolvent insurance company is involved lie in certain cases and written code sections.  At first glance, these regulations imply that agents are not responsible for involving a client with an insolvent company or a carrier that eventually is state liquidated. Here is how the law of liability is interpreted in most states:

"The general rule in the United States is that an insurance agent or broker is not a guarantor of the financial condition or solvency of the insurer from which he obtains coverage for a client." (Harnett, Responsibilities of Insurance Agents and Brokers - 1990).


In an actual case against a California agent, Wilson vs All Service Insurance Corp (1979) similar results accrued:

"An insurance broker has no duty to investigate the financial condition of an insurer that transacts business in California pursuant to a certificate of authority because the scheme of licensing and regulation of insurers administered by the Insurance Commissioner was sufficient for this purpose and could be relied upon by the broker when placing insurance."


Currently, agents are NOT responsible for client losses from an insurer insolvency UNLESS the agent knew or should have known that the insurer was insolvent at the time insurance was placed.


Before an agent rejoices in knowing that laws of this nature are on the books, he must realize that regardless of this implied protection, court cases continue to be tried and a trend is developing that places greater legal responsibility on agents concerning insurer insolvency.  In Wilson vs All Service Insurance, for example, the client commenced a lawsuit in 1975 and even though the agent prevailed, the decision was not rendered until 1979 -- that's four years of attorney and court fees!  So aggressive was the client that two different appeals to the State Supreme Court were attempted, involving more defense fees.  One must also ask . . . If agent liability laws and codes represent a "safe harbor" and if agents are "untouchable", why do professional liability policies REFUSE to defend and REFUSE to indemnify agents where an insurer insolvency arises?


The legal caveat that "muddies the waters", relevant to agents and insurer failures, is the result of a 1971 lawsuit -- Williams-Berryman Insurance vs Morphis, (Ark. 1971) 461 S.W.2d 577, 580.  It proclaims the following:

"The agent or broker is required to exercise reasonable care, skill and judgment in procuring insurance, and a failure in this regard may render him or her liable for losses covered by the policy but not paid due to the insolvency of the insurer."  What is "reasonable care"?  In Wilson v. All Service (above), the fact that the carrier was an admitted company proved to be adequate care.  In Higginbotham & Associates vs Green - 1987, however, the courts further clarified:

"If, for some reason, it is shown that the agent or broker knew, or should have known, that the insurer was insolvent at the time of placement, he or she may be liable for the loss caused by insolvency."


In all these cases, the agents won, or prevailed on appeal.  The reader should be aware, however, that in addition to the expense of a lengthy trial, a legal pattern is being established.  To summarize, the burden of agent liability involving financially distressed insurance companies is greater today for two reasons:

1)   Because more liquidations are in process

2)   Because the courts want agents to be more responsible for their actions.


In addition to these known precedents and cases, agents are continually subjected to harassment suits from disgruntled clients and others that are settled out of court.  Because these settlements are not published, it is impossible to know the depth and breadth of the problem.  Most agents, however, know someone or has had some personal experience, and  realize such cases occur frequently. One  case involved an Oregon couple who invested their $26,000 retirement fund in an annuity with Pacific Standard Life in 1987.  About three years later, they attended a financial planning seminar where they learned that their insurance

company had been taken over by the California State Insurance Department due to losses in "junk bond" holdings.  The couple immediately demanded a surrender of their policy.  Of course, they were blocked from withdrawing their money by the conservators and the six-month payment delay provision in their policy.  Seven months later they received a check for about 70 percent of their annuity value.  The agent was threatened with legal recourse to pay the deficiency.  After weighing the possibility of a lengthy court case and to keep an action from going public, the agent agreed to pay. 


Based on the  court cases we discussed, this agent clearly had no exposure.  The  path of least resistance, however, was to pay the client and move on.  Fortunately, the dollars involved were controllable.  But what of the situation where multiple clients are seeking reimbursement or the policy amounts are significant?  The answer is not easy to predict, but the solution involves a multi-faceted approach to managing exposure while still providing service.


Misrepresentation & Insurer Failures

Insurer insolvency cases against agents may be based on misrepresentations by agents.  Where agents have made expressed warranties or specifically agreed to supply a solvent carrier or one with stated or minimum amounts of capital are obvious areas of liability .  An even worse situation occurs where an agent knowingly distorts actual capital or asset statistics of an insurer to make it more appealing.  A similar violation occurs where an agent represents that he made a detailed investigation of the insurer when, in fact, he did not.  Examples where agent liability is not so clear, however, include cases where an agent convinces a client to surrender or cancel a policy from one company for a policy of another company and it is determined that the second insurer is weaker and maybe even be liquidated at some later date.  In this instance, the law might interpret the agent actions to be more than just a "usual transaction", where a policy product is simply “sold".  Here, the agent acted more as an advisor.  His actions might appear to be assurances that the new company is better than the old company when, in fact it is not, for purposes of generating a commission.

Agents who induce clients to buy a policy from an insurer, or to exchange a policy from one insurer to another insurer, which then becomes insolvent, may assume liability if the agent made false promises or misstatements about the insurer’s financial condition.


In yet another legal strategy, agents may be culpable by  statements of confidence.  Saying things like, "trust me" or "I guarantee it" could be construed as a warranty by the agent.  Since most agents find it impractical to "clear" every representation with compliance departments, many oral declarations are made in the course of a sale or counseling clients.  Technically, a guaranty should be in writing, but this would not stop an attorney from pursuing a talkative agent who made similar representations to more than one client. 


A common example is in the area of "safety" regulations.  The following are phrases probably used everyday by agents.  Although they stop short of creating an absolute financial guarantee for policy owners, they infer financial stability and give the purchaser a measure of confidence that the company behind the product is financially secure.  An agent who cites these utterances is likely to be responsible for their truth:


Claims of Regulation by the State Insurance Department

An agent might say: "All insurers are regulated by the State Insurance Departments in the states in which they do business.  These departments enforce the states' insurance laws.  These laws cover such areas as insurer licensing, agent licensing, financial examination of insurers, review and approval of policy forms and rates, etc.  Generally speaking, an insurer's and reinsurer's operations are at all times subject to the review and scrutiny of state regulators."


Claims of Minimum Capital and Surplus Requirements

"Among the requirements imposed by state laws are minimum capital and surplus requirements.  These provide that an insurer or reinsurer will not be allowed to do business unless it is adequately capitalized and has sufficient available surplus funds with which conduct its operations."


Claims of Minimum Reserve Requirements

“State laws require insurers and reinsurers to post reserve liabilities to cover their future obligations so that financial statements accurately reflect financial condition at any given point in time."


Claims of Annual Statements

"Insurers and reinsurers are required to file annually a sworn financial statement with each insurance department of the state in which they do business.  This detailed document provides and open book of the insurer's financial posture and is reviewed closely by state regulators."


Claims of Periodic Examinations

"State regulators perform examinations or audits in the home office of insurers and reinsurers as often as they deem necessary, but generally no less frequently

than every three years.  The primary purpose of such examinations is to verify the financial condition of the insurer.  In addition, a reinsurer may perform period audits of the company they reinsure.  Finally, an annual audit is also conducted by a public accounting firm."


Claims of Statutory Accounting

"In reporting to state regulators, insurers and reinsurers are required by state laws to practice "statutory accounting", as opposed to conforming with "generally accepted accounting principles (GAAP). The statutory method is generally acknowledged to be a more conservative approach and thus much less likely to overstate a company's true financial condition."


Claims of Investment Restrictions

"State insurance laws restrict the manner in which insurers and reinsurers can invest the funds they hold.  Insurers and reinsurers generally may invest only in assets of a certain type or quality and must diversify their investments to minimize overall risk."


Guaranty Fund Claims

"It is possible that, in spite of these and other safeguards, an insurer could become insolvent.  If this should occur, there still remains the likelihood that a policy owner will retain most, if not all, of the value of his policy from funds still remaining with the insolvent insurer through the state guaranty fund.”


Most states discourage the advertising of an insurance product as “safe” due to the backing or existence of state guaranty funds.


Virtually every state has enacted what are commonly known as "guaranty fund" laws for the added protection of the policy owners of insolvent insurers. These laws generally provide that other insurers doing business in that state will contribute funds to alleviate any deficiency of assets in the insolvent insurer.  The provisions of the laws generally cover all policy owners, wherever located, of insurers domiciled in such states and all residents of such states who are policy owners of insurers who are not domiciled in such states, but who are authorized to do business there.  The law in some states, however, limits protection on several fronts: There are coverage limits or caps ranging from $50,000 to $1 million per claim; some completely eliminate claims or place severe restrictions on certain policies including life, variable life blends, disability, mortgage guaranty, ocean marine, surplus lines, HMOs, PPOs and other non-traditional markets. Learn more about guaranty funds in Chapter 3.


Many states disallow advertising or use of any statements regarding state fund insurance prior to the sale.  The premise is that guaranty fund warranties made to fortify the financial security of a weaker insurer could lull the public into overlooking the need to deal with sound companies.  Further, violations of sales tactics using guaranty funds may cost an agent more than a liability suit.  It may result in  monetary fines and license suspension.


Agent Relationships & Insurer Failures

Often, agents develop special relationships with clients which can result in additional liability exposure.  This can occur when an agent has handled all the insured's business or when a client has come to completely depend on the agent for all his insurance decisions and the agent knows it.  In these cases, there may be legal authority to proceed against the agent where losses are due to an insolvency.  Even when faced with limited success, policy holders and their attorneys have pursued agents asserting a "personal" claim -- that is, the culpable conduct of a third party (the agent) was personal to the policy holders, who relied upon that wrongful conduct.  Also, never let it be said that policy holders cannot sue an agent for any reason.  This "right" has been upheld under Matter of Integrity Insurance Co., 573 A.2d 928 (1990).


One justification for placing tort responsibility on the agent is the conclusion that :

"The risk of loss in an insolvency setting should not rest with the insured or the claimant."


Cal Ins Code, 780-790.1 (Dearing 1991), N.Y. Ins Laws, 2401-2409 (1990), Mass Ann Laws ch 175, 2B (1990).


In the not-too-distant-future, it is likely that agents will be held responsible for monitoring the financial status of insurance companies and for client losses due to failures.


In essence, the courts are sympathetic concerning an insured's need for complete protection.  This stems from the special circumstances that surround an insurance contract, i.e., the insured and insurer are not equal partners since the insured cannot protect itself by contract.  Also, the insured cannot bargain or require a provision of the policy to protect or indemnify for a potential insolvency.  The insured can only seek other insurance with a more stable company.  And, even when an insured is informed about the financial condition of an insurer, the courts feel that they would lack the knowledge and experience necessary to evaluate financial statements, reports and solvency terms like surplus, reserves, etc.  Finally, an insured cannot mitigate or control his damages since insurance cannot be purchased after a loss, i.e., the insured could have already paid for a benefit he cannot receive if an insolvency occurs.

Recent legal research, which will be cited in claims against agents, presents a clear and loud indictment of agent and broker responsibility (A Proposal for Tort Remedy For Insureds of Insolvent Insurers Against Brokers, Ohio State Law Journal, vol 52, 4 (1991):

"When one considers all of the factors of tort recognition, including the social policy aspects, the argument for the establishment of a tort duty on the part of the collateral parties (agents, brokers, reinsurers, etc) to the insurance relationship is compelling.  Placing a duty on the collateral parties to investigate and monitor reasonably the solvency of insurers with which they deal yields a much more socially advantageous result.  This duty logically extends the duty already existing for brokers to exercise care in the placement of insurance with solvent insurers.  The proposed duty, however, requires affirmative investigation and monitoring.  This investigation and monitoring should, at least, include an evaluation of National Association of Insurance Commissioners' data, Insurance Regulatory Information System data, ratings service data, and any other public information and general information circulating within the industry.  Thus, the duty requires a more thorough investigation than present law apparently requires brokers to make.  In addition, the duty continues past the placement of the insurance or the commencement of the insurance relationship."


"The duties of these public parties is a high duty that encompasses nonfeasance (Pennsylvania v. Roy, 102 U.S. 451, 456).  Imposing a duty on collateral parties (agents, brokers, reinsurers, etc) to conduct a reasonable investigation and monitoring of the solvency of insurers, and imposing liability for a failure to abide by that duty accords with prior treatment of public entities."


Congress has also chimed in by suggesting that:

"Brokers should be required to check the integrity of the people and records which determine ultimate premiums and losses charged on policies".


"Failed Promises", Testimony before the Subcommittee on Oversight and Investigations for the U.S. House of Representatives (1990).







In Chapter 1 you learned that legal conduct is a broad area of agent responsibility you are duty-bound to know.  Sales conduct, on the other hand, is a responsibility you choose to uphold in order to do a better job for your clients.  If you need more reasons why you should practice proper sales conduct here’s a short list:

·        It might keep you from being sued by a client or your insurer.

·        The cleaner your record, the less involved underwriters will be in the sales process, i.e., you have more control over the sales process and less compliance.

·        Sales conduct violations drive up the cost of doing business which could effect your commissions, or, completely replace the current system of incentive pay with a salary or other form of measured compensation, i.e., you won’t make as much money.

·        Sales conduct problems erode the public trust and that can cut into your sales.

·        Sales conduct lawsuits are now part of how companies are rated.  More suits mean a lower rating and a harder sale.


There are many industry groups and agent associations who feel that the movement toward sales ethics is way behind schedule.  Too much emphasis and money has been spent on grooming sophisticated “salesmen”, they say, when there is a greater need for agent diligence and fair dealing.


Sales conduct is an optional agent duty that involves proper handling and choice of company, product and sales presentation to best serve a client’s financial planning.


The cornerstone of this agent diligence movement is now called agent due care or sales conduct.  Roughly translated, the meaning of sales conduct is an agent's professional and ethical handling and choice of company, product and sales presentation to best serve a client's financial planning.  Others have embellished on this definition where the practice of sales diligence might read like this:  “Conduct business according to high standards of honesty and fairness and to render that service to its customers which, in the same circumstances, it would demand for itself.  Provide competent and customer-focused sales and service.  Engage in active and fair competition.  Provide advertising and sales materials that are clear as to purpose and honest and fair as to content.  Provide fair and expeditious handling of customer complaints and disputes”.


If you went a step further and combined legal conduct and sales conduct you might run your business by the following credo:

·        I will know everything possible about my client’s financial and insurance needs.

·        I will have a complete understanding of all products I sell and present them fairly.

·        I will find the most suitable product for my client and make sure I place him with financially capable companies without “bashing” the competition.

·        I will document any lack of knowledge with a full disclosure agreement.

·        I will request each client to sign a binding arbitration agreement for any potential misunderstanding or dispute.


While it would be wonderful if every agent lived by these rules “real world” situations often get in the way.   Taking the time to follow each and every rule would probably add to your work load.  On the other hand, a little less free time today might save you considerable time and money by avoiding a major legal confrontation later.  Likewise, the loss of a policy sale or two today might make it a whole lot easier to sell one . . . or be referred one . . . next year.


Proper sales conduct requires agents to be suspicious about policies that sound “too good to be true”.


Fundamental to sales conduct is the understanding that all insurance is constructed of the same elements -- expenses; experience (claims risk or mortality); and return or profit.  Therefore, a policy that appears to be significantly better than others in the marketplace should be suspect.  Once a suitable product can be found, the decision to buy should be based on the assumptions in the policy and the financial stability of the company.  Policy illustrations and quotes are one method to make this assessment.  Unfortunately, agents and clients rely too much on these presentations to the extent that policies are rarely read.  As a result, agents should be sure that any projection or estimate disclose the assumptions that went into the projection and the fact that variations in these assumptions can significantly change insurance results.  Recent laws have even made it mandatory to bold or highlight any "guaranteed" portions, as compared to simple projections.  It is further suggested that illustrations be run again, without forecasting better times or improved rates into the future, to see if they still meet client expectations.

Sales conduct involves the disciplines of disclosure, diversification, periodic monitoring and knowledge of product, ratings and regulations.


With reference to agents choosing safe companies to insure their clients, it will be demonstrated that sales conduct involves many disciplines including: disclosure, diversification among multiple carriers, product variation diversification, regulatory knowledge, multiple rating verification, key ratio comparisons, periodic monitoring and more.  A recent business magazine survey is a painful reminder to the industry that the road to agent diligence may still be cluttered with potholes and a fair share of detours.  Money Magazine tested 20 insurance agents on their accuracy and clarity in explaining their insurance products and the role they played in a client's financial planning.  Most of the agents failed simple standards of due care, including the ability to demonstrate simple financial assumptions concerning the solvency of a chosen insurer -- either at time of purchase or later.  Agents must realize, that doing "too little" concerning how and where they place client business can be hazardous to their financial health and moral responsibility to the people they serve.  This takes on special meaning to agents when they discover that lawyers want to prove that a pocket rating card and other company supplied financial condition brochures may not be enough to demonstrate that an agent did his best in selecting a carrier who, after purchase, declined financially to unsafe or liquidated status. 


Agents are selling more than an insurance policy . . . they sell security, peace of mind & freedom from financial worry in the event of a catastrophic claim.


  There is no question that  lawyers are increasingly aware of the numerous legal theories available to hold the insurance producer liable for failing to meet some kind of professional standard.  Could a jury be convinced, for example, that an insurance professional, especially one who has earned a designation such as CLU or CFP, neglected his professional duties in not explaining the full impact of estate taxation to a now deceased, but underinsured client?  Is a casualty agent, possibly a CIC or CPCU, liable for placing a client with a B-rated carrier that liquidates at the very time a client files a claim or failing to recommend a specific policy option that later involves losses?


The answers to these questions are continually being litigated as we saw in Chapter 1.  The significance, however, is that the courts in just about every state, have made it absolutely clear that insurance agents are selling a lot more than a mere contract of insurance.  They are selling security, peace of mind and freedom from financial worry in the event of a catastrophic claim.


Sales Conduct In Choosing A Company

Agent legal conduct in choosing a company centers on the ability to direct a client to an insurer that is solvent at the time of purchase and able to meet its contractual obligations.  Sales conduct considers diversification, to spread risks among carriers and to meet state guaranty fund protection, and on going monitoring by private rating services. 


Policy owners must depend on agents for choosing insurers because they are generally unsophisticated in analyzing the financial complexities of solvency.  Agents help businesses and individuals purchase property and liability insurance to minimize current financial losses.  Life, health and annuity policies cover losses of future economic potential.  In both cases, the purpose is to shift the financial consequences of loss.  Sometimes, however, policy owners find that the "safety net" they purchased is not always as safe as it started out to be.  The recent increase in frequency of insurance company failures and inability to pay claims is proof.  It is further substantiated by the substantial increase in claims submitted to state guaranty funds which are forced to step forward and make good on failed promises of defunct or faltering companies.


Clients should expect to have their coverage placed with financially reliable insurers.


An agent is engaged by a client because he is an insurance professional.  Clients should expect to be placed with financially reliable insurers.  Too often, it is believed that state regulators are monitoring solvency closely and will advise agents and brokers by some mysterious "hot line" . It just doesn't happen that way, and we have recent examples to prove that it doesn’t.  Regulators of insurance companies, like regulators of financial institutions such as banks and thrifts, do not make public announcements of pending problems.  This could cause a "run on the bank" or a "run on the insurance company".  Severe disintermediation, withdrawal of policyholder funds or policy cancellations could initiate a complete collapse similar to what happened with Mutual Benefit Life.  By stepping in without public warning or fanfare, regulators hope to avoid the severity of a takeover and minimize consumer panic.  That is why an agent will not receive advance warning from regulators.  Unless the agent is tracking solvency by demanding full disclosure from an insurer BEFORE AND AFTER involving a client, he may experience the unpleasant experience of dealing with a
disgruntled client or his attorney who just read about an insurer's demise, complaints filed with the insurance commissioner, or worse, a surprise visit from the "60 Minutes" investigative team!


There are NO set rules on solvency due care techniques since the actual process must consider the risk capacity of a client, the current economy and the specific financial result or exposure needing coverage.  However, there are some steps that agents might take to help mitigate bad choices.  It is hoped that at least a few of the following sources and considerations will have application and will involve the agent in an area of due care that has been largely ignored.  If this is considered too time consuming, an agent would be advised to concentrate only on those companies where this information can be acquired.  In some cases, due care is not simply a matter of collecting a financial ratio.  The story behind the numbers is often as important.


Using the Rating Services

An agent choosing a company for his or her client would be advised to consult the major rating services. The activities of insurance company rating agencies have become increasingly prominent with the industry's recent financial difficulties and the well publicized failures of several large life insurers.  The ratings issued by these agencies represent their opinions of  insurers' financial conditions and their ability to meet their obligations to policyholders.  Rating downgrades are watched closely and can significantly affect an insurer's ability to attract and retain business.  Even the rumor of a downgrade may precipitate a "run on the bank", as in the case of Mutual Benefit, and seriously exacerbate an insurer's financial problems.  There is little doubt that rating organizations play a significant role in the insurance marketplace.


When ratings of an insurer vary widely among rating companies, the financial safety of the insurer should be questioned.


Some have expressed concerns about the potential adverse effect of ratings on particular insurers and consumer confidence in the insurance industry in general.  Once the province of only one organization, A.M. Best, a number of new raters emerged during the 1980s.  Questions have been raised about the motivations and methods of the raters in light of the recent sensitivity regarding insurers' financial conditions and what some perceive to be a rash of arbitrary downgrades.  On the one hand, insurer ratings historically have been criticized for being inflated or overly positive.  On the other side, there are concerns that raters, in an effort to regain credibility, have lowered their ratings arbitrarily in reaction to declines in the junk bond and real estate markets and the resulting insurer failures and diminished consumer confidence.


One consultant  suggests a way to determine if an insurer is running into difficulty is to monitor several ratings.  If the ratings vary widely, this should send a signal that there are other factors of concern regarding the insurer.  A recent example is United Pacific Life.  In  1992 it was rated A-Plus by Duff and Phelps, BBB by Standard & Poors and Ba-1 by Moody's.


On Going Monitoring & Policy Replacement

In the past, there has been no legal premise to hold agents responsible for monitoring solvency of a company after the initial sale.  However, in Higginbotham v. Greer, it is suggested that agents need to keep clients informed about significant changes in the financial condition of the company on an on going basis.  Sales conduct goes much further by emphasizing ongoing due diligence, and when replacement is considered, documentation of files including third party testimonials as justification, especially for any recommendation to move a client’s coverage from a company rated "A" or better to a lesser rated carrier.  Even if the intent of replacement is to provide superior coverage, the client's security position is technically downgraded if the new insurer has lower financial ratings.


Company Deals

Agent sales conduct should carefully consider companies that offer deals that are "too good to be true".  Agents might be advised to at least be suspicious of a company offering a "better deal" than anyone else.  It is common sense that something along the way will suffer, as it did in the case of some life companies that invested in junk bonds and many casualty companies which participated in deep discount premium wars where expenses and claim costs at times exceeded income.  This can only represent a degenerative financial condition for the insurer.


Also remember that insurance agents, as salesmen, want to believe something is a better product or a better company.  By their very nature, salesmen often "get sold" as easily as some clients.  It would be wise to be critical of all brochures and analysis distributed by a carrier which portray it to be the "best" or "safest".


Company Diversification, Business Lines & Parent Affiliation


In the quest to exercise proper sales conduct, a strategy of multiple company coverage may be the

answer.  For a client's life insurance needs, some combination of term, whole life, variable life or universal life may be employed to spread the risks among many different insurers  and product lines.  The variable life component could be diversified even more by using multiple asset purchases.  On the casualty side, similar diversification might be employed between business and home owners policies, workers’ compensation, professional liability, etc.


A strategy of using multiple companies may satisfy the need for client diversification.


The insurance consumer should also be educated by agents about the different types of insurers, i.e., stock versus mutual companies, although it might be considered an error to generalize about the safety of an insurer or the price of its coverage or the service it provides, based solely on the insurer's legal structure.  This disclosure may be particularly appropriate where an insurer, due to its legal structure, may NOT be covered by state guaranty fund protection, e.g., the non-profit Blue Cross and Blue Shield.  Or, where the legal structure of the product offered may NOT be "insured" by state funds, e.g., variable annuities.


An agent may not have many choices concerning the company he writes, e.g., worker's comp coverage can only be secured with a carrier willing to write worker's comp.  It has been suggested, however, that agents may consider the nature of multi-line companies to determine if one of the lines is weak enough to "down-drag" a profitable line.  An example could be a life company that also writes health insurance as a direct line of business or by affiliation.  If health carriers become threatened under a new national health care proposal, it could spell trouble for an insurer's health line which can affect ALL lines of business written.  Of course, this is not to say that a multi-line carrier cannot be profitable and solvent.


Who or what kind of company owns the insurer is another consideration.  Is the parent sufficiently solvent that it will not recruit or siphon funds from the insurer?  In a like manner, does the insurer own an affiliate that is likely to need capital infusion from the insurer?  Has the insurer recently created an affiliate, and are the assets in this affiliate some of the non-performing or under performing investments of the original insurer? Is a merger in the offing that might mingle your client's A-rated company with a larger B+ company?  In what partnerships or joint ventures does the insurer participate?  Do these entities own problem real estate properties of the original insurer?  Has the insurer invested in other insurance companies, and have those companies, in turn, invested back in the original insurer or one of its affiliates?


Name recognition can go a long way in giving a client a high level of comfort.  In the early 1980's, for example, Cal Farm Insurance, a B rated company, was proud to point out that it was owned by the California Farm Bureau, a 100-year-old company.  By the mid 1980's, however, Cal Farm Insurance was liquidated by the California Department of Insurance for overextending itself on financial guarantee bonds that it could not pay.  Because the claimants were considered to be sophisticated investors, they received only 25 cents on the dollar and forced to foreclose on the properties behind the financial guarantee bonds themselves. The California Farm Bureau was not "forced" as a source to pay any deficiencies.


Other abuses have occurred with a slightly different twist.  For example, Senate investigations have revealed that the failure of many insurers can be directly tied to the "milking" of these companies by a "non insurance" parent.  Further, not all abuses have been on the side of the parent.  Insurance companies themselves have been known to tap huge sums of capital from their parents, commingle assets and devise elaborate capitalization schemes, including sale and leaseback arrangements and the securitization of future revenues.


Conflicts of Interest

Agents receive a commission for their expertise in selecting a suitable product and company.  The fact that the agent receives this commission from the same company represents a definite conflict of interest.  An ethical agent should disclose this fact in reference to the choice of the company selected.  Where the commission is higher than normal, one might question the specific policy elements that will be affected, such as higher surrender or cancellation charges, and make sure to check on the financial qualifications of the insurer and include these facts in any disclosure.  An insurer recently placed in liquidation had a known history of paying higher than prevailing commissions.



Reinsurance is an effective tool for spreading risk and expanding capacity in the insurance marketplace.  The strength of the guarantees backing the primary company, however, are only as strong as the financial

strength of the reinsurer.  Abuses have occurred where the levels of reinsurance have been too high, the quality poor and the controls nonexistent.  Industry analysts suggest that the total amount of reinsurance should not exceed 0.5 to 1.3 times a company’s surplus.  Agents should also be concerned about foreign reinsurance since U.S. regulator control

and jurisdiction is difficult.  See how much of the foreign reinsurer's assets are held in the US.


Ask if the reinsurer has directly guaranteed the ceding company or used bank letters of credit for this purpose.  These credit letters have not been effective guarantees in the past.  Also, under terms of the ceding contracts, can the reinsurance be "retroceded" or assumed by another reinsurance company -- it is possible to have layers of reinsurance which could create difficult legal maneuvering during a liquidation?  Does the ceding contract have a "cut-through" clause which allows the reinsurer to pay deficient policy owners or insureds directly, rather than to the liquidator?  Is the insurer writing a significant amount of new business that may require costly amounts of first- year reinsurance?


Reinsurance surplus relief  is another area of concern to investigate.  The first year that an insurance policy goes on the "books", the insurance company suffers a loss.  This is attributed to laws related to the accounting valuation of the policy and the high costs or expenses paid in the first year, such as commissions, etc.  A loss to an insurer also reduces a company's surplus.  A strain on surplus can create all kinds of problems with regulators and lenders, so insurance companies go to great lengths to shore up their surplus from the losses of first year policies.  This may be accomplished by raising additional capital or through some form of financing.  More often than not, however, an insurance company will simply call up the local reinsurance company and obtain surplus relief reinsurance.  Once in place, surplus reinsurance provides the ceding company, the insurer who uses the reinsurance funds, with assets or reserve credits which improve the insurers earnings and surplus position.  The major difference between using reinsurance to cover first-year losses and a loan is how the transaction is reported.  When an insurer obtains a loan, the accountant must record a liability.  Reinsurance for surplus relief, however, is NOT considered a liability under statutory accounting because the repayment is tied to future profits of the policy or policies being reinsured.  Collateral for the reinsurance, in essence, is future profits.  Thus, reinsurers run substantial risks when the ceding company cannot pay.  The fee for providing the reinsurance is typically from 1 percent to 5 percent of the amount provided.


Regulators are well aware of reinsurance surplus relief practices.  Over the years, they have introduced rules which attempted to minimize abuses.  The 1992 Life and Health Reinsurance Agreements Model Regulation was adopted by the National Association of Insurance Commissioners for implementation starting in 1994.  The National Association of Insurance Commissioners also adopted a 1988 regulation which reads as follows: " . . . If the reinsurance agreement is entered into for the principal purpose of providing significant surplus aid for the ceding insurer, typically on a temporary basis, while not transferring all of the significant risks inherent in the business reinsured and, in substance or effect, the unexpected potential liability to the ceding insurer remains basically unchanged".


Size of Company & Loan Portfolio

What percentage of an insurer's nonperforming or under performing real estate projects have been "restructured" -- sold and self-financed to a new owner at favorable terms to eliminate a "drag" on surplus?


