Key Points in This Chapter
- Agents have a fiduciary duty to insurers: solicit profitable business, act with reasonable care, make full disclosures, avoid conflicts of interest, submit business timely, account for premiums, and act with loyalty
- Twisting is replacing insurance coverage through misrepresentation; churning is an insurer inducing existing clients to replace their own coverage through misrepresentation — both are illegal
- Rebating is generally prohibited; in Florida it is permitted only under the strict conditions of FS 626.572
- Free-look periods: 10 days for life and most health insurance; 30 days for Medicare Supplement and Long-Term Care policies
- Misrepresentation — whether oral or written, intentional or unintentional — is unethical; ignorance is not a defense
- Life insurance replacement requires disclosure of restarting suicide and incontestable clauses, potential loss of cost basis, and possible adverse tax consequences
- Certain terms commonly used to describe insurance features are inherently misleading and must be avoided
- The phrases “private pension” and “vanishing premiums” have been the subject of major litigation and must never be used
Fiduciary Responsibility to Insurers
The agency agreement establishes a fiduciary relationship between insurer and agent. The agent’s key fiduciary obligations include:
- Solicit profitable business: Select prospects in reasonably good health who can pay the initial and future premiums. Submitting applications for uninsurable risks wastes insurer resources and harms the agent’s relationship with the company.
- Act with reasonable care: Do not engage in business areas where you lack necessary skill. Seek assistance from specialists when needed.
- Full disclosure on applications and claims: Disclose all pertinent information on applications. When uncertain whether information is pertinent, disclose it.
- Avoid conflicts of interest: Captive agents are held to a higher standard than independent agents. Any interest that could compromise objectivity must be disclosed.
- Timely submission: Applications and premiums must be submitted within one business day of being taken.
- Account for premiums: Premiums must never be commingled with personal funds or used for personal expenses. Maintain a separate bank account for client premiums.
- Loyalty and obedience: Follow carriers’ lawful and reasonable instructions. Agents who ignore compliance requirements face contract termination and potential personal liability.
Illegal Acts
Twisting & Churning
Twisting is the act of replacing insurance coverage of one insurer with that of another based on misrepresentations or incomplete comparisons. Churning (in the insurance context) occurs when an insurer induces existing clients to replace their own coverage through misrepresentations. In the securities context, churning means excessive trading in a client’s account to generate commissions with no benefit to the client. Both are illegal in Florida under FS 626.9541(1)(aa) and Rule 4-151.
Rebating
Rebating involves giving or promising any valuable consideration not specified in the policy as an inducement to purchase insurance. It is illegal in most states. In Florida, rebating is permitted only under the strict conditions of FS 626.572: 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.
Abuse of the Free-Look Provision
The free-look period is a cooling-off period after policy delivery during which the applicant may return the policy and receive a full refund of premium for any reason. Failure to inform the policyholder of this right is unethical.
- Life insurance (all forms): Minimum 14 days
- Most health policies: Minimum 10 days
- Medicare Supplement (Medigap) policies: Minimum 30 days
- Long-Term Care policies: Minimum 30 days
Insurers may extend these timeframes but may not shorten them. The free-look period begins upon delivery of the policy to the policyholder.
Misrepresentation
Misrepresentation — whether oral or written — is the basis of many of the industry’s legal problems. Although most appear to happen unintentionally, the agent’s ignorance is not a defense. Agents have a professional duty to know what they are selling and to present policies truthfully and completely. Omitting a material fact is as serious as stating a falsehood.
Replacement
Regardless of whether a replacement is suitable, the comparison must be complete and accurate. The following consequences of replacement must always be disclosed:
- The suicide and incontestable provisions begin anew with the new policy
- The previous policy’s cost basis may be lost, potentially creating a tax liability on future distributions
- Adverse tax consequences could result, particularly if the old policy had a favorable grandfathered tax status
Florida Replacement Rule — Rule 4-151
Replacement occurs when a new policy is issued while existing coverage lapses, is reduced, or 25% or more of the policy’s loan value is borrowed. Agents must:
- Ask prospects whether existing coverage is being reduced as part of the application process
- Complete Form DI4-312 for any replacement transaction
- Provide the applicant a comparison of existing and proposed policy benefits if requested
NAIC model replacement legislation also requires a 60-day cooling-off period, a signed disclosure form defining the scope of the replacement, and that the replacing insurer reject any application not accompanied by required disclosure forms.
Client Expectations & Misleading Terms
Customer expectations can affect agent liability as long as those expectations are reasonable. Two of the most common liability areas are: (1) failure to obtain the coverage agreed upon; and (2) failure to maintain proper coverage through timely renewal.
Certain terms have a high likelihood of ultimately misleading clients about the nature of insurance products and must be avoided:
| Avoid Using | Use Instead |
|---|---|
| Account, plan, program, private pension | Policy |
| Contribution, deposit, investment, payment | Premium |
| Earnings, profit, return | Dividends |
| Account or savings | Cash value |
| Mutual funds | Separate accounts |
| Vanishing premiums | Using dividends to pay premiums |
| Tax-free | Tax-deferred (if applicable) |
“Private Pension”
The phrase “private pension” when referring to a life insurance policy has been the subject of major class action litigation, with one settlement reaching several hundred million dollars. Courts have held the term inherently misleading because it implies guaranteed retirement income funded by tax-deductible contributions — characteristics that do not apply to individual life insurance.
“Vanishing Premiums”
The phrase “vanishing premiums” is misleading because premiums never truly vanish. What actually happens is that dividends are used to pay premiums, reducing the policy’s cash value. If the insurer subsequently reduces its dividend scale — which it may do at any time — out-of-pocket premiums may resume. Using this phrase without a full explanation of the mechanism has resulted in significant E&O claims.