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Agent Responsibilities

Florida law requires any individual who solicits insurance products, including annuities (fixed and/or variable) to hold a valid license issued by the Department of Financial Services. Once properly licensed, the individual also must be appointed by an insurance or annuity company to transact insurance on behalf of that company. A licensed agent is prohibited from transacting any kind of insurance for which he or she is not properly appointed. An individual may not be appointed until that individual has been licensed for the same kind of insurance. In short, an agent must simultaneously hold a license from the state and an appointment from an insurance company to solicit or transact insurance — one is not effective without the other.

Brokers vs. Agents

Brokers, unlike agents, legally represent the annuity purchaser (or prospective purchasers). A broker solicits and accepts applications for insurance and then places the coverage with an insurer. The business is not in force and the insurance company is not bound until it accepts the application. Technically speaking, a broker does not represent anyone until a prospect or client requests coverage — then the broker represents the buyer.

This distinction between agent and broker becomes blurred in the annuity market when independent (unaffiliated) agents are appointed by various companies to sell their products. In many cases, a client will wish to purchase an annuity and the agent will show proposals from several different companies — is the salesperson an agent representing the company’s products, or a broker representing the client’s needs?

In practice, the regulatory distinction between brokers and agents is not significant, as Florida does not issue separate licenses for brokers. Licensed agents may act as brokers for their clients. There is, however, an important legal distinction: brokers owe their ultimate fiduciary responsibility to their clients; agents owe a fiduciary responsibility to the company that appoints them. Since a company can only pay commissions to appointed agents, a broker legally owes a fiduciary responsibility to both clients and the annuity company. Ethical agents will strive to behave as fiduciaries for their clients too. These conflicting interests can sometimes place an agent or broker in a difficult position.

Fiduciary Responsibility

Many persons act as fiduciaries — not just insurance agents and brokers. A fiduciary is a person in a position of financial trust. Attorneys, accountants, trust officers, pension plan trustees, stockbrokers, and insurance agents are all considered fiduciaries. As mentioned above, agents and brokers may owe a fiduciary duty to both the companies they represent and to the insurance-buying public.

Agents who make recommendations to clients have an obligation to be knowledgeable about the features and provisions of various insurance policies, as well as the prudent use of these insurance contracts. Agents must also take the time to become acquainted with the client’s financial needs, situation, and objectives. Agents collect premiums on behalf of the insurers they represent — they have a fiduciary duty to make certain that these premiums are submitted to the insurer promptly and are not converted to personal use or commingled with the agent’s personal funds.

Insurance agents and brokers voluntarily accept this fiduciary responsibility and implicitly agree to carry out that duty in good faith. Courts have interpreted that to mean that fiduciaries must act reasonably to avoid negligence and to not favor anyone else’s interest (including their own) over that of their clients or the companies that appointed them. Fiduciaries owe their principals:

Utmost Care One standard applied to fiduciaries is the “prudent man rule” — the fiduciary should behave as a “prudent person” would under the same circumstances. Professionals are usually held to a higher standard of “utmost care” because they are assumed to be more knowledgeable and experienced than an ordinary prudent person.
Integrity The fiduciary must act with fidelity to the principal’s interest and with complete honesty — soundness of moral principle and character.
Honesty and Duty of Full Disclosure Disclosure of all material facts, either known, within the knowledge of, or reasonably discoverable by the agent, which could influence in any way the principal’s decisions, actions, or willingness to enter into a transaction.
Loyalty An obligation to refrain from acquiring any interest adverse to that of a principal without full and complete disclosure of all material facts and obtaining the principal’s informed consent. This precludes the agent from personally benefiting from secret profits, competing with the principal, or obtaining any advantage from the agency for personal benefit.
Duty of Good Faith Includes total truthfulness, absolute integrity, and total fidelity to the principal’s interest. The duty of good faith prohibits taking advantage of the principal through the slightest misrepresentation, concealment, threat, or adverse pressure of any kind.