Statistically, fewer failures have hit companies with assets greater than $50 million.  It is thought that larger companies have more diverse product lines, bigger sales forces, better management talent--in essence, they are better equipped to ride out financial cycles.  In recent wide scale downgrading of insurers, A.M. Best seems to have favored significantly larger companies in the over $600 million category.  However, another advisor feels that a small, well capitalized companies can deliver as much or more solvency protection as a large one suffering from capital anemia.


State Admission

Checking that an insurer is licensed or admitted to do business in the state at least assures that the company has met solvency and financial reporting standards.  Most states offer toll free numbers for these inquiries.  Some states will also divulge the rank of an insurer by the number of complaints per premium volume.  Agents should realize, however, that to date no court has allowed an insured, who has suffered a loss as a result of an insurer insolvency, to recover from a state run department of insurance for failure to regulate the solvency of the insurer.


Risked Based Capital

Risked Based Capital guidelines could prove to be one of the most useful tools for quantitative analysis.  In a nutshell, it is a capital sufficiency test which compares actual capital, surplus, to a required level of capital determined by the insurer's unique mix of investment and underwriting risks.


Guidelines for this new regulation took effect in 1994 for life and health companies and 1995 for property/casualty insurers.  Risk Based Capital  is the brainchild of the National Association of Insurance Commissioners. Since its inception, the National

Association of Insurance Commissioners has strived to create a national regulatory system by the passage of model acts  or policies designed to standardize accounting and solvency methods from state to state.  Risk Based Capital is one of many "model acts" recently adopted by the National Association of Insurance Commissioners.


Risked Based Capital ratios define acceptable levels of risk an insurer may incur.


The Risk Based Capital Model Act  defines acceptable levels of risk that insurance companies may incur with regards to their assets, insurance products, investments and other business operations.  Insurers will be required, at the request of each state insurance department, to annually report and fill out Risk Based Capital forms created by the National Association of Insurance Commissioners. Formulas, under risk based capital, will test capitalization thresholds that insurers must maintain to avoid regulatory action; recalculate how reserves are used; reduce capitalization required for ownership of affiliated alien insurers and non-insurance assets; and allow single-state insurers to qualify for exemption from reinsurance capitalization if their reinsurance doesn't exceed 5 percent of total business written.  The risked based capital system will set minimum surplus capital amounts that companies must meet to support underwriting and other business activities.  Because the standards will be different for each company, the guidelines run counter to existing state-by-state regulations that require one minimum capitalization requirement for all insurers regardless of their individual styles of business or levels of risk. 


For example, insurers reporting Risk Based Capital levels of less than 70 percent to 100 percent may be subject to strict regulatory control.  Scores from 100 percent to 150 percent might be issued regulatory orders requiring specific action to cure deficiencies.  Higher scores might receive regulatory warnings and corrective action stipulations.  Attaining 250 percent or more, would relieve an insurer from any further Risk Based Capital requirements in a given year.


It is clear that Risked Based Capital encourages certain classes of investment over others.  For example, an asset-default test  under Risked Based Capital, called C-1, establishes varying reserve accounts be established for various classes of investments based on their default risk.  These amounts could be as much as 30 percent for stocks and low quality bonds and 15 percent for real estate owned as a result of foreclosed mortgages.  Industry critics say that the C-1 surplus requirements  alone could be far greater than all other categories of Risked Based Capital like mortality risk assumptions, interest rate risks and other unexpected business risks. 


On the surface, Risk Based Capital seems to solve many regulatory concerns.  Solvency rulings are standardized from state to state and specific action is mandated across the board.  This would appear to be acceptable by insurance companies who could now predict regulatory response in any state.  However, Risked Based Capital may also adversely affect financially sound companies simply because they own more real estate -- performing or not.


Some in the industry also feel that the Risk Based Capital rules are simply too restrictive, subjecting many of the best known insurers to immediate regulatory action and "bad press".  This, in turn leads to a "run on the bank" that could tip these insurers into worse condition.  The concern of these parties is that the risk based capital system might falsely identify inadequately capitalized insurance companies and undercapitalized ones as being adequately capitalized.  Too much emphasis is placed on the type of investment, rather than its quality.


Sales Conduct In Choosing Product

If an agent is truly using due care in selecting the right policy, before selling, he should:

·        Obtain specific information on the client's current and anticipated risk exposure and review all existing policies.

·        Review a "specimen" policy and policy amendments for every insurance contract he is marketing.

·        Make sure that the client understands the type and limit of coverage being purchased; the responsibilities of each party, the insured and the insurance company; and the services that will be provided by the agent.

·        Monitor policy needs on a continuing basis.  Regardless of the sequence of policy decisions, agents must recognize that the  factors involved in the choice of a policy may be viewed differently by the agent and client.


The value of an agent’s service is a function of his care in making appropriate insurance decisions.


An agent seeks coverage as a means of transferring pure risk.  A client views policies in terms of obtaining reduced uncertainty, i.e., in most cases, your customers can only hope that the policy they purchase is appropriate.  That is why agents are vital players in any insurance purchase.  The greater agent due care exercised, the more valuable the service.  It is also why, when viewed from an agent's liability perspective, ALL options should be disclosed.


Policy Choices & Risk Management

The process by which agents help clients select the most suitable policy is known as risk management.  The two basic rules concerning risk management are: 1)The size of potential losses must have a reasonable relationship to the resources of the client, and 2) Benefits of risk reduction must be related to its cost 


In essence, these rules advise risk takers not to risk more than they can afford to lose, to consider the odds and not to risk a lot for a little.


The agent must also consider a client's pure risk vs. speculative risk.  Both pure and speculative risk involved uncertainty, but in pure risk, the uncertainty relates only to the occurrence of the loss.  In other words, there is no chance for a profit to be made.  Speculative risk offers the opportunity for both gain and loss.  An example of a speculative risk is when a dilapidated apartments burns and is replaced with new housing.  Society can gain from speculative risk.  However, the agent would do better to concern himself with the pure risk losses of the client.  In the above case, does the apartment policy provide pure risk provisions, such as a "lost rent clause" to provide the client and his family sufficient cash flow while the new apartment is being built?


The process of risk management requires setting and achieving goals in at least four areas:  pure risk discovery, options to deal with the risk, implementation and ongoing risk monitoring. 


Pure risk discovery requires knowledge about a clients assets, income and activities of his family or business.  Several sources can be valuable, including: financial records (balance sheet and income statement), specific information on each asset (location, title replacement cost, perils, hazards they are exposed to).  Questions about sources of income and expenses help determine the client's ability to self-insure all or a portion of any potential loss.  Physical inspections of the client's home and business might also pinpoint additional liability loss hazards.  This can even include a study of all existing contracts such as leases, employment contracts, sales and loan agreements.


Even when exposures are detected, no estimate of the maximum loss potential can be made with absolute confidence, since matters concerning the timing of a client's death, disability or health problem can change the desired resource amount.  The same is true concerning property and liability exposures -- depth and breadth are hard to quantify.


Options to deal with risk can be evaluated after specific risks have been identified.  The risk manager's goal is to reduce the "post loss" resources needed by the client using the most efficient method.  In essence, this is the age-old battle of balancing costs and benefits.  That is why risk management is maximized when using more than one insurance company to carry the burden.  In this decision, however, there is temptation to resist paying for excess coverage of any type which can rob the client of cash flow that could otherwise be used to build assets more quickly and less expensively -- specifically, assets that are needed to provide for the present or to create a "living" for the future.  As part of this consideration, it may just be that the client pays premiums for many years, is never disabled or does not die earlier that his life expectancy.  Or, he may never sustain a loss of property.  The responsible agent should advise the client that this too, is a possible outcome.


Factors to consider include personal and business resources the client may wish to devote to covering losses (cash, assets, bonds, etc), available credit resources, the use of higher than average deductibles and any possible claims for reimbursement the client may make against outside parties who may be legally responsible to help pay all or part of the loss.  Of course, it is likely that the major transference of risk, or the final source of loss coverage, is the insurance contract.


Implementation of the insurance contract is made after the agent has developed specifications for coverage, established criteria or standards for insurers; compared rates and terms for the most efficient contracts and arranged for all contractual requirements, like the application, rating history, specimen tests, inspections, etc.  Probably the most important contribution the agent can make at this phase is in aiding client indecision.  Clients and agents alike can be frequently confused by the continuing arguments favoring term versus whole life or the value of an inflation rider to protect future property values.  The result of these conflicting considerations and advice can be that too much time is spent in indecision about levels and types of  protection.  The fallout may be over insurance or under insurance or no insurance at all.  The professional agent who practices due care provides counseling to bring these decisions to a conclusion.


Ongoing Risk Monitoring can be as crucial as any one or all of the processes involved in risk management.  Simply put, after the implementation of the appropriate policy, it should be the agent's duty to review coverage annually, evaluate ongoing adequacy, stay current with new coverage that might better suit the client's needs, alert the client when the policy needs to be

renewed and be available to assist in servicing needs such as title changes, claims assistance, alternative payment planning, etc.


While the process of risk management is conceptually similar across most product lines . . . life, health, disability, property, casualty . . . the analysis of exposure is quite different.  Following is a discussion of possible due care precautions an agent might explore when working in each product line.  In cases where the agent does NOT handle multiple lines of insurance, a simple disclosure and referrals to a professional as necessary, may be advised to meet minimum due care.


Sales Conduct – Life/ Health

Questionable market conduct in the 1980's and early 1990's created new demands for today’s agent.  For life and health agents, past abuses have centered around twisting, wholesale replacement, deceptive advertising, misleading illustrations and other unethical acts.  Regulators have responded with replacement policy forms, insurer fines, agent reprimands, and in some cases, revocation of licenses.  To compound the problem, the industry's image has been tarnished by solvency problems.  Further, stiffer competition, declining interest rates and thinner profit margins have impacted how insurers and agents work together; there is  less support in marketing and support materials from the insurer today.  The bottom line is that agents are forced to work harder and smarter.  In lieu of sitting back and waiting for the market to improve, industry forecasters say that agents must accept new roles to survive.   Repeat business, referrals and long-term rewards must center more around the client’s needs, rather than the products agents wish to sell.


The trend toward "agent as counselor" will most likely continue. Putting oneself out to be knowledgeable in many financial matters, however, will come with a price tag, as we saw in Chapter 1.  Both regulators and clients will hold insurance professionals to ever higher standards.  Agent due care and sales conduct will be more important than at anytime in our industry's history.  This emphasis will require a commitment by agents to polish skills and acquire a systematic approach to filling client needs.  Following are some basic due care discussions which may help the agent get started.  Of course, every situation will vary and require constant refinement:


Life Insurance Risk Analysis

Before determining the amount of life insurance needed by a client, due care involves the agent and client discussing the various types of life insurance available . . . annual renewable term, deposit term, decreasing term, level term, whole live, modified whole life, single premium whole life, universal life, variable life, etc.  The attributes of these different policies are best left to a course on basic life insurance. However, it is critical, under due care, that agents recognize the "pure risk" need of clients and counsel them on the proper choice.  For example, persuading a client to accept a high monthly premium whole life policy with a settlement payoff that leaves a significant financial gap at the death of a breadwinner, is NOT exercising due care.  This is not to imply that whole life forms of insurance are inappropriate.  Rather, there are situations  where a client's age and situation call for the agent to consider future estate settlement costs and liquidity as prime factors in making policy choices.  There may even be conditions where due care by the agent might involve a recommendation for a client to carry little or no life insurance at all.  .


One process for determining an estimate of the amount of life insurance needed is called capital needs analysis.  Financial planning courses cover this process in considerable detail and typically include a sample capital needs worksheet.  For purposes of proper sales conduct by agents, factors to consider include:


Capital needs for family income

Most families will be able to maintain their standard of living with about 75% of the former breadwinner's income.  Depending on the skills and resources of the surviving spouse, this fund may be large enough to provide lifetime income or for a specified period of transition.


Capital needs for debt repayment

Typical debts to consider include home mortgages, charge cards, bank notes, business debt, etc. A decision can be made to totally liquidate the debt or to use life insurance proceeds to set up a "sinking fund" to make payments for the life of the loan or a specified period.


Other Capital Needs

This might include emergency reserve funds, estimated to be between 50 percent and 100 percent of a client's annual after-tax income, and  college education funds for surviving children.


Estate Settlement Costs

Final expenses can be expensive.  Uninsured medical costs and funeral expenses should be considered.  In addition, there are federal and state death taxes.  Although the Economic Recovery Tax Act of 1981 eliminates the federal estate tax on property passed to a surviving spouse and the Economic Growth and Tax Relief and Recovery Act of 2001 may completely

eliminate estate taxation in 2010, for now the estate of the survivor may face a large death tax liability.  State death taxes vary considerably.


Current Assets Available for Income Production

What current assets, such as savings accounts, investments, real estate, pension plans, etc, are currently available for income production or liquidity needs to offset the capital needs above?


Net Capital Needs

By combining the above factors, the agent can arrive at the net capital needed to be replaced by life insurance.


Where capital needs analysis indicate that a $500,000 gap will occur at the death of the breadwinner(s), the agent's due care life insurance recommendation should be for $500,000 of life insurance.  Anything less could leave the client underinsured.  Lesser amounts may be purchased where the client cannot afford the premiums or makes the choice to carry less.  If there are additional concerns, such as a client’s long-term health, the agent might be advised to disclose his recommendation even though a more expensive policy with less coverage is purchased.


Ongoing monitoring of capital needs is necessary to plan for new client objectives, repositioning of debt, inflation, estate settlement changes and potential health problems that may prohibit coverage in the future.


Another due care consideration concerning life insurance is ownership or title of the policy.  Agents should recognize conditions when it would be beneficial to keep life insurance proceeds out of a client's estate by using a life insurance trust or alternative ownership.  Due care may be sufficient through agent disclosure of estate tax consequences of life insurance owned by a client and a proper referral to a competent estate planning attorney.


Essential Life Insurance Due Care Questions

· What existing death benefit sources does the client have?  Group life, survivor's income, individual plans, association group life plans, pension plan death benefits.

· Who is insured?  Is someone contributing economically who needs to be insured, but is not?

· Do all death benefits, along with available assets, meet client objectives?

· Are there other needs to consider such as dependents with special problems? Business debts?  Personal debts?

· Are there existing life policies that can be cash surrendered or tax exchanged to more efficient plans?

· Is waiver of premium available?  Is this a desirable benefit for this client?

· Is there an accidental death benefit or double indemnity?  If so, is this desirable or can it be dropped in favor a lower premium?

· Is coverage guaranteed renewable?  To what age?  Is the client's health stable enough to change policies?

· Is coverage decreasing term?  Is the balance sufficient?

· Is there a substandard rating that can be removed?

· Are there policy dividends?  Is the client making the best use of these dividends?  Or, would reduced premiums be recommended?

· What are the settlement options available at  death?  (Lump sum, payment options, insurance trust, etc)

· Is there a plan for the "common disaster" involving BOTH husband and wife?


Disability Insurance

Statistics have surfaced which indicate that the average person is three times more likely to suffer a lengthy disability than die.  Providing a source of financial income in the event of a major disability is probably the most overlooked portion of client financial planning.


By definition, a disability can be a temporary or permanent loss of earned income due to illness or accident. 


Essential Disability Due Care Questions

· How much monthly protection is needed?  Is an individual policy needed to supplement work plans?

· When does protection need to start? (30, 60, 90 days etc -- the elimination period), i.e., can the client "self-insure" for a period of time?

· Does the client have discretionary income to buy needed protection?

· Is the coverage noncancellable or guaranteed renewable?  Can a block of insureds, including your client, be canceled?

· If multiple policies are owned (employer, association, individual),  will the benefits of one be reduced by the other?  Is there a case for eliminating a policy?

· Is there an employer supported uninsured sick-pay plan available?

· What is the definition of a disability in the client's policy?  How severe?  How long?

· Does the policy include occupational and non-occupational coverage?

· Is there a substandard rating or waiver of condition?

Will the company remove it?  Will another company write without a waiver?

· Is there a waiver of premium benefit?  Would this be necessary for the client?

Similar to life insurance, due care analysis by the agent involves "need analysis".  Through inquiries and available financial papers the agent should determine the current after-tax income needs of the client.  This amount could be reduced by expenses that might be eliminated due to the disability.  For example, if the client is homebound, he will not need to cover transportation costs of commuting to work or other work related expenses.  Next, an adjustment for possible government benefits can be made using Maximum Benefit Amounts that might be available from Social Security.  Minimum employment history and limitations on the term of protection covered should also be considered.  Other adjustments that an agent should investigate include earned income continuing from other family members, investment income that might be derived from current assets and inflation to keep pace with cost of living increases.


For just about every client, the above process will establish that some form of disability protection is generally needed beyond the limits granted by Social Security, and in some cases private, employer provided protection.


Once a disability need is established, it can be compared to the participation limits allowed by insurers and the ability of clients to afford it.  Disability sales conduct would involve an agent/client discussion explaining how disability insurers may ONLY offer certain maximum allowable coverage tied to income, e.g. a client who earned an after tax monthly income of $7,500 might be eligible for a maximum of $3,000 of monthly disability coverage.  There may also be limits of how long this protection is covered, e.g., 24 months, five years, or to age 65.  Further, there may be minimum waiting periods before coverage begins, e.g., 90 days, 180 days, etc.  Also, there may be reductions in the amount of disability protection paid based on the degree of the disability, e.g., a partial disability that allows a client to continue working may reduce benefits substantially.  Finally, watch for renewability features.  Some policies are truly noncancellable and guaranteed renewable.  Others may appear to be renewable unless canceled by "class".  Thus, if an insurer has a particularly bad block of business with a higher than normal claims experience, it can cancel that class of insureds. Clients need to be counseled that the "gaps" in coverage outlined by these events require them to seek alternative forms of protection, develop contingency plans or rely on available pension plans, family members and accumulated savings to make ends meet during times of disability.




Health Insurance

Health insurance is one of the most valuable segments of risk management and the most difficult to predict.  This is further complicated by recent efforts to create a national health care system.  Hours of agent due care to develop a long term plan for clients may be broad sided by an entirely different style of health care brought on by federal directives.


The most efficient form of health protection is group coverage.  Group insurance is the predominant way of providing health insurance today with a definite trend toward HMOs (health maintenance organizations).  Due care in health counseling would involve fact finding to determine sources of social insurance available to the client, such as Medicare and occupational worker's compensation.  Any gaps in coverage need to be filled through blanket health coverage policy, or through medical benefits under a liability policy if the health condition developed as a result of an accident.


In addition, an agent-to-client discussion should cover points concerning:


Basic Eligibility

Exactly who is covered?  Does "family" include the subscriber, spouse, one, two or more children?  How old can the children be and still be covered?  Does this change if the children are married?  Will family members lose their eligibility when they turn 65 and Medicare takes over?  How will a divorce affect a members coverage?  Will a foreign or out of state residency longer than six months affect coverage?  How long will a retarded or physically handicapped child or member be covered?


Total Maximum Coverage

A limit to coverage could be present in form of duration and/or a dollar cap.  Is this a "lifetime cap"?  Is this cap per family member or for the entire family?  A lifetime cap of between $2 and $5 million, per family member would not be uncommon and might be considered a minimum considering the high cost of medical care.



How much is the deductible, if any exists?  Is it per family member?  Per year?  Is there a maximum deductible per family?  Are there specific deductibles for medicines vs. health care?  Are there deductible surcharges if the client does NOT pre register with the insurer, say for non emergency care?


Stop Loss & Co-Payments

After deductibles, is the client expected to share or co pay any medical expenses?  Is there an established time, usually after a specific amount of expenses have

been incurred, that the co pay will stop and benefits will be 100% covered by the insurer?


Pre-Existing Conditions & Waivers

Are certain known pre-existing health conditions prohibited or wavered?  If wavered, for how long?  Is there a waiting period for unknown pre-existing conditions?  Some policies specify a 6 to 12 month waiting period for listed conditions such as: hernia, tonsils, adenoids, hemorrhoids, varicose veins, nasal surgeries, foot and toe surgeries, breast reductions, otis media (ear problems),etc.


Exclusions - Possible policy exclusions or highly limited protection might include conditions and services as follows: medical costs exceeding limits, unlisted services, service covered by occupational insurance (worker's compensation, etc), health problems due to acts of war, government provided services, Medicare benefits, services from relatives, private nursing fees, custodial care, long-term care, inpatient diagnostics (x-rays not related to specific surgery), dental and hearing aids, vision care, speech therapy, cosmetic sex changes, infertility, weight reduction, orthopedic devices, maternity care, outpatient drugs, acupuncture, nutritional counseling, physical or occupational therapy outside the hospital.


Some "bare bones" plans may cover costs ONLY at prescribed hospitals, although emergencies are typically covered no matter where care is given.  Some only pay for procedures incurred in the hospital by hospital employed physicians, i.e., regular doctor visits or follow-up sessions are not covered unless specified by the hospital doctor.  Further, many plans may cover certain hospital procedures but NOT the supplies, e.g., a blood transfusion procedure may be covered, but NOT the cost of blood.


One of the latest trends is the requirement that certain procedures, such as organ and tissue transplants, be pre-authorized.  Additionally, some procedures, like bone marrow transplants, are considered experimental and not covered under any conditions.


Mental health and home health care are usually very limited areas of care.  Dollar limits per day with annual maximums are not uncommon, as are the maximum number of visits per year.


Guaranteed Renewability & Rate Changes

Can the insurer modify or change premium costs?  Under what conditions?  Can a class or "block" of subscribers be changed without changing rates for all subscribers?  Can the subscriber be canceled?  If so, how long will benefits last if client is in the middle of a health crisis?

Important Dates & Notification

Agents who handle multiple lines of insurance for clients must consider health insurance a clear priority.

While many of the above exclusions and limitations are typically spelled out in policy brochures or in bold print, issues of important dates and notifications can "fall through the cracks".  Proper due care would involve a discussion or memo to the client concerning policy time lines.  Examples include:  "All claims must be filed within 15 days on approved claim forms"; "the insurer must be notified within 60 days of any newborn or adopted children"; "annual notice is required to sustain coverage for a retarded or handicapped child who is older than the specified age limits"; "a family member must apply for his or her own plan within 31 days of the main subscriber's ineligibility"


Agents who handle multiple lines of insurance . . . life, health, disability, property/casualty . . . must consider the impact of health insurance on the client's financial planning.  A medical catastrophe can permanently devastate a family.  Despite the important of life insurance, disability protection and certain property/casualty coverage, health insurance is a clear priority.  It would NOT be considered due care for an agent who handles different product lines to market a $250 per month whole life insurance plan to a financially limited client when there was NO health insurance in place.  A more prudent approach would combine a "basic hospital plan" for major medical emergencies at $150 per month and a term life plan for $100 per month.  Even the agent who specializes in a specific product line should exercise due care to inquire that clients have health coverage in place or at least budget for same before selling other forms of insurance.


Essential Health Coverage Due Care Questions

· What available sources of health care are available to your client -- group plans (employer provided), HMO's, Medicare, other?

· Does your client have enough medical expense benefits to meet basic hospital needs or major medical expenses?

· Which family members of the client require coverage and are they eligible?  Does the client or family member need supplemental coverage?

· Should the client terminate any existing or duplicate medical expense premiums?

· Does the client have dependents who have terminated or will soon terminate coverage under the family plan?  If so, can they purchase their own?  What conversion rights do they have?

· Is your client's policy guaranteed renewable?

· Does the client's health care continue to protect dependents in the event of  his or her  death?

· Does the client have a substandard rating or  waiver of coverage?  Will the insurer remove it?  When?  Will another company write without the waiver or rating?


Annuity Analysis

Sales conduct concerning annuity investing first involves fact finding to determine what portion, if any, annuities should play in a client's overall financial plan.  A needs analysis should be conducted to uncover growth and income requirements, risk tolerance, liquidity specifications, and whether tax deferral benefits are worthwhile to pursue.


Who should invest in annuities?  One rule of thumb follows that a client looking for a long-term investment with a tax bracket greater than 15 percent might consider annuities.  Other likely candidates include moderate or high tax bracket individuals looking for a conservative way to shelter current income or growth over a long period of time, i.e., retirement monies.


Fixed rate annuities might be an alternative for CDS, GNMAs (Ginnie Maes), T-Bills or other similar obligations.  Variable annuities are better geared to individuals who seek tax deferral, yet willing to ride with the ups and downs that accompany stock and mutual fund investments.


Once an annuity can be established as an appropriate investment opportunity, agents must carefully weigh the following choices and discuss them with each client:


Immediate Annuity vs. Deferred Annuity

Clients may have current income needs or the desire to defer income for greater growth.  Perhaps a combination is appropriate.  Tax planning and liquidity are key considerations for the agent.


Single Premium vs. Flexible Premium

Client's generally have a lump sum to invest or need to accumulate by paying into a savings plan.  Both short and long-term liquidity are an important considerations.


Fixed Rate vs. Variable Rate

Clients may have a need to lock-in their yields or to go for growth.  One group is typically a CD type investor and the other group is willing and able to incur greater risk.  Agents need to carefully explain the potential loss of principal possible in variable plans.  Agents should review potential interruptions in return of principal and yield that can develop with either fixed or variable contracts.

Yield vs. Guarantees

It is logical that the stronger the guarantee, the lower the yield.  Agents must explain that a higher first year yield may include bonuses or special terms that later change.  This type of contract should be compared to other contracts that may offer a slightly lower yield that is locked in for a specific period, i.e., determining overall predictable yield over time is important due diligence.  In the same vein, a disclosure would be appropriate as to the method used by the insurer to adjust yield.  A contract with a guaranteed yield spread may be more appropriate for some clients than a yield that is adjusted by the insurer's board of directors.  Equally important is whether yield is banded, i.e., are yields adjusted separately for certain blocks of investors or are investors who entered five years ago given the same yield as new investors.


Yield vs. Liquidity

Clients demanding easy access to their money should be prepared to settle for lower overall yields.  Agents need  to determine special liquidity needs, such as the need to pay for a potential illness or nursing home, before suggesting product.  Certain contracts allow penalty free withdrawals for special circumstances.  Due care dictates that agents carefully and clearly explain all surrender charges associated with the contract and when they occur.


Maturity options

Annuity contracts may mature at specific ages.  This can affect a client's long-term investment planning as well as tax planning.  A client wishing to plan for long term deferral to age 95, for example, might be disappointed to learn that a contract must annuitize at age 85.  Further, agents MUST disclose the potential tax affect of a maturing annuity.  Pre-1981 Annuities deliver principal first, then tax interest or appreciation.  Post 1981 annuities tax interest or appreciation first then deliver principal.  Also to be considered is annuitization of the contract, where taxation is spread out over time because each payment includes some principal and taxable interest.


Withdrawals & IRS Penalties

Where the client is withdrawing all or part of an annuity contract PRIOR to age 59.5, he should be appraised of the ten percent IRS penalty for early withdrawals.  At present, this can only be avoided where the annuitant dies or becomes substantially disabled or when annuitization is chosen within one year of investing in the annuity contract.


Guaranteed Death Benefits

Where agents assist in estate planning, due care would involve a disclosure concerning death benefits.

Most fixed rate contracts guarantee the return of principal and any appreciation (interest left to grow).  However, agents should uncover and review factors concerning potential surrender penalties and how they may be avoided, as well as the basis of the guarantee.  Is the death benefit guarantee, for example, the greater of ALL contributions of principal withdrawals OR  the value of the contract on the date of the annuitant's death, or just the value of the contract on the date of the annuitant’s death?


Settlement Options & Taxes

Clients should be made to understand that annuities provide tax deferred, not tax free, income.  Unless the beneficiary of the annuity is a surviving spouse, taxes on the accumulated growth will be due at death -- there is NO step-up in basis.  The tax liability is the difference between the amount invested subtracted from the value of the annuity contract, multiplied by the beneficiary's tax bracket.  Options to continue tax deferral after the annuitant’s death  include five year or lifetime annuitization of the contract. 


Other settlement options that should be discussed with the client include a life annuity, joint and last survivor, lifetime with period certain, etc.


State Guaranty Fund Coverage

Rules governing state guaranty coverage should be disclosed to the client.  If the State does NOT permit advanced disclosure concerning guaranty fund protection, the agent should privately exercise diligence in planning annuity purchases.  The primary concern? Is the full amount of the annuity covered against insurer failure.  Perhaps due care is served by diversifying among several insurers and/or between fixed AND variable contracts to take full advantage of guaranty protection.


Titling Options

If the agent is advertising tax and estate planning advice he should disclose the consequences of the ownership structure of contracts.  Where no tax or estate counseling is provided, the agent should still exercise due care by disclosing the fact that tax consequences may result and offer to refer a competent attorney or tax expert before any purchasing decisions.  As a general rule, the death of an owner or annuitant triggers a death benefit which carries tax liability.  Unless the survivor beneficiary is the spouse, the beneficiary must take a lump sum and pay the tax or annuitize over a minimum five-year period.  An important area for agents to investigate is whether the annuity contract enforces or waives surrender charges where a death of the annuitant or owner has occurred.  In some contracts, the surrender


charge can be deferred where an owner dies and a contingent owner is allowed.


Essential Annuity Due Care Questions

· Is the client interested in growth or income?

· Is the client interested in current income or retirement income?  How soon does he need to start receiving income?

· How much risk is the client ready to accept today and in the future?  Could he stand the loss of his entire investment?  How would an interruption in income affect him?

· What are the client's liquidity needs in the short-, intermediate- and long-term?

· What is the client's federal/state tax bracket?  Does tax deferral through annuities make sense?

· Is the client under age 60, and is it likely that he will need to withdraw major portions of the annuity in the future?  Will the ten percent penalty offset the benefits of tax deferral?

· Does the client demand full and complete protection of principal?  Or, can the client afford to take risk in hopes of greater appreciation using variable contracts?

· Is the preservation of principal more important to the client than the effects inflation may have against a fixed yield?

· What are the survivor spouse/family needs in the event the client dies?  How may these needs be met?


