Key Points in This Chapter
- Federal government influences insurance through McCarran-Ferguson, IRS tax provisions, health/pension legislation, and SEC regulation of securities products
- State regulation covers agent licensing, prohibited practices, replacement rules, rebating limits, and timely performance
- Florida’s Code of Ethics (Rules 4-215.210 through 4-215.235) specifically declares twisting, rebating, defamation, and misrepresentation to be unethical
- Three types of agent authority exist: express (contractual), implied (customary), and apparent (based on the agent’s believable statements)
- Apparent authority causes the majority of liability for life insurers
- Ratification can create insurer liability even without prior express or implied authority
- Four common law liability concepts affect insurance disputes: Course of Conduct, Waiver, Estoppel, and Election
- The courts have shifted from caveat emptor (let the buyer beware) to caveat vendor (let the seller beware) — agents today bear significantly greater legal responsibility to their clients
Federal Government’s Role
Despite the predominance of state regulators, the federal government exerts regulatory control over the insurance industry in four principal ways:
- McCarran-Ferguson Act: The federal government retains power to control insurance to the extent that issues are deemed national in character.
- IRS and tax provisions: Tax treatment of insurance products — including tax-favored cash value growth and income tax-free death benefits — significantly influences the industry.
- Health insurance and pension legislation: Federal standards govern Medicare supplement policies, long-term care, HIPAA, and qualified plan regulations. The SECURE Act (2019) and SECURE 2.0 Act (2022) made significant updates to pension contribution limits and required minimum distributions.
- SEC regulation: The SEC exerts considerable influence in licensing and product registration of insurance products that have dual character as both insurance and investment products.
State Government’s Role
State insurance laws contain common themes establishing rules of practice. Common rules deal with: the requirement that only approved policies may be sold; prohibition against misrepresentation; guidelines for replacement of coverage; rules on rebating; and the requirement that agents perform duties in a timely way.
Key Florida Laws and Rules
Rule 4-230: Agents aware of unauthorized insurers must notify the Department of Financial Services.
Replacement — Rule 4-151: Replacement occurs when a new policy is sold while existing coverage lapses, is reduced, or 25% or more of the policy’s loan value is borrowed. Agents must complete Form DI4-312. If an insurer replaces its own coverage through misrepresentation (churning), it must be disclosed on Form DI4-1180. Both twisting and churning are prohibited under FS 626.9541(1)(aa) and Rule 4-151 Part III.
Rebating — FS 626.572: Rebating is permitted in Florida only under strict conditions. The rebate must be available to all insureds in the same actuarial class, filed with the insurer, uniformly applied, and prominently displayed. Rebating schedules must be maintained for the most recent 5 years.
Gifts — FS 626.9541(1)(m): Effective July 1, 2018, agents may give insureds, prospective insureds, or others merchandise, goods, wares, store gift cards, gift certificates, event tickets, anti-fraud or loss mitigation services, or other items with a total value of $100 or less per person per calendar year. Agents may also make charitable contributions on behalf of insureds of up to $100 per person per year. Cash and bank-branded prepaid debit cards (e.g., Visa or Amex gift cards usable anywhere) are not permitted. Prior to July 1, 2018, the limit was $25 and only “articles of merchandise” were allowed.
Defamation — FS 626.9541(1)(c): Knowingly making, publishing, or circulating any oral or written statement that is false or maliciously critical of or derogatory to any person, calculated to injure that person. Includes both libel (written) and slander (spoken).
Life Underwriters Code of Ethics (Rules 4-215.210 through 4-215.235)
4-215.210 Scope: The business of life insurance is a public trust. Agents must observe the laws in letter and spirit, present every fact essential to a client’s decision accurately and completely, and always place the policyholder’s interests first.
4-215.215 Twisting: Declared unethical. No misleading representations or fraudulent comparisons to induce any person to lapse, forfeit, surrender, or convert any insurance policy, or take out a policy with another insurer.
4-215.220 Rebating: Declared unethical except as expressly permitted by law. No paying, allowing, or offering any rebate of premiums or special favor not specified in the contract as an inducement to purchase insurance.
4-215.225 Defamation: Declared unethical. No making, publishing, or circulating any false or maliciously critical statement about the financial condition of any insurance company or any person in the business of life insurance.
4-215.230 Misrepresentations: Declared unethical. No misrepresenting the terms, benefits, dividends, or financial condition of any insurer or policy. No false or misleading statements in any advertisement or communication.
4-215.235 Proposals: Any written proposal must contain: the company proposed, the date of the proposal, and the agent’s signature and address.
Common Law & Concept of Agency
The three types of authority that may be given to agents are:
Express Authority
Contractual, given authority — specific and detailed in the agent’s contract with the insurer. Few compliance problems arise from express authority because of its specificity.
Implied Authority
Intended to be given by the insurer; relates to general customs of the business; not contractually provided. The critical liability issue: when an insurer knowingly or negligently permits its agents to engage in unethical sales practices, it may be deemed to have given those agents implied authority to act that way.
Apparent Authority
Not provided by contract; not intended by the insurer; appears to the client to be given based on the agent’s believable statements. Apparent authority causes the majority of liability for life insurers.
Ratification
Confirmation or approval of an agent’s actions by the principal. Four elements required: (1) the agent represented himself as acting for the insurer; (2) the customer believed the agent’s representations; (3) the insurer subsequently validated the agent’s actions; and (4) the insurer ratified the entire transaction.
Legal Concepts of Liability
Four concepts affect how courts determine liability in insurance malpractice suits:
- Course of Conduct and Custom Doctrine: The way parties have previously done business determines what is reasonable in future dealings.
- Waiver: The voluntary and intentional giving up of a right the individual knows he or she has.
- Estoppel: Similar to waiver, but the client gives up a right without intending to do so. Limits an individual’s right to change his or her mind when another party has reasonably relied on a promise.
- Election: When a party to an insurance contract chooses one course of action and later tries to change it, the court may hold that party to the original election if the change would be detrimental to the other party.
Judicial Review
The doctrine of caveat emptor (“let the buyer beware”) — which prevailed in the first half of the 20th century — has been effectively replaced by caveat vendor (“let the seller beware”). This is the environment in which agents operate today.
One of the important benefits of acting ethically is its positive effect on the likelihood of being held liable for professional actions. The agent who consistently applies the Golden Rule — treating clients as the agent would wish to be treated — builds a practice that is both professionally sound and legally defensible.