In the case of conflicting interests, the agent must disclose the “dual agency” (acting for two parties at the same time) or risk being accused of fraud from either or both principals. Most brokers are compensated by commissions — this in itself creates an inherent conflict of interest. While it is common knowledge to most insurance purchasers that agents and brokers earn a sales commission (which may mitigate the conflict somewhat), this does not excuse a broker for churning or twisting a client’s coverage to earn additional commissions.

Florida Case Law on Fiduciary Duty

Beardmore v. Abbott — Commission Disclosure Mr. Beardmore purchased an annuity through his broker, Mr. Abbott. Later, Mr. Beardmore let the contract lapse. He sued, claiming his broker had not disclosed the amount of commission paid on the sale, and therefore breached his fiduciary responsibility. The courts ruled that Mr. Abbott did indeed have a fiduciary responsibility to Mr. Beardmore, but the broker’s failure to disclose the full amount of his commission did not breach that duty (the court also found that the annuity purchase was suitable for Mr. Beardmore’s needs).

In this case, Mr. Beardmore did not inquire as to the size of the commission at the time of purchase, and Mr. Abbott did not volunteer the information. Had Mr. Beardmore asked, the courts would have required Mr. Abbott to honestly disclose that information as a matter of fiduciary trust.

Takeaway for agents: At a minimum, agents should make clients aware that they may receive a commission as part of an insurance/annuity transaction. Florida law also requires companies to use licensed agents to deliver policies in Florida and pay the “customary” commission to those agents (i.e., there is no cost savings to the customer by purchasing the product through another agent or purchasing directly from the company).
Moss v. Appel — Ongoing Fiduciary Duty of a Broker The Appels, a self-employed couple, hired Moss, a pension benefits consultant, to set up a defined benefit plan. Mr. Moss sold them an annuity as part of that plan and was hired to handle administrative paperwork. Mr. Moss received notice from the annuity company that it was seeking additional capital to remain in business, but he did not alert his clients. The annuity company later became insolvent. The courts ruled that Mr. Moss owed a fiduciary responsibility to his clients based both on the sale of the annuity and the ongoing consulting/administrative contract.

As the court noted: “It is undisputed that Moss was acting as an insurance broker, not an insurance agent employed by a particular company, when he sold the plaintiffs the annuity.” That distinction means Mr. Moss should have placed the client’s interests above any duty he may have felt to keep the contract in force with the troubled annuity company — even if that company compensated him for the sale.

Takeaway: These cases illustrate some of the problems that can arise for insurance brokers. Because annuities are more likely to be “shopped around,” the salesperson is more likely to be viewed as a broker with a fiduciary duty to the client.

Agent Licensing

The Florida Insurance Code requires anyone “transacting insurance” within Florida to have a Florida-issued license: a resident license for agents who reside in Florida, or a non-resident license for those living in other states and transacting business in Florida. The licensing law makes no distinction between agents and brokers.

Florida law defines “solicitation of insurance” as:

“Any attempt to persuade any person to purchase an insurance product by: describing the benefits or terms of insurance coverage, including premiums or rates of return; distributing an invitation to contract to prospective purchasers; making general or specific recommendations as to insurance products; completing orders or applications for insurance products; or comparing insurance products, advising as to insurance matters, or interpreting policies or coverages.”

Note: Under Florida law, “insurance products” include annuities of all types — fixed, indexed, and variable.

Unlicensed clerical personnel in insurance agencies may service a contractholder’s account, answer clerical questions, and assist contractholders with paperwork — provided they do so under the supervision of a licensed agent and are not paid based on sales commissions. Unlicensed personnel should not give advice, compare contract features, or initiate contact with clients.

Variable Annuity Licenses

Persons selling variable contracts (variable annuities, variable life, variable universal life) are subject to dual regulation — state regulation as an insurance agent and federal regulation as a securities representative. At the federal level, this means passing FINRA’s General Representative (Series 7) or Limited Representative (Series 6) examination. At the state level, these salespersons must hold a Florida Variable Annuity license.

A variable annuity license does not exist by itself — it is valid only if the agent also holds a life insurance agent license. Recently-licensed life agents will be licensed for both life and variable annuities. Life agents who were licensed prior to 1990 did not automatically obtain the variable annuity license — for these agents, there is a separate variable annuity examination.