Business Insurance

The risk managing agent recognizes that due care extends to businesses as well as individuals, since businesses are composed of people.  The illness, disability or death of these people represent an exposure to businesses in terms of their survival and commitment to principals, employees and their families.  Sales conduct in business analysis involves a determination of the reduced revenues and increased expenses that may result from the death or disability of a key person in the business, including the possible costs to replace or sell the business, if necessary.


The degree of risk protection in business insurance varies by the person who is affected and the legal structure of the company.  Following are some due care considerations for three major forms of ownership -- sole proprietors, partners and corporations:


Sole Proprietorships

There is no legal distinction between personal and business assets . . . debts of the business are debts of the sole proprietor's estate.  Agents should determine needs or preloss arrangements of the surviving family to continue the business, sell it or liquidate it in the event

of the owner’s death and disability.  Capital deficiencies can be filled through appropriate insurance coverage.



The legal relationship between partners is personal . . . each is fully responsible for acts of the business and business debts of all others.  If a partner withdraws or dies, the partnership must be terminated or reorganized.  The disability of one partner can also create a significant financial strain on the entire business.  Due care planning here involves learning the wishes of the surviving family and surviving partners.  Where a deceased or disabled partner's family wishes to exit the business, a buy-sell agreement can satisfy the purchase of his share with the business passing to the surviving partner.  Alternatively, the heirs of the deceased may become partners or sell the lost partner's interest, assuming this is permitted in the partnership agreement.  Again, preloss arrangements covering the possibility of reduced revenues and higher expenses during this transition must be considered.



Most agents will deal with the "close corporation" where the stock is closely held by a few individuals and not offered for public sale.  Typically, the stockholders are also employees of the company.  In this case, situations similar to the partnership can develop.  A key employee or stockholder can become disabled or die creating additional financial burdens on the company.  Most corporation charters provide that remaining stockholders can purchase the share of the withdrawing or deceased shareholder. The risk manager needs to uncover the "formula" for purchase, and plan for available funds via buy-sell policies, disability protection, health care, etc.


Other significant due care factors concerning business insurance include planning for taxes and liability.  For planning purposes, most transfers or sales of business interest become part of your client's gross taxable estate for purposes of death taxes.  Income taxes become a factor in corporations where the challenge is to transfer assets out of the corporation without claims of dividend.  This is a very complicated area of planning best left to other courses.  The issue of liability will be discussed in sections below.


Essential Business Insurance Due Care Questions

· Who will control the business when your client dies or becomes ill for an extended period?

· Will there be a market for the business if it has to be sold?

· Will the business provide adequate income for the heirs of your client?

· How will the value of the business affect the taxes and liquidity needs of your client's estate?

· Will the client be able to continue in business if one of his associates dies?

· How will working capital be kept intact where a partner or owner dies or is seriously disabled?

· How can a business be transferred to a new owner without shrinkage in value?

· What will become of your client's interest in the business if he or she retires?


Sales Conduct – Property / Casualty

Risk management in the property/casualty arena is extremely complicated, yet the primary goal is the same as other forms of insurance -- the transfer of risk.  However, a higher standard of due care and agent liability exist in property/casualty because of binders, indemnity disputes and redlining.


A binder can be written or oral.  At the point when the client says "I want it" and the agent says, "You're covered", a binder has occurred.  Immediately upon creating any oral binder, the agent should make note of the terms of coverage, when the binder was made and the parties involved.  Further, to reduce the possibility of disputes, the agreement should be reduced to writing as soon as possible.  Abuses occur where agents do NOT have binding authority, yet lead clients to believe they do.  Likewise, clients may use binders as a means of obtaining free insurance for limited periods.


Property and casualty insurance contracts are contracts of indemnity in that they provide for compensating the insured for the amount of loss or damage.  Due care is accomplished when an adequate amount of compensation is provided that will avoid profit or loss from a peril or hazard.


Elementary insurance defines a peril as the cause of a loss.  Fire, lightening and collision are all examples of perils.  A hazard is anything that increases the chance of loss.  A loose gas connection to a main heater system is an example of a hazard.  Hazards, however, can also take shape in "morale" form.  Reckless driving is one such example of a morale hazard.


While there are, as yet, no formal rules on insurance redlining, there is pending legislation that would force insurers to comply with rules similar to Community Reinvestment requirements now imposed on banks.  If passed, a majority of the burden would fall on underwriters.  However, agents should be aware that clients living in inferior, low income or minority communities should NOT be denied application for coverage.  The logic behind this is obvious – without

access to insurance, clients would not be able to buy housing. 


Clients depend more on agents in casualty matters because there is less public understanding of casualty policies than other insurance.


Compared to life and health contracts, it can be said, that fewer property/casualty policies are read by clients.  There is generally less understanding of liability or casualty matters, and therefore, a greater reliance is placed on agent advice and counsel.  This is why proper sales conduct would encourage clients to read their policies and help them review the fine print to fully understand exact limits of coverage, define perils, clarify what constitutes a hazard and recognize policy owner duties.  Having specimen policies available for this purpose should be standard procedure.


Areas where agents should exercise additional due care involve the "agent as counselor".  Insurance is the first line of defense in asset protection.  The role of the property/casualty agent in preserving what clients have already accumulated is vital.  This should not occur, however, without also recognizing the value of other forms of insurance, i.e., A deluxe homeowner's policy should be scaled back where high premiums might not allow clients to purchase basic health insurance.  There may also be validity to the argument that insurance premiums should not be so excessive as to preclude clients from starting necessary retirement savings plans.


In addition to these points, there are many contributions that can be made by agents to promote greater client understanding of risk, loss control and proper valuation. (See below).  By educating clients in these disciplines, a higher level of insurance efficiency will be realized.  The result can be stabilized or lower premiums through  lower claims experience.   This may NOT initially improve agent commissions, but in the long run, client retention and the agent’s income stability will be strengthened.


Essential Liability Due Care Questions

· What is the insured's "insurable interest"?

· Is the peril covered?

· Is the property covered?

· Is the type of loss covered?

· Is the person covered?

· s the location covered?

· Is the time period covered?

· When does the policy take effect?

· Are there hazards that exclude or suspend coverage?

· What are policy owners duties after a loss?

· What are the insurer's options in settling a loss?

· What are the time limits for the policy owner to recover from the insurer?

· What are the time limits for the insurer to pay a claim?      


Next, a due care discussion might include:



A client's perception of risk influences how insurance dollars are spent and, to some extent,  how the industry is regulated.  Unfortunately, much of society has set a low priority on reducing risk, i.e., "That's why I buy insurance".  Many in the industry, however, feel it is extremely important to reassess societal views on risk and that client’s must take more responsibility for risk consequences.  An example would be clients who continue to build in flood plains or high-risk fire areas, despite knowledge of their existence.  When disaster strikes, should these individuals receive subsidies through taxpayer financed state and federal disaster aid, government flood control projects and mandatory shared-market insurance programs?  Should accident victims who violate seatbelt laws receive full compensation?  Should people who live in hurricane and earthquake country be responsible to better secure a structure against these risks?  Some believe that people must realize what they can do for themselves before risk priorities can change.  Agents can play a valuable role in helping clients manage a certain level of risk and give them strategies to reduce it.


Loss Control

In the insurance industry, the process of risk reduction is called loss control.  Loss control procedures involve the steps necessary in eliminating exposures to risk and reducing their frequency or severity.  Today, loss control makes the workplace safer and reduces a broad range of liability exposures in homes as well.  Offering loss control advice and services to clients has potential rewards as well as risks.  Reasons agents might consider advising clients on safety issues include:  client credibility, client retention, new client generation, insurer qualification and attractibility, favorable insurer status and additional profits where "advice fees" are permitted by law.  With competition stiff, some larger agencies are establishing entire subsidiaries to perform loss control-for-fee services.  In these cases, loss control fees can represent from two percent to ten percent of total agency revenues.  Smaller companies may contract to outside loss control consultants or simply rely on insurer provided services.  Loss control services can run the gamut from standard, non-controversial safety recommendations to complicated compliance advice.  Whatever level of service provided to attract or retain clients, agents

should realize that loss control advice exposes him to additional liability.  There may also be statutory violations, particularly in the commercial area, for offering safety expertise without required licensing.


Code compliance is an extremely important area of loss control.  It is a discipline usually reserved for underwriters and is typically outside the venue of agents.  This does not mean it should be ignored by the agent.  Due care should involve an agent performing a physical inspection of the property to determine that fire sprinklers are indeed in place or that a security fence has been installed around a construction site before delivery of materials.  The importance in doing so can be seen by the reduction  of liability exposure when an accident hits .



A recent survey by a well-known real estate statistics firm found that almost 70 percent of the homes in the U.S. are underinsured by an average of 35 percent.  With an increased awareness of this problem, many insurers of large policies are sending appraisers to high-value neighborhoods to determine if policy replacement values adequately reflect current values.  In addition, companies are encouraging agents to re-evaluate coverage levels.  In many cases, this involves inspections of properties to account for recent improvements, such as finished basements, patio covers, garage conversions; deterioration; code compliance to rebuild; i.e., new hurricane or earthquake standards; and illegal uses, e.g., a business run out of the home.  Bringing inadequately covered premises to full coverage levels increases underwriting income, which may allow a carrier to lower rates within a class of policy owners.  Equally important is the liability protection afforded carriers and agents.  Both were targets of litigation for misrepresentation and negligence after the catastrophic Oakland fires in California.


Homeowners Insurance

Agents should exercise due care in several important capacities:


Selection of Policy

The selection of policy type . . . HO-1, HO-2, HO-3, HO-4, HO-6 and HO-8 . . . should be a function of client need.   Obvious factors to consider include dwelling type, dwelling size, dwelling construction, dwelling replace ability, additional structures, type and extent of personal property, loss of use and basic liability.  Refinement of the process occurs where agent due diligence uncovers  the true "limits of need" and special circumstances.  This can only be accomplished by carefully interviewing clients about key coverage issues:


The amount of dwelling insurance requested is typically a reflection of the mortgage amount.  Does this reflect the true replacement value?  Is an appraisal in order for larger policies or where a special construction has been used?  Remember, like kind and quality does not mean "exact" kind and quality.  Clients must understand that replacement cost is limited to the style, quality and function of the destroyed or damaged property.  Few or no allowances are made for increased costs of repair or reconstruction caused by ordinances or laws regulating construction or repair.  An example of coverage gaps may be new construction school fees or special fees that are currently charged for construction that were not around when the client's house was built.


Concerning personal property, does an inventory exceed policy limits?  Is replacement value available?  Should items be "scheduled" like paintings, historical documents, original manuscripts, exotic pets, etc?


Are "sublimits" of the policy meeting client needs, for cash, gold, coins, stamps, securities, deeds, trailers, jewelry, watches, furs, precious stones, silverware, guns, etc.?


After primary values are established, the client's "insurable interest" must be determined since a policy owner will NOT recover for an amount greater than their insurable interest.



Due care discussions with clients should cover circumstances where their eligibility to recover a claim may be jeopardized. Is the policy owner the intended owner occupant or does he intend to rent the property?  Will only one family occupy?  Is a business being operated out of a home?  Are there code violations like additions without permits, zoning violations, etc?  Will the client be unable to perform his duties to mitigate losses (draining pipes to prevent freezing, maintaining heat if the structure is vacant, minimal repairs to protect the property from further damage, etc.)?  Is a detailed inventory necessary to track descriptions, purchase dates, values, etc?  Are clients aware that they should hold on to damaged property and make it available for adjuster inspection?  Do clients need to produce books of account or fill out a proof of loss form?  Will the client be available to assist and cooperate with the adjuster?  Are insureds aware that they should NOT make any voluntary admissions of guilt or make voluntary payments to someone they have injured? Many of these circumstances can be brought to surface in an initial meeting or physical inspection of the property.


Clients should be apprised of their deductible options. Although higher deductibles mean lower premiums and lower agent commissions, they represent a fair opportunity for clients to accept part of the financial consequences of risk taking.  This, in turn, can lead to fewer claims and more stable coverage costs for clients.


Policy Exclusions

If the policy is in "readable form" it should be easier for the client to pinpoint policy exclusions.  Some necessary disclosures, however, should include exclusions related to damages caused by earthquakes, flooding, sewer flooding, flooding driven by wind, power interruption, owner neglect, war, freezing of appliances or pipes (especially if vacant over 30 days, or 60 days in newer policies), theft of a dwelling under construction, breakage of glass if vacant over 30 days, continuous or repeated seepage from plumbing or heat & air system, normal wear & tear, latent defects, mechanical breakdowns, rust, mold, wet or dry rot, contamination, smog, settling, cracking, expansion of pavements, patios, foundations, walks, walls, floors, roofs or ceilings, rodent or pest infestations.


Liability & Liability Exclusions

Primary to determining liability limits is the client's overall exposure.  What is his or her personal net worth that could be at risk?  Will the limits of the policy or an umbrella cover the exposure?  Are there any liability exclusions in the policy that leave the client uncovered?  Some common areas of neglect include:  Boats over 50 horsepower, aircraft, motor vehicles loaned or rented by the insured, certain professional services, most business pursuits, outside premises, cases where the insured is eligible for worker's compensation, for damage to property used by or rented by the insured, etc.


Auto Insurance

Auto policies are typically divided into different sections, covering liability, medical, uninsured motorists and damages (comprehensive, collision, towing, labor and transportation expenses).  Insuring agreements traditionally  offered "split limits" which applied to each person for each occurrence of liability, damage, etc.  Today, the trend is more toward  a single limit of liability, which can expanded within the policy or through the addition of umbrella coverage, that applies to all covered liability losses arising out of an accident regardless of the number of persons injured or the amount of separate property damage.  Minimum due care considerations in this area include:


Policy Limits

A needs analysis to determine that liability limits of the policy adequately shield client assets and meet financial responsibility laws of the state which may assign specific minimums relating to liability, bodily injury, property damage and/or uninsured motorist coverage.


Policy Eligibility

Clients should be appraised of the specific vehicles eligible for coverage, e.g., private passenger autos owned or leased, longer than six months, AND those which are NOT eligible, e.g., less than four wheel vehicles, autos used to carry persons or property for a fee and those needing to be named as additional vehicles, e.g., trailers, off-road vehicles, etc.  Clients should also be advised that new or replacement vehicles must be reported within 30 days of purchase to receive full coverage.  Clients with poor driving records may be referred to assigned risk plans or "fair" plans organized through state programs.


Policy Conditions

Agents should direct clients to specific areas of the policy pertaining to "duties of the insured after an accident".  Clients should be told that they should promptly notify the company of the accident, the time limits within which they should act and steps that they should take to reasonably protect the covered auto from further harm or damage.  Policy owners must provide sufficient evidence of loss, cooperate in any insurance investigation and notify the police if a hit-and-run driver is involved or if the covered auto is stolen.


Policy Endorsements

Clients should know the options they have to broaden their coverage to include coverage such as full replacement cost, towing and labor costs, rental reimbursements, specialized vehicle coverage, extended nonownership liability, additional damage coverage for special vehicles, named nonowner endorsements, coverage for special personal property coverage for items like tapes, CDS, CBs, portable phones, etc.  Some attorneys might advise agents to prepare a written list of available endorsements and the applicable cost to present with the original quote.  Clients who incurred claims but refused the option to buy these endorsements would have a difficult time pursuing agents for not making them available.


Policy Exclusions

Due care discussions should also disclose to clients items of coverage specifically excluded.  Examples include: property being transported, bodily injury to an employee of a covered person, motorcycles, off-road vehicles, etc.  Also excluded is coverage in areas

outside the United States, its territories or possessions and Canada.  Clients should understand that an endorsement for extended coverage should be considered when traveling outside these domains.


Policy Effective Date

It should be clear that coverage begins at 12:01 AM standard time on the date of inception to 12:01 AM on the date of expiration.


Named Insured

Who is the insured?  Is the insured the policy owner, his spouse, a household resident, other family members?


Auto User

Is everyone who uses the auto a named insured?


Associated Named Entities

What is the name of any other person or organization who may not use the auto but may still have legal responsibility for the acts of omissions of the covered insured?


Commercial & Professional Lines

Commercial and professional insurance takes many forms: investment and commercial property coverage, business owners insurance, farm coverage, commercial auto plans, commercial liability policies, for directors, officers and professionals, workers compensation and more.  A full discussion of each goes beyond the scope of this course.  However, there are some important due care factors for agents to disclose and discuss with clients.


Policy Limits

As with most other forms of insurance, a client needs analysis should determine the extent of assets to protect, including any personal exposures.  Policy endorsements and/or commercial umbrella protection may be considered as options.  Special occurrences may have individual limits which must be evaluated for each client.  For example, a "products-completed" limit may be small for a bakery but should be expanded for a lawnmower repair service.



Rules of eligibility in the commercial arena are very complex.  Suffice to day, clients should be aware of ALL limitations that might exclude coverage, including:  building size or height restrictions, e.g., buildings not exceeding 15,000 square feet and no more than four stories; business class restrictions, e.g., office uses permitted / manufacturing prohibited or retail permitted / restaurants prohibited, etc.  Where liability is concerned, is the policy based on a "claims made" basis or a "claims occurred" basis? Clients should be well informed that coverage may exist ONLY while they are in business and paying premiums.  A claim made ten years after a client retires can be financially devastating.


Policy Endorsements

Due care should involve the listing of available options to extend coverage, reimburse for loss of use, loss of rents, loss of income, business expense coverage, builders risk protection, for buildings under construction, add or exclude specific accidents, products, work or locations, employment occurrences (termination, defamation, discipline, discrimination, etc), liquor liability, products completed protection, pollution liability, malpractice, errors and omissions, personal and advertising violations, contractual liability, employee use of vehicles coverage, product defects or deficiencies, product recall protections, inflation upgrade protection, replacement cost coverage, personal effects protection, debris removal, etc.


Scheduled Losses

The exact property or premises covered should be disclosed, such as buildings, insured's business personal property and the personal property of others located at the business premises.  In the case of liability policies, premises and operations exposure is the heart of coverage. Options should also be disclosed concerning upgrades to broader forms of coverage perils, like extended reporting periods or extending coverage beyond termination of the policy, earthquake damage, crop insurance, livestock, loading/unloading accidents, window glass breakage, falling objects, weight of snow, water damage, etc.


Policy Exclusions

Clients should also understand exactly what is excluded:  Building ordinances, government actions, power failure, water damage, bursting pipes, explosion of steam boilers, mechanical breakdown, money, animals, autos for sale, illegal property, underground pipes, fences, antennas, signs, etc.


Named Insured

Since multiple parties may share insurable interest, it is important that ALL parties understand that the "first insured" is typically the "notified insurance partner".  In the event of cancellation and policy changes, the conditions of the policy normally name the first insured to be responsible to notify other named insureds. In essence, the first insured is the "point man" for most policy transactions.


Sales Conduct – Quotes & Illustrations

In the past few years, media "sound bites" and state regulator attention concerning the financial stability of

insurers and sales misrepresentations have been the primary focus of sales conduct.  Not far behind are the issues and supporters demanding agent due care in choosing the right policy -- after all, an industry cannot rise to responsible status, perhaps even survive, if its members take a "sale at all cost" attitude.  Both these issues have and will be the target of new company compliance procedures and new regulatory standards.  These efforts, however, have been pursued more in a "broad brush" fashion with an emphasis on concerns such as fraud, misrepresentation and twisting.


Many professional agent groups feel that sales conduct should include a new dimension: fair and understandable illustrations and quotes.  The reason?  Most insurance purchasing decisions are made by clients and agents using illustrations and quotes.  Minor variations in the assumptions that go into these projections can produce dramatically different results -- especially if they are spread over long periods of time.


With the advent of computers, multiple page illustrations, some with graphics, literally predict results a client can expect from almost any given product, at any given time in the future using an almost unlimited choice of assumptions.  Agents also use mass mailing technology that can tap public records, such as property values, ages, names to personalize and customize a quote without even visiting the property or client.  Stiff competition has made the use of computerized quotes and illustrations widespread. Given the sophistication and high quality of these proposals, agents and clients are depending more and more on the face value of the illustration, rather than the actual policy itself.  In many instances, clients and agents alike completely pass on reading the policy.  This, in turn, has resulted in some surprises for clients and the call for greater scrutiny of sales presentations from professional associations and some regulators.


The problems that surface with most illustration sales relate to the disclosure of assumptions made in illustrations, e.g., interest rates that went down instead of up, insurer insolvencies that could not meet minimum policy rates and/or return of principal, surrender values well below projected results, premiums that were expected to "vanish" simply continued, premium quotes well below replacement value of the property, quotes that do not reflect necessary endorsements, etc.   For the most part, the responsibility of misleading illustrations lie with insurer actuaries and marketing departments that produce them.  Some agents have also manipulated quotes to specifically avoid true comparisons, i.e., presenting only projected cash values NOT guaranteed values OR quoting skeleton plans void of necessary endorsements. 


In recent cases, the misuse of illustrations has led to significant charges of questionable sales tactics by state regulators.  The MetLife case involved fines totaling $20 million among 40 state agencies and $75 million in restitution to as many as 60,000 customers.  Shortly after these fines were levied, the Florida department of insurance filed charges against the company's top agent, and at least 100 more, accusing them of fraudulent sales practices. 


While there is no one single solution to the problem, some remedies are underway in the areas of education, disclosure and better illustration design.  In the MetLife case, the company has created a corporate ethics and compliance department which will audit agent offices in the area of sales techniques, including the use of illustrations.  Regulators have threatened to prohibit certain proposal techniques altogether, require specific "full disclosure" requirements.  Others are launching new compliance orders like requiring insurers to conduct internal investigations designed to uncover illegal illustration marketing practices.  Further, the National Association of Insurance Commissioners has outlined the misuse of policy illustrations as a violation of their Unfair Trade and Practices Act  and Congress has proposed the Insurance Marketing and Sales Reform Act to strengthen consumer protection laws concerning advertising and illustration mishandling by agents, brokers and insurers. 


Certain professional organizations and government agencies, such as the National Association of Insurance Commissioners, have proposed "model" illustration disclosures.  Many states have already passed laws requiring agent due care to disclose all assumptions of the quote and/or highlight or bold the guaranteed portions of these proposals to contrast the "anticipated" results.  Further, life insurance companies are required to answer certain questions in their annual statement filings pertaining to the "basis" of dividend and interest rate projections.  These questions include:

·        What is the company's opinion of its ability to continue supporting  current dividends and nonguaranteed elements (interest rates).

·        Are company assumptions of these factors exceeding the company's experience level.

To a great extent, the answers to these questions fall on the shoulders of company actuaries.  These individuals maintain personal standards of practice that require full and complete disclosure.  The Society of

Actuaries has also promoted education of this problem to its members and the Academy of Actuaries has made recommendations to the National Association of Insurance Commissioners (NAIC) on possible regulatory actions that could be useful now and in the long term.

·        Some industry groups, feel that much of the pressure to greatly restrict or eliminate the use of illustrations is unwarranted.  They believe that illustrations can be a valuable tool to educate clients with visual interpretations of their options.  Rather than scrap the entire illustration system, for example, it is suggested that, as a minimum, agent illustration sales conduct can focus on treating the client fairly by implementing the following considerations:

·        Specimen policies should be on file to compare with specific illustration issues and/or client questions.

·        Before doing business with a specific company, request a copy of illustrations for policies the agent intends to handle. Clear up any questions as soon as possible.  If the company's management say they don't know the answer, or they avoid requests altogether, it may be a clue that they will handle client policies in a similar way.

·        Agents should be certain that all illustration pages are printed and that all projected interest rates are disclosed and discussed with the client.  In casualty quotes, if an “All Risk” policy is presented list ANY & ALL exclusions.

·        Particular attention should focus on matters of age, gender, classification, avocations, past experience  and other "default" conditions of the life illustration.  For casualty, does the quote match the requested coverage, is the principal disclosed, do words imply that client is bound?

·        Be sure that the client receives all pages and disclosures.

·        On the life side, look for sudden jumps in cash values or premiums -- especially in later years.





It is estimated that one in seven agents face an errors and omissions claim each year.  Errors and omissions charges challenge your reputation, waste enormous time and could threaten your financial well-being. Basic measures to limit liability begin by avoiding claims at the outset.  Of course, this is easier said than done, since there is NO foolproof method to sidetrack a lawsuit from a client or an insurer.  There are, however, some steps that agents can use to help reduce the possibility of a claim developing and present a reasonable defense if one does. 


Step 1

Know your basic legal responsibilities as an agent and  exceed them only when you are absolutely sure what you’re doing (see Legal Conduct, Chapter 1).  Pull out your agency agreement right now and read it!!!  When you decide that you want to be more than an agent, i.e., a counselor to your clients,  understand that it comes with a high price tag -- added liability.  Also, make sure you are complying with basic license responsibilities to keep from becoming a commissioner’s target for suspension or revocation.

Step 2

Learn from other agent mistakes (see Agent Blunders, Chapter 6 ). The best school in town is the one taught by agents who have already had a problem. Study their errors, learn from them and make sure you don’t repeat them.  

Step 3

Be aware of and avoid current industry conflicts that could develop into problems for your agency (see examples Chapter 7).  There are hundreds of professional industry publications that will help  keep you abreast.  Once you are aware of a potential problem, take action to make sure it doesn’t end up at your doorstep.

Step 4

Maintain a strong code of ethics (see this chapter).  As you will see from our discussion of ethics, you don’t need a list of degrees or designations to be ethical.  Simply be as honest and responsible as possible.

Step 5

Be consistent in your level of “due care” (see Sales Conduct, Chapter 2).  Write a procedures manual that forces you to treat client situations the same way every time.  Courts and attorneys alike are quick to point out any inconsistency or lack of standard operating procedures where the client with a problem was handled different than another client.

Step 6

Know every trade practice and consumer protection rule you can (Consumer Protection, Chapter 4 will help).  The violation of “unfair practice rules” is a really big deal to lawyers.  They will portray you as something short of a “master criminal” for the smallest of violations.

Step 7

Use client disclosures whenever possible (see this Chapter).  There is nothing more convincing than a client’s own signature witnessing his knowledge of the situation.

Step 8

Get connected to the latest office protocol systems (see this chapter).  The ability to access a note concerning a client conversation or the way you “package” correspondence can make a big difference in the outcome of a claim or avoiding one at the outset.  You want a system that will produce solid evidence, not “hearsay”.

Step 9

Maintain and understand your errors and omission insurance (see this chapter).  This policy is your “first line of defense”, but know its limitations and gaps.


The discussions that follow will expand on most of the steps we just mentioned.


Know Your Agent & License Responsibilities


Agent/Client Duties

As we pointed out in Chapter 1, the agent/broker generally assumes only those duties normally found in any agency relationship.  Your agency contract is a good source of basic duties.  Overall, the basic duty of agents is to select a company and a coverage and bind it (if you have binding authority -- casualty agents).  Where clients have come to you and requested coverage, you need to decide whether it is available and if the client qualifies.


Agents have a responsibility to know the differences in product they are selling. While you do not need to obtain “complete” coverage in every case, you have a duty to explain policy options that are reasonably priced and widely available for the policy you are suggesting.


In some cases, agents have been responsible for “after sale” duties to see that a policy continues to meet client needs.  The more that your clients depend on you for their insurance needs and the longer you do business with them, the higher your standard of care is in selling and serving them.


Agent/Company Duties

In addition to agent/client duties, you have duties to your company.  Again, your agency contract is a good

source to review.  The problems occur in the areas of fiduciary duties and statutory duties.


When agents are sued by their insurer, it is most often for a violation of the law of agency.   Most agents are familiar with the term fiduciary duty.  Between agent and principal (the insurer), fiduciary duty of the agent prevents him from competing with the principal concerning the subject matter of the agency or from making a "secret profit" by making money in ways that are not stipulated or agreed upon as commissions.  Beyond this, however, agents are bound to the insurer by other statutory duties. They include Duty of Care and Skill, using standard care and skill; Duty of Good Conduct or acting so as not to bring disrepute to the principal; Duty to Give Information by communicating with the principle and clients; Duty to Keep Accounts by keeping track of money; Duty to Act as Authorized; Duty to be Practical and not attempt the impossible; and Duty to Obey or comply with the principal's directions.  A violation of these duties can be considered grounds for termination or legal action from the principal or insurance company. 

Areas of additional concern include clerical mistakes, erroneous policy limits, omissions of endorsement, misappropriating premiums, failure to disclose risk, failure to cancel or notify cancellation, authority to bind, premium financing activities and unfair trade practices.


Agent Integrity

While some agents believe that "integrity" is an optional professional quality, many state laws set minimum agent responsibilities, such as:



Many states set minimum standards for agent integrity.

Insurance Commissioners have been known to suspend or revoke an insurance agent if it is determined that he or she is not properly qualified to perform the duties of a person holding the license.  Qualification may be the meeting of minimum licensing requirements (age, exam scores, etc) and more.


Lack of Business Skills or Reputation

Licenses have been revoked when the agent is NOT of good business reputation, has shown incompetence or untrustworthiness in the conduct of any business, or has exposed the public or those dealing with him or her to danger of loss.  In Goldberg vs Barger  (1974), an application for an insurance license was denied by one state on the basis of reports and allegations in other states involving the applicant's violations of laws, misdealing, mismanagement and missing property concerning "non-insurance" companies.

Activities Circumventing Laws

Agent licenses have been revoked or suspended for activities where the licensee  (1) did not actively and in good faith carry on as a business the transactions that are permitted by law;  (2) avoids or prevents the operation or enforcement of insurance laws;  (3) knowingly misrepresents any terms or the effect of a policy or contract; or (4) fails to perform a duty or act expressly required of him or her by the insurance code.  In Hohreiter vs. Garrison  (1947), the Commissioner revoked a license because the agent misrepresented benefits of policies he was selling and had entered false answers in applications as to the physical condition of the applicants.  In Steadman vs. McConnell (1957), a Commissioner found a licensee guilty of making false and fraudulent representations for the purpose of inducing persons to take out insurance by misrepresenting the total cash that would be available from the policies.


Agent Dishonesty

Agents have lost their license because they have engaged in fraudulent practices or conducted business in a dishonest manner.  A licensee is also subject to disciplinary action if he or she has been convicted of a public offense involving a fraudulent act or an act of dishonesty in acceptance of money or property.  Furthermore, most Insurance Commissioners will discipline any licensee who aids or abets any person in an act or omission which would be grounds for disciplinary action against the persons he or she aided or abetted.  In McConnell vs. Ehrlich (1963), a license was revoked after an agent made a concerted effort to attract "bad risk business" from drivers who licenses had been suspended or revoked.  The Commissioner found that the agent had sent out deceptive and misleading solicitation letters and advertising from which it could be inferred that the agents could place automobile insurance at lower rates than could others because of their "volume plan".  Moreover, the letters appeared to be official correspondence of the Department of Motor Vehicles.  Clients would be induced to sign contracts with the agents where the agent would advance the premiums to the insurance company.  The prospective insured would agree to repay the agents for the amount of the premium plus "charges" amounting to an interest rate of 40 percent per annum.  The interest rates charged were usurious and violated state law.


Catchall Category

In addition to the specific violations above, most states  establish agent responsibilities that MUST NOT violate "the public interest".  This is an obvious catchall category that has been used where agents have  perpetrated acts of mail fraud, securities violations, RICO (criminal) violations, etc.


License Responsibilities

There are agent responsibilities necessary to maintain licensing in "good standing":


License Authority

A person or employee shall not act in the capacity of an agent/broker without holding a valid agent/broker license. This becomes the "age-old test" of what activities constitute an insurance producer. It is generally assumed that anyone quoting premiums or terms of an insurance contract should be licensed.  However, insurance departments across the country have pushed to constantly expand the definition of who in an agency should be subjected to licensing as an insurance producer. To avoid unintentional noncompliance, many agency principals have licensed almost all staff members, regardless of how limited the functions they perform.  By contrast, the staff of insurance companies are exempt from producer licensing for a wide variety of service functions such as collecting premiums, mailing and delivering insurance policies and taking additional information requested by the agent or the insurer concerning an applicant or other transaction over the phone.


At the agency level, some insurance departments require agencies to be licensed both as corporate entities and as individual agency owners and principals.


Temporary licensing can be requested when the agency principal or owner dies or to fill a void in an insurer's marketing force.  This allows the surviving family to  conduct business with existing clients. These licenses are usually limited to 30-days with two renewals for a total of 90 days.


Recent controversy has surfaced concerning the granting of producer licensing and special privileges (exemption from licensing) to special interest groups like financial institutions and self-insured group purchasers.  Independent agents are protesting this treatment and have requested new rules be established by the National Association of Insurance Commissioners.


Notice of Appointment

In addition to license requirements, states generally require a notice of appointment be filed with the insurance department.  This document is executed between the agent and insurer and authorizes the agent to transact one or more classes of insurance business.  An agent may be appointed with several insurers.  Upon termination of all appointments, an agent's license becomes inactive.  While inactive it can be renewed and reactivated by the filing of a new appointment.


License Domicile

Agent domicile is a rapidly changing area of law.  Currently, many states will grant non-residents a producer license. The rules are fairly straightforward:  Agents and brokers of insureds with exposures in several states must be licensed in those states before they can collect a commission for the coverage they have written.  However, since a non-resident agent "exports" premiums and business outside a given state,  many states are beginning to erect barriers to prevent outside solicitation.  One state (Texas) has strictly prohibited agents and firms from entering to solicit property/casualty insurance business (life and health sales are permitted) without forming a corporation or agency and physically opening a Texas office.  Soliciting is defined as direct mail, telephone or any other form of communication, such as fax.


Other new rules and regulations enacted in some states require that insurance policies be countersigned by licensed resident agents of the insurer, regardless of where the contracts are made or the residency of the insureds.  Many states require proof of continuing education credits for non-resident agents in those lines of insurance they are licensed or physically go to the state and pass a test before renewal or relicensing.


Display of License

Most states require that an issued license be prominently displayed in the agent's office or available for inspection.  Where the business entity is

a "fictitious name", such name should be registered with the insurance department.



Agents should maintain a record-keeping system that will provide a sufficient "paper-trail" to identify specific insurance transactions and dates.  At a minimum, such record systems should track the name of the insurer, the insured, the policy number and effective date, date of cancellation, premium amounts and payment plans, dates premiums are paid and forwarded or deposited to a the insurer or trust account, commissions (and who gets them).  Where an agent trust bank account is used, agents should maintain all bank statements, deposit records and canceled checks.  Most records should be kept for a total of 5 years after the expiration or cancellation of the policy.  Some states require that records be maintained "on-site" for one year after expiration or cancellation or stored off-premises but available within two business days.


Agent Files

While agent files may not be law in certain states, every policy transaction should be separately filed
and include a copy of the original application for insurance or a memo that the client requested coverage, all correspondence between agent/client and agent/insurer, notes of client meetings and phone conversations, memorandums of binders (oral or written) and termination/cancellation dates with proof of notification.


Agent Business & Marketing Practices

Agents should pay particular attention to the responsibilities they have in the following areas:


Presentations, Illustrations & Quotes

It is illegal to induce a client to purchase or replace a policy by use of presentation materials, illustrations or quotes that are materially inaccurate. (See Sales Conduct, Chapter 2).



An agent, broker or solicitor shall not misrepresent any material fact concerning the terms, benefits or future values of an insurance contract.  This will include misrepresenting the financial condition of an insurance company, making false statements on an application, disclosure of State Guaranty Fund backing of insurance contracts (some states), making false statements or deceptive advertising designed to discredit an insurer, agent or other industry group, making agreements that will result in restraint of trade or a monopolizing of insurance business, etc.


Twisting & Churning

The act of "twisting" or “churning” is defined as misrepresentation or comparison of insurers or policies for the purpose of inducing a client to change, surrender, lapse or forfeit an existing policy.  Agent violators may be subject to fines, imprisonment and/or license suspension/revocation.



An agent/insurer may not refuse to accept an application for insurance or cancel a policy based on a person's race, marital status, sex or religion.  New proposals before Congress are targeting redlining


violators (insurers and agents) who are withholding insurance protection in certain metropolitan areas.


False Claims

It is unlawful for an agent to submit a false or fraudulent claim to receive insurance loss proceeds.  This includes "staging" or conspiring to stage accidents, thefts, destruction of property, damage or conversion of an automobile, etc.


Unfair Business Practices

It is a violation in most states for agent/brokers to fail to act promptly and in good faith regarding an insurance claim, fail to confirm or deny coverage applied for within a reasonable time, dissuade a claimant from filing a claim, persuading a client to take less of a claim than he or she is entitled to, fail to inform and forward claim payment to a client or a beneficiary, fail to promptly relay reasons why a claim was denied, specifically advise a client NOT to seek an attorney when seeking claim relief, mislead clients concerning time limits or applicable statutes of limitation concerning their policy,  advertising insurance that the agent does NOT  have or intend to sell, use any method of marketing designed to induce a client to purchase through the use of force, threat or undue pressure, use any marketing method that fails to disclose (in a conspicuous manner) that the agent is soliciting insurance and/or that an agent will make contact.


Policy Replacement    (Specific states only) 

Agents must clearly disclose in writing, signed by the client, their intention to replace insurance with a new policy and that the existing insurance will lapse, be forfeited, surrendered or terminated, converted to a paid-up or reduced paid-up contract, etc.  A copy of this "replacement notice" shall be sent to the existing insurer (by the new insurer).


 Additional requirements typically include the completion of specific sections of the insurance application where the agent must acknowledge that he or she is aware of the replacement.     



Information gathered in connection with an insurance transaction should be confidential and have specific purpose.  Clients are entitled to know why information is needed and have access to verifying its accuracy where a claim or application is denied.


Agent Ethics

It is difficult to discuss matters of agent responsibility and reducing liability without exploring ethics.  As it relates to insurance agents, ethics go beyond the maintenance of "moral standards".  Insurance ethics

involves the maintaining of honest standards and judgments that place the client first.  To keep it simple, just remember the old adage “the customer is king”.


Insurance ethics center on maintaining honest standards and judgments that place the client first.


Someday, it may be real important for a court and jury to hear that you have a history of serving the client without consideration for how much commission you made or how busy you were, i.e., you are a person with good ethics. Take the case of Grace vs Interstate Life (1996).  An agent sold his client a health insurance policy while in her 50's.  After the client reached 65 he continued to collect premiums despite the fact that Medicare would have replaced most of the benefits of her policy.  The court did not look favorably on the agent’s lack of duty to notify his client. Federal legislation included in OBRA ‘90 prohibits insurers from offering insurance to Medicare recipients that duplicates Medicare coverage


Ethics exist to inspire us to do good.  Having high ethical standards, can be more important than being right because honesty reflects character while being right reflects a level of ability.  Unfortunately, the insurance industry, like many industries still rewards ability.  There are, for example, plenty of "million dollar" marketing winners and "sales achievement awards", few, if any, "Ethics & Due Care" certificates.


For some, the very effort to be as ethical as possible brings its own rewards.  Consider, for example, the satisfaction that agents realize when the interest of a client has been served by the proper placement of insurance:


The capital needs of a family are met by a $1 million life insurance policy when the breadwinner dies prematurely.


The estate of an entire family is left intact because an umbrella liability policy sheltered against a major accident claim.


A business is able to survive after the death of a partner because a life policy payment provided necessary capital to replace the devastating loss.


The retirement plans of a once young married couple are made possible through investments in pensions and annuities.


The owner of income property financially survives a major fire because his liability policy included "loss of income" provisions.


A family survives a mother's long term bout with cancer because their health insurance carried a sufficient "lifetime" benefit.


Sales ethics involve more than compliance with the law and more than NOT telling lies because an incomplete answer can be just as deceptive as a lie.


The list can go on and on, but the point is made:  The work of an insurance agent often impacts the entire financial well being and future of businesses and families. Ethics place the interest of these clients above an agent's commission.  Being ethical is being professional but the gesture goes beyond the mere compliance with law.  It means being completely honest concerning ALL FACTS.  It means more than merely NOT telling lies because an incomplete answer can be more deceptive than a lie.


Perhaps this whole issue of ethics can be summed up in the very codes of conduct now in place for members of organizations like the American Society of CLU and ChFC, Chartered Property and Casualty Underwriters and the International Association of  Financial Planning.  Following are some examples:


In all my professional relationships, I pledge myself to the following rule of ethical conduct -- I shall, in the light of conditions surrounding those I serve, which I will make every conscious effort to ascertain and understand, render that service which, in the same circumstances, I would apply to myself.


In a conflict of interest situation, the interest of the client shall be paramount.


Take responsibility for knowledge of the various laws and regulations affecting my services.


Avoid sensational, exaggerated and unwarranted statements.


Improve my professional knowledge, skills and competence.


Maintain a high degree of personal integrity.


Maintain a professional level of conduct in association with peers and others involved in the same activities


Instilling ethics is a process that must start long before a person chooses insurance as a career.  It is probably part of the very fiber that is rooted in lessons parents teach their children.  So, preaching ethics in this book may not be incentive enough to sway agents to stay on

track.  It may be easier to explain that honesty and fair play could mean cleaner sales and lessen the possibility of lawsuits.


Agent Disclosure


Client Disclosure

In response to frequent and often groundless claims, many agents have resorted to limiting contracts and disclosures for clients to review and sign prior to any purchase decision.  It may be common, in years ahead, to attach such statements to each and every policy or even require clients to sign one prior to any insurance discussions, much like doctors have patients sign disclosures in advance of services.  The sample on the next page was composed by an agent’s association and is provided for educational purposes only.  Before using any disclosure letter speak to an attorney for approval.  Also, know that specific products may require different wording.


Additional attachments to this letter could disclose options the client chose to refuse, such as:  The opportunity to seek tax, legal or business advice prior to making any insurance purchase or the availability and cost of various options or riders to a policy that were available and suggested at time of purchase (waiver of premium, higher deductible options, exclusions, etc). 


Agents have successfully used disclosures to qualify a promise of coverage as in T.G.I. East Coast Construction vs Fireman’s Fund Insurance (1985).  Here, an agent’s letter to a client regarding future coverage commitments included a very important disclosure: “You will be covered subject to our normal underwriting requirements.”  Of course, when the time came, the client automatically assumed he was covered.  However, on the strength of the disclosure, the courts disagreed.


Agents may also want to use disclosures to "narrow the scope" of their duties.  For example, agents have been held liable for NOT securing "complete" coverage.  If an agent is unwilling to assume responsibility and take the time necessary to provide "complete" coverage, it might be wise to disclose that coverage is for a specific property, condition or a specific insurance carrier.  Further, it might be appropriate to say that the agent has NOT reviewed client coverage needs concerning leases, contracts, directors, product liability, estate taxes, etc. 


In Eddy vs Sharpe (1988) an agent proposal included the following disclosure: “This proposal is prepared for your convenience only and is not intended to be a complete explanation of policy coverage or terms.  Actual policy language will govern the scope and limits of protection afforded.”  While this seems to cover any omission the agent might make in his proposal, he was found liable for client losses because his proposal also listed eight specific exclusions of the policy.  Unfortunately, the one he left out was the peril that damaged the client’s policy.


Nothing can prevent a lawsuit, but an agent may limit liability and be able to demonstrate client knowledge about product and service by using disclosures.


While nothing will prevent legal action by a disgruntled client, an agent may limit liability by being able to demonstrate client knowledge in advance of the sale.  Further, some legal advisors recommend inserting a binding arbitration clause to hopefully circumvent the long, expensive process of a judicial proceeding.  Only a competent attorney should prepare these types of disclosures and clauses.


Sample Agent / Client Disclosure

(Speak to an attorney before using ANY disclosure form)


Dear Client:

As you know, we are an insurance agency and not an insurance company.  Our service to you includes the pricing and presentation of various insurance programs which may fit your needs, and the transmittal of your application to the insurance company.  There are, however, limitations to our service, including the following:

1) Premium quotation and coverage are controlled by the insurance company and may be subject to change.  We do not warrant or guarantee that a premium or coverage quoted by an insurance company will be identical to the ultimate premiums or coverage of the policy as issued by the company.  There is no coverage promised or implied beyond the policy as written and endorsed.  Your acceptance of the policy replaces all other agreements, either oral or written.

2) While we are pleased to provide to you and explain the industry ratings of a particular company or alternate insurers, we do not make any independent investigation of a specific company's solvency or financial stability.  We do not warrant or guarantee that any insurance company will remain solvent, and we will not be liable to any insurance applicant or insured for the failure or inability of an insurance company to pay claims.

3) Insurance companies rely on the truthfulness and accuracy of information provided in the application.  It is your sole responsibility to complete the application accurately, and if the insurance company should deny a claim based on its contention that the application has not been truthfully or accurately completed, we take no responsibility for such inaccuracy.

We ask that our client applicants signify their understanding of the foregoing points and their agreement to defend, indemnify, and hold us harmless against any loss or liability which may arise from the applicant's failure to truthfully and accurately complete the application, by signing and dating this letter in the place provided below and returning the copy to us.  Kindly do so at your earliest convenience.


Accepted by ____________________ on _____________


Insurer Disclosure

The obligations and duties of agents and insurers should be fully disclosed in the agency agreement, general agency agreement or explicitly detailed in other written documents.  Agents reading these documents should be clear on issues of authority (what the agent/broker can and cannot do), advertising (what compliance is the agent subject to), waivers, venue (governing law of state), materials and records, rules & regulations, supervision, audits, commissions, special conditions, indemnification, termination conditions, etc. 


As accountability grows, some agent contracts are including aggressive hold-harmless agreements that impose liability on agents for any claims, regardless of

fault, while others contain personal indemnification clauses that place an agent's home and personal assets at risk.


With ALL these disclosures present, it is a wonder how disputes develop between agents and their insurance companies.  The answer lies in the interpretation of these agreements and circumstances that can be quite different for each transaction.   Agents and brokers have been sued by their insurers for failure to comply with terms of agency agreements ranging from gross misappropriation of premiums to seemingly small violations involving clerical errors.  In many of these cases, the attorney for the defense had to go beyond the written disclosure by defending the agent or broker on the following points of law:


Agency Relationship

Without specific contractual ties, the agent's only duty to the insurer is to collect premiums and deliver the policy.  The extent of any agency relationship between the agent and insurer beyond collecting the premium and delivery the policy is governed ONLY by specific agency agreement or binding authority.


Proximate Cause & Reliance

In cases where the insurer sues a broker for failing to supply correct or complete information on the risk or client, brokers have countered that the insurer would have agreed to underwrite the risk even if he had not supplied correct or complete information.  As a practical matter, it is rare to encounter liability insurance litigation in which the insurer can prove that it would not have provided coverage if better information had been provided.



An insurer who has had a long course of dealing with a given broker/agent may well have been willing, over the years, to overlook shortcomings in the information a broker provided the insurer.  In some cases, brokers are allowed to "bind" coverage and later provide additional information.  If the same insurer brings an action against the broker after a loss has occurred, the broker may be able to point to the insurer's past practices as the basis for an estoppel argument.



When an insurer can be shown to have a practice of issuing policies even though the broker has supplied incomplete information, the broker may be able to establish that the insurer has ratified the broker's actions and adopted them as the insurer's own.  Ratification of unauthorized acts of an agent can be sufficient in some cases to release the broker/agent from liability to the principal.


Errors & Omissions Insurance

Like other professionals, insurance agents should carry their own errors and omissions insurance.  One author suggests that the highest level of agent ethics occurs when errors and omissions insurance is purchased for the protection of clients.  While this is indeed a noble gesture, it is more likely that agents purchase these policies for more selfish motives.  After all, we have entered an era of high accountability and cannot hope to survive a major claim without this protection.  In some states, for example, the punitive awards can be as high as three times the amount of compensatory awards (some policies do not cover punitive damages).  Faced with these kinds of actions, insurers, who many times foot the bill for agent mistakes, are less timid about suing their agents and brokers for any malfeasance.  Of course, to some extent, the very existence of errors and omissions insurance may be a factor in an agent being named in litigation that he may otherwise have avoided.  In a case involving several security salesmen, for example, a pre-trial judge asked for a show of  hands of agents who did NOT have errors and omissions insurance.  They were excused from the case!  This could happen again, or not at all.  Who wants to take the chance?


There is no standard errors and omissions policy.   Most policies are written on a claims-made basis rather than on an occurrence basis.  Claims made means the insurer is ONLY responsible for claims filed while the policy was in force.  This could represent a problem down the road a few years, if the agent moves or retires.  Even death is not an excuse, where a "hot shot" attorney can file his client's claim against the agent's estate!!


Policies today also have some very significant limitations, caps, gaps, consent clauses and relatively high deductibles.  So many loopholes, in fact, that an agent is likely to feel the financial impact of any

litigation almost immediately and under certain conditions may receive NO protection whatsoever.  Some older style policies even require the agent to pay the entire claim before the errors and omissions insurer has any obligation at all.  These are referred to  as indemnification policies.


In many instances, the choice of an errors and omissions policy doesn’t center on the limits or features an agent wants, rather it comes down, for many, to what the agent can afford.  Unless agents find a way to finance the huge premiums, through banks or association groups, this often leads to the agent accepting many policy exclusions.



Aside from the primary limits of the policy ($1 Million seems to be the limit of choice for most agents) the cost of defense is the most important exclusion to watch.   Does your errors and omission policy include defense costs as part of the limit?  If so, the amount of money available to pay monetary or punitive awards will be significantly reduced.  Defense costs can also be limited to a percentage of policy limits. Here, when the number is reached, you start paying  the balance of defense costs.  Obviously, the best errors and omission plan will pay for all defense costs in addition to policy limits.


The claims made exclusion is the next consideration.  If you have one, you will be covered for only the claims that occur while the policy is in force.  If so, how will you handle a claim problem that occurs down the road, say at retirement, when you have dropped your policy?  Actually, you may have little choice in the matter since most policies today are written on a claims made basis versus an occurrence basis.  However, there are endorsements, discussed later, that can help protect you in the “down the road” scenarios.


In addition to the claims made limitation, there are many other important coverage exclusions an agent must consider, such as:  insurer insolvency, receivership, bankruptcy, liquidation or financial inability to pay; acts by the agent that are dishonest, fraudulent, criminal, malicious or committed while knowing the conduct was wrong;  promises or guarantees as to interest rates or fluctuations of interest rates in policies sold, the market value of any insurance or financial product or future premium payments;  activities of the agent related to any employee benefit plan as defined under ERISA;  agent violations of the rules and regulations of the Securities Exchange Commission, the National Association of Security dealers or any similar federal or state security statute;  violations of the provisionsof the Consolidated Omnibus Budget Reconciliation Act (COBRA);  discrimination or unfair competition charges, violations of the Racketeer Influenced Corrupt Organizations Act (RICO), and structured settlement placements.


In most of the instances above, the standard agent's errors and omissions policy WILL NOT PAY a claim.  In the case of an insolvent company that retains client's money or refuses to make good on a claim, the agent WILL NOT even be defended according to  terms that exist in most policies. 


Also, be aware of specific limitations.  You may not be covered for errors and omissions in the following areas: punitive damages, business outside the state or country; failure to give notice if new employees or agents are added to your staff;  fraudulent or dishonest acts of employees or agent staff; negligence may be covered, but bodily injury and property damage may not;  judgments -- some policies only pay if a judgment is obtained against you; some exclude contractual obligations in the form of “hold harmless” clauses (watch them); outside services like the sale of securities, real estate or notary work.


Most errors and omissions policies are far from perfect. However, before losing interest in buying this valuable coverage, you should consider the high costs, and lost production time,  associated in the defense of even one client claim and any subsequent judgment requiring an agent to pay any deficiencies and attorney/court fees.  The cost of the average errors and omissions policy is cheap when compared to these costs.


If you want your errors and omissions to do more, you can pay more and upgrade your coverage.  Critical policy options that you might consider include first dollar defense coverage, defense costs in addition to policy limits, adequate liability limits ($1 million minimum), the availability of prior-acts coverage and coverage  carrier solvency.


Obviously, the concerned agent would do better to avoid malpractice claims at the outset by doing everything possible to investigate safety and solvency of any proposed carrier, acting professionally, keeping current, exercising due care, etc.   Further, there is no substitute for operating in a prudent, ethical manner .  After all, why work and build a practice only to lose everything because of the dissatisfaction of one client?


Working With E&O Claims

If you feel you have a potential errors and omissions claim, you should first review your policy and follow the reporting requirements. Most E & O carriers want

you to report an incident right away.  However, it is important to know what your company determines to be an “incident”.  Is it an actual claim?  Is it a threat of a claim?  If in doubt, you might want to call the company and discuss the situation with them.  


Generally, it is in your best interest to cooperate fully with the company by assisting in any evidence gathering and witness lists. However, this same spirit of cooperation does NOT always extend to your client.  Most errors and omissions insurers do NOT want you or any staff member to make any voluntary admission of guilt to the client.  Never blame the insurance company in any way or make any statement that might lead them to believe that the situation will be cured.  While you can be cordial and calm in dealing with the client, be careful NOT to give any advice, legal or otherwise. If you are absolutely positive the claim is wrong, you can deny it, but never offer to settle.


If the situation involves a claim between the agent and a represented insurance company, the same precautions must be taken.  In essence, you can’t afford to “prejudice” your case in any way.  Violating this errors and omissions contractual promise will cause your coverage to be canceled.


Cooperation also extends to any settlement offer proposed by your errors and omissions company.  If your E&O insurer suggests a settlement offer that you do not agree with, and the case ends with a higher judgment than the settlement, you could be held liable for the difference as well as any amounts that exceed policy limits.


Office Protocol

Properly used, an agent's office automation and procedures can help to avoid costly claims or at least limit E&O losses.  For example, a sound basis for a defense can be established if an agent produces documentation, records of phone conversations regarding binding and specific coverages or records that show a clients decision to reject a recommended coverage.  The client would have a hard time proving otherwise.  Some liability claims have hinged on a hastily scribbled note confirming that a disputed conversation took place.


The legal purpose of documenting client dealings is to establish evidence.  The best evidence gathering results from “standard operating procedures”.


The legal purpose of documenting client transactions is to establish evidence.  Evidence can be parol evidence  which is oral (difficult to prove in court), or it can be hearsay evidence (behind the scenes notes) which are written but not generally admissible unless it is collected under ordinary business rules.  You should develop standard operating procedures which require the following evidence rules for the best protection possible:


Reduce oral agreements to writing as soon as possible and indicate that the written document is the entire agreement.


Handle ordinary course of business using an operating manual that is followed consistently, e.g., You offer a special endorsement coverage to everyone and log their acceptance or denial in the client file.


Instead of “post-it” notes and scattered comments in client files make a point to transfer the content of these notes to a formal log kept in every client file.


Following are some areas of office protocol that may make or break a claim against an agent:


Automated Equipment

Computers and their diary capabilities provide up-to-date documentation that can be used to verify an agent's defense.  Electronic "date-stamping" can also be valuable, as can fax messages concerning any client/agent contact concerning the dispute.  We use a program called “Maximizer” which allows a quick location of a client file and fast entry of the conversation.  Retrieval is a snap.


Application For Insurance

Complete and legible copies of the original application for coverage are extremely important.  They presumably show the "intent" of the insured when he took out the policy, what he communicated to the agent regarding his wishes, whether the agent followed his wishes and whether the insurance company followed the wishes of the agent who requested a policy of insurance pursuant to the wishes of the insured.  Also, a material misrepresentation of fact by the insured in his application may cause the policy to be void (American Family Mutual Insurance Co vs. Bowser - 1989)


The Agent's File

In a legal action involving an agent or his insurer, a client's attorney will always attempt to secure a copy of the agent's file.  It will show his knowledge of the insured's intent for specific coverage, communications between the agent and the insured about securing these coverages and the communications between agent and the underwriting department of the insurer. In State Farm Fire & Casualty vs. Gros (1991), lack of notation regarding a client conversation three years before the loss was evidence upon which a jury

concluded that the agent misrepresented the terms of the policy to the insured.


By law, insurance companies generally have access to your files.  So, it would be wise to NEVER make a derogatory comment about a client in these files.  Also, when a claim or potential claim situation surfaces, it is always a good idea to check with your errors and omissions insurer before turning over any documents. 


As the industry edges closer to “paperless” filing it is important to understand that ALL files (paper, electronic, fax, post-it notes, etc)  are considered evidence and can be used on your behalf or against you.  Certain documents, such as  applications with original signatures still need to be kept in paper form.



Clients will often say they “never received” a letter or cancellation notice or “it was not in the envelope you sent.  Experts suggest that using window envelopes and various methods of proven delivery, like Western Union, Certified Mail or United Parcel will provide you with a tracking record.  Additionally, if the insured acknowledges receipt of a window style envelope he can’t say there was nothing inside since the address was on the letter showing through the envelope window.



E-mail messages and correspondence is fast replacing written memos, faxes, phones calls and more.  The ease of use, however, may hide liabilities that you need to address.  For instance, confidential notes or information can be unintentionally sent without saving a copy, or worse yet, sent to the wrong party.  E-Mail users often hit the “enter” key before they think, and just hitting “delete” doesn’t automatically eliminate a message or derogatory remark.  The system may “back-up”.


E-Mail communications are just as binding, admissible and prohibitive in court as other communications.  Attorneys are finding damaging information in E-Mail files that they can’t find elsewhere.  That is why it is imperative to have use guidelines for E-Mail. For liability purposes, all parties who have access to E-Mail in your company should apply good judgment.  They should communicate with E-Mail as they would in a public meeting.  Sensitive information should be encrypted to protect it from being transmitted via the Internet.  For the best protection, use software that requires passwords.




Operations Manual

As you read above, standard operating procedures are steps that you follow consistently in selling and serving client.  Standard procedures can be critical in establishing your notes and records as usable evidence in a trial.  Further, it can be suggested that an agent who is careful to follow set procedures is usually found to be more credible in his own defense.  Both are important reasons to document procedures in an operations manual.  Some errors and omission insurers are requiring agents to have and see their operations manual before coverage can commence.  You should also be aware that in an insurance dispute, the existence of such a manual may be uncovered. From a defense standpoint, the manual and your adherence to it may prove that you are a diligent agent.  From a plaintiff’s vantage, non-compliance of policy procedures that you establish may work against you.


 An operations manual should detail standard procedures to follow in dealing with clients, insurers and special services you offer.


Your operations manual should cover procedures for dealing with client applications, claims, policies and certificates, insurance companies and any special services you plan to offer.  The following is a basic outline of information that could be included in your manual.  Because agencies and insurances differ widely, you will want to add issues that are specific to your business before implementing procedures.


Client needs and requests should always be noted in the file. Many agents routinely take 5 minutes after a client interview or phone call to document the needs and requests of the client in the file.  Even if you have to shut the door and set the answering machine, this is important.  Chapter 2 discusses many routine questions concerning agent due care and client needs. Always be consistent.  If you ask one client to accept or deny a specific endorsement,  make sure that you ask the same question of others. Note the date or nature of all correspondence that notifies a client that his application has been accepted or denied.  Equally important is logging notification of clients or potential clients that coverage is NOT available.


Create a “hot list” or “follow-up” file for ALL transactions that require additional review.  A contact management or database system is excellent for noting the need to review the client file within 10 days, 20 days or on a specific date to check a renewal, ordered endorsement, etc. Your operations manual should also layout office procedures to be followed for handling and logging phone messages, faxes (copy

thermal paper before putting in file), e-mail, photographs, microfilm, proof of mailing receipts as well as how long and where storage and “deep storage” of records will be kept. Standard procedures such as using window envelopes (advisable) for all notifications should also be established.


As mentioned above, all oral agreements and binders should be reduced to writing and dated in the file. Policies received should be checked against “specimen policies” to be sure they are  the correct contract and against the client application to be sure it meets client needs. Endorsements should be processed as soon as possible.  Make notes that show the policy has been endorsed and create a follow-up system that compares any endorsement papers mailed with the endorsement received from the insurance company.