Agents who are licensed for a particular line of insurance must also be appointed for that same line. If they remain unappointed for a line of insurance for 48 months, their license will lapse.

Example: If you become licensed for life, health, and variable annuity (2-15 license), but are only appointed for life and health, your qualification as a variable annuity agent will expire in 48 months (if there is no appointment within that time), and you will have to take the variable annuity portion of the exam again.
Equity indexed annuities are currently treated as fixed annuities for regulatory purposes. The SEC has proposed that EIAs be subject to the same regulations as variable annuities; this proposal has met with opposition from the NAIC and companies that issue EIAs. Under current regulations, agents selling EIAs must be life-licensed (and appointed) — no other license is required.

Controlled Business

Florida statutes do not permit an individual to hold an insurance agent’s license if that person does not hold himself or herself out to the general public as an insurance agent, but instead uses the license principally for soliciting, negotiating, or procuring controlled business.

Controlled business means insurance contracts covering the agent and/or members of his or her family; officers, directors, stockholders, partners, or employees of a business in which he or she or a member of his or her family is engaged; or the debtors of a firm, association, or corporation of which the agent is an officer, director, stockholder, partner, or employee. The underlying premise is that the agent may exercise undue influence over the purchasing decisions of these people.

Agents are permitted to write contracts for clients considered controlled business, provided that the agent writes other similar business at least equal to the amount of controlled business written within a 12-month period. Failure to write an offsetting amount of noncontrolled business can result in revocation of the agent’s license.

Ongoing Agent Requirements

In Florida, an agent’s license does not have an expiration or renewal date — it may remain in force perpetually. An agent’s license terminates if he or she allows four years to elapse without being appointed for each class of insurance listed on the license. The Department may also suspend or revoke an agent’s license for violations of the Insurance Code or Department rules.

Florida law requires an agent to notify the Department of Financial Services in writing, within 60 days, of any changes to his or her name, residence address, business street address, mailing address, phone numbers, or email address.

Under Florida law, any agent who has been found guilty (or pleaded guilty or nolo contendere [“no contest”]) to a felony or a crime punishable by imprisonment of one year or more must notify the Department in writing within 30 days. This requirement applies whether the crime occurred in Florida or elsewhere; regardless of whether it was a violation of state or federal law; and regardless of whether a judgment of conviction has been entered or adjudication was withheld. The agent must also notify the Department of comparable violations of foreign laws.

Continuing Education

To maintain a life or health license, agents must complete at least 24 credits of continuing education every two years in courses approved by the Department. The rules provide exceptions for persons with certain professional designations (CLUs, ChFCs, etc.).

  • Agents licensed less than six years may earn credit in courses rated basic, intermediate, or advanced
  • Agents licensed six or more years must complete only 20 credits every two years, but only in intermediate or advanced level courses
  • Each agent must complete a minimum of four credits on the subject of Law & Ethics Update approved by the Department every two years
  • Life-licensed agents must also complete a one-time, four-credit course on the subject of Annuity Suitability/Best Interest

An agent’s continuing education compliance period is based on his or her birth date. The first compliance period ends on the last day of the agent’s birth month following two years of licensure — subsequent periods end every two years thereafter.

Example: Dawn Day passed her licensing exam on March 15, 2010. Her birthday is September 13th. Her first compliance period will end on September 30, 2012, and future compliance periods will end September 30th of every odd-numbered year thereafter.

Agents will not be able to renew their appointments, reinstate old ones, or obtain new ones if they are out of compliance with continuing education requirements. All agents are strongly advised to maintain current continuing education and to consult the Florida continuing education law for specific requirements and exceptions.