Cancellation procedures should comply with state regulations and policy provisions. Notices to client should be tracked and posted in the client file.  Also, be sure that the client does NOT continue receiving a bill after cancellation.


Renewals should be sent within a specified time before expiration of the policy (usually 60-90 days).  Experts agree that if you can’t reach the client you should order the renewal anyway.  Posting and tracking any notices to file is very important.


Expirations should comply with state and policy provisions.  Always notify clients of any expiration.

Claims should receive immediate attention and all requests should be promptly sent to the insurer.  A follow-up note to the file should be prepared.  Don’t

tell the client that the claim will be paid unless you are absolutely sure. Don’t offer any legal advice to the client.  Compare claim awards to policy accuracy.






Rules and regulations vary from state to state.  There are, however, widely accepted codes of behavior expected from licensed agents that fall under the category of consumer protection.  Conflicts that surface here are usually the result of violations in advertising and deceptive or unfair trade practices.  Agents in the real world find it near impossible to know each and every consumer statute, yet a single mistake could jeopardize your career and personal assets.  Sometimes, it is the tiny indiscretions in business that create the problem.   For example, placing a small and seemingly harmless Asub-title@ on your letterhead that says AProfessional Services Guaranteed@ could hold you accountable for more than you bargained.  Or, how about sending a withdrawal or surrender of cash value form to an insured to sign and mail back.  This seems both efficient and convenient for the client, and a practice familiar with many agents.  However, the client signature is not truly witnessed.  Will a spouse or surviving family member who did not participate in any cash distribution deny the signature is real?  Such is the way that matters of simple mistakes grow into legal conflicts.  Knowing what is expected of agents in the consumer protection arena is the best place to reduce and avoid these problems.


Insurance Advertising

Insurance advertising is highly regulated with guidelines that differ from state to state.  These guidelines determine what is communicated in an advertising message, how it is communicated, and how it looks.  In fact, much of what agents communicate probably falls under the legal definition of advertising.  Failure to comply with state laws could require the insurer and agent to cease doing business and incur penalties.


What is Advertising?

Nearly ALL client contact is considered advertising and subject to strict state guidelines.


Advertising includes all materials designed to create public interest in an insurer, its products, an agent or broker.  This may include, but is not limited to: Product Brochures, Prospect Letters, Sales Presentations, Agent Recruiting Materials, Newsletters, Business Cards, Trade Publication Ads, Point-of-Sale Illustrations, Print/Radio/TV/Internet Advertising, Stationary, Telemarketing, Telephone Conversations, Yellow Page Ads, Videos, etc.  Most insurance companies require that agents submit these forms of advertising to compliance departments for approval prior to publishing.


Blind ads which do not identify product features or rates are particularly  vulnerable to mistakes since they are typically not reviewed by compliance departments, although many insurers will look them over as a courtesy.  Due to violations in this area of advertising, many states now require an agent’s license number be displayed in ALL forms of communication, including blind ads.


What Isn’t Advertising?

Communication used purely for internal purposes and not intended for public use, as well as policy holder communications that DO NOT encourage policy modifications, are not considered advertising.


Advertising Compliance

The consequences of using nonapproved advertising are both severe and damaging.  Insurance regulators concerned about an advertisement’s content may require that ALL future advertising for the entire company be submitted for prior state approval.  This would be disruptive and time-consuming.  Additionally, a violation  in  advertising may carry fines of $1,000 or more per violation.  As an example, 1,000 misleading flyers could be assessed a fine of $1 million ($1,000 X 1,000). To avoid these kinds of conflicts advertising should comply on several fronts:


Identity of Insurer or Product

If advertising focuses on a specific company it is advised that the FULL NAME of the company be used along with the home office address (City and State).  Initials or abbreviations are not acceptable to most companies or insurance regulators.


Advertising should identify the insurer, the policy type and be understood by a person of average intelligence.

For specific product ads, the policy or contract type should be clearly and accurately identified.


Accuracy and Truthfulness

As a general rule, the advertising piece, when examined as a whole, cannot lead a person of average intelligence to any false conclusions.  These conclusions can be based on the literal meanings of words in the ad and  impressions from pictures or graphics as well as materials and descriptions omitted from the advertising piece.  In one case
(McConnell vs Ehrlich - 1963) the agent lost his license for using prospecting letters that closely resembled official correspondence from the Department of Motor Vehicles.


Words like Asafety@ should be supported while terms like Alegal reserve@ should be avoided, as should other words that might lead a purchaser to believe he was getting something other than an insurance product.


Specific words like Asafety@ should be supported using A.M. Best Ratings, etc., while terms like ALEGAL RESERVE@ should not be used at all.  Absolute words like Aall@, Anever@ and Ashall@ should be avoided, while words such as Afree@, Ano cost@ and Ano extra cost@ can be included IF actually true and then ONLY if the one paying for the benefit is identified or if the copy indicates that the charge is included in the premium.


Words that are not typically used in connection with a policy, like Ainvestment@, Apersonal pension plan@, Aasset protector@, etc., should not be used in a context which leads a purchaser to believe he is getting something other than an insurance product.


Illustrations and Quotes

There are many proposals by states, professional groups and organizations like the National Association of Insurance Commissioners.  Most require that agents disclose all assumptions in the illustration or quote and explain and highlight any guaranteed portions as opposed to anticipated results.  Almost as important is whether nonguaranteed elements of the policy are shown with equal prominence and close proximity to the guaranteed elements.  Representations concerning withdrawals cannot be made unless reference is also made to any prepayment or surrender charge.  Where words like Atax free@ or@exempt@ are used, they should be explained.


Comparisons, Ratings and Competition References


Illustrations or proposals must not be misleading.  Ratings should be supported and reference to competition should be fair.


Comparisons made between policies and investment products, e.g., comparing an annuity to a savings account or a split limit quote to a single limit estimate, must be complete, accurate and not misleading.   Agents have lost their license by using solicitations and letters that inferred that insurance is available at lower rates than others because of a special Avolume plan@.   All statistical information should be recent, relevant and the source and date identified.  Any reference to a commercial rating should be clear in describing the scope and extent of the rating.  If an A.M. Best, S&P, Moody’s or other rating is advertised, the appropriate disclosures should be given.


References to the competition should be factual and not disparaging.  Comparisons to competitor’s products ought to be fair and complete and there should never be a reference to State Guaranty Associations as a means to induce the purchase of an insurance product.



If you display a rating from a commercial company you should use a disclosure similar to this: ’A.M. Best has assigned (Company) an AA@ (Excellent) rating, reflecting their current opinion of the financial strength and operating performance of (Company) relative to norms of the insurance industry.  A.M. Best utilizes 15 rating classifications from A++ to F.


If your agency is located in a bank or other prominent corporate institution, the following disclosure is appropriate: Contracts are products of the insurance industry, and are not guaranteed by any bank or company, or insured by the FDIC.


Also, if your product aligns with estate planning, financial planning, taxes or asset protection, you might display the following caveat: Neither (Company) nor any of its agents give legal, tax or investment advice.  Consult a qualified advisor.


Testimonials and Endorsements

Never use or imply an endorsement or testimonial by a person or organization without their approval.  Further, if a person or organization making an endorsement or analysis is an employee of or has a financial interest in the Company or receives any benefit, it should be prominently displayed.


Other Unfair Insurance Practices

While advertising is the most obvious trade practice violation, agents should be certain they are not also participating in other unfair methods of competition or unfair or deceptive acts or practices in the course of their daily business, the subject our of next discussion. 

Agents accused of unfair trade practice methods are typically subject to a hearing, usually before the State Department of Insurance, to show cause why a cease and desist order should not be made by the appropriate regulatory agency or board.  After a hearing, if it is determined that the agent's actions violate the rules of unfair competition and practices, a formal cease and desist order may be served -- a warning.  Violating a cease and desist order is typically

subject to various dollar penalties and administrative penalties such as injunctions, loss or suspension of license, and severe civil penalties such as high dollar fines, damage awards, and court fees to the injured parties.   In addition to advertising, discussed above, areas of specific importance include:



Agents should clearly identify themselves as insurance agents promoting or selling an insurance product.



Defamation violations occur where an agent is involved in making, publishing, disseminating, directly or indirectly, any oral or written statement, pamphlet, circular, article or literature which is false or maliciously critical of or derogatory to the financial condition of any insurer or which is designed to injure any person engaged in the business of insurance.


Boycott, Coercion & Intimidation

Most states consider it unlawful for licensed agents to enter into any agreement or commit any act of boycott, coercion or intimidation resulting in or tending to result in unreasonable restraint of, or monopoly in, the business of insurance.


False Financial Statements

Restrictions are very clear that an agent violates the law when filing with any supervisor, public official or making, publishing, disseminating, circulating or delivering to any person, directly, or indirectly, any false statement of financial condition of an insurer with intent to deceive.  This also includes making any false entry in any book, report or statement of any insurer with intent to deceive any agent, examiner or public official lawfully appointed to examine an insurer's condition or  any of its affairs.  Willfully omitting to make a true entry of any material fact pertaining to the business of such an insurer in any book, report or statement are similar violations.



Stock Operations

It is considered unlawful to issue, deliver or permit agents, officers or employees to issue or deliver company stock, benefit certificates or shares in any corporation promising returns and profits as an inducement to sell insurance.  Participating insurance contracts, however, are excluded from this category.



An agent clearly violates insurance law in making or permitting any unfair discrimination between individuals of the same class and equal expectation of life in the rates charged for any contract of life insurance or life annuity or in the dividends or other benefits payable by such contracts.  Similarly, there shall be no discrimination between individuals of the same class and of essentially the same casualty hazard in the amount of premium, policy fees, or rates charged for any policy or contract of accident or health insurance or in the benefits payable under such contracts.  Discrimination can also occur where individuals of the same class and of essentially the same hazards are refused renewability of a policy, subject to reduced coverage or canceled because of geographic location.



Rebates permitted by law are authorized.  Otherwise, it is a violation in most states to offer, pay or rebate premiums, provide bonuses or abatement of premiums or allow special favors or advantages concerning dividends or benefits related to an insurance policy, annuity or contracts connected with any stock, bond or securities of any insurance company.  A rebate may also be classified as any readjustment in the rate of premium for a group insurance policy based on the loss or expense experience at the end of the first year, made retroactively only for that year.


Deceptive Name or Symbol

Agents shall not use, display, publish, circulate, distribute or cause to be used or distributed any letter, pamphlet, circular, contract, policy, evidence of coverage, article, poster or other document, literature bearing a name, symbol, slogan or device that is the same or highly similar to a  name adopted and already in use.


Deceptive or Unfair Business Practices

In addition to specified insurance codes, insurance agents must comply with general consumer protection laws carrying titles such as "Deceptive Trade Practices" or "Unfair Trade Practices".  For the most part, these consumer laws apply to insurance and agents because an insurance policy is deemed a "service" and the purchaser of a policy is deemed a "consumer".  Therefore, insurance services fall within the meaning of widely adopted consumer protection acts.  Agents are also pursued under consumer protection laws, because some insurance codes do not specifically address certain questionable acts by agents where the misrepresentation or fraud occurs outside the limits of insurance business.  In such cases, the damaged insureds or policy owners were not considered to be "consumers".  By including the purchase of insurance services as a consumer transaction, the additional protection of deceptive or unfair trade practices acts can be invoked.

In addition to insurance codes, agents are held responsible for violations of state consumer protection laws.


The Uniform Consumer Sales Practices Act was enacted by the federal government and adopted by many states to protect consumers from deceptive marketing practices and establish a uniform policy.  The essence of this legislation, as well as local and state laws, is that "buyer beware" is an old attitude now replaced by real laws and enforceable legal limits.  The courts frown on oppressive and unconscionable acts and consider it the duty of any sales person and agent to disclose information available to him which gives him an unfair advantage in a sale.  False statements constitute fraud, and the fine print in contracts may be construed, under certain conditions, as an intent to conceal.


Unlawful Trade Practices

False, misleading or deceptive acts or practices in the conduct of any trade or commerce are unlawful and subject to action by the appropriate codes of consumer protection.  Such acts, which may apply to insurance agents and brokers, include, but are not limited to the following:

·        Passing off services as those of another.

·        Causing confusion or misunderstanding as to the source, sponsorship, approval or certification of services offered.

·        Causing confusion or misunderstanding as to affiliation, connection or association with another.

·        Using deceptive representations or designations of geographic origin in connection with services.

·        Representing that services have sponsorship, approval, characteristics or benefits which they do not have.

·        Disparaging services or the business of another by a false or misleading representation of facts.

·        Advertising services with intent not to sell them as advertised.

·        Advertising services with intent not to supply a reasonable expectable public demand, unless the advertisements disclose a limitation on quantity.

·        Representing that an agreement confers or involves rights, remedies or obligations which it does not have or involve, or which are prohibited by law.

·        Misrepresenting the authority of a salesman or agent to negotiate the final terms or execution of a consumer transaction.

·        Failure to disclose information concerning services which was known at the time of the transaction if such failure was intended to induce the consumer into a transaction which the consumer would not have entered had the information been disclosed.

·        Advertising under the guise of obtaining sales personnel when in fact the purpose is to first sell a service to the sales personnel applicant.

·        Making false or misleading statements of fact concerning the price or rate of services.

·        Employing "bait and switch" advertising in an effort to sell services other than those advertised on different terms or rates.

·        Requiring tie-in sales or other undisclosed conditions to be met prior to selling the advertised services.

·        Refusing to take orders for the advertised services within reasonable time.

·        Showing defective services which are unusable or impractical for the purposes set forth in the advertisement.

·        Failure to make deliveries of the services advertised within a reasonable time or make a refund.

·        Soliciting by telephone or door-to-door as a seller, unless, within thirty seconds after beginning the conversation the agent identifies himself, whom he represents and the purpose of the call.

·        Contriving, setting up or promoting any pyramid promotional scheme.

·        Advertising services that are guaranteed without clearly and conspicuously disclosing the nature and extent of the guarantee, any material conditions or limitations in the guarantee, the manner in which the guarantor will perform and the identification of the guarantor.


Burden of Proof

To recover under deceptive or unfair trade practice acts, it is the claimant's burden to prove all elements of his cause of action and that he is a "consumer" within meaning of the act.


Legal Remedies

Whenever the courts or consumer protection division of an insurance department have reason to believe that any person is engaging in, has engaged in, or is about to engage in any act or practice that may violate a trade or practices act, and that proceedings would be in the public interest, the division may bring action in the name of the state against the person to restrain by temporary restraining order, temporary injunction, or permanent injunction the use of such method, act or practice.  In addition, there may be a request by the

consumer protection division, requesting a civil penalty for each violation, possibly $2,000, with a maximum total not to exceed an established amount (typically $10,000).  These procedures may be taken without notification to such person that court action is or may be under consideration.  Usually, however, there is a small waiting period, seven days or more,  prior to instituting court actions.


Actions which allege a claim of relief may be commenced in the district court -- usually where the person resides or conducts business.  The Court may make such additional orders or judgments as are necessary to compensate those damaged by the unlawful practice or act.  Usually, there is a statute of limitations, typically two years, to bring such action.


Unfair Competition & Unfair Practices by Insurers

Agents should know that the insurance companies they represent are also subject to the insurance and practice rules above, as well as to specific deceptive or misleading acts in the areas of advertising, settlement practices, reporting procedures, discrimination (by race, disability, rates, renewal, benefits), investment practices, reinsurance restrictions, liquidations and more. 


Violations of consumer protection issues by insurers will be met with an array of fines and penalties ranging from hearings before the commissioner, public hearings, judicial hearings and review, additional periodic reporting (beyond annual statements), investigative audits, dollar penalties, civil penalties to the more severe cease and desist actions and revocation of an insurer's certificate of authority to conduct business.


The following are some areas of consumer protection violations by insurers that should alert agents:


Unauthorized Insurer False Advertising

The purpose of consumer protection laws in this area is obvious -- insurers not authorized to transact business in the state should not place, send or falsify any advertising designed to induce residents of the state to purchase insurance.  This legislation is usually directed at "foreign or alien insurers" and defines advertising to include ads in the newspaper, magazine, radio, television and illustrations, circulars and pamphlets.  Violations can also include the misrepresenting of the insurer's financial condition, terms and benefits of the insurance contract issued or dividend benefits distributed.




Unfair Settlement Practices

Insurers doing business in a state are subject to rules and regulations detailing unfair claim settlement practices such as:

·        Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages.

·        Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies.

·        Failing to adopt and implement reasonable standards for prompt investigation of claims arising under its policies

·        Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims submitted in which liability has become reasonably clear.

·        Compelling policy holders to institute lawsuits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in the suits brought by these policy holders.

·        Failures of any insurer to maintain a complete record of all the complaints which it has received during recent years (usually three years) or since the date of its last examination by the commissioner.  This record shall indicate the total number of complaints, their classification by line of insurance, the nature of each complaint, the disposition of these complaints and the time it took to process each complaint.


Discrimination by Handicap

An insurer doing business in a state may not refuse to insure, continue to insure or limit the amount, extent, or kind of coverage available to an individual, or charge an individual a different rate for the same coverage solely because of handicap or partial handicap, except where the refusal, limitation, or rate differential is based on sound actuarial principles or is related to actual or reasonable anticipated experience.


Discrimination by HIV Testing

In recent years, HIV related testing in connection with an application for insurance has become commonplace.  If an insurer requests or requires applicants to take an HIV RELATED test, he must do so on a nondiscriminatory basis.  An HIV RELATED test may be required only if the test is based on the person's current medical condition or medical history or if the underwriting guidelines for the coverage amounts require all persons within the risk class to be tested.   Additional stipulations require that an insurer may not make a decision to require or request an HIV RELATED test based solely on marital status, occupation, gender, beneficiary designation or zip

code.  Further, the uses that will be made of the test must be explained to the proposed insured or any other person legally authorized to consent to the test and a written authorization must be obtained from that person by the insurer.


An insurer may not inquire whether a person applying for insurance has already tested negative from a previous HIV test. The insurer may inquire if an applicant has ever tested positive on an HIV RELATED test or has been diagnosed as having HIV or AIDS.  The results of an HIV test are considered confidential, and an insurer may not release or disclose the test results or allow the test results to become known, except where required by law or by written permission from the proposed insured.  Then and only then can results be released, but only to the proposed insured, a licensed physician, an insurance medical information exchange, a reinsurer or an outside legal counsel who needs the information to represent the insurer in an action by the proposed insured. 


Discrimination in Rates or Renewal

An insurer may not discriminate on the basis of race, color, religion, or national origin, and, to the extent not justified by sound actuarial principles on the basis of geographical location, disability, sex, or age, in the setting or use of rates or rating manuals or in the nonrenewal of policies.


Benefits Protection

Insurers are duty bound to protect all money and benefits of any kind, including policy proceeds and cash values to be paid or rendered to the insured or any beneficiary under a life insurance policy or annuity contract.  In essence, these benefits must inure exclusively to the person designated in the policy or annuity contract.  They must be exempt from attachment, garnishment or seizure to pay any debt or liability of the insured or beneficiary either before or after the money or benefits are paid.  They are also exempt from demands of a bankruptcy proceeding of the insured or beneficiary.


Health Policy Benefits

In the health insurance industry, benefit payments are commonly assigned to a physician or other form of health care provider who furnishes health care services to the insured.  An insurer may not prohibit or restrict the written assignment of benefits.  When such an assignment is requested, the benefit payments shall be made directly by the insurer to the physician or health care provider and the insurer is relieved of any further obligation.  Of course, the payment of benefits under an assignment does not relieve the covered person from any responsibility for the payment of deductibles and copayments.  Further, a physician or health care provider may not waive copayments or deductibles by acceptance of an assignment.


Contract Entirety

Every policy of insurance issued or delivered within the state by any insurance company doing business in the state shall contain the entire contract between the parties.  Furthermore, the application used to secure the insurance is usually made part of the contract.


Insurer Mergers

The conditions and regulations necessary for two insurance companies to merge or consolidate are well documented in state insurance codes.  Concerning consumer protection, however, it is important to know that all policies of insurance outstanding against an insurer must be assumed by the new or surviving corporation on the same terms and under the same conditions as if the policies had continued in force with the original insurer.


Reinsurance Assumptions

A method used by one insurance company to insure or reinsure another insurance company is called stock assumption.  Most insurance codes do not affect or limit the right of a reinsurer to purchase or to contract to purchase all or part of the outstanding shares of another insurance company doing a similar line of business for the purpose of reinsuring all of the business including the assumption of its liabilities. 


Despite the practice of assumption reinsurance, some members of Congress in recent years have objected to the process, since there is no requirement to inform policy holders in advance that the insurance company behind their policy is relinquishing responsibility to another company, that is, the reinsurer.  The reasoning behind their concern is that policy holders who have purchased coverage based on the financial condition and reputation of one company may suddenly find themselves insured by another company without warning or knowledge of the new company's abilities to pay their claims.  To date, however, there is no definitive legislation passed to change reinsurance assumption.











Insurance can fail to insure in many ways.  An agent's negligence in providing coverage, offering inadequate or defective protection, coverage disputes,  or the insolvency of the insurer can all cause this failure.  The result is bound to disappoint a client and cause the potential loss of personal assets, as well as create liability for the agent.


What Goes Wrong With Insurance


Coverage Shortfalls

Many Americans consider it a duty to purchase and maintain insurance, often buying multiple policies with varying features and limits.  Occasionally, situations arise where a liability surfaces from an unanticipated source, beyond the scope of these features and limits, resulting in an insurance shortfall.  Such is the case where a breadwinner who bought a $50,000 whole life policy dies prematurely leaving a family with young children.  Or consider a high wage earner who is the cause of a serious auto accident that disables a neurosurgeon for life.  Obviously a $300,000 policy limit may not satisfy the surgeon’s family and their attorney.  When events like this occur, the agent may find himself in the position of breaking  bad news to the insured, or worse, being liable for the shortfall.


Sometimes, insurance shortfalls cannot be helped.  After all, nothing in life is guaranteed to work out right every time, and unexpected, freakish accidents and events can occur without  warning.  Unfortunately, there are also instances where the coverage provided by an agent was significantly less than needed and the agent paid the difference (Insurance Company of North America vs J.L. Hubbard - 1975).  Then too, there are times when the coverage purchased or sold to a client exceeded what was needed in one type of insurance at the expense of another insurance coverage, e.g., a high premium whole life policy leaves no monthly budget for health insurance, or an auto policy with low deductibles is chosen or sold instead of a higher deductible policy and umbrella coverage.  Where clients depend on an agent for multiple lines of insurance , agents need to consider balancing coverage to avoid critical shortfalls.


Coverage Disputes

In the midst of the litigation explosion, the stakes are high.  Insurers are offering increasingly high policy limits, and insureds, who cannot secure coverage or who fail to be awarded coverage, risk losing a lifetime of assets.  Given this scenario, conflicts between insureds and insurers and agents can easily gather steam.   To further confuse the issue, the courts are constantly “bending” statutes while public attitudes produce more and larger plaintiff verdicts, this despite the fact that the industry operates under fairly standard contracts.   In essence, there has never been a time for greater disputes in coverage.


One form of coverage dispute results when the agent fails to secure the promised coverage (Bell vs. O’Leary - 1984).  The courts have found that when an insurance broker agrees to obtain insurance for a client, with a view to earning a commission, the broker becomes the client’s agent and owes a duty to the client to act with reasonable care, skill and diligence.  As seen earlier, agents have been sued for neglecting to secure the requested coverage, failure to notify the client that the insurance is not available, failure to forward premiums on policies which then lapsed, unintentionally omitting a specific type of coverage, providing  unsuitable coverage, failure to properly bind the client and much more!


A more common form of dispute occurs when the insured and the insurance company simply do not agree on the interpretation of coverage provided.  In practice, insurance coverage cases can be extremely complex.  It is not unusual for these cases to involve numerous parties on both sides of the litigation.  And, since policyholders usually buy insurance in many layers of coverage, i.e., life, health, casualty, excess, umbrella, from many different insurance companies over many years, the number of companies brought into one insurance coverage case can be quite large.  Coverage cases are also being consolidated by the courts where numerous policy holders and insurance companies have been found to be litigating coverage for the same underlying claims or addressing the same coverage issues.  In one instance, a group of independent environmental coverage actions were ordered to collectively resolve many common contract issues and cooperate in case management and discovery procedures simply because they were similar.


Legal Maneuvers


Attorneys at Work

Where coverage disagreements persist beyond an initial settlement, policy holders or their attorneys
must begin the tedious task of processing documents and information relating to the insurance companies'

interpretations and meanings of their policies.  This often leads to a drafting history. The drafting history contains detailed records of the insurance industry's deliberations regarding policies and seeks the original meaning of policy terms and the manner in which they were intended to apply.  Courts have founds such histories to be relevant and material, as well as filings made by insurance industry organizations on behalf of their members to state insurance departments and insurance regulatory agencies.


Policy holders and their attorneys also seek underwriting and claims handling manuals written by insurance company experts that are used to provide guidance to insurance company employees.  These manuals may demonstrate how the insurance company interpreted their policies.  In addition, they may contain the company's official position on coverage, claims and loss control.  Many courts have ordered the production of such manuals and guidelines in the early stages of coverage cases.


Another valuable source used by attorneys is reinsurance documents.  Communications between an insurance company and its reinsurer can provide information on whether and how policies may apply to underlying claims and may offer assessment of the insurance company's coverage obligations.  Access to reinsurance documents is a hotly contested issue in insurance litigation discovery, and some courts have refused access to such documents.


Disputes also lead to discovery of insurance company marketing policies by documenting company advertising and agent/broker representations, as well as how the insurer has handled other policy holders with similar coverage claims.  Also investigated is the possible cause and effect of the insurance company's involvement in other coverage litigation.


Agent Records

A dispute between you and a client or you and an insurance company may require that you produce certain records and evidence.  In your own defense, you can typically produce any file, note or electronic record (fax, e-mail, computer record) as long as it is something generated in the ordinary course of business.  In other words, if you use as operations manual or stick “post-it” notes in you client files as standard operating procedure, they are generally admissible.  The test will be: Do you use these methods for every client?  For example, using a standard checklist of coverages that you review with each client.  If you can show that the client was offered, but refused a particular


coverage on your checklist, it will be harder for clients to say they were unaware this coverage was available.


In a lawsuit, agents can use any evidence, file or notation as long as it is something used in the “ordinary course of business”.


Keep in mind that most parties to a claim will eventually gain  equal access to your records.  So, you want to keep all legally required records and be consistent from file to file.  Also, never write derogatory comments about clients or the company in files.  This could work against you in a trial or settlement.


Agent Cooperation

Chapter 3 discussed several issues regarding defense of an insurance claim.  A few of the more important items focus on agent cooperation.  In a nutshell, most suits settle before going to trial so cooperation on all sides is generally desired.  However, you should proceed with caution in any dispute or potential claim.  Check with your errors and omissions carrier before discussing matters with clients or your represented companies.  Don’t try to settle the case, it could void your E&O policy.  Don’t make any promises to clients about resolving the matter or give them legal advice of any kind.  Don’t ever try to cover-up mistakes -- it mostly backfires.  If your errors and omissions carrier wants to settle it is usually best to agree.  If you don’t, you could be liable for court judgments that exceed the settlement already proposed by your E&O carrier.


Insurance Litigation

Although most insurance conflicts settle prior to trial, some disintegrate into protracted and unnecessary litigation,  Some areas of specific conflict include the following:


Triggers of Coverage

The term "trigger" is merely a label for the event or events that, under the terms of an insurance policy, determine whether a policy must respond to a claim in a given set of circumstances.  While this definition seems clear,  "trigger of coverage" disputes have been raging for decades and have been the source of much confusion.


In a life policy, the trigger seems clear: death.  However, issues of whether the death was an accident or suicide within the incontestable period is often up for debate.  Disability and health policies, however, have a higher propensity for dispute: What is a permanent disability?  Are there waivers and if so, how long? What is a major illness? Has the deductible been met?

Are there additional policy exclusions?   In long term care policies, trigger of coverage is even more acute where a written declaration by a physician may be required to solidify a patient’s inability to care for himself: the prerequisite for insurance benefits.


Policy language in most casualty policies centers around three primary "trigger of coverage" issues.  First, the carrier agrees to provide coverage for "all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence."  Second, an "occurrence" is defined in the policies as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected or intended from the standpoint of the insured..."  Third, "bodily injury" is defined as "bodily injury, sickness or disease sustained by any person which occurs during the policy period", and "property damage" is defined as "injury to property which occurs during the policy period...".


The "trigger" is plain under these three policy provisions when property damage or bodily injury "occurs" during the policy period.  But, the trigger question becomes somewhat complicated when a long period of time has elapsed between the act giving rise to liability.  Examples include a leak or spill involving hazardous waste or exposure to asbestos or lead which may result in problems years later.


Most of the litigation concerning coverage for latent injuries have raised at least four different explanations of when damage "occurs" and thus "triggers" coverage.  1) The date of exposure to the toxic substance (the "exposure" theory);  2) the years in which the claimant incurred tangible injury ("injury in fact" theory);  3) the date of manifestation of injury (the "manifestation" theory) and 4) the year in which damage "occurs" or "could have occurred” ( the "continuous trigger" theory).  The "continuous trigger" theory has received considerable attention during the past twenty years surrounding property damage or bodily injury due to hazardous waste/environmental contamination. In essence, the courts have generally ruled that casualty insurance policies can be "triggered continuously" from the initial exposure to the contamination to the manifestation of any injury, disease or damage of property. By far, most policy holder attorneys adopt a "continuous trigger" approach to litigation.   Insurance companies continue to argue, sometimes to no avail,  that insurance policies cover an "occurrence" and NOT A "REOCCURRENCE".




The following are terms that often become the focus of coverage disputes:


Bodily Injury - bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.


Property Damage - physical injury to or destruction of tangible property which occurs during the policy period.  Loss of use of tangible property which has not been physically injured or destroyed, provided such loss of use is caused by an occurrence during the policy period.


Occurrence - an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.



In addition to standard provisions and definitions, coverage is further defined in a "conditions" section where the duties and legal requirements of the insured and insurer are established.  Typical conditions are the insurer's right to inspect, and the insured's duty to cooperate with the insurer and the notice provision.


The notice provision is the most frequently litigated condition.  A sample notice provision might include the following language:  "In the event of an occurrence, written notice containing particulars sufficient to identify the insured, the time, the place and circumstances thereof, and the names and addresses of the injured and of available witnesses, shall be given by or for the insured to the company".


Some courts have relieved the insured of its notice of obligation unless the insured was in some way prejudiced or harmed by the insured's delay in providing notice.  The insurance company usually has the burden to prove that it was harmed by the insured's failure to comply with the notice requirement.



There are many standard policy exclusions as well as those relating to high risk issues such as partial disability, pollution, nuclear attack, "owned property", aircraft and liquor liability.  The purpose of these types of exclusions is to limit the policy coverage to contemplated risks only.  The burden of proving that an exclusion applies generally falls on the insurer in coverage disputes.

Named Insured

The definition of a "named insured" varies from policy to policy.  Some define it in broad terms, while others insist on a more narrow description.  Often, standard policy formats will provide a "listing" which has resulted in legal conflicts where coverage was denied a party on the listing who is no longer associated with the primary insured.  The burden to prove continued association is with the insured.



Conditions of most standard policies prohibit assignments without written consent of the insurer.  Such provisions are enforceable because they ensure that the risk the insurance company agreed to insure remains the same.  In fact, the majority of courts have refused to hold an insurer liable for an occurrence derived from a risk not contemplated by the insurer at the time the policy was issued.  It is important to note, however, that prohibiting assignments does not bar the assignment of insurance proceeds.


Rules of Construction

The rules governing the construction of insurance contracts are usually the same as those for other contracts -- the policy language is to be interpreted given its plain and ordinary meaning.  If a court determines that an ambiguity exists in an insurance policy, it will look to any outside factors or evidence that may help determine the parties' intentions.  Where an ambiguity is not capable of resolution, most courts have construed the ambiguity in favor of the insured.  Other courts have applied a "reasonable expectations" test and construed ambiguous policy language based on what a reasonable person in the position of the insured would understand the language to mean.


Duty to Defend

The prevalent view by the courts is that an insurer has the duty to defend an insured where the policy language gives the insured a reasonable expectation that the insurer will provide a defense.  Standard policies employ language reading: “the company shall have the right and duty to defend any suit against the insured seeking damages on the account of bodily injury or property damage even if the allegations of the suit are groundless, false, or fraudulent”.   Insurers maintain the position that they may be contractually bound to defend, but may NOT be bound to pay, either because its insured is not factually or legally liable or because the occurrence is later proven to be outside the policy's coverage.


Coverage disputes are likely to develop and do, when an insurance company attempts to shield itself from any defense of an insured whatsoever, or when it withdraws from an action after it determines there is no basis for recovery.  Other conflicts center around whether an insurer must defend only against an action that is an actual lawsuit seeking damages or be required to defend against all claims which may result in liability.   In general, courts assume a connection between the filing of a complaint and the triggering of a duty to defend by an insurer.  A PRP letter (Potentially Responsible Party), received by a client although not an actual claim, has also been interpreted by the courts to be a serious event that could, in fact, represent a new legal action against the insured.  The duty to defend is typically established here, but not in the case of a simple demand letter which only exposes one to a potential threat of future litigation.


If there is any doubt as to whether the facts give rise to a duty to defend, it is usually resolved in favor of the insured, but it is the insured's burden to show that the claims come within the coverage.  Claims related to acts of an insured in the area of crime, sexual misconduct, wrongful termination, contractual obligation, loss of profits or goodwill etc., have been ruled unacceptable ways to force an insurer's duty to defend.


Breach of Contract / Refusal of Coverage 

Breach of contract claims typically allege that an insurance company failed to defend or indemnify the policy holder under terms of the insurance contract.  To a great extent, public policy supports the policy holder in most breach of contract allegations in an effort to solidify the "strict enforcement of insurance contracts".  This is why state insurance regulators will typically be involved or called upon to rule on an insurer's potential or actual violation of codes.


Many times, an insured is denied protection because the insurer knows facts which would defeat coverage.  A majority of different courts have ruled that under such conditions, an insurance company is not bound to "defend" such claims simply because it cannot be bound to indemnify -- in essence, the duty to defend can be disputed.  Here, the insurer has the burden to prove that the facts of the insured's claim fall squarely within a policy exclusion.


Bad Faith    

There is increasing judicial recognition that the relationship between an insurer and its policy holder is fiduciary in nature.  Courts have compared the relationship of an insurance company to its policy holder to that of a "trustee for the benefit of its insured".  Where an insurance company allegedly has violated its fiduciary duties owed its policy holders, a bad faith claim could be appropriate in addition to any breach of contract action.

Choice of Law / Venue

Choice of law and venue, or where to bring a suit, have become integrally tied together in coverage cases.  There is general agreement that insurance coverage issues are state law questions even though most insurance policies do not contain any choice of law provisions.  Courts, however, have also made venue decisions based on issues such as  1) the place where policies were contracted; 2) the location of the damage and/or 3) the principal place of business/residence of the policy holder.


Lost Policies

Some claims between insureds and insurance companies have developed over the inability of the policy holder to prove coverage by producing an executed insurance policy.  If a policy has been lost or destroyed, the policy holder must satisfy two requirements to prove coverage.  First, the policy holder must prove that the policy was, in fact, lost or otherwise unavailable by showing that he made a diligent search for the policy in all places where it can likely be found.  Second, the policy holder must prove the existence and the contents of the policy by identifying the parties to the contract, the policy period and the subject matter of the policy.  Secondary evidence includes any correspondence, certificates of insurance, claim files, management reports, corporate records, ledger entries, receipts, licenses and agent files and agent testimony. 


Coverage disputes also revolve around the nature of damages or hidden exposures such as:


Environmental Litigation

There are numerous actions pending in state and federal court concerning the interpretation of commercial liability policies and environmental claims.  Much of the confusion was started by the insurance companies themselves when they first marketed the 1966 standard form Comprehensive General Liability (C.G.L.) policy which represented coverage for environmental hazards.  Some companies went so far as to refer to environmental problems, in their sales literature and presentations, as a "hidden exposure" that policy holders should consider.  Agents were instructed to sell the new policy on the basis of its broadened coverage in the area of pollution which was then only a growing, but minor exposure. 


Since the 1960s, the Environmental Protection Agency (EPA) has contended with almost 300 million tons of hazardous industrial chemical waste leading to passage of the Superfund legislation which has obtained almost $4 billion in settlements from waste generators, disposers and transporters of hazardous materials.  Similar pending litigation involves other forms of mass tort liability, including asbestos, DES and other substances.  The generators, disposers and transporters of hazardous waste and product manufacturers, installers and sellers faced with mass tort claims all turned to their insurance companies for coverage, and insurance coverage litigation often followed.


In response to a flood of litigation, the insurance industry began making adjustments.  In 1973, certain terms in the C.G.L. policy were revised.  For example, the 1973 C.G.L. policy defines "occurrence" as "an accident, including continuous and repeated exposure to conditions, which results in bodily injury or property damage neither expected or intended from the standpoint of the insured."  Obviously, an occurrence under the 1973 definition required exposure to conditions over a period of time.  "Property damage" was also changed to read "physical injury to or destruction of tangible property which occurs during the policy period . . . or, the loss of use of tangible property which has not been physically injured or destroyed, provided such loss of use is caused by an occurrence during the policy period."  Thus, compared to the pre-1973 contracts, "property damage" now requires physical injury to tangible property.  This distinction may be critical in certain hazardous waste cases and in asbestos property damage cases.  In fact, courts have held that some insurers are not required to provide a defense in suits where the there was no covered "occurrence" or "property damage" as defined in the C.G.L..


In the late 1970s and early 1980s, a number of carriers made even more dramatic moves by changing the "pollution exclusion" clause in their policies from the "sudden and accidental" variety to what is called the "absolute pollution exclusion".  Although there are several versions of this exclusion, the basic thrust of each is to exclude coverage if the omission or discharge was accidental or sudden.   Since most hazardous waste problems are sudden and accidental, the absolute exclusion appears to exclude most pollution incidents.   A growing number of courts are siding with insurers where the absolute exclusion is in place.  In these cases, most environmental exposure falls back to the insured and his own ability to cure the problem.  The results can be devastating to a company,  its owners and their respective estates.


Excess Insurance Claims    

With the increase in mass tort litigation, environmental litigation and substantial jury awards, excess insurance policies and the role of excess insurance carriers have received increased scrutiny.  In general, the fact that a primary carrier owes duty to

its insured is well known.  With respect to an excess insurer, the courts continue to struggle with the origin of duty.  


In coverage disputes where the insured is bringing action against BOTH a primary and excess insurer, the excess carriers sometimes moves to dismiss the lawsuit on the basis that the actual exhaustion of the underlying primary liability limits is a prerequisite to a claim under the excess policy.  Policy holders, on the other hand, argue that the mere potential that the underlying insurance will be exhausted is enough to justify a coverage dispute against the excess carrier.  The courts have sided with each.


Another area of dispute is the drop down -- where an excess insurer "drops down" to provide insurance when the primary insurer has become insolvent.  Courts are split on this issue, although a majority currently feel that an excess insurer is NOT OBLIGATED to drop down and provide coverage to an insured.  The court's determination is usually based upon the language of both the primary and excess insurance policies.


In yet another decision, the courts have determined that the "trigger" of excess coverage is the amount "indemnified", not the additional costs involved in defense nor punitive damages.  In Harnischfeger v. Harbor, for example, the fact that the insured paid $3 million in defense and indemnity expenses could not yet trigger the $3 million excess policy limits because the legal expenses incurred were not a factor.


Business Insurance Disputes

In recent years, the number and variety of claims brought against business has increased significantly.  In spite of this fact, many businesses have not given adequate consideration to the potential insurance coverage for these claims.  As an example, businesses which face claims only against their directors and officers, might tend to ignore the possibility of comprehensive general liability (C.G.L.) insurance coverage.  Likewise, when companies face claims of unfair business practices or statutory violations, they consider the bodily injury and property damage portions of their C.G.L. policies only, failing to consider the advertising injury and personal injury provisions, which may provide broader coverage.


In one advertising coverage dispute, the court held that the insured was NOT covered by its C.G.L. policy because the insured failed to establish that its advertising activity caused the alleged injuries.  The insured was selling a product that "infringed" on a competitor suggesting that  the relationship of selling and advertising were the same thing.  Another court’s rejection of coverage involved copyright infringement. Here, an insured distributed brochures that merely advertised copyrighted material for sale.


Directors and officers liability coverage typically insures the directors and officers directly and provides that the insurer will pay on behalf of or reimburse the directors and officers for "loss" arising from claims alleging "wrongful acts".  Coverage is NOT afforded under this insuring agreement if the corporation is required or permitted to indemnify the directors and officers.  Coverage has also been denied for claims involving dishonest conduct, claims in connection with the Employee Retirement Income Security Act (ERISA), claims involving bodily injury, personal injury and property damage as well as claims involving seepage, pollution and hazardous waste.


In a "wrongful entry" claim, the courts first rejected the insured's coverage under his C.G.L. because the insured trespassed AND committed battery against a tenant.  The courts ruled that actual damages resulted from the battery only.  Later, on appeal, the court reversed its decision since it was determined that the

battery could not have taken place if the insured had not trespassed.  The trespass made the battery possible.


Other, business insurance coverage exclusions occur under the following conditions:


Liability under contract, willful violation of a penal statute, offenses relating to employment, libel and slander made prior to effective date of insurance or with knowledge that it is false.


Defenses of the Insurer

Much attention is devoted to the "rights" of policy holders.  Insurance companies, however, have their own safeguards, which help protect their interests, but add to the growing list of things that can go wrong with insurance. Depending on the issue at hand, the result of having these "built-in" protections can completely void a policy or greatly limit its scope of coverage.   Defenses consist of legal tools and techniques that help an insurer initially determine pertinent aspects of the insurance risk for purposes of deciding whether to issue the policy and at what premium.  After a policy is committed, additional policy conditions help the insurer "contain" the risk within the intended bounds of the contract.  Over the years, a series of standard defense devices have evolved.  These can be categorized as concealment, representations of the insured, conditions, warranties and limitations to coverage.



The insured has the duty to disclose to the insurer all material facts that might influence a decision to issue a policy of insurance at all, or issue it at a particular level of premium.  The holding back of information can, in some cases, constitute fraud by the insured and can render a policy void.  In general, the rule on determining when a policy is voided lies in the issue of "bad faith". If the insured withholds information that he knows would be necessary to the insurer in evaluating risk, the insurer has grounds to void the contract.  Examples might include a life insurance policy where an insured has agreed to an examination by the insurer's physician but still fails to disclose a medical condition that is critical to the insurer's risk decision.


The burden of proof as to fraud in concealment falls on the insurance company.  In some cases, courts have sided with the insurer in establishing fraud by "inference".  An example might be discovered evidence that the insured had made a previous attempt to destroy the covered building.  On occasion, the insured has won based on the argument that facts uncovered by the insurer were not material because it was NOT made a subject by the questions asked on the application even though most applications include a provision requiring the insured to represent that  he or she has disclosed all material information.  Again, the issue of bad faith enters the picture.  Only when the insured conceals a fact in bad faith, knowing the fact to be material, will the policy be voidable.  An example is a life insurance application which contains a question as to how many times the insured has been hospitalized and for what causes.  If the insurer describes one hospitalization but fails to mention a second, the incomplete answer is considered material and grounds for voidance of the policy.  However, if the insured had left the answer blank or merely given a date without specifying the cause, the incompleteness would be obvious and NOT grounds for voidance.  The test is whether or not a reasonable insurer would be misled.


The duty of a client to disclose information on an application applies only to facts, and not his fears or concerns.


Once a contract of insurance becomes binding, the insured ceases to be obligated to disclose any material information.  In the case of life insurance, for example, where there is an appreciable period of time between the submission of the completed application and the issuance of the policy, the duty of the insured to disclose new or forgotten material information continues.  The duty to disclose applies only to facts, and not to mere fears or concerns of the insured about his health or the subject matter of the policy. There is also no requirement that the insured disclose facts that the insurance company already knows, or which the insurer has wavered.  Nor, is the insured required to communicate events that are a matter of public record such as earthquakes, forest fires, etc.



A representation by the insured that is untrue or misleading,  material to the risk, and is relied upon by the insurer in issuing the policy at a specific premium is considered a misrepresentation and grounds for voidance of the policy, unless the policy is beyond the incontestable period.  This is true even if the misrepresentation was made by the insured innocently, with no intent to defraud.  A minority of courts, however, take a somewhat less severe position limiting or prohibiting voidance where the insured's misrepresentation was NOT an intent to deceive the insurer. 


Representations by an insured to an agent bind a contract because they are considered to be made to the insurer itself.  However, a policy refusal or voidance could occur when the insured has reason to believe that the agent will not pass information on to the insurance company.


The insurer cannot void a policy based on a representation by an insured regarding an intention or future conduct unless it is made a condition of the contract.  An example here would be an oral statement by an insured that he will install a fire alarm at the premises.  The insurer relies on this representation and reduces the premium but does not include an express term in the contract regarding the alarm.  On the other hand, a written commitment by an insured to install an alarm that is not followed can jeopardize the policy.


Many insurance conflicts center around materiality.  A representation is considered material if it served to induce an insurer to enter into a contract that would otherwise be refused or issued at a different premium.  The point where representations by an insured cause coverage problems is where such representations are made with the intent to deceive and defraud.  The burden of proving a representation to be material falls on the insurance company.  If a material representation is found to be substantially correct, or believed to be correct by the insured,  the courts have not permitted a voidance or limitation of coverage.  An example might be an insured indicating he has not seen a physician within the past five years when he has been to a doctor for treatment of minor and passing ailments.

Warranties & Conditions    

The terms warranty and condition are generally used to mean the same thing -- a representation or promise by the insured incorporated into the contract.   A warranty or condition statement that is untrue and relied upon by the insurer at the inception of the policy can void the contract.   A possible exception to this rule occurs in life insurance where an "incontestable clause" prohibits the insurer from voiding a policy after the insured has survived a given period of time -- usually two years.  Thus, a valid warranty/condition is a powerful tool for insurers.


In recent years, the effectiveness of warranties and conditions have come under fire. In fact, many statutes now place stiff definitions and limitations on warranties.  One statute, for example, provides that all statements made by the insured will be considered to be a "representation" rather than a warranty unless fraudulently made.  As previously discussed, it is much harder to void a policy for misrepresentation than for a violation of a warranty or condition.  Another statute requires that the breach of warranty is a defense for the insurer ONLY if it actually contributed to causing the loss, as opposed to simply increasing the risk.  This is the most severe type of statute for the insurer, since even is cases in which the breach caused the loss, it is frequently impossible to prove the cause, e.g., when a fire completely destroys a portion of a building.


Limitations on Coverage 

Insurers over the years have attempted to control their exposure by tightening terms of the insurance contract.  Adding personalized warranties and conditions is cumbersome and not always useful as a defense for insurers (see warranties and conditions above).  Some courts, however,  believe that insurers side-step warranties and conditions by creating numerous clauses that serve, instead, to limit coverage.   The reason insurers have do this is because many of the statutes which commonly limit warranty defenses, such as incontestability, "contribute to loss" statutes and "increase the risk" statutes, do not apply to limitations to coverage.


There are several types of limitations that insurance companies can and do employ:


Limitations of Policy Subject Matter -- A homeowner's policy may cover most household possessions, but specifically exclude from coverage particular items like cash or coin collections.  Likewise a health policy may exclude or waiver certain illnesses.




Limitations by Type of Peril -- A fire policy may except from coverage any loss caused by a fire resulting from lightening or earthquake.


Limitations on Proceeds Paid -- Casualty insurance policies frequently specify an upper limit of proceeds payable for any loss, as well as limiting the payment to the value of the insured's interest in the property damaged.  Automobile policies generally fix the upper limit of coverage both in terms of maximum proceeds per person and maximum proceeds per accident.


Limitations on Period Covered -- Every policy will be specific as to the date of expiration, and in some cases, as with life insurance, will also specify a grace period beyond the date of expiration that insureds may make a premium payment.  Also, the date of inception of a policy can be specified on the policy or can be subject to the occurrence of some event such as the payment of the first premium or delivery of the policy to the insured.


A limitation on coverage can cause considerable conflict between insurer and insured.  One reason is the fact that in some instances, it is nearly impossible to determine from the wording of a clause whether it is a warranty or limitation.   In response,  the courts have developed two tests to distinguish the two.


In one test, if the circumstance which is the subject of the clause is discoverable by the insurer at the time of inception of the policy, the clause will be classified as a warranty rather than a limitation.  An example might be a policy condition that obligates the insurer when the policy is delivered to the insured "in good health" when, in fact, the insured is suffering from a discoverable disease.


Another test deals with risk.  If a clause refers to a fact which potentially affects risk, but necessarily causes the loss, it is considered to be a warranty not a limitation.  An example is a life insurance policy with a provision that excludes a death benefit WHILE the insured is flying in a private plane.  The insured can bring action to force payment of such a claim, EVEN if the insured died of a heart attack while in a private plane.  The flying merely increased the risk, but need not be the actual cause of death.  Such a clause is considered a warranty.  On the other hand, if flying in the plane was the cause of death, it could be interpreted to be a limitation that is better defended by the insurance company.


Settlement Disputes

Some forms of insurance, like life insurance, are generally easily settled since the amount paid in the

event of loss is fixed by the contract.  Similarly, in the case of accident insurance, the proceeds are measured by a specific amount agreed to be paid for loss of a particular limb or faculty, or, as in the case of health insurance, by the medical expenses actually incurred.  By far, most settlement disputes occur over property/casualty policies where the payment in the event of loss is determined by an amount up to the "actual cash value" of the property at the time of loss.  There are two basic approaches which insurance companies use in an attempt to arrive at a mutually agreeable value -- reproduction costs less depreciation and market value.


Reproduction Cost Less Depreciation   

This measure is aimed at determining the cost of replacing the depreciated property that was lost.  If this were the only option for insureds, it would represent an extreme hardship where, for example, the owner of a fifty-year old home that is destroyed would have great difficulty replacing it with a new building on the depreciated settlement,  For this reason, replacement cost insurance is offered.  Here, depending on the wording of the contract, the insured may be required to  actually repair or replace the building in order to collect full payment.  The most pressing problem for insureds is to keep policy limits above the 80% of market value requirement.  Insurance companies require policy limits above this level to assure adequate coverage and keep premium levels high.  Insureds may lose, however, if inflation and rising house prices cause the limit of coverage to wind up below the 80% figure at the time of loss, thereby nullifying the replacement cost provision.


Market Value    

Items of commerce that are readily replaceable in kind, e.g., a warehouse full of books, shipments of grain, etc., have a market value that is relatively easy to establish.  In the case of income producing property such as office buildings, apartments or commercial buildings, market value is determined by a more detailed method using the capitalization of earnings.  Disputes in this area usually require testimony of an expert witness who determines the rate of return on investment that a reasonable investor would require in investing in this type of property.


Insurer Insolvency

When a state determines that an insurer is in trouble, the insurance commissioner usually files an application to the court.  The court petitions the insurance company to show cause why the company should not be placed in rehabilitation or liquidation.  Once a company is placed under supervision, an injunction is issued to restrain the insurer, its officers, agents and others from any disposition of property without court approval.  Liquidation is the more severe condition where the insurance commissioner must take title to the insurer's assets and use them to pay creditors and policy owners. Rehabilitation, on the other hand, allows for a restructuring of the insurer under the guidance of the commissioner.  Unless the

condition is extremely severe, companies are usually started in rehabilitation.  If it is later determined that a restructuring will still not revive the insurer, a liquidation is ordered.


If an insurer is liquidated, all policy owners and other potential claimants MUST be informed and permitted to file a proof of claim with the insolvent estate.  These claims will then be evaluated and a value established.  Recent failures have demonstrated that claim values can be less than the amount due the policy holder.  Under these conditions, a policy owner can file an appeal and seek a court decision before the actual liquidation of the company occurs.  In order to protect the overall insurer estate, there are time limitations for filing these appeals.


Once all appropriate values are determined, the assets of the insurer will be distributed under a statutory procedure.  This process requires that certain priority lien holders be paid in full, while others may divide what is left.  The typical liquidation order of priority is:

1.  Liquidation expenses and costs

2.  Unpaid wages of employees of the insurer

3.  Taxes

4.  Policy holders, insureds and guaranty funds

5.  Reinsurers and all other claims


If a reinsurer indemnifies a liquidating company, it is only required to pay to the liquidator the actual loss it indemnifies.  In other words, the reinsurer can only be called upon to pay deficiencies up to the limit it has agreed, once the ceding company, the liquidating insurer,  has made all possible payments.  This provision, which appears in most reinsurance contracts, is called an insolvency clause.  The disadvantage of an insolvency clause is that policy owners, guaranty funds and other third-party claimants have no additional claim against reinsurance proceeds.  An exception to this rule is where a cut through clause exists.  A cut through endorsement would require a reinsurer to pay a loss or specified portion of a loss directly to the policy owner or insureds when an insolvency or another specific event occurs.  General creditors and other third party claimants could be excluded under a cut through endorsement.


State Guaranty Funds

The liquidation process can be extremely involved and lengthy.  This is the reason that guaranty funds

were established. They are an advance payment system to pay off individuals and groups who would be devastated by the liquidation process.  A claim against a state guaranty fund is typically limited to residents of that state.  Payments are limited to certain amounts, depending on the type of insurance purchased.  Once a claim has been paid, the guaranty association becomes subrogated to the claimant's rights to further payments.  Thus, a policy holder who collected from a state fund forfeits his claim rights against the insolvent insurance company.


The guaranty associations are non-profit legal entities whose members comprise all insurance companies licensed to write insurance or annuities in the state.  Each association is governed by a board of directors approved by the state's insurance commissioner.



In general, guaranty acts exclude from coverage policies issued by entities that are not regulated under the standards applicable to legal reserve carriers.  Insurance exchanges, assessment companies, fraternals, HMOs and, in many cases, the Blues (Blue Cross and Blue Shield -- especially where they have not been converted to legal reserve carriers), are commonly excluded.


The guaranty laws also commonly exclude from coverage policies or portions of policies under which the risk is borne by the policyholder or which are not guaranteed by the insurer.  Variable accounts in some life policies or annuity contracts are examples.


Significant variation does exist in the treatment of unallocated funding obligations (UFOs), including GICs, which are commonly purchased as pension plan assets on professional, sophisticated advice by pension plan trustees.


Limits of Protection

Most guaranty associations limit their protection to policyholders who are residents of their own state.  (It does not matter where the policyowner's beneficiaries live.)  The trend toward adopting such a residents-only provision follows a major amendment to NAIC's model guaranty act adopted in 1985.  Arizona, Virginia, West Virginia, Nevada, North Carolina and Oregon very recently amended their life-health guaranty laws to cover only their own residents.


However, if the insolvent insurer's domiciliary state follows the NAIC model, coverage would be extended by the domiciliary state to residents of another state if that state also has a similar guaranty act and the impaired company was not licensed there and the policyholder is not eligible for coverage there.  An example of such a situation would be a New York resident who owns a policy of the Executive Life Insurance Company, which is domiciled (chartered) in California.  Since New York has a life-health guaranty association but the company was not licensed to do business there, New York residents will be covered by the California Life Insurance Guaranty Association.  However, residents of a jurisdiction such as the District of Columbia which does not have a life-health insurance guaranty association would have no guaranty association protection, even though Executive Life was licensed there.


Other states, like Alabama, still follow an older model act and guaranty benefits of impaired or insolvent insurers domiciled in their own state, no matter where the policyholders live, and also cover their own residents who are policyholders of licensed companies domiciled in other states, unless coverage is provided by the state of domicile.


Dollar Limits

Typical payouts to policyholders who are victims of failed or financially strapped insurance companies might read as follows:


Life and Health Guaranty Funds

Maximum death benefit                    $300,000

Maximum cash value covered          $100,000

Maximum Annuities                          $100,000

Maximum Health and Disability                  $100,000

Maximum Aggregate Per Person               $300,000


Property/Casualty Guaranty Funds


Maximum Claim                      $300,000 - $500,000


Individuals who have several policies may have additional limits.  For example, a person who owned a term life insurance for $500,000, a whole life policy with cash values of $150,000 and a single premium annuity with an accumulated value of $200,000, will collect ONLY $300,000 -- the maximum aggregate limit per person regardless of how many policies.  The fact that these policies may be spread among three different insurers does not make any difference.  There would still be a $300,000 maximum in most states.  The same is true for property/casualty claims.  Regardless of the number of policies or how they are distributed among different insurance companies, the maximum claim that can be paid by a state guaranty fund is fixed at between $300,000 and $500,000 per individual.



Generally, the guaranty associations provide coverage when the company has been declared financially

impaired or has been ruled to be insolvent by a court of law.  However, there are some situations preceding such a judicial action when many associations may take measures to cover the impaired insurer's policyholder obligations, particularly for health benefits, death benefits, and immediate annuity payments.  However, since the primary purpose of the guaranty associations is to protect policyholders, and not to bail out impaired or insolvent insurers, most associations are reluctant to provide coverage before an order of liquidation, unless it is clearly demonstrated that to do so in a particular case will be less costly over time.


Coverage Options

Guaranty associations may provide coverage directly, or through outside administration or other insurance companies.  In many cases, the guaranty association will continue coverage for the full policy period.  It may do this directly or it may transfer the policy to another insurer or administrator.


In multi-state insolvencies, most guaranty associations work through NOLGHA to secure an assumption reinsurance agreement with another insurer or a claims servicing agreement with a third party administrator on a multi-state basis.


If the impaired or insolvent insurer is licensed in more than one state, as most are, NOLHGA's affected member associations try to work closely through our Disposition Committee with domestic receivers to protect policyholders and insure early and equitable access of guaranty associations to the insolvent company's assets.  On behalf of its participating member guaranty associations, NOLHGA's Disposition Committee expedites reinsurance assumptions, claims processing and audits.








A few years ago, no one knew what market conduct meant.  Today there are class action suits and negligence claims filed against insurers and agents alike amounting to millions of dollars for sales and legal conduct violations.  Of course, agent conflict is nothing new.  Our research into “blunders” found cases dating back to the early 1800's.  What is different between cases of today and the ones that occurred years ago is the trend toward fiduciary responsibility.  In essence, the courts are viewing agents as more than mere salesmen. 


Agent responsibility, in the past generation, has evolved from contractual compliance to ethical duty.  Recent cases, for example, lean toward the precedent that agents, as insurance professionals, should have known something was wrong compared to years ago where agents were generally held liable for outright negligence in a matter.  There is a world of difference between the two that is best explained by the legal precedent theory discussed in the preface.  In a nutshell, this theory claims that because our legal system makes legal decisions based on precedents it is destined to constantly expand.   Each decision in the chain sets the stage for the next step of expansion.  This chain reaction is demonstrated in some recent court cases.  In Southwest vs Binsfield (1995) the agent should have known that a specific coverage option was important to the business he insured.  In Brill vs Guardian Life (1995) the agent breached his fiduciary duty by not using an optional conditional receipt.  Clearly, the expansion of agent liability from decades-old “negligence” issues to these types of fiduciary duties is a trend.  In the next chapter, we discuss these controversies and other potential conflicts which may be the next expansion phase, i.e., sales and legal conduct issues of the future.


Due to our expanding legal precedent system, events  NOT a problem in the past, could now represent agent liability.