Agent Appointments

An appointment is defined as the authority given by an insurer to a licensee to transact insurance on behalf of an insurer. Only licensed agents may “transact insurance” in Florida, and the agent’s license is only valid if at least one insurer has appointed the agent for that line of insurance. When an insurer appoints an agent, the new relationship allows the agent to:

  • Describe the company’s insurance policies to prospective buyers and explain the conditions under which policies may be obtained
  • Solicit applications for insurance
  • Collect premiums from policyowners
  • Render service to prospects and to those who have purchased policies from the company

The authority of an agent to undertake these functions is clearly defined in a “contract of agency” (or agency agreement) between the agent and the company. Within the authority granted, the agent is considered identical with the company. The concept of “agency law” governs the relationship between an agent and the company he or she represents.

Agent Requirements for Appointments

A licensee may not transact insurance until he or she is appointed by an authorized insurer for the class of licensure held. For example, if an individual is licensed for life, health, and variable annuity, and wishes to market all three types of products, he or she must be appointed by either one insurance company authorized in all three lines, or by separate companies for each line.

Example: If you become licensed for life and variable annuities, and Company XYZ appoints you for life only, you will still be required to obtain an additional appointment with an appropriate company for the variable annuity portion of your license if you intend to market variable annuities.

It is the agent’s responsibility to obtain the desired and appropriate appointments for his or her licensure. Florida law states: “Upon the expiration of a person’s appointment… the person shall be without any authority conferred by the appointment and shall not engage or attempt to engage in any activity requiring an appointment.”

If a licensee loses an appointment for any line of business, his or her qualifications for that portion of his or her license will remain valid for 48 months. However, the licensee may not engage in insurance activity for that line of business until a new appointment is obtained. If the agent remains unappointed for 48 months, the license lapses.

Example: An agent was licensed for life, health, and variable annuity in 1996 and obtained appointments for all three lines. In April 2002, the company that had appointed her for variable annuities chose not to renew her appointment. Her variable annuity license remained valid (although she could not solicit variable annuity business without an appointment) until April 2006. If she did not obtain a variable annuity appointment by then, her variable annuity license lapsed and she would have to take the variable annuity portion of the exam again to be re-licensed.

Florida law requires insurers to conduct a background check prior to appointing an agent — specifically inquiring as to the criminal history, credit standing, and moral character of each appointee. After the background check, the company will file the appointment paperwork plus filing fee with the Department of Financial Services. Appointments must be renewed every two years. If the agent fails to comply with continuing education requirements, the Department will not allow renewal.

Premium Payments

Under the law of agency, an agent is the lawful representative of the principal (the insurance company). Thus, the payment of premiums or other sums to the agent is the same as paying them to the insurance company. Because of this, the agent has a fiduciary responsibility to turn the funds over to the insurance company immediately and not to use them for his or her own purposes. If held by the agent, these funds must be held in a segregated account — separate from personal funds. Converting those funds to personal use is a crime known as embezzlement or conversion. The severity of the crime depends on the amount of funds misapplied.

Florida law requires agents to keep records for at least three years if the transaction pertains to premium payments. The Office and the Department may examine these records at any time.

Commissions

Generally speaking, agents will show proposals for companies that have appointed the agent. Agents may, however, show proposals for other companies — provided the agent is licensed and appointed for that particular line of insurance. If the agent actually writes the business, the company must formally appoint the agent when the agent submits the application. Furthermore, the company may not pay the agent a commission until the appointment is actually issued.

Agents may split their commissions with another agent who is Florida-licensed and appointed for that line of insurance. Splitting commissions with non-licensed persons is considered “rebating,” which is permitted only under tightly regulated circumstances.

Example — Commission Splitting: John Williams holds a life license and is an appointed life agent. While he is comfortable discussing traditional life insurance and fixed annuities, for variable annuities he refers clients to Maria Perez, a licensed life and variable annuity agent.

Maria cannot pay John a referral fee or split commissions on variable products with John, since he does not hold a variable annuity license.

She could, however, split a commission on an equity indexed contract with John, as EIAs are considered fixed annuities, and he is licensed for that line of business.

Insurance companies are generally limited to paying commissions to licensed individual agents only. However, insurance companies may pay commissions to an incorporated insurance agency that is properly registered or licensed with the Department of Financial Services. State law requires all employees, officers, and directors of these agencies who transact insurance business to hold a valid Florida agent license.

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