In reviewing the following court cases, keep in mind that issues in the past that  did NOT result in agent liability might indeed represent exposure today, mostly because of the legal precedent theory and the fact that courts and juries in more recent years show a willingness to  sanction this expansion.  Further, an agent who escaped liability in a conflict may not have escaped the huge cost of a trial or legal fees.  A lot of agents fail to insure for this contingency and errors and omissions carriers can also refuse to cover the claim.  Also, don’t assume that a casualty court case has no application to you if you sell life insurance and vice versa.  Many legal matters concerning duties are fully portable and transferable between classes of agent.  Finally, be aware that some court decisions appear to “clear” the agent of wrongdoing.  These decisions can result from issues extraneous to the case or a technicality:


Aetna of the Midwest vs Rodriguez (1988)                         

TYPE: Casualty / Homeowners

ISSUE: Failure to assess client’s real need

RESULT: Agent responsible

Based on a conversation, an agent believed his client was seeking insurance on a conditional sales contract when, in fact, client had purchased a home secured by a mortgage.  A claim resulted in lack of coverage and a lawsuit commenced.  The courts determined that even though the client used words that could have been interpreted two ways, the agent should have investigated the “real” coverage and not simply wrote the policy in a manner that was most legally advantageous to the insurance company.


American Pioneer Life vs Sandlin (1985)                           

TYPE: Life / Annuities

ISSUE: Misrepresentation of future value

RESULT: Agent liable

An agent sold annuity policies to mostly retired clients where the average purchase was about $20,000.  The agent typically represented that the principal was available at anytime and the accumulation value of the contracts were guaranteed to grow to certain levels.  Both representations were so false so as to prove a fraudulent scheme for which the agent was liable.


Ahern vs Dillenback (1991

TYPE: Casualty / Auto

ISSUE: Failure to procure adequate coverage

RESULT: Agent not liable but paid big legal fees

In 1982, clients were visiting California and purchased an automobile policy which agent said would cover them on an up and coming trip to Europe.  Client requested “the best policy available” and agent assured client that she and her husband would receive full insurance coverage with policy limits that would safely protect them.  In 1984, the client was driving in France and was seriously injured in a hit-and-run accident with an unidentified and uninsured motorist.  Claims by the client were denied since the following coverages were not in the policy: collision, medical payments and uninsured motorist.  Client’s lawsuit against the agent was not successful in this case because the courts felt that the general duty of reasonable care that an agent owes a client does not

include the obligation to procure “complete liability protection”.  Further, there was NO special relationship with the client that held agent to a higher standard of care.


Bayley Et All vs Pete’s Satire (1987)

TYPE: Casualty / Commercial

ISSUE: Failure to obtain proper coverage

RESULT: Agent liable for current and future losses

In an unusual case a client owned a bar/lounge and was assured by the agent that his business was “fully covered” for alcohol-related lawsuits.  In fact, the policy obtained for client contained an exclusion for such lawsuits.  The bar was eventually sued for negligence by permitting a minor to leave the lounge while intoxicated and causing an accident.  The insurance company cited the exclusion and refused to pay.  The client sued both the insurance company and agent for full reimbursement of his costs to settle the  accident case.  The courts concluded that the insurance company was NOT liable but the agent WAS.  Further, because the error was  rooted in complete negligence, the agent was held liable for all future alcohol related lawsuits the client might incur.


Bedford vs Connecticut Mutual Insurance (1996)

TYPE: Life

ISSUE: Misrepresentation of policy terms

RESULT: Agent liable

Client purchased a whole life policy from agent under the assumption that coverage would be fully “paid-up” in six years.  When it became apparent that the policy would not be paid-up in six years client sued and the courts determined that the special relationship between agent and client was a factor in determining agent’s fraud.


Bell vs O’Leary (1984)

TYPE: Casualty / Homeowners

ISSUE: Failure to notify coverage not available

RESULT: Agent liable

Agent took an application for flood insurance but failed to notify client that his mobile home was located in unincorporated areas that were ineligible under the National Flood Insurance Plan.  A loss occurred and agent was sued.  The agent tried to assert the client could NOT have purchased flood insurance from anyone and he could have known coverage was not available because the Code of Federal Regulations regarding flood coverage availability was public information.  The courts did not agree rendering that agent has superior knowledge and failure to notify clients that coverage was unavailable takes precedence over the fact that coverage was not available from any source.



Benton vs Paul Revere Life (1994)                                     TYPE: Disability

ISSUE: False statements by agent

RESULT: Agent liable

Agent sold a disability policy to his client on basis that coverage could be extended for life for an additional premium, when in fact, the policy and rider required a higher level of disability occur before life benefits are awarded.   The court was clear to point out that any agent who does not understand the differences between two products he is selling is subject to liability for fraud.


Born vs Medico Life (1988)

TYPE:  Health

ISSUE: Gaps in coverage

RESULT: Agent not liable but paid huge legal bills

A client purchased a new health insurance policy from agent with a typical six-month pre-condition waiting period.  Client then canceled his old policy but soon developed health problems that were wavered by the precondition waiting period of the new policy.  Client sued agent for “gaps in coverage” but court decided that agent did not have a duty to advise client about maintaining his old policy until the six-month waiting period of the new policy had expired.  Also, it was discovered that agent advised client specifically about the six-month waiting period.


Brill vs Guardian Life (1995

TYPE: Life

ISSUE: Failure to advise conditional coverage

RESULT: Agent liable

A client expressed a desire to obtain life insurance coverage as soon as possible.  Agent took client’s application but failed to advise client his option to pay a small fee for a conditional receipt which would have provided immediate, although temporary life insurance.  Upon client’s sudden death, his widow sued the agent and company for negligence in failing to recommend use of the conditional receipt.  The court sided with the widow by determining agent’s negligence was a breach of duty.


BSF Inc vs Cason (1985)

TYPE: Casualty / Homeowners

ISSUE: Inaccurate application by agent

RESULT: Agent liable

An agent met with a client and filled out an application for homeowner’s coverage.  Client supplied information that indicated he had previous claims and was canceled by another carrier.  A loss resulted and the insurance company refused the claim upon learning the true experience of client which was not disclosed on application filled out by agent.  The courts determined that the agent was liable for acting

outside his scope of authority by failing to record the client’s claim and cancellation experience.


Boothe vs American Assurance (1976)                             TYPE: Casualty / Homeowners

ISSUE: Failure to notify application not accepted

RESULT: Agent liable

Client requested flood insurance coverage.  Agent accepted a completed application and advance premium payment and led client to believe he was protected.  The application was not sent and the insurance company refused coverage which client discovered when he submitted a claim for a flood loss.  Agent was sued and found liable for neglecting to follow up on application and notify clients that they did not have coverage.


Campbell vs Valley State Agency (1987

TYPE: Casualty / Auto

ISSUE: Agent negligence due to special knowledge

RESULT: Agent potentially liable

The client was a founder and director of a bank that owned and operated an insurance agency.  The agent was also manager of the agency and knew that client was a millionaire.  Agent obtained automobile coverage for client in the amount of $100,000 per person and $300,000 per occurrence.  A major accident occurred which exceed the limits of the policy.  The client sued agent for these additional damages.  Although the case was scheduled for a new trial the original court found that a jury could have found the agent had a duty to advise the client about his liability coverage needs due to the special relationship that existed.  Thus, the agent was potentially liable for the damages that exceeded policy limits.


Cartwright vs Equitable Life (1996

TYPE: Life

ISSUE: Misrepresenting policy terms

RESULT: Agent fined $30,000

Multiple clients purchased life insurance policies from an agent on the  strength that policies were “self-supporting” after only three premium payments.  When clients learned that automatic premium loans were reducing face values agent again reassured clients he would “take care of the problem”.  The courts sought $6.1 million in punitive damages from insurance company for failure to curb agent after his conduct was first reported.  Agent was fined $30,000 for fraud even though he was retired at the time of the trial.


Commissioner vs Grossman (1986)                                     

TYPE: Casualty

ISSUE: Agent fraud for back-dating application

RESULT: Agent subject to fraud conviction

Agent received an initial premium from client three months prior to  fire that damaged client’s home.  Upon learning of the fire, agent scurried to obtain insurance he had neglected to purchase by altering his postage meter to give the appearance that he processed the application two days prior to the fire.  The insurance company received the application three days after the fire and refused the claim.  The insurance commissioner pursued and won a conviction for fraud.


Crobons vs Wisconsin National Life (1984)

TYPE: Life

ISSUE: Agent was party to fraudulent signature

RESULT: Agent liable

Agent sold client a life insurance policy.  Client later became very ill and lapsed into a coma.  Agent, who was fully aware that client was in a coma, “witnessed” a change in beneficiary signature that led to a dispute in determining the proper beneficiary of the proceeds.  Agent was responsible for his damages by his fraud.


Cuismano vs St Paul Fire (1981)                                  

TYPE: Casualty

ISSUE: Failure to obtain requested coverage

RESULT: Agent liable

Client clearly informed agent of the need for a specific coverage.  The face page of the policy suggested that the client was furnished this coverage.  A claim for loss, however, proved otherwise.  The court held that the ambiguity of the policy did not require the client to verify coverage, especially in light of agent’s assurance.  Negligence here resulted in agent liability.


Durham vs McFarland Et Al (1988) 

TYPE: Casualty / Homeowners

ISSUE: Failure to obtain adequate coverage

RESULT: Agent liable

Agent handled most of client’s insurance needs for approximately 15 years.  Client purchased a new residence boathouse and met agent to discuss transferring the coverages on the old residence to the new boathouse.  Ten months after the meeting the boathouse was damaged by a flood and the client submitted a claim.  The insurance company did not list the flood peril and denied coverage.  The agent was sued and the courts agreed that he had a duty to advise the client about flood insurance on the new residence, especially since it was a covered event for the old residence.


Eddy vs Sharp (1988)

TYPE: Casualty / Commercial

ISSUE: Failure to obtain adequate coverage

RESULT: Agent liable under fiduciary duty

Client owned multiple rental buildings requested coverage from new agent similar to old coverage.  The agent prepared a proposal describing his coverage as

“All Risk” subject to a list of eight exclusions.  Additionally the proposal contained the following disclaimer: “This proposal is prepared for your convenience only and is not intended to be a complete explanation of policy coverage or terms.  Actual policy language will govern the scope and limits of protection afforded”.  Client relied on the proposal letter and decided it met his needs.  When the policy arrived he did not read it.  Client losses resulted from the back up of water through drains and sewers (due to a clogged city drain).  This was not covered by the policy but was not listed as an exclusion in agent’s proposal. The court held that the agent owed his clients a fiduciary duty, a duty of care under agency principals, and a statutory duty to accurately describe the provisions of their policy.  Further, when agent described proposed coverage as “all risk” and clients accepted same, there was a binding contract obligating agent to obtain the promised coverage.


Employers Fire Insurance vs Speed (1961)

TYPE: Casualty / Builder’s Risk

ISSUE: Coverage not obtained

RESULT: Agent sued but not liable

Agent agreed to obtain fire and extended coverage on client’s soon-to-be constructed building. Client was led to believe he was covered  but agent failed to do so.  Client relied on agent but did not request the name of agent’s principal (insurance company).  Upon a claim for loss, the court ruled that there was no contract for insurance, even though the same client was already insured with six of the eight companies carried by agent on other projects.  The agent incurred big legal fees and lost a good client.  (Compare this result to Julien vs Spring Lake Agency  - 1969).


Europeon Bakers vs Holman (1985)

TYPE: Casualty / Business Interruption

ISSUE: Negligence in obtaining adequate coverage

RESULT: Agent liable

After handling the client’s insurance needs for approximately six years the agent proposed that the client change its business interruption coverage to a policy that included a coinsurance provision.  The insured accepted the proposal but found that it covered only 28 percent of his loss caused by the interruption of business when an oven accidentally exploded. The agent was sued for negligence by the bakery which was seeking the full amount of the lost business production it suffered.  The court held that the agent was responsible since he had a duty to advise the client about its business interruption needs, especially since agent held himself to be an “expert” in this area and client had relied on him in the past.




Evanston Insurance vs Fred A. Tucker (1989)

TYPE: Casualty / Marine

ISSUE: Agent’s broker took premiums without coverage

RESULT: Agent responsible for client losses

The client paid agent almost $75,000 for fishing vessel coverage.  Agent requested coverage and sent premiums to intermediary broker who failed to obtain coverage and refused to return premium money.  Agent’s E&O carrier refused to pay claim since his E&O policy excluded any claim for premiums lost.  Agent was found liable.


Flattery vs Gregory (1986) 

 TYPE: Casualty / Auto

ISSUE: Agent failed to obtain options he bought before

RESULT: Agent responsible for optional coverage

Agent had previous business with client where he purchased “optional” coverage on his automobile.  A new policy was purchased, but nothing was said about adding the optional coverage.  Naturally, the client’s loss involved optional coverage damages which were not included in the new policy.  The court ruled that the agent’s “promise” to procure optional coverage was implied from the earlier transaction.  He was responsible to provide this coverage at his own expense.


Foster vs American Deposit Insurance (1983)

TYPE: Casualty / Auto

ISSUE: Agent miscalculated coverage period

RESULT: Agent liable

Agent sent client a letter indicating that client’s automobile policy was paid for 90 days.  A loss occurred 89 days from client letter and client submitted his claim.  The insurance company denied coverage since 90 day coverage had expired days earlier.  Agent was responsible for damages due to his error.


Free vs Republic Insurance (1992)

TYPE: Casualty / Homeowners

ISSUE: Insufficient policy limits

RESULT: Open for future trial

Since 1979 agent provided client homeowner’s coverage and assured same that the policy limits were sufficient to rebuild his home.  In 1989 client’s home was destroyed by fire and insurance proceeds were found to be less than needed to rebuild.  The client brought an action against agent and insurance company in that they failed to inform him of the inadequate limits of coverage despite years of assurance.  The courts held that the agent was under NO general duty of care to advise client about the sufficiency of coverage to replace his home, but once

he elected to respond to his inquiries he acquired special duty to use reasonable care.  Due to some extraneous issues a new trial was to set to establish liability.


Gabrielson vs Warnemunde (1988)

TYPE: Casualty

ISSUE: Duty at purchase greater than on-going

RESULT: Agent sued but not liable

The particulars in this case are not as important as the result.  It was found that an agent’s duty to inform the client that he had appropriate coverage is greatest at the time of purchase.  Agents do not generally have a duty to ferret out, at regular intervals, information which brings a client within provisions of a policy exclusion or waiver.  Agents typically acquire this duty by their own admission (refer to Free vs Republic -1992 and Grace vs Interstate Life - 1996).


Gauntt vs United Insurance Co of America (1994

TYPE: Life

ISSUE: Agent refused to tender policy

RESULT: Agent potentially liable

A client requested  insurance company pay the accumulated cash value in her life policy.  The company refused because the policy had already been converted to another policy without a current surrender.  As a result of the dispute, the agent refused to turnover the client’s policy.  The courts found that even though the policy was rightfully converted, the agent’s wrongful detention of the policy effectively denied the client the ability to know her policy rights and thus constituted a conversion for which the agent could be liable.


Glenn vs Leaman & Reynolds (1983)                                 

 TYPE: Casualty

ISSUE: Failed coverage due to insolvency of carrier

RESULT: Agent liable

An independent agent obtained coverage for client in the past and was asked to do so again.  An application and advance premium payment was made and coverage obtained.  Shortly thereafter the insurance company was declared insolvent and client’s coverage was prematurely terminated.  The courts in this case established that a fiduciary relationship existed between the agent and client and that he did NOT fulfill his obligation to inform client of the premature termination even though he mailed an unregistered letter to client’s last known address.  For the most part, the court was disturbed that this letter was sent more as a “courtesy” and not out of any course of action designed to notify client of the insolvency and the procedure to be followed in obtaining a refund of his unearned premium.  Agent was liable for losses client incurred.


Grace vs Interstate Life (1996)

TYPE: Health

ISSUE: Policy not necessary any longer

RESULT: Agent potentially liable

Agent obtain a health insurance policy for client who kept it going for almost ten years.  Benefits of this policy were substantially replaced by Medicare after age 65 but agent continued to collect premiums.  The courts determined that the special relationship that existed between agent and client created a duty for agent to disclose this fact and his silence made him personally culpable in a second potential lawsuit.


Great American Insurance vs York (1978)

TYPE: Casualty

ISSUE: Failure to follow instructions

RESULT: Agent liable

Agent accepted an application from client’s wife without client’s knowledge.  In addition, a business was operated on the residential property but agent failed to make a personal inspection to discover this.  Shortly after submitting for coverage a fire destroyed the home but the insurance company refused the claim since insufficient information was obtained on the application.  The agent was responsible for client’s damages because he had failed to follow insurance company instructions to submit a completed application, including all signatures.


Greenfield vs Insurance Incorporated (1971)

TYPE: Casualty / Business Interruption

ISSUE: Failure to cover specific machinery

RESULT: Agent liable

Client requested business interruption coverage including mechanical breakdown of an automobile shredder.  Agent assured client this coverage was in place but a claim for lost production went unpaid as uncovered.  The courts ruled that even though the client failed to read the policy, he had a right to rely on agent’s representations as well as years of agent/client relationship.  The agent was liable.


Gulf Insurance vs The Kolob Corporation (1968)

TYPE: Casualty

ISSUE: Reasonable time to cancel

RESULT: Agent sued and liable in a costly trial

For various reasons, an insurance company decided to cancel all of an agent’s business policies.  The agent was asked to collect and send any remaining premiums and cancel policies.  Because agent had a large volume of clients to cancel and find replacement coverage,  this process was delayed.  Cancellation for one client did not occur for six weeks, during which time a claim occurred.  The major task before the court was determining what is “reasonable” time to cancel these policies.  Despite evidence of the agent’s tremendous workload and possible “contributory

negligence” by the insurance company in not following up sooner, the insurance company was forced to pay the client and the agent was ultimately liable to the insurance company for not taking quicker action.


Hardt vs Brink (1961)

TYPE: Casualty

ISSUE: Failure to obtain adequate coverage

RESULT: Agent liable

Client owned a metal products company and leased space for which agent obtained a comprehensive liability policy.  Although the agent never saw client’s lease, it included language that excluded the tenant client from any benefits of the building owner’s coverage.  Thus, when a major fire damaged the building, the client was uncovered.  In fact, agent’s coverage specifically exempted the insurance company from liability for damage to the leased property.  The agent was sued and the court ruled that even though agent was unaware of the lease provisions, he had breached his duty to advise the client to obtain sufficient coverage under the lease.  This duty was solidified through previous dealings with client where client followed all agent recommendations.  Agent was liable for damages.


Honeycutt vs Kendall (1982)

TYPE: Casualty

ISSUE: Client not notified about lack of coverage

RESULT: Agent liable

Client requested automobile coverage by tendering an application and premium payment.  Before policy was issued, the insurance company discovered an undisclosed traffic violation and asked for an additional premium payment.  Client was not aware of this demand and the policy was shortly canceled.  Client’s loss claim was denied and the agent was sued.  The courts determined that the agent had a duty to provide notice to the client that coverage was not available.


Hutchins vs Hill Petroleum (1993)

TYPE: Casualty

ISSUE: Failure to add additional insured

RESULT: Agent found negligent

Client owned a maintenance company specializing in oil refineries.  Client requested that agent name a refinery as additional insured under his existing policy.  An employee of client was witness to the phone conversation where agent was orally instructed to accomplish this.  When the agent failed to add the refinery, the client’s maintenance contract was terminated resulting in business losses.  The agent was sued and the court agreed that the contract termination was mostly the agent’s failure to add the refinery.

INCO Express vs Marketing Insurance (1984)

TYPE: Casualty

ISSUE: Non admitted company / insolvent insurer

RESULT: Agent sued at costly trial but not liable

This case involved a non-admitted insurance company that eventually became insolvent.  When the client incurred losses, the agent and the surplus line broker he used were initially found liable because the agent failed to investigate a low-rated carrier and disclose to client that they were a non-admitted company.  On appeal, the surplus lines broker was determined to have ultimate responsibility.


Independent Life vs Peavy (1988)

TYPE: Life

ISSUE: Agent fraud

RESULT: Agent liable for big punitive damages

The specifics of this case are not as important as the lesson.  An agent attempted to cheat a client out of $412 in policy benefits.  The court was so enraged with this deception that it awarded the client punitive damages in the amount of $250,000 -- that’s 606 times the compensatory damages of $412!


Jarvis vs Modern Woodmen of America (1991)

TYPE: Life

ISSUE: Preexisting condition and incontestable period

RESULT: Agent potentially liable

Agent encouraged client to drop an incontestable policy and purchase a new policy even after being advised about client’s certain mental and financial problems.  Policy was later canceled when these facts were found missing from application.  The courts awarded $500,000 punitive damages against the insurance company  based on acts of its agent and agent’s gross, reckless and wanton negligence.  Further action by the insurance company against the agent was contemplated.


Johnson vs Illini Mutual Insurance (1958)

TYPE: Casualty / Homeowners

ISSUES: Agent described wrong house

RESULT: Agent liable

An insurance broker was requested to insure the client’s home at a specific address.  The agent “misdescribed” the house number and the building and contents were subsequently destroyed by fire.  The insurance company refused to pay the claim and the courts ruled that the broker was liable to his principal (client) for failure to follow instructions.


Julien vs Spring Lake Agency (1969)

TYPE: Casualty

ISSUE: Failed coverage but principal disclosed

RESULT: Agent sued but insurance company liable

The client was a builder who dealt with agent

regularly among a variety of properties.  Client requested agent cancel a specific policy and add two others.  Although agent noted the request to add two policies, only one was issued.  As luck would have it, the uncovered property incurred damages.  Since the claim went unpaid the client sued both agent and insurance company.  The courts found for the client but denied the insurance company claim for reimbursement from agent on the basis that agent had binding authority and all previous business policies were written with the same insurer.  In essence, the courts felt that the principal was adequately known to the client even though coverage was never obtained. (Compare this case to Employers Fire vs Speed).


Karam vs St Paul Fire (1973)

TYPE: Casualty

ISSUE: Failure to obtain adequate coverage

RESULT: Agent liable

Client owned a Laundromat and requested agent obtain “as much property damage liability insurance as possible”.  Agent said that $100,000 was the most he could get.  Client approved but through agent error only $10,000 was written.  A water heater exploded causing $20,000 of damage.  Agent was sued and found liable for the difference between damages and policy limits.  The courts felt that the client had no responsibility to read the policy or the bill sent by agent which stated “$10,000 of coverage”.


Kurtz, Et Al vs Insurance Communicators (1993)

TYPE: Group Medical

ISSUES: Dual Agency & Agent Misrepresentation

RESULT: Agent liable

In 1985, client obtained group medical, life and accident coverage for its employees.  Client was not knowledgeable in this area of insurance and relied on agent, who held himself out as an “expert” in the field.  Agent advised client to sign a Certificate of Non-Applicability which essentially exempted client from certain Medicare provisions of TEFRA.  In fact, this exemption does not apply to companies with more than 20 employees.  Agent informed insurance company that client had only 12 employees when, in fact, he knew they had 30.  A serious illness with client’s employee was the source of major claims in 1987.  The insurance company paid for some of the claims, then informed client that is was not required to pay for the employee’s treatment because client had violated the above TEFRA provisions.  Late in 1987 the insurance company canceled the policy and then demanded that client reimburse it for amounts already paid.  A lawsuit was commenced in 1989 by insurance company which believed its coverage to be secondary to Medicare coverage.  Client filed a cross complaint against insurance company and agent alleging breach of contract, breach of implied covenant of good faith, fraud, negligent misrepresentation and unfair business practices.  The complaints between the client and insurance company were a “wash”, but on appeal, the agent was found to be liable for negligence and negligent misrepresentation.


Lazzara vs Howard Esser (1986)

TYPE: Casualty

ISSUE: Agent missed split limit gap in coverage

RESULT: Agent liable

Client requested $1,000,000 automobile coverage.  Agent purchased two policies: A primary with $300,000 maximum and an extended policy covering claims in excess of $250,000 up to $1 million.  A few years later, the primary coverage was issued for split limits of $100,000 per person and $300,000 per occurrence, i.e., a $150,000 gap occurred but client was not notified.  Upon a loss client sued agent for the gap in coverage.  Client prevailed because agent “had a duty to act in good faith with reasonable care, skill and diligence”.


Lewis vs Equity National Life (1994

TYPE: Health

ISSUE: Agent failure to disclose known information

RESULT: Agent liable

Client was injured in a car accident and had many heart-related treatments which the insurance company refused to pay after learning that client had a preexisting condition that was NOT disclosed on the original application.  Client alleged that agent was the one who filled out the application and failed to list the condition even though it was disclosed to him.  The courts awarded contract and punitive damages to client because agent misrepresented information disclosed to him.


Lott vs Metropolitan Life (1993)

TYPE: Life

ISSUE: Deceptive sales practices

RESULT: Agent and company subject to fines

Client’s employees were sold life policies through a “cafeteria plan”.  Agent mistakenly represented to employees that they must buy life insurance in order  the plan to be granted tax savings.  Agent and company found liable for undisclosed damages and fines.


MacGillivary vs W. Dana Bartlett (1982)

TYPE: Casualty

ISSUE: Agent failed to disclose insolvent, non-admitted insurer

RESULT: Agent liable

Agent obtained insurance on client’s boat which was later stolen.  Insurance company failed to pay claim since it was declared insolvent.  Client also found out

that this company was not licensed to do business in state.  The courts determined that the agent’s failure to apprise himself of the non-admitted status of insurance company was gross negligence.


Magnavox Co of Tennessee vs Boles & Hite (1979)

TYPE: Casualty / Builder’s Risk

ISSUE: Failure to obtain adequate coverage

RESULT: Agent liable

The agent set out to provide a construction company “complete” liability coverage.  Agent had done business with client for over seven years and had in his possession the construction contracts used by the client which required client to “indemnify” his customers  damages occurring in connection with his performance.  An employee of client’s subcontractor died in an accident and all parties were sued for damages, including agent.  The courts held that the agent had a duty to advise the client of the need to be covered for the peril and was negligent in failing to investigate this need based on the client contracts he had in his files.


Naijmias Realty vs Cohen (1985)

TYPE: Casualty

ISSUE: Agent obtained wrong insurance

RESULT: Agent liable

Client builder asked agent to obtain “replacement cost” coverage for his rental property.  Agent instead procured “actual cash value” coverage.  A fire to the

building and requirements to meet updated building codes resulted in damages exceeding policy limits.  Agent was sued for deficit and the courts awarded same to client due to agent’s breach of duty to obtain the correct coverage as instructed.


Nationwide Insurance vs Patterson (1985)

TYPE: Health

ISSUE: Misrepresentation of policy terms

RESULT: Agent liable

A trial court concluded that an agent was liable for misrepresentation  for not advising client about the “stop loss” payment feature of his policy when he accepted a revised group health policy proposal.  Agent was responsible for the stop loss damages.


Osendorf vs American Family Insurance (1982)

TYPE: Casualty / Worker’s Comp

ISSUE: Agent relationship meant higher care

RESULT: Agent liable

Agent handled ALL client’s farm insurance business for 10 years.  Agent had visited the operation many times during this period but failed to advise client that he needed liability coverage for his employees.  An on-the-job injury caused uninsured damages which the agent was liable to cover.


Pacific Insurance vs Quarlls Drilling (1988)

TYPE: Casualty

ISSUE: Agent wrote wrong coverage with insolvent insurer

RESULT: Agent sued in costly trial but not liable

Agent and client agreed that “crew and employee injuries” would NOT be covered under a hull and indemnity policy because it was already covered by another liability policy.  Somehow the crew and employee coverage was “bound and written” with the hull and indemnity policy.  Meanwhile, the insurer for the “other” policy became insolvent and an employee-related client loss occurred. The client filed his claim with the hull and indemnity company which denied it upon learning that agent and client agreed NOT to include it.  Because the agent produced documentation that proved this, the courts sided with the hull and indemnity company and agent.  The client’s higher level of sophistication was also a factor in this decision.


Padeh vs Zagoria (1995)                                                     

TYPE: Life

ISSUE: Inappropriate product recommendation

RESULT: Agent potentially liable

An investment advisor/agent recommended client invest the proceeds of an investment into a pension plan and purchase additional life insurance for the same purpose.  Client launched a lawsuit for reasons that the pension plan was ill-suited for their financial goals and life insurance was inappropriate inside this plan.  The courts established that the agent misrepresented claims of the potential benefits and offered negligent advice.  Where results of the plan are negative, the agent has a potential liability.


Parlette vs Parlette (1991)

TYPE: Life

ISSUE: Agent failed to name beneficiary

RESULT: Agent liable

Agent sold a life insurance policy to a client, the primary purpose being to benefit the mother of the client if he died prematurely.  Despite this knowledge, agent failed to see that the mother was properly designated as beneficiary.  Upon the client’s death, the mother proved she was the intended beneficiary and sued agent for  his negligence in failing to see that it was accomplished.


R-Anell Homes vs Alexander & Alexander (1983)

TYPE: Casualty

ISSUE: Incorrect description of policy coverage

RESULT: Agent liable

Client advised agent that a new telephone system would be part of  his building.  Agent indicated that the phone system would automatically be covered under the building’s blanket policy.  Damages that

occurred to the phone system were denied since it was NOT covered under terms of the policy.  The courts found the agent liable for negligently conveying false advice.


R.H. Grover vs Flynn Insurance (1989)

TYPE: Casualty

ISSUE: Agent error and negligence

RESULT: Agent liable

Client requested a Certificate of Insurance from agent.  Agent’s new employee issued the certificate, however no coverage was ordered.  A claim was presented and denied.  The courts held the agent liable to client for his negligence in supervising his new employee.


Reserve National Insurance vs Crowell (1993)

TYPE: health

ISSUE: Agent misrepresented preexisting condition

RESULT: Agent liable

Client requested Medicare supplement information from agent and disclosed certain preexisting health problems.  The agent told client he could receive better coverage under a new policy.  After policy was issued, a claim developed which was denied by the insurer upon learning of client’s preexisting condition.  The courts awarded client contract damages and punitive damages totaling 600 times the out-of-pocket expenses based on the agent’s intentional misrepresentations about the preexisting condition.


Saunders vs Cariss (1990)                                                   

TYPE: Casualty / Automobile

ISSUE: Alleged signature fraud

RESULT: Agent liable

In 1986 client obtained an automobile policy from agent.  The policy included uninsured motorist coverage with $100,000 in limits.  The policy was in effect in 1988 when client was seriously injured in an accident caused by an uninsured motorist.  When client submitted his claim the insurance company produced “Reduction Agreements” consenting to reduce uninsured coverage down to $25,000.  The agreements purported to bear the signature of Client although he denied signing them. Client sued claiming agent signed his name without authorization.  The court held that the agent was liable where his intentional acts or failure to exercise reasonable care in obtaining or maintaining insurance resulted in damages to the client.


Seascape vs Associated Insurance (1984)

TYPE:  Casualty

ISSUE: Agent claim that coverage was available was in error

RESULT: Agent liable

Agents held themselves out to be “professional insurance planners”.  They had served client for several years.  Client came to them to get specific advice regarding “seawall insurance”.  Agents advised client that this type of insurance was NOT available to them.  Later, a storm damaged client’s seawall and clients learned that seawall insurance could have been purchased.  Clients sued agent alleging that their relationship was such that agent owed a duty to exercise reasonable care in rendering advice on insurance matters.  The courts agreed.


Small vs King (1996)

TYPE: Casualty

ISSUE: Duty to procure correct coverage

RESULT: Agent liable to insurer for client losses

The specifics of this case are not as important as the result.  Client requested “full coverage”.  In response, agent obtained additional coverage, but the wrong kind.  Client losses were attributable to the insurance company who sued agent for reimbursement.  The court in this case ruled that the agent’s duty to provide correct coverage cannot be triggered by a client’s request for “full coverage” because that request is not a specific inquiry about a specific type of coverage.


Smith vs National Flood Insurance Program (1986)

TYPE: Casualty

ISSUE: Improper notification by agent

RESULT: Agent liable

Agent filled out a flood insurance application dated March 31.  As typical with this type of insurance, coverage only becomes effective the day after the application IF the payment and application are received within 10 days of application or if mailed “certified” within four days of application.  Agent used regular mail and application was received April 11 (after the deadline).  Clients claim for loss that occurred after application mailed was denied.  Agent was sued and the courts determined that he was negligent for using regular mail rather than certified mail, the only sure method of fulfilling his duty under provisions of the coverage.  Agent was liable for the flood damage of client’s home and contents.


Sobotor vs Prudential Property & Casualty (1984)

TYPE: Casualty

ISSUE: Agent as expert / Failure to procure coverage

RESULT: Agent liable

Client requested the “best available” auto insurance package from agent.  Coverage options for uninsured motorist were NOT discussed and this coverage was NOT included in the policy as issued.  Subsequent client losses prompted a lawsuit.  The courts sided with the client by determining that even though this was a single insurance transaction between agent and client, a fiduciary relationship existed because the agent held himself out to have special knowledge in

insurance and client, who knew nothing about the technical aspects of insurance, placed his faith in agent.  Also, by asking agent for the “best available” package client put agent on notice that he was relying on agent’s expertise to obtain desired coverage.


Southland Lloyd’s Insurance vs Tomborlain (1996)

TYPE: Casualty

ISSUE: Fiduciary duty is highest on agent’s own contracts

RESULT: Agent denied coverage

Agent made application to insurance company to cover property he personally owned.  The property was later destroyed by fire but the insurance company denied coverage based on misrepresentations by agent concerning the property’s age, purchase price and condition.  The court held that an agent’s fiduciary duty to its principal (insurance company) is highest when agent writes his OWN contract  insurance.


Southwest Auto Painting vs Binsfield (1995)

TYPE: Casualty

ISSUE: Lack of reasonable coverage

RESULT: Agent liable

Client requested coverage for his auto painting business indicating his reliance on the advice and ability of agent to obtain appropriate coverage.  At no time was employee dishonesty coverage mentioned and it was NOT included in the policy as issued.  Later, one of client’s employees embezzled over $150,000 of company money.  The insurance company refused the claim and agent was sued.  Agent was found liable, contrary to previous court cases where agents, who had no special relationship with client, had no duty to advise or recommend a specific coverage.  In this case, however, expert testimony helped the court determine that the agent was duty bound to advise client about the relevant types of coverage where this coverage is widely available for this type of business at a relatively low cost.


Speir Insurance Agency vs Lee (1981)

TYPE: Casualty

ISSUE: Replacement coverage not obtained

RESULT: Agent liable

Agent agreed to bind comprehensive collision and liability coverage on client’s vehicle.  Insurance company canceled policy prior to date of collision but agent failed to obtain replacement coverage upon learning of the cancellation.  The court felt that the agent acted in bad faith and committed fraud on the client.  As such, punitive damages were authorized.





State Farm vs Gros (1991)

TYPE: Casualty

ISSUE: Misrepresentation and lack of agent notes

RESULT: Insurer liable / agent sued

Client built a home on the side of a hill and carried a standard homeowners policy.  The policy contained  a common exclusion landslide damage.  However, client alleged that agent told him “if a landslide made contact with your home, you’re covered”.  Three years later, client filed a landslide claim.  Agent advised client he was NOT covered for landslide.  Lack of notes in agent’s file to support earlier conversations with client forced court to hold that the policy was misrepresented when purchased.  The insurance company was liable and bound by the agent’s action.


Steadman vs McConnell (1957)

TYPE: Life Insurance

ISSUE: Misrepresentations to induce sales

RESULT: Agent’s license suspended for one year

Agent sold multiple life contracts called “Bank Loan Life Insurance Plans” where clients paid the first annual premium on a ten-payment life insurance policy.  The policy is subsequently assigned as collateral  a bank loan.  Proceeds of the loan are applied to payment of the second annual premium.  On each anniversary date, a new note is executed in the amount then outstanding.  The result of this process was that after ten years the cash values of the policy would be substantially less than the premiums paid.  Knowing this fact, agent continued to promise clients that cash values, sufficient to meet their financial planning needs, would be available.  They were not. The insurance commissioner accused the agent with misrepresentation, dishonest conduct and other counts which resulted in the suspension of the agent’s license for one year.


Stuart vs National Indemnity (1982)

TYPE: Casualty

ISSUE: Agent promise to cover / Lack of binding ability

RESULT: Agent liable

Client requested coverage and tendered initial premium.  Agent represented that client had “full coverage” even though agent had NO binding authority.  A loss occurred before application was approved but insurance company denied coverage.  The court ruled that an agent who advises client that coverage is bound, with knowledge that the intended insurance company has not yet agreed to accept such coverage, acts as the insurance company until coverage is accepted. The agent was liable for client losses.

Tillman vs Short (1973)

TYPE: Group Health

ISSUE: Agent negligence

RESULT: Agent not liable but paid legal costs

Client owned a business and purchased a group medical plan.  Client sold business but continued to pay his portion of premiums with full knowledge of agent.  A subsequent car accident caused client to submit a medical claim which the insurance company denied upon learning he was no longer a full-time employee (a requirement for coverage).  Even though the agent seemed to be doing the client a favor client sued agent, but the court ruled that BOTH agent and client were equally at fault.  It doesn’t pay to “cross the line”.


Todd vs Malafronte (1984)

TYPE: Casualty / Worker’s Comp

ISSUE: Failure to obtain adequate coverage

RESULT: Agent liable

Client maintained a business insurance policy through agent that did NOT include worker’s compensation coverage even though the agent knew that client hired a part-time summer employee.  The agent had assured client that it was not necessary to cover this employee who was later injured.  The client sued the agent for the damages and the courts agreed that it was the responsibility of the agent to be sure the client had proper coverage for this condition.


United Farm Mutual Insurance vs Cook (1984)

TYPE: Casualty

ISSUE: Failure to obtain coverage

RESULT: Agent liable

Agent and client had a long-standing relationship where the agent exercised broad discretion to serve client needs. Client explained a new project that he wanted agent to insure.Despite having sufficient information to know that he could NOT obtain this coverage, agent said nothing and did not procure coverage. The courts determined that agent was liable for losses of the client since he had to exercise reasonable care to inform client he couldn’t cover him.


Wal-Mart Stores vs Crist (1988)

TYPE: Worker’s comp

ISSUE: Agent exceeded authority / insolvent insurer

RESULT: Agent not liable but incurred major legal expenses

Client (Wal-Mart) asked for bids on worker’s comp coverage.  Agent submitted a $3.5 million premium offer which client accepted.  After issuance, the high claims experience did not seem to match the payroll.  Then it was discovered that a Wal-Mart employee intentionally misrepresented the payroll amounts to secure a better insurance bid.  Thereafter, the insurance company refused to pay claims and demanded Wal-Mart pay premiums that matched it’s actual payroll.  Just about that time, the insurance company became insolvent.  A lawsuit followed that involved the agent.  Through testimony, the courts determined that the agent and insurance company were equally at fault as Wal-Mart. In essence, all parties had sufficient information to know that the premium deal was “too good to be true”.  No one was liable to the other, but all parties incurred huge legal bills.


Ward vs Durham Life Insurance (1989)

TYPE: Life

ISSUE: Failure to disclose information on app

RESULT: Agent potentially liable

Client purchased a life insurance policy from agent and later died.  The insurance company denied benefits because certain health history information was left out of the application.  The client’s widow sued on the basis that the agent told her and her husband that the missing information did not need to be disclosed on the application.  The court ruled  a new trial indicating possible collusion between agent and the client where no agent notes of the conversation could be produced.


Watts vs Talladega Savings & Loan (1984)

TYPE: Casualty

ISSUE: Failure to notify premium due

RESULT: Agent liable

For years agent worked with client by sending notice of payment due for real estate fire insurance coverage.  The mortgage company would then draw a check from the escrow account and pay agent.  The policy would automatically renew upon payment.   For some reason, agent failed to send premium notice and the policy was canceled, despite a call to the agent by the mortgage company regarding coverage.  A claim caused client to sue agent.  The courts felt that agent had a duty to notify client that premium was due as he had in the past.  A phone call from the mortgage company was further proof of agent’s negligence.


Westrick vs State Farm (1982)

TYPE: Casualty

ISSUE: Failure to obtain coverage

RESULT: Agent potentially liable

Client maintained insurance with agent since 1964.

The agent’s office was run by a father and son team.  Both shared an office but had different clients.  Since they had no employees they would answer the phone for each other when one was out.  In early 1977 client inquired about insuring a jeep-type vehicle to be used in his agricultural business.  Agent son gave client impression that said business vehicle would automatically be insured for 30 days.  Client did not purchase this vehicle.  In late 1977 client did purchase

a welding business for his son which included a six-wheel welding truck.  The day client called the insurance office the father agent was alone.  Client asked for son agent and then explained that he purchased the business with two vehicles for which he wanted coverage (client’s automobile coverage provided for 30 days of automatic coverage for any newly acquired auto if it replaced an auto already insured with company).  Client said he offered the father agent serial numbers but the agent said his son would be in the next day.  Client assumed he had coverage and that night the welding truck was involved in an accident.  Father agent believed that the truck was NOT insured because client wanted to talk to son agent.  Further, it was a commercial vehicle not covered by his policy.  Client, however, assumed this type of vehicle was insurable based on his earlier conversation with son agent regarding the jeep-type vehicle (in court the son agent did not remember this conversation).  The court originally found in favor of the agents but this was reversed on appeal because it felt that a jury would have ruled negligence on the part of agent.  The case was recommended  for retrial.


White vs Calley (1960)

TYPE: Casualty / Builder’s Risk

ISSUE: Breach of agent oral promise

RESULT: Agent liable

Client maintained a “builder’s risk” policy covering a rental home that was set to expire on April 16.  In March, client requested that agent increase the insurance limits of the rental.  Agent verbally agreed that she would “take care of increasing the insurance”.  A few days later the agent delivered to client a routine rider that contained a mortgage clause to be endorsed on the new policy which commenced April 16.  When the building was destroyed by fire on March 30, the insurance company paid ONLY the old value.  Client’s lawsuit to obtain the new value from agent was successful even though agent testified that the client’s real intent was to increase limits for the new policy.


Williams Agency vs Dee-Bee Contracting (1984)

TYPE: Casualty

ISSUE: Agent employee promises

RESULT: Agent liable

Agent discovered that client’s apartment building was underinsured.  Unable to reach client about this situation agent left on a trip and took no further action.  During agent’s absence, the client also learned about the valuation problem but was unable to reach agent.  Agent’s secretary indicated that “the matter would be taken care of”.  The client took no further action but a major fire destroyed his building.  Agent was sued for failure to fully insure the property and  the courts determined that agent was negligent.


Wood vs Newman Agency (1995)

TYPE: Casualty

ISSUE: Failure to notify coverage dropped

RESULT: Agent liable

A client maintained a comprehensive business policy with agent for her marina complex.  The insurance company notified agent that this policy would no longer cover ice and snow damage but agent failed to advise client of this fact when the policy was renewed.  When the next storm hit the area, the client lost 18 covered wooden docks which collapsed under the weight of snow and ice.  The insurance company denied coverage and the client sued all parties.  The courts determined the agent was negligent and liable for not advising client of this lost coverage even though her knowledge of same might not have changed the outcome, i.e., she would have suffered loss from the damage anyway because NO snow and ice coverage was available from any source.


Wright Bodyworks vs Columbus Agency (1974)

TYPE: Casualty

ISSUE: Dual agency / lack of coverage

RESULT: Agent liable

Client requested business interruption insurance from agent.  Agent agreed to adequate coverage based on agent’s yearly inspection of client’s books to determine premium.  Coverage was placed but agent calculated premiums based on client’s “gross profits” rather than it’s “gross earnings”.  When a major loss occurred the client was underinsured in a big way.  The courts determined that the agent assumed a “dual agency” role because of his special arrangement to audit the books and the fact that agent advertised himself as an expert in this field of insurance.  The insurance company paid their limits and the agent was liable for any deficit.









Coming from a decade of insolvency threats and major misconduct claims is it possible that future agent conflicts can get worse before they get better?  Well, when courts and juries are involved, it can always get worse and it can always fail to improve.  However, there is little to gain by wholesale pessimism.  I prefer to say that the insurance business will put problems of the past aside and forge ahead… actually there is little choice, and our Country is based on this kind of self-healing.  For example, when rising property taxes threatened California homeowners in the late 1970's they pushed back with an initiative to limit taxes.  When doctors were threatened by record-setting malpractice claims they pushed-back by placing limits on the claims, and when insurance companies got tired of settling every frivolous claim that came along they pushed back by taking them to trial.  Of course, it will take time for these “push-back” efforts to build defense against  the tide of litigation.  Along the way, new legal challenges will also need to be swatted down.


The purpose of this chapter is to suggest areas of legal and sales conduct exposure that agents may face in the future.  Some of the issues proposed may seem too large to “suck-in” an individual agent, but that is probably what all of the agents in our “blunder’s” chapter thought.  The fact is, you can be affected by these future conflicts.  Your best defense is to know about the “triggers” or events that create liability, i.e., stay on top of the issues, and manage potential conflicts using techniques similar to those we discuss in Chapter 3.


Life & Health Challenges


Sales Conduct

It will take years for the current wave of market misconduct lawsuits to settle down.  Before it is all over, however, there will probably be a few more companies and agents that fall.  The claims will probably be similar to those we are now experiencing:  insurance sold as an investment, non-performing vanishing premium policies, churning policies, misrepresentation for life insurance sold as a pension plan, interest rate and investment performance falling short of projections and more. 


Currently, insurance companies are settling these suits even though claims are wildly exaggerated or untrue.  As of the printing of this book, for example, major settlements are in the works for Crown Life, Equitable Life, Metropolitan Life, National Benefit Life, New York Life, Phoenix Home Life and Prudential.  Pending cases are ongoing with Allianz Life, Cigna, Jackson National Life, Manufacturers Life, Northwestern Mutual Life and Paine Webber.  Agents by the hundreds, who were involved with specific offerings of these companies, are being investigated.  Already, more than 100 Met Life representatives (the first misconduct case filed in 1994) are charged with deceptive sales practice and at least one has been asked to leave the insurance business.


One of the most important lessons to be learned from these sales misconduct lawsuits is the need to conduct personal due diligence.  Don’t always assume that sales literature from your insurer is without fault.  The consumer protection issues presented in Chapter 4 discuss this as well as other matters critical to sales conduct.


American Disabilities Act

Insurance companies and their agents may see increased activity in the area of civil rights claims, particularly those dealing with the American Disabilities Act (ADA).  In Parker vs. Metropolitan Life (1995), a client alleged unlawful ADA discrimination because the disability plan administered by Metropolitan Life distinguished between benefits for mental and physical disabilities.  The client had already received the maximum two years of benefit for a mental disorder although the plan provided for payments to age sixty-five for individuals with physical disorders.  Although the client did not prevail, the courts would have allowed these benefits for someone else who was ADA “eligible”.



Cases are surfacing that challenge the AIDs/HIV policy exclusions and limitations.  In one case, the limitation was outlined in the policy and listed in the data page entitled “Schedule of Benefits”.  The courts held that although the line pertaining to the limitation was clearly eligible, it was not highlighted, set apart, or emphasized in any way.  Therefore, the limitation was not enforceable. (Gonzales vs American Life - 1994).


Defining Occupation

In Oglesby vs Penn Mutual Life (1995), the insurer denied a disability claim to a client radiologist (vascular interventional radiologist) since a spine and

neck problem did not allow him to practice within the same specialty but still permitted him to work as a radiologist.  The courts disagreed because the insurance company initially listed his occupation as “radiologist” then later narrowed it to “vascular interventional radiologist”.  In essence, they could not deny benefits.  Look for more of these “narrow definition” conflicts which may involve agents.


Psychologically Induced Illness

In Rizk vs Dun & Bradstreet / Met Life (1994) the client claimed he was unable to perform certain work tasks due to back injuries.  The insurer denied claims because they felt that client’s injuries were at least partially psychologically induced.  The courts, ruled in favor of the client because his disability was “total” as defined by the  policy regardless of whether the illness was psychologically stimulated.


Experimental Treatment

There will undoubtedly be many cases defining what is experimental treatment under health policies in the years ahead.  Recent cases have “tested” policy meaning regarding alleged experimental breast cancer treatment, AIDs-related liver transplants, bone marrow transplants, etc.  Clients have lost their claims for coverage on the basis of a legitimate denial based on policy terms (Wolf vs. Prudential Insurance - 1995) and Hendricks vs Central Reserve Life Insurance - 1994) and (Barnett vs Kaiser Foundation Health Plan - 1994).   Insurance companies have lost their cases where an exclusion about experimental treatment was NOT highlighted in a conspicuous manner (Gonzales vs Associates Life Insurance - 1994) or where policy language was considered ambiguous (Fredericks vs Blue Cross of Michigan - 1995) and (Bailey vs Blue Cross of Virginia - 1994).


Language Barriers

There are new cases developing in the area of language misunderstandings where clients have pursued claims on the basis they did not fully comprehend the matters at hand.  In Parsaie vs United Olympic Life Insurance (1994) a client prevailed in her action against a health insurer because she understood little English and could not read the application.  She relied on the advice of the agent but failed to disclose a preexisting condition. The courts determined that the insurance company could only deny coverage where an intent to deceive was found.  In this case, they said there was no intent to deceive.


Defining Accidental

Policy language often limits coverage for “accidentally sustained” injuries.  Thus, cases have and are developing where attempted suicides have left clients permanently or severely injured.  Since the injuries were self-inflicted, insurance companies have refused to pay.  In one case, the insurer lost to a client who attempted suicide because “accidental” was NOT defined in the plan documents (Casey vs Uddeholm Corp - 1994).  In another example, the client also prevailed because the courts decided her treatment for an attempted drug overdose suicide was really treatment for her underlying depression.  Further, the insurer was found to have misled her by not informing that mental and nervous disorders would not be covered if followed by an attempted suicide (Lutheran Medical Center vs Contractors Health Plan - 1994).  Finally an insurer was prohibited from withholding a claim because the client had a “subjective expectation of survival”, thus even though his injuries were self-inflicted it was still deemed an accident (Todd vs AIF Life Insurance - 1995).


Casualty Challenges

Some of the agent challenges above also have application to the casualty agent.  There will also be new “legal” conduct issues related to fiduciary duties of agents as well as some unusual problems in the areas listed below:


Tenants As Implied Beneficiaries

The courts are leaning more and more to the proposition that tenant’s are implied beneficiaries under a landlord’s policy.  In Bannock vs Sahlberry - 1994 the tenant and landlord had only an oral lease agreement.  Even though the tenant was responsible for the fire, the landlord’s insurer could not recover from the tenant since he was an implied “additional insured”.  However, in the reverse situation, a landlord could not be construed to be an implied beneficiary of the tenant’s policy (American National Fire Insurance vs A. Secondino - 1995).  More bizarre is the case of Cigna Fire vs Leonard (1994).  Here, the tenant was required to obtain fire insurance naming the landlord and mortgagee as additional insureds.  However, he only purchased insurance on himself and then proceeded to intentionally burn his business to the ground along with the landlord’s building.  The courts denied the landlord and mortgagee’s claim against the tenant’s insurer because there was “no clear intention to cover the lessor or the mortgagee”.  Only the tenant was named in the policy but his claim was denied under the policy’s arson provision.



Within the last 20 years the insurance industry introduced environmental impairment liability insurance (EIL) in an effort to provide pollution coverage for events the industry deemed not to be covered by the more well-known comprehensive general liability policy (CGL).  A very important distinction between these coverages is that EIL

policies are claims-made policies, while CGL policies are occurrence-based.  The introduction of EIL insurance provided clients an alternative that was broader than CGL coverage in some respects, while narrower in others.  For example, the insurance industry’s position is that EIL insurance affords coverage for the gradual release of contaminants that, according to the carriers, would no be covered under typical CGL policies. 


On the other hand, as discussed above, claims under an EIL policy must be made during the policy period.


One issue that continues to surface is the relationship of EIL coverage to other insurance purchased.  For example, assume a company purchases both primary CGL insurance and EIL insurance.  The question then arises whether the EIL insurance is primary coinsurance or excess to the CGL.  In Rhone-Poulenc vs International Insurance (1994), the client owned both EIL and CGL policies. However, the EIL policy contained a provision that loss or damage could not be recoverable as long as other insurance was in force.  The courts ruled that the EIL was indeed excess coverage, however, there could be cases where EIL, if purchased alone, could be the primary insurer for environmental liabilities.



Despite the fact that policies have been written as “All Risk” insurers continue to deny contamination claims based on policy exclusions.  In W.H. Breshears vs Federated Mutual Insurance (1994), the court rejected a client’s claim for coverage on the basis that an oil spill on his property was not “covered property” because it was “land” and “pavement” only, not considered “property”.  In Conde vs State Farm Fire & Casualty (1994), a client was denied coverage, which was upheld by the court, for contamination caused to his home by an exterminator’s negligence because “contamination” was not defined in the policy.  The court also rejected the client’s argument that the exterminator’s negligence (a covered peril) was the actual cause of loss.


“Sick Building” Syndrome

People have an unusual ability to acquire the problems and illnesses of others.  Most “sick building” illnesses are found to be psychologically based rather than rooted in fact.  In Sternmann vs  May Department Stores (1994), an employee claimed a long-term disability from toxic exposure at her place of work.  The company refused full disability coverage since tests showed that toxic levels did not exist.  The courts ruled against the client even though her physician’s diagnosis was total disability due to toxic exposure and chemical sensitivity.


The removal of asbestos continues to be a major source of conflict  between clients and insurance companies.  In University of Cincinnati vs Arkwright Insurance - 1995 asbestos was found in a dormitory that suffered a partial loss due to fire.  The client’s all risk policy did not cover the removal of asbestos since it was not considered an unexpected event



New standards introduced in September 1996 require property owners who are selling or renting real estate built prior to 1977 to disclose any known lead-based paint or lead hazards.  Experts believe that the next wave of lawsuits will result from these disclosures and potential client illnesses, real or not.


Business Interruption

On the heels of major hurricanes and earthquake, claims are surfacing concerning business interruption where clients have been forced to close stores and businesses incurring major damages.  A major issue that occurs in these cases is the determination of income.  Most policies include a clause similar to this: “In calculating your lost income we will consider your situation before the loss and what your situation would probably have been if the loss had not occurred”.  In American Auto Insurance vs Fisherman’s Paradise (1994), the client lost his argument that his store would have made huge profits in the aftermath of Hurricane Andrew if it were left undamaged.  The courts disagreed indicating that hypothetical profits would have created a “windfall” not contemplated by the policy.



Section III

Understanding Errors & Omissions Coverage


Table of Contents


Introduction   2

Chapter One: True Cost of Error and Omission Claims   3

Errors and Omissions Insurance Defined  3

Insured Losses  3

Uninsured Losses  4

Chapter 1 Quiz  11

Chapter Two: Actions that Minimize and Cause E & O Claims   13

Actions that Minimize E & O Claims  13

Practices to Avoid  16

Practices to Institute  17

Chapter 2 Quiz  21

Chapter Three: Application, Declarations and Exclusions   22

Claims-Made Application Form Information  22

What Is The Difference Between Claims-Made And Occurrences Policies?  23

Common Exclusions  26

Chapter 3 Quiz  32

Chapter Four: Claims, Causes and E & O Cases   33

How to Report a Claim?  33

What to Do If Sued for an E & O Claim   33

Could It Have Been an Innocent or Avoidable Error or Omission?  34

How a Lawsuit Begins  36

Fire Insurance Cases  37

Automobile Insurance Cases  38

Premium Payments and Oral Contracts Cases  38

Insurance Disputes Cases  39

Unlicensed Insurer Cases  40

Cancellations Cases  40

Brokers Malpractice Cases  41

Insurance Broker Error & Omission Cases  41

Additional Insured Cases  42

Chapter 4 Quiz  43

Conclusion   44

Glossary   45

Chapter Quiz Answers   47


The ever-increasing complexities of today’s business transactions and the rising use of litigation have prompted a need for Errors and Omissions (E & O) insurance programs. This type of insurance is necessary to reduce the risk of potential lawsuits for sales and service professionals and the businesses they represent. The following course addresses E & O and professional liability insurance, answering many of the questions about how E & O insurance works.


E & O is a form of insurance that covers liabilities for errors, mistakes and negligence in the usual business activities. It does not, however, cover fraudulent behavior, punitive damages or claims based on transactions for the personal account of a business professional. Considering the enormous exposure to liability of business professionals under the provisions of the broad liability laws, the importance of E & O insurance cannot be overstated. Take the purchase of E&O insurance seriously – it is one of the most important business decisions a professional will make.


Chapter One: True Cost of Error and Omission Claims


Errors and Omissions Insurance Defined

Errors and Omissions Insurance is a critical coverage that protects the insured against loss from a claim of alleged negligent acts, errors, or omissions in the performance of a professional service. This might include loss of data, software or system failure, claims of non-performance, or negligent oversell. E & O Insurance provides coverage for lawsuits that are a result of the rendering of professional services. It is important for insurance professionals to analyze the E & O coverage most suitable for his or her individual client’s specific needs.


E & O insurance is meant to cover unforeseen happenings. It can also cover the insured’s legal liability to other people. The policy is specific to certain risks.


A professional is expected to provide correct advice. In today’s litigious society, if the client considers that advice to be incorrect or improper, that client can sue the professional. This course discusses the risk for damages sought by clients that perceive wrongs have occurred as a result of a professional’s mistakes. Errors and Omissions Insurance provides protection against claims of certain mistakes made by professionals. Some examples of professionals benefiting from Errors and Omissions Insurance include:

v Accountants/CPAs/Auditors

v Lawyers

v Doctors/Other Medical Professionals/Insurance Administrators

v Architects and Engineers

v Real Estate Professionals/Appraisers

v Corporate Directors and Officers

v Dentists

v Teachers

v Mortgage Bankers/Financial Planners

v Employers

v Insurance Agents


Errors and Omissions can apply to virtually any type of industry.


Loss Exposure

A loss exposure is a possibility of loss, or more specifically, the possibility of financial loss that a particular organization or individual faces as the result of a particular peril striking a thing of value. Every loss exposure has three dimensions:

v The type of value exposed to loss

v The peril causing loss

v The extent of the potential loss


Insured Losses

Settlement to Injured Client

It is important for the E & O policy to include personal injury coverage. Personal injury protects the insured against claims of libel, slander and invasion of privacy.

v Libel – defamatory statement about a person that is published and thereby exposes that person to public ridicule. Libelous statements are not the same as slanderous statements. Libelous statements are printed, malicious (i.e., printed without just cause), and may be true;

v Slander – statements are spoken, not printed, and are not true. A lawsuit charging a publisher or advertiser with libel may be lost if it can be proven that the allegedly libeled individual is a celebrity (in the public eye) and that the statement in question was published because of its newsworthiness, not because of malicious intent on the part of the publisher or advertiser.

v Invasion of privacy – Invasion of privacy is the intrusion into the personal life of another, without just cause, which can give the person whose privacy has been invaded a right to bring a lawsuit for damages against the person or entity that intruded. It encompasses workplace monitoring, Internet privacy, data collection, and other means of disseminating private information.


Rights Regarding Invasion of Privacy

A non-public individual has a right to privacy from:

v intrusion on one’s solitude or into one’s private affairs

v public disclosure of embarrassing private information

v publicity which puts him/her in a false light to the public

v appropriation of one’s name or picture for personal or commercial advantage


Celebrities are not protected in most situations, since they have voluntarily placed themselves in the public eye, and their activities are considered newsworthy.


The Supreme Court has ruled that there is a limited constitutional right of privacy based on a number of provisions in the Bill of Rights and subsequent amendments. This includes a right to privacy from government surveillance into an area where a person has a “reasonable expectation of privacy” and also in matters relating to marriage, procreation, contraception, family relationships, child rearing and education. However, records held by third parties such as financial records or telephone-calling records